<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
AUTODESK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 94-2819853
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NUMBER)
</TABLE>
111 MCINNIS PARKWAY
SAN RAFAEL, CA 94903
(415) 507-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
CAROL A. BARTZ
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
AUTODESK, INC.
111 MCINNIS PARKWAY
SAN RAFAEL, CA 94903
(415) 507-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
<TABLE>
<S> <C> <C> <C>
MARK A. BERTELSEN, ESQ. MARCIA K. STERLING, ESQ. RICHARD J. SZALWINSKI MARK J. MACENKA, ESQ.
HERBERT P. FOCKLER, ESQ. VICE PRESIDENT, BUSINESS CHAIRMAN, PRESIDENT AND JOCELYN M. AREL, ESQ.
DON S. WILLIAMS, ESQ. DEVELOPMENT, GENERAL COUNSEL CHIEF EXECUTIVE OFFICER MICHAEL D. HOCHBERG, ESQ.
WILSON SONSINI GOODRICH & AND SECRETARY DISCREET LOGIC INC. TESTA, HURWITZ &
ROSATI AUTODESK, INC. 10 DUKE STREET THIBEAULT, LLP
PROFESSIONAL CORPORATION 111 MCINNIS PARKWAY MONTREAL, QUEBEC, CANADA HIGH STREET TOWER
650 PAGE MILL ROAD SAN RAFAEL, CA 94903 H3C 2L7 BOSTON, MA 02110
PALO ALTO, CA 94304-1050 (415) 507-5000 (514) 393-1616 (617) 248-7000
(650) 493-9300
</TABLE>
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and the
satisfaction or waiver of certain conditions under the Acquisition Agreement
described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) FEE(1)(2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share, of the 17,551,174
Registrant............. shares(3) N/A $434,600,504 $128,208
- ----------------------------------------------------------------------------------------------
Class B non-voting
common shares of 33,430,808
Discreet Logic Inc..... shares(4) N/A N/A N/A
- ----------------------------------------------------------------------------------------------
Class E voting common
shares of Discreet 33,430,808
Logic Inc.............. shares(4) N/A N/A N/A
- ----------------------------------------------------------------------------------------------
Class F non-voting
common shares of 33,430,808
Discreet Logic Inc..... shares(4) N/A N/A N/A
- ----------------------------------------------------------------------------------------------
Exchangeable non-voting
shares of Discreet 3,508,478
Logic Inc.............. shares(5) N/A N/A N/A
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated pursuant to Rule 457(f) and (c), based upon the average of the
reported high and low sales prices for the Discreet Common Shares as
reported on the Nasdaq National Market for September 28, 1998.
(2) Pursuant to 17 C.F.R. 240.0-11(a)(2), the filing fee paid has been reduced
by $71,088, as such amount was paid with the filing of the preliminary
proxy materials for this transaction.
(3) Represents the maximum amount of common stock, $0.01 par value per share
("Autodesk Common Stock"), of the Registrant issuable upon consummation of
the Transactions (as defined in this Registration Statement), assuming:
(a) the exchange of each outstanding common share of Discreet Logic Inc.
("Discreet Common Shares") for 0.525 shares of Autodesk Common Stock, (b)
the exercise of all outstanding options to acquire Discreet Common Shares
and the issuance of Autodesk Common Stock upon such exercise and (c) the
issuance of shares of Autodesk Common Stock upon exercise of assumed
purchase rights under the Discreet Logic Inc. 1995 Employee Stock Purchase
Plan.
(4) Represents shares in the share capital of a newly created subsidiary of
the Registrant ("New Discreet") to be formed effective upon the
Amalgamation (as defined in this Registration Statement), which shares
will be issued at or immediately after the Amalgamation. Such shares
ultimately will be exchanged for either shares of Autodesk Common Stock or
Exchangeable Shares (as described in Note 5, below) upon consummation of
the Transactions.
(5) Represents the maximum number of exchangeable non-voting shares in the
share capital of New Discreet ("New Discreet Exchangeable Shares") that
may be issued in connection with the Transactions. Each New Discreet
Exchangeable Share entitles the holder thereof to receive one share of
Autodesk Common Stock in exchange therefor.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[LOGO OF AUTODESK]
, 1998
Dear Autodesk Stockholder:
You are cordially invited to attend an important Special Meeting of
Stockholders to be held on November , 1998, at .m., local time, at The
Executive Briefing Center, Autodesk, Inc., 111 McInnis Parkway, San Rafael,
California. Because of the importance of the business of the Autodesk meeting,
we hope as many of you as possible will attend in person or be represented by
sending in your proxies.
The business of the Autodesk meeting is to consider and vote on the issuance
of shares of Autodesk Common Stock in connection with a strategic business
combination with Discreet Logic Inc. ("Discreet"), a leader in the development
and marketing of digital systems and software for creating, editing and
compositing imagery and special effects for film, video, HDTV, broadcast and
the web. We believe the business combination with Discreet will position us to
create together the premier total solutions provider of digital content
design, creation and manipulation tools for the creation of moving images. The
acquisition will be effected principally by way of an amalgamation under the
laws of the Canadian province of Quebec (the "Amalgamation") whereby Discreet
will be combined with certain subsidiaries of Autodesk, resulting in the
formation of a new Autodesk subsidiary which will carry on the business of
Discreet.
The details of the Amalgamation and the subsequent transactions are included
in the attached Joint Proxy Statement/Prospectus. Also included is a form of
proxy for you to complete and return no later than , 1998, as specified in
the enclosed Notice of Special Meeting. After careful consideration, your
Board of Directors has unanimously approved the proposed combination with
Discreet and has determined that the transaction is fair and in the best
interests of Autodesk and its stockholders, and recommends that you vote FOR
the resolution concerning the issuance of Autodesk Common Stock in connection
with the Amalgamation and subsequent transactions. The Autodesk Board believes
that the business combination with Discreet will enhance Autodesk's position
as a leading technology supplier to the entertainment and design industries
and will further Autodesk's strategy of diversification into complementary
high-growth businesses and markets. Based on the capitalization of each of
Autodesk and Discreet as of August 20, 1998, the date the companies announced
the proposed business combination, Autodesk will issue approximately 15.5
million new shares of Autodesk Common Stock to shareholders of Discreet
(including shares of Autodesk Common Stock issuable upon exchange of
exchangeable shares to be issued pursuant to the transactions), which shares
will represent approximately 25% of the Autodesk Common Stock outstanding upon
consummation of the transactions (assuming exchange of all exchangeable shares
issued in the transactions).
Yours very truly,
/s/ CAROL A. BARTZ
Carol A. Bartz
Chairman of the Board and Chief
Executive Officer
WE HOPE YOU WILL BE ABLE TO ATTEND THE AUTODESK MEETING. WHETHER OR NOT
YOU ARE ABLE TO ATTEND THE MEETING, IT IS STILL IMPORTANT THAT YOU BE
REPRESENTED AT THE AUTODESK MEETING. WE URGE YOU TO COMPLETE THE ENCLOSED
FORM OF PROXY AND RETURN IT IN THE POSTAGE-PAID ENVELOPE PROVIDED NOT LATER
THAN NOVEMBER [ ], 1998, AS SPECIFIED IN THE NOTICE OF AUTODESK SPECIAL
MEETING. REGARDLESS OF THE NUMBER OF SHARES YOU OWN, YOUR VOTE IS
IMPORTANT.
<PAGE>
AUTODESK, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of
Autodesk, Inc. (the "Autodesk Meeting") will be held at The Executive Briefing
Center, Autodesk, Inc., 111 McInnis Parkway, San Rafael, California, on
November [ ], 1998 at . .m (local time) for the purposes described below:
(i) to consider and vote upon the proposed issuance of shares of Common
Stock, $0.01 par value, of Autodesk, Inc. ("Autodesk Common Stock"),
pursuant to the Amended and Restated Agreement and Plan of Acquisition and
Amalgamation by and among Autodesk, Inc., 9066-9771 Quebec Inc., 9066-9854
Quebec Inc., Autodesk Canada Inc., Autodesk Development B.V. and Discreet
Logic Inc. dated as of September 23, 1998 (the "Acquisition Agreement"),
the full text of which is set out in Appendix A to the accompanying Joint
Proxy Statement/Prospectus (the "Proxy Circular"); and
(ii) to transact such other business as may properly come before the
Autodesk Meeting or at any adjournment or postponement thereof, including a
proposal to adjourn the Autodesk Meeting, if necessary, to permit further
solicitation of proxies in the event sufficient votes are not obtained to
approve the proposed issuance of Autodesk Common Stock pursuant to the
Acquisition Agreement.
The foregoing proposal is described more fully in the accompanying Proxy
Circular.
Stockholders of record at the close of business on [ ], 1998 are entitled
to notice of, and to vote at, the Autodesk Meeting and any adjournments or
postponements thereof, and are cordially invited to attend the Autodesk
Meeting in person.
FOR THE BOARD OF DIRECTORS
/s/ MARCIA K. STERLING
Marcia K. Sterling
Vice President, Business Development,
General Counsel and Secretary
San Rafael, California
[ ], 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE AUTODESK MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED ENVELOPE IN ORDER TO ENSURE REPRESENTATION OF YOUR SHARES. NO
POSTAGE NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
PROXIES MUST BE RECEIVED BEFORE 5:00 P.M. (PACIFIC TIME) ON THE BUSINESS
DAY PRIOR TO THE DAY OF THE AUTODESK MEETING (OR ANY ADJOURNMENT THEREOF)
OR MAY BE DEPOSITED WITH THE AUTODESK SECRETARY PRIOR TO THE COMMENCEMENT
OF THE AUTODESK MEETING OR OF ANY ADJOURNMENT THEREOF.
<PAGE>
[LOGO OF DISCREET LOGIC]
, 1998
Dear Discreet Shareholder:
As most of you are aware, Discreet has entered into an agreement to combine
with Autodesk, Inc. ("Autodesk") in a strategic business combination. We are
pleased to invite you to attend an important Special General Meeting of
Shareholders (the "Discreet Meeting"), to be held on November , 1998 at
:00 .m. (Montreal time) at [ ]. Because of the importance of the
business of the Discreet Meeting, we would like as many of you as possible
either to attend in person, or to be represented by sending in your proxies.
The business of the Discreet Meeting is to consider and vote on a proposal
to approve consummation of an amalgamation under the laws of Quebec (the
"Amalgamation") to implement the previously announced combination of Discreet
and Autodesk and to approve the Amended and Restated Agreement and Plan of
Acquisition and Amalgamation by and among Autodesk, 9066-9771 Quebec Inc.,
9066-9854 Quebec Inc., Autodesk Development Canada Inc., Autodesk Development
B.V. and Discreet dated as of September 23, 1998 (the "Acquisition
Agreement"). The Amalgamation will result in the creation of a newly formed
indirect subsidiary of Autodesk which will carry on the business of Discreet
("New Discreet").
After careful consideration, and based on the unanimous recommendation of a
special committee of the Discreet Board of Directors consisting of directors
who are not employees of Discreet and who do not own a significant number of
Discreet common shares, Discreet's Board of Directors has approved the
Acquisition Agreement by the unanimous vote of all non-interested directors
and believes that the Amalgamation and certain related transactions
(collectively, with the Amalgamation, the "Transactions") are fair and in the
best interests of Discreet and its shareholders, and recommends that you vote
FOR the proposal to approve consummation of the Amalgamation and to approve
the Acquisition Agreement. The Board of Directors of Discreet believes that
the Transactions offer Discreet and its shareholders a number of important
benefits, including the potential for the combined company to capitalize on
the expanded product offerings, the distribution, marketing and product
synergies, and the greater financial, product development, distribution, sales
and marketing resources that would result from combining the two companies.
The details of the Transactions are included in the attached Joint Proxy
Statement/Prospectus (the "Proxy Circular"). Also included are a form of proxy
and Letter of Transmittal and Election Form. Please review the Proxy
Circular--it has been prepared to help you make an informed investment and
voting decision.
If the Acquisition Agreement is approved and the Transactions are
consummated, then effectively Discreet shareholders will have two choices:
(i) to exchange each of their Discreet common shares for 0.525 shares
of Autodesk common stock; or
(ii) subject to possible pro ration, to exchange each of their Discreet
Common Shares for 0.525 of an exchangeable share of New Discreet (the
"New Discreet Exchangeable Shares"). New Discreet will be a Quebec
company. Each New Discreet Exchangeable Share may subsequently be
exchanged, at the option of the holder, for one share of Autodesk
Common Stock. Until such exchange, each New Discreet Exchangeable Share
will entitle its holder to receive dividends functionally equivalent to
any dividends paid on one share of Autodesk Common Stock and will carry
the right to direct the number of votes at meetings of the stockholders
of Autodesk equal to that number of votes to which such New Discreet
Exchangeable Share would be entitled if exchanged for Autodesk Common
Stock. This is an option which may appeal to certain of Discreet's
Canadian shareholders for Canadian tax reasons.
<PAGE>
Please review the Proxy Circular carefully with respect to your choices and
their anticipated tax effects.
WE HOPE YOU WILL BE ABLE TO ATTEND THE DISCREET MEETING. WHETHER OR NOT
YOU ARE ABLE TO ATTEND THE MEETING, IT IS STILL IMPORTANT THAT YOU BE
REPRESENTED AT THE DISCREET MEETING. WE URGE YOU TO COMPLETE THE ENCLOSED
FORM OF PROXY AND RETURN IT IN THE POSTAGE-PAID ENVELOPE PROVIDED NOT LATER
THAN NOVEMBER [ ], 1998, AS SPECIFIED IN THE NOTICE OF SPECIAL GENERAL
MEETING. REGARDLESS OF THE NUMBER OF SHARES YOU OWN, YOUR VOTE IS
IMPORTANT.
Yours very truly,
/s/ RICHARD J. SZALWINSKI
Richard J. Szalwinski
Chairman of the Board, President and
Chief Executive Officer
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY. IF YOU WISH TO RECEIVE
EXCHANGEABLE SHARES PURSUANT TO THE TRANSACTIONS, YOU MUST USE THE LETTER
OF TRANSMITTAL AND ELECTION FORM TO DEPOSIT YOUR DISCREET COMMON SHARES,
AND RETURN SUCH LETTER OF TRANSMITTAL AND ELECTION FORM, TOGETHER WITH YOUR
CERTIFICATES REPRESENTING DISCREET COMMON SHARES, PROMPTLY, BUT IN NO EVENT
LATER THAN NOVEMBER [ ], 1998, AS INDICATED IN THE INSTRUCTIONS THERETO.
HOWEVER, IF YOU WISH TO RECEIVE AUTODESK COMMON STOCK, DO NOT SURRENDER
YOUR CERTIFICATES REPRESENTING DISCREET COMMON SHARES AT THE PRESENT TIME,
BUT RATHER WAIT UNTIL YOU HAVE BEEN ADVISED TO DO SO.
<PAGE>
DISCREET LOGIC INC.
NOTICE OF SPECIAL GENERAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a special general meeting of the holders of
Common Shares of Discreet Logic Inc. (the "Discreet Meeting") will be held at
[ ] at [ ], on November [ ], 1998 at . .m. (Montreal time) for the
purposes described below:
(i) to consider and vote upon a proposal of the Board of Directors to
approve the Amended and Restated Agreement and Plan of Acquisition and
Amalgamation (the "Acquisition Agreement") by and among Autodesk, Inc.,
9066-9771 Quebec Inc. ("Amalgamation Sub"), 9066-9854 Quebec Inc.
("Autodesk Quebec"), Autodesk Canada Inc., Autodesk Development B.V. and
Discreet Logic Inc. ("Discreet") dated as of September 23, 1998, the full
text of which is set out in Appendix A to the accompanying Joint Proxy
Statement/Prospectus (the "Proxy Circular"), and the by-law giving effect
to the resulting amalgamation of Discreet, Autodesk Quebec and Amalgamation
Sub; and
(ii) to transact such other business as may properly come before the
Discreet Meeting or at any adjournment or postponement thereof, including a
proposal to adjourn the Discreet Meeting, if necessary, to permit further
solicitation of proxies in the event there are not sufficient votes at the
time of the Discreet Meeting to approve and adopt the Acquisition Agreement
and/or approve the consummation of the transactions contemplated thereby.
The Proxy Circular as well as a proxy form accompany this Notice of Special
General Meeting of Shareholders. The Shareholders registered as of the close
of business on [ ], 1998 are entitled to receive notice of, and to vote at,
the Discreet Meeting and any adjournment or postponement thereof.
By Order of the Board of Directors
/s/ FRANCOIS PLAMONDON
Francois Plamondon,
Executive Vice-President,
Chief Financial Officer,
Treasurer and Secretary
Montreal, Quebec
[ ], 1998
SHAREHOLDERS MAY EXERCISE THEIR VOTING RIGHTS BY ATTENDING THE DISCREET
MEETING OR BY COMPLETING A FORM OF PROXY. SHAREHOLDERS WHO ARE UNABLE TO BE
PRESENT IN PERSON AT THE DISCREET MEETING ARE REQUESTED TO COMPLETE, SIGN,
DATE AND RETURN THE ENCLOSED FORM OF PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE PROVIDED FOR THAT PURPOSE. PROXIES MUST BE RECEIVED
BEFORE 5:00 P.M. (MONTREAL TIME) ON THE BUSINESS DAY PRIOR TO THE DISCREET
MEETING (OR ANY ADJOURNMENT THEREOF) OR MAY BE DEPOSITED WITH THE CHAIRMAN
OF THE DISCREET MEETING PRIOR TO THE COMMENCEMENT OF THE DISCREET MEETING
(OR OF ANY ADJOURNMENT THEREOF).
<PAGE>
[LOGO OF AUTODESK] [LOGO OF DISCREET LOGIC]
JOINT PROXY STATEMENT/PROSPECTUS
---------------
This Joint Proxy Statement/Prospectus (this "Proxy Circular") is being
furnished to Autodesk Stockholders and Discreet Shareholders in connection
with the solicitation of proxies by management of Autodesk for use at the
Special Meeting of Autodesk Stockholders to be held at :00 .m., local time,
on November [ ], 1998, at The Executive Center, Autodesk, Inc., 111 McInnis
Parkway, San Rafael, California (the "Autodesk Meeting"), and any adjournment
or postponement thereof, and by management of Discreet at the Special General
Meeting of Discreet Shareholders to be held at :00 .m., local time, on
November [ ], 1998, at [ ] (the "Discreet Meeting"), and at any
adjournment or postponement thereof. Certain capitalized terms used in this
Proxy Circular without definition have the meanings given in the Glossary of
Terms found at page 1.
The Autodesk and Discreet Meetings relate to a business combination
transaction involving Dutchco, Autodesk and Discreet. The Transactions will be
completed by way of an amalgamation under the Quebec Act and certain related
transactions described below. Pursuant to the Articles of Amalgamation,
Discreet will be amalgamated with Autodesk Quebec and Amalgamation Sub to form
New Discreet, which will be a subsidiary of Dutchco following the
Transactions. Each holder of Discreet Common Shares will receive upon the
Amalgamation one New Discreet Class B Share for each Discreet Common Share
then held by such holder. Immediately following the Amalgamation, each such
New Discreet Class B Share will automatically, based upon the prior election
of the holder thereof, either (i) be redeemed by New Discreet for 0.525 New
Discreet Exchangeable Shares, or (ii) be converted into one New Discreet Unit,
which will immediately thereafter be acquired by Dutchco in exchange for 0.525
shares of Autodesk Common Stock, in either case without any further required
action on the part of the holder. Pursuant to the Acquisition Agreement, the
maximum number of New Discreet Exchangeable Shares issuable pursuant to the
Transactions may not exceed 19.99% of the number of Discreet Common Shares
outstanding immediately prior to the Amalgamation, multiplied by the Exchange
Ratio. In the event the number of New Discreet Exchangeable Shares otherwise
issuable to holders of Discreet Common Shares in the Transactions exceeds this
maximum number, such holders will receive, pro rata, New Discreet Units in
lieu of New Discreet Exchangeable Shares in respect of such excess. The New
Discreet Exchangeable Shares will be exchangeable at any time at the option of
the holder, and will be automatically exchanged on the eleventh anniversary of
the Effective Time (or earlier upon the occurrence of certain events,
including the liquidation, dissolution or winding-up of Autodesk or New
Discreet), for Autodesk Common Stock on a one-for-one basis plus the Dividend
Amount.
At the Autodesk Meeting, Autodesk Stockholders will be asked to consider and
vote upon the Autodesk Resolution and to transact such further or other
business as may properly come before the Autodesk Meeting or any adjournment
or postponement thereof. At the Discreet Meeting, Discreet Shareholders will
be asked to consider and vote upon a proposal to approve the Discreet
Resolution and to transact such further or other business as may properly come
before the Discreet Meeting or any adjournment or postponement thereof. This
Proxy Circular and the accompanying form of proxy and (in the case of Discreet
Shareholders only) the Letter of Transmittal and Election are first being
mailed to Autodesk Stockholders and Discreet Shareholders on or about October
[ ], 1998.
PURSUANT TO THE TRANSACTIONS, DISCREET SHAREHOLDERS MAY CHOOSE TO RECEIVE
EITHER SHARES OF AUTODESK COMMON STOCK OR NEW DISCREET EXCHANGEABLE SHARES. IT
IS STRONGLY RECOMMENDED THAT US HOLDERS (AS DEFINED HEREIN) WHO OWN DISCREET
COMMON SHARES DO NOT ELECT TO RECEIVE NEW DISCREET EXCHANGEABLE SHARES SINCE
THE OWNERSHIP AND DISPOSITION OF SUCH SHARES MAY HAVE CERTAIN ADVERSE TAX
CONSEQUENCES.
---------------
SEE "RISK FACTORS" BEGINNING AT PAGE 24 FOR CERTAIN CONSIDERATIONS RELEVANT
TO APPROVAL OF THE MATTERS REFERRED TO ABOVE AND AN INVESTMENT IN THE
SECURITIES REFERRED TO HEREIN.
---------------
NEITHER THIS TRANSACTION NOR THE SECURITIES OFFERED HEREBY HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is , 1998.
<PAGE>
AVAILABLE INFORMATION
Autodesk and Discreet are subject to the informational requirements of the
Securities Exchange Act, and in accordance therewith file reports, proxy
statements and other information with the SEC. The reports, proxy statements
and other information filed by Autodesk and Discreet with the SEC can be
inspected and copied at or obtained at prescribed rates from the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and should be available for inspection at the
SEC's Regional Offices located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611. The SEC maintains a website (the "SEC Website") that
contains reports, proxy and information statements and other information
regarding Autodesk and Discreet. The address of the SEC Website is
http://www.sec.gov. Autodesk Common Stock and Discreet Common Shares are
quoted on the Nasdaq National Market. Reports and other information concerning
Autodesk and Discreet also can be inspected at the offices of the National
Association of Securities Dealers, Inc., Market Listing Section, 1735 K
Street, N.W., Washington, D.C. 20006.
Autodesk has filed with the SEC the Form S-4 under the Securities Act
registering the shares of Autodesk Common Stock, New Discreet Exchangeable
Shares, New Discreet Class B Shares, New Discreet Class E Shares and New
Discreet Class F Shares to be received by Discreet Shareholders in connection
with the Transactions. This Proxy Circular does not contain all of the
information set forth in the Form S-4, certain parts of which are omitted from
this Proxy Circular in accordance with the rules and regulations of the SEC.
For further information, reference is hereby made to the Form S-4. Copies of
the Form S-4 (including the exhibits and schedules thereto), may be inspected,
without charge, at the offices of the SEC, or obtained at prescribed rates
from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or accessed via the SEC Website at
http://www.sec.gov.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY CIRCULAR AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROXY CIRCULAR DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A
PROXY, BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION OF AN OFFER OR PROXY SOLICITATION.
NEITHER DELIVERY OF THIS PROXY CIRCULAR NOR ANY DISTRIBUTION OF THE SECURITIES
REFERRED TO IN THIS PROXY CIRCULAR SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
SINCE THE DATE OF THIS PROXY CIRCULAR.
---------------
INFORMATION PROVIDED BY AUTODESK AND DISCREET
All information in this Proxy Circular relating to Discreet has been
supplied by Discreet. All information relating to Autodesk, ACI, Autodesk
Quebec, Amalgamation Sub or Dutchco has been supplied by Autodesk. The
unaudited pro forma combined condensed financial information contained in this
Proxy Circular was prepared by Autodesk with information furnished, in part,
by Discreet.
---------------
TRADEMARKS
This Proxy Circular contains trademarks of Autodesk and Discreet and also
may include other trademarks and trade names which are the property of their
respective owners.
---------------
FORWARD-LOOKING STATEMENTS
This Proxy Circular contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. Any statements contained herein (including without limitation
statements to the effect that Autodesk, Discreet or their respective
managements "believes," "expects," "anticipates," "plans" and similar
expressions) that are not statements of historical fact should be considered
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of certain factors,
including those set forth in the "Risk Factors" section below. Reference is
also made to the particular discussions set forth under "Autodesk Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Discreet Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<PAGE>
INCORPORATION OF DOCUMENTS BY REFERENCE
All documents and reports subsequently filed by Autodesk or Discreet
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Circular and prior to the Effective Time shall be deemed to
be incorporated by reference in this Proxy Circular and to be part hereof from
the dates of filing of such documents or reports. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Proxy Circular to
the extent that a statement contained herein or in any other subsequently
filed document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Circular.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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GLOSSARY OF TERMS......................................................... 1
AUTODESK AND DISCREET REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES...... 6
CANADIAN/US EXCHANGE RATES................................................ 6
SUMMARY................................................................... 7
Parties to the Acquisition Agreement...................................... 7
Special Meeting of Stockholders of Autodesk............................... 8
Special Meeting of Shareholders of Discreet............................... 9
Risk Factors.............................................................. 9
Reasons for the Transactions.............................................. 10
Piper Jaffray Fairness Opinion............................................ 10
Volpe Brown Whelan Fairness Opinion....................................... 10
The Transactions.......................................................... 10
Accounting Treatment...................................................... 13
Offering of Autodesk Common Stock......................................... 13
Certain Canadian Federal Income Tax Considerations........................ 14
Regulatory Matters........................................................ 16
No Appraisal Rights....................................................... 16
MARKET PRICE AND DIVIDEND INFORMATION..................................... 17
Autodesk Common Stock..................................................... 17
Discreet Common Shares.................................................... 17
SELECTED HISTORICAL AND UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL
DATA..................................................................... 19
UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA............ 22
COMPARATIVE PER SHARE DATA................................................ 23
RISK FACTORS.............................................................. 24
Risks Relating to the Transactions........................................ 24
Risks Relating to the Combined Company.................................... 27
AUTODESK SPECIAL MEETING.................................................. 35
Date, Time and Place of Autodesk Meeting.................................. 35
Purpose................................................................... 35
Record Date and Outstanding Shares........................................ 35
Vote Required............................................................. 35
Solicitation of Proxies; Expenses......................................... 36
Recommendation of the Autodesk Board...................................... 36
DISCREET SPECIAL MEETING.................................................. 37
Date, Time and Place of Discreet Meeting.................................. 37
Purpose................................................................... 37
Record Date and Outstanding Shares........................................ 37
Vote Required............................................................. 37
Proxies................................................................... 38
Solicitation of Proxies; Expenses......................................... 38
Recommendation of the Discreet Board...................................... 38
APPROVAL OF THE TRANSACTIONS.............................................. 39
Background of the Transactions............................................ 39
Joint Reasons for the Transactions........................................ 44
Discreet's Reasons for the Transactions .................................. 45
</TABLE>
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TABLE OF CONTENTS--(CONTINUED)
<TABLE>
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<S> <C>
Autodesk's Reasons for the Transactions................................... 47
Interests of Certain Persons in the Transactions.......................... 49
Opinion of Autodesk's Financial Advisor................................... 50
Opinion of Discreet's Financial Advisor................................... 55
Proposed Market Purchases of Discreet Common Shares....................... 59
TERMS OF THE TRANSACTIONS................................................. 60
General................................................................... 60
Effective Time of the Amalgamation........................................ 61
Conversion of Discreet Common Shares...................................... 61
Treatment of Discreet Share Options, the Discreet Stock Option Plans and
the Discreet Employee Stock Purchase Plan................................ 61
Procedures for Election and Exchange of Share Certificates by Discreet
Shareholders............................................................. 62
Operations of the Combined Company Following the Transactions............. 63
Transaction Mechanics..................................................... 64
Post-Combination Share Ownership.......................................... 65
Accounting Treatment...................................................... 65
Offering of Autodesk Common Stock......................................... 66
Description of New Discreet Exchangeable Shares........................... 66
Representations and Warranties............................................ 69
Business of Autodesk Pending Consummation of the Transactions............. 69
Business of Discreet Pending Consummation of the Transactions............. 69
Non-Solicitation by Discreet of Alternative Transactions.................. 70
Indemnification........................................................... 72
Conditions to the Transactions............................................ 72
Termination, Amendment and Waiver......................................... 74
Fees and Expenses......................................................... 74
Assignment................................................................ 76
Confidentiality Agreement................................................. 76
Agreements of Autodesk and Discreet Affiliates............................ 76
Autodesk and Discreet Voting Agreements................................... 77
Support Agreement......................................................... 77
Voting and Exchange Trust Agreement....................................... 77
Nasdaq National Market Listings........................................... 78
Eligibility for Investment in Canada...................................... 78
Regulatory Matters........................................................ 78
Resale of New Discreet Exchangeable Shares and Autodesk Common Stock
Received in connection with the Transactions............................. 79
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.............. 80
CERTAIN CANADIAN FEDERAL AND UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS TO DISCREET SHAREHOLDERS.................................. 88
Canadian Federal Income Tax Considerations................................ 88
Discreet Shareholders Resident in Canada.................................. 88
Discreet Shareholders Not Resident in Canada.............................. 94
Certain United States Federal Income Tax Considerations................... 95
U.S. Holders in General................................................... 96
Non-U.S. Holders.......................................................... 98
Backup Withholding........................................................ 99
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AUTODESK................................................................... 100
BUSINESS................................................................... 100
Background................................................................. 100
Products................................................................... 100
Product Development and Enhancement........................................ 103
Marketing and Sales........................................................ 105
Customer and Dealer Support................................................ 105
Developer Programs......................................................... 106
Backlog.................................................................... 107
Competition................................................................ 107
Intellectual Property and Licenses......................................... 107
Production................................................................. 108
Employees.................................................................. 108
Properties................................................................. 108
Legal Proceedings.......................................................... 109
AUTODESK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 110
Results of Operations...................................................... 110
Six Months Ended July 31, 1998 and 1997.................................... 110
Fiscal Years Ended January 31, 1998, 1997 and 1996......................... 114
Certain Risk Factors Which May Impact Future Operating Results............. 117
Liquidity and Capital Resources............................................ 122
AUTODESK MANAGEMENT, EXECUTIVE COMPENSATION AND PRINCIPAL STOCKHOLDERS..... 124
Autodesk Management........................................................ 124
Compensation of Directors.................................................. 126
Autodesk Executive Compensation............................................ 126
Option Grants.............................................................. 127
Option Exercises and Holdings.............................................. 127
Autodesk Principal Stockholders............................................ 128
Employment Contracts and Certain Transactions.............................. 129
Pro Forma Stock Ownership of Autodesk Principal Stockholders and Directors. 130
DISCREET................................................................... 132
BUSINESS................................................................... 132
Background................................................................. 132
Products................................................................... 133
Advanced Systems........................................................... 133
System Components.......................................................... 134
New Media Software......................................................... 135
Customers.................................................................. 136
Marketing and Sales........................................................ 136
Systems Integration, Service and Support................................... 137
Research and Development................................................... 137
Proprietary Rights......................................................... 138
Manufacturing and Suppliers................................................ 139
Competition................................................................ 140
Employees.................................................................. 140
</TABLE>
iii
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TABLE OF CONTENTS--(CONTINUED)
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Properties................................................................ 140
Legal Proceedings......................................................... 141
Recent Acquisitions....................................................... 141
DISCREET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 143
Certain Factors That May Affect Future Results............................ 143
Overview.................................................................. 145
Results of Operations..................................................... 148
Quarterly Results of Operations........................................... 153
Liquidity and Capital Resources........................................... 155
DISCREET MANAGEMENT, EXECUTIVE COMPENSATION AND PRINCIPAL SHAREHOLDERS.... 157
Discreet Management....................................................... 157
Compensation and Other Information Concerning Discreet Officers........... 159
Employment Agreements and Severance Arrangements.......................... 161
Compensation Committee Interlocks Insider Participation................... 163
Compensation of Discreet Directors........................................ 163
Certain Relationships and Related Transactions............................ 163
Security Ownership of Certain Beneficial Owners and Management of
Discreet................................................................. 165
DESCRIPTION OF CAPITAL STOCK.............................................. 167
Autodesk Capital Stock.................................................... 167
Discreet Share Capital.................................................... 168
Comparison of Shareholders' Rights........................................ 168
EXPERTS................................................................... 175
LEGAL MATTERS............................................................. 175
FINANCIAL STATEMENTS...................................................... F-1
Index to Consolidated Financial Statements................................ F-1
Discreet Logic Inc. and Subsidiaries...................................... F-2
Autodesk, Inc............................................................. F-29
</TABLE>
<TABLE>
<C> <S>
APPENDIX A ACQUISITION AGREEMENT
APPENDIX B AMALGAMATION AGREEMENT
APPENDIX C FORM OF SUPPORT AGREEMENT
APPENDIX D FORM OF VOTING AND EXCHANGE TRUST AGREEMENT
APPENDIX E-1 AUTODESK RESOLUTION
APPENDIX E-2 DISCREET RESOLUTION
APPENDIX F OPINION OF AUTODESK FINANCIAL ADVISOR
APPENDIX G OPINION OF DISCREET FINANCIAL ADVISOR
</TABLE>
iv
<PAGE>
GLOSSARY OF TERMS
The following terms have the following meanings when used in this Proxy
Circular (including the summary). These defined terms are not used in the
consolidated financial statements contained herein. The * (asterisk) appearing
after the Discreet product names identifies the product as being from
Discreet.
"ACI" means Autodesk Canada Inc., an Ontario corporation and wholly owned
subsidiary of Autodesk.
"Acquisition Agreement" means the Amended and Restated Agreement and Plan of
Acquisition and Amalgamation by and among Autodesk, Dutchco, Amalgamation Sub,
Autodesk Quebec, ACI and Discreet dated as of September 23, 1998, a copy of
which is attached as Appendix A to this Proxy Circular.
"Amalgamation" means the amalgamation of Amalgamation Sub, Autodesk Quebec
and Discreet pursuant to the Articles of Amalgamation.
"Amalgamation Agreement" means the Amalgamation Agreement dated as of
September 21, 1998 by and among Discreet, Autodesk Quebec, Amalgamation Sub
and Autodesk, a copy of which is attached as Appendix B to this Proxy
Circular.
"Amalgamation Sub" means 9066-9771 Quebec Inc., a newly incorporated Quebec
company and wholly owned subsidiary of Dutchco.
"Antitrust Division" means the Antitrust Division of the United States
Department of Justice.
"Articles of Amalgamation" means the articles of amalgamation to be filed
with the Inspector General of Financial Institutions pursuant to Section
123.118 of the Quebec Act to give effect to the Amalgamation.
"Autodesk" means Autodesk, Inc., a Delaware corporation, together with its
subsidiaries, unless the context otherwise requires.
"Autodesk Board" means the Board of Directors of Autodesk.
"Autodesk Common Stock" means the common stock of Autodesk, par value $0.01
per share.
"Autodesk Meeting" means the special meeting of Autodesk Stockholders to be
held on November [ ], 1998 at [ ] .m, local time, at The Executive
Briefing Center, Autodesk, Inc., 111 McInnis Parkway, San Rafael, California,
to consider and vote on the Autodesk Resolution.
"Autodesk Quebec" means 9066-9854 Quebec Inc., a newly incorporated Quebec
company, which is a wholly owned subsidiary of ACI and an indirect wholly
owned subsidiary of Autodesk.
"Autodesk Record Date" means [ ], 1998.
"Autodesk Resolution" means the resolution for consideration at the Autodesk
Meeting by the Autodesk Stockholders concerning the issuance of Autodesk
Common Stock pursuant to the Transactions in the form set forth in Appendix E-
1 to this Proxy Circular.
"Autodesk Stockholder" means a holder of Autodesk Common Stock.
"Business Day" means any day other than a Saturday, Sunday or a day on which
banks are not open for business in either of San Francisco, California or
Montreal, Quebec.
"Call Rights" means the Liquidation Call Right, the Redemption Call Right
and the Retraction Call Right, collectively.
"Canadian Dollar Equivalent" means, with respect to an amount expressed in
US dollars (the "US Dollar Amount") at any date, the product obtained by
multiplying (i) the US Dollar Amount by (ii) the noon spot exchange rate on
such date for US dollars expressed in Canadian dollars as reported by the Bank
of Canada or, in the event such spot exchange rate is not available, such
exchange rate on such date for US dollars expressed in Canadian dollars as may
be deemed by the Board of Directors of New Discreet to be appropriate for such
purpose.
1
<PAGE>
"Canadian dollars" and "Cdn$" mean the lawful currency of Canada.
"Canadian Tax Act" means the Income Tax Act (Canada), including all
regulations made thereunder, all amendments to such statute or regulations
from time to time, and any statute or regulation that supplements or
supersedes such statute or regulation.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Combined Company" means Autodesk, New Discreet and their respective
subsidiaries as a consolidated entity following the Amalgamation.
"Depositary" means Harris Trust & Savings Bank.
"DGCL" means the General Corporation Law of the State of Delaware, including
all regulations made thereunder, all amendments to such statute or regulations
from time to time, and any statute or regulation that supplements or
supersedes such statute or regulation.
"Discreet" means Discreet Logic Inc., a Quebec company, together with its
subsidiaries, unless the context otherwise requires.
"Discreet Board" means the Board of Directors of Discreet.
"Discreet Common Shares" means the common shares of Discreet, no par value
per share.
"Discreet Employee Stock Purchase Plan" means Discreet's 1995 Employee Stock
Purchase Plan.
"Discreet Meeting" means the special general meeting of Discreet
Shareholders to be held on November [ ], 1998 at [ ] .m, local time, at
[ ], to consider and vote upon the Discreet Resolution.
"Discreet Record Date" means [ ], 1998.
"Discreet Resolution" means the resolution for consideration by the Discreet
Shareholders at the Discreet Meeting concerning the Acquisition Agreement and
the Transactions, in the form set forth in Appendix E-2 to this Proxy
Circular.
"Discreet Share Option" means an option to purchase Discreet Common Shares
issued under a Discreet Stock Option Plan.
"Discreet Shareholder" means a holder of record of Discreet Common Shares.
"Discreet Special Committee" means the special committee of the Discreet
Board, consisting of three directors who are not employees of Discreet and who
do not own a significant number of Discreet Common Shares, formed to review
the proposed Transactions and to determine whether they are in the best
interests of Discreet and its shareholders, and make a recommendation with
respect thereto.
"Discreet Stock Option Plans" means Discreet's Amended and Restated 1994
Restricted Stock and Stock Option Plan, 1995 Non-Employee Director Stock
Option Plan and 1997 Special Limited Non-Employee Director Stock Plan.
"Dividend Amount" means an amount equivalent to the full amount of all
declared and unpaid dividends on the New Discreet Exchangeable Shares plus all
dividends declared on Autodesk Common Stock which have not been declared in an
economically equivalent amount on the New Discreet Exchangeable Shares in
accordance with the rights attaching to the New Discreet Exchangeable Shares.
"Dutchco" means Autodesk Development B.V., a Netherlands corporation and
indirect wholly owned subsidiary of Autodesk.
2
<PAGE>
"Effective Time" means 3:59 p.m. (Montreal time) on the date shown on the
Certificate of Amalgamation to be issued by the Inspector General of Financial
Institutions confirming the Amalgamation pursuant to Section 123.119 of the
Quebec Act.
"Election Deadline" means 5:00 p.m. (local time at the place of deposit) on
, 1998.
"Elected Amount" means the amount selected by a holder of New Discreet Class
B Shares to be the proceeds of disposition of the New Discreet Class B Shares
in the election made pursuant to the Canadian Tax Act.
"Eligible Holder" means a holder (i) who is a Canadian resident for purposes
of the Canadian Tax Act other than any such holder who is exempt from tax
under the Canadian Tax Act, or (ii) which is a partnership that owns New
Discreet Class B Shares if one or more of its members would be an Eligible
Holder if such member held directly such shares.
"Exchange Ratio" means 0.525 shares of Autodesk Common Stock or New Discreet
Exchangeable Shares, as the case may be, for each Discreet Common Share.
"Exchange Rights" means the rights of holders of New Discreet Exchangeable
Shares to require Dutchco to purchase their New Discreet Exchangeable Shares
using one share of Autodesk Common Stock for each New Discreet Exchangeable
Share in the circumstances described in Article 5 of the Voting and Exchange
Trust Agreement.
"Form S-3" means the Registration Statement on Form S-3 under the Securities
Act (together with all amendments and exhibits thereto) filed by Autodesk to
register the shares of Autodesk Common Stock issuable from time to time upon
exchange of the New Discreet Exchangeable Shares issued in connection with the
Transactions.
"Form S-4" means the Registration Statement on Form S-4 under the Securities
Act (together with all amendments and exhibits thereto) filed by Autodesk to
register the issuance of shares of Autodesk Common Stock, New Discreet
Exchangeable Shares, New Discreet Class B Shares, New Discreet Class E Shares
and New Discreet Class F Shares in connection with the Transactions.
"FTC" means the United States Federal Trade Commission.
"HSR Act" means the United States Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"HSR Notice" means a Notification and Report Form filed with the Antitrust
Division and the FTC.
"Letter of Transmittal and Election Form" means the letter of transmittal
and election form for use by Discreet Shareholders. A copy is enclosed with
this Proxy Circular and additional copies are available upon request from the
Depositary.
"Liquidation Call Right" means the overriding right of Dutchco, in the event
of and notwithstanding the proposed liquidation, dissolution or winding-up of
New Discreet, to purchase from all but not less than all of the holders of New
Discreet Exchangeable Shares all but not less than all of the New Discreet
Exchangeable Shares held by each such holder, as more particularly described
in Article 5.4 of the provisions attaching to the New Discreet Exchangeable
Shares set forth in Appendix A to the Amalgamation Agreement.
"Nasdaq National Market" means the Nasdaq National Market of The Nasdaq
Stock Market, Inc.
"New Discreet" means a new subsidiary of Dutchco and indirect subsidiary of
Autodesk resulting from the Amalgamation which will carry on, among other
things, the business of Discreet.
"New Discreet Class A Shares" means the Class A voting common shares in the
share capital of New Discreet having the rights, privileges, restrictions and
conditions set forth in Appendix A to the Amalgamation Agreement.
"New Discreet Class B Shares" means the Class B non-voting common shares in
the share capital of New Discreet having the rights, privileges, restrictions
and conditions set forth in Appendix A to the Amalgamation Agreement.
3
<PAGE>
"New Discreet Class C Shares" means the Class C non-voting preferred shares
in the share capital of New Discreet having the rights, privileges,
restrictions and conditions set forth in Appendix A to the Amalgamation
Agreement.
"New Discreet Class D Shares" means the Class D non-voting preferred shares
in the share capital of New Discreet having the rights, privileges,
restrictions and conditions set forth in Appendix A to the Amalgamation
Agreement.
"New Discreet Class E Shares" means the Class E voting common shares in the
share capital of New Discreet having the rights, privileges, restrictions and
conditions set forth in Appendix A to the Amalgamation Agreement.
"New Discreet Class F Shares" means the Class F non-voting common shares in
the share capital of New Discreet having the rights, privileges, restrictions
and conditions set forth in Appendix A to the Amalgamation Agreement.
"New Discreet Exchangeable Shares" means the exchangeable non-voting shares
in the share capital of New Discreet having the rights, privileges,
restrictions and conditions set forth in Appendix A to the Amalgamation
Agreement.
"New Discreet Units" means the units, each consisting of one New Discreet
Class E Share and one New Discreet Class F Share.
"Original Agreement" means the Agreement and Plan of Acquisition and
Arrangement by and among Autodesk, Dutchco, Amalgamation Sub, ACI, Autodesk
Quebec and Discreet dated as of August 20, 1998.
"Piper Jaffray" means Piper Jaffray, Inc., financial advisor to Autodesk.
"Quebec Act" means the Companies Act (Quebec), including all regulations
made thereunder, all amendments to such statute or regulations from time to
time, and any statute or regulation that supplements or supersedes such
statute or regulation.
"Redemption Call Right" means the overriding right of Dutchco in the event
of and notwithstanding a proposed redemption of New Discreet Exchangeable
Shares by New Discreet, to purchase from all but not less than all of the
holders of New Discreet Exchangeable Shares all but not less than all of the
New Discreet Exchangeable Shares held by each such holder, as more
particularly described in the provisions attaching to the New Discreet
Exchangeable Shares set forth in Appendix A to the Amalgamation Agreement.
"Reissuance Offering" means the offering and sale by Autodesk of
approximately 3 million shares of Autodesk Common Stock prior to the Effective
Time in order to ensure that the Transactions may be accounted for as a
pooling-of-interests.
"Retraction Call Right" means the overriding right of Dutchco in the event
of and notwithstanding a request by a holder of New Discreet Exchangeable
Shares for New Discreet to redeem any or all of the New Discreet Exchangeable
Shares registered in the name of such holder, to purchase all but not less
than all of the New Discreet Exchangeable Shares that are the subject of such
request directly from such holder, as more particularly described in the
provisions attaching to the New Discreet Exchangeable Shares set forth in
Appendix A to the Amalgamation Agreement.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the United States Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Securities Exchange Act" means the United States Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
"Special Voting Share" means the one share of Series B Preferred Stock of
Autodesk to be issued to the Trustee by Autodesk upon consummation of the
Transactions and to be held by the Trustee pursuant to the terms of the Voting
and Exchange Trust Agreement.
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<PAGE>
"Support Agreement" means the agreement to be entered into by and among
Autodesk, Dutchco and New Discreet in connection with the Transactions,
substantially in the form attached as Appendix C to this Proxy Circular.
"Transactions" means the business combination of Autodesk and Discreet
effected by way of (i) the Amalgamation, (ii) the redemption of New Discreet
Class B Shares for Exchangeable Shares, (iii) the automatic conversion of New
Discreet Class B Shares into New Discreet Units and (iv) the acquisition by
Dutchco of New Discreet Units in exchange for shares of Autodesk Common Stock.
"Trustee" means Montreal Trust Company of Canada, as trustee under the
Voting and Exchange Trust Agreement.
"US dollars," "$" and "US$" mean the lawful currency of the United States.
"US GAAP" means the generally accepted accounting principles in effect in
the United States as of the date of the financial statements contained in this
Proxy Circular.
"Volpe Brown Whelan" means Volpe Brown Whelan & Company, LLC, financial
advisor to Discreet.
"Voting and Exchange Trust Agreement" means the agreement to be entered into
immediately after the Effective Time by and among Autodesk, New Discreet,
Dutchco and the Trustee in connection with the Transactions, substantially in
the form attached as Appendix D to this Proxy Circular.
"Voting Rights" means the voting rights attached to the Special Voting Share
exercisable by the Trustee at the direction of the holders of New Discreet
Exchangeable Shares, other than Autodesk, its subsidiaries and affiliates,
pursuant to the terms of the Voting and Exchange Trust Agreement.
5
<PAGE>
AUTODESK AND DISCREET REPORTING CURRENCIES
AND ACCOUNTING PRINCIPLES
The financial statements and the pro forma financial statements of, and the
selected historical and pro forma financial data concerning, Autodesk and
Discreet, as the case may be, contained in this Proxy Circular are reported in
US dollars and have been prepared in accordance with US GAAP.
CANADIAN/US EXCHANGE RATES
According to Dow Jones Interactive, for Discreet's fiscal 1994 through
fiscal 1998, the high and low exchange rates (i.e., the rate at which Canadian
dollars were sold for US dollars), the average exchange rate (i.e., the
average of the exchange rates on the last day of each month during the period)
and end-of-period exchange rates for one Canadian dollar expressed in US
dollars for the periods indicated are set forth below:
<TABLE>
<CAPTION>
FISCAL YEAR ELEVEN MONTHS FISCAL YEAR
ENDED JULY 31, ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------- --------------
1994 1995 1996 1997 1998
------ ------ ------ -------------- --------------
US$ US$ US$ US$ US$
<S> <C> <C> <C> <C> <C>
High for period........... 0.7777 0.7455 0.7523 0.7514 0.7293
Low for period............ 0.7167 0.7096 0.7218 0.7150 0.6837
Average for period........ 0.7438 0.7260 0.7343 0.7322 0.7645
End of period............. 0.7236 0.7287 0.7276 0.7249 0.6800
</TABLE>
On , 1998, the noon buying rate for Cdn$1.00 was US$ . .
6
<PAGE>
SUMMARY
The following is a summary of certain information about Autodesk, Dutchco,
Discreet, the Acquisition Agreement and the Transactions, and is qualified in
its entirety by reference to the full text of this Proxy Circular and the
appendices hereto. Autodesk Stockholders and Discreet Shareholders are urged to
read this Proxy Circular and the accompanying appendices in their entirety.
References to "dollars" or "$" shall be to US dollars unless otherwise
specified herein. This Proxy Circular contains a number of forward-looking
statements which reflect the current view of Autodesk and/or Discreet with
respect to future events that are expected to have an effect on their future
individual or combined operations and financial performance, including, but not
limited to, forward-looking statements regarding the expected benefits and
synergies of the Transactions and regarding the reasons for the Transactions.
These forward-looking statements are subject to various risks and
uncertainties, including those set forth under "Risk Factors" and elsewhere
herein, that could cause actual results to differ materially from historical
results or those currently anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements.
PARTIES TO THE ACQUISITION AGREEMENT
Autodesk. Autodesk develops, markets and supports personal computer software
for design drafting, visualization and multimedia content creation. Autodesk
has structured its internal marketing and development organizations around five
key market groups that most closely match Autodesk's customer base:
Architecture, Engineering and Construction ("AEC"), Mechanical Computer-Aided
Design ("MCAD"), Geographic Information Systems ("GIS"), Personal Solutions
Group ("PSG") and Multimedia ("Kinetix"). Autodesk's AEC Market Group provides
solutions from Autodesk and third-party developers to manage every phase of a
building's life cycle--from conceptual design through construction, maintenance
and renovation. Autodesk's MCAD Market Group provides mechanical engineers,
designers and drafters with advanced, value-based solutions designed to solve
their professional design challenges. Autodesk's GIS products provide easy-to-
use mapping and GIS technology to help businesses and governments manage their
assets and infrastructure. Autodesk's PSG Market Group develops easy-to-use,
affordable tools for professionals, occasional users and consumers who design,
draft, and diagram. The Kinetix division of Autodesk is devoted to bringing
powerful 3D content-creation software to computer-industry professionals
focused on two markets: entertainment (film, broadcast video and interactive
games) and design conceptualization and visualization. Kinetix provides two
core platform products--3D Studio MAX and 3D Studio VIZ--that specifically
focus on these markets.
Autodesk is a corporation organized under the laws of the State of Delaware.
Its principal executive offices are located at 111 McInnis Parkway, San Rafael,
California 94903, and its telephone number is (415) 507-5000.
Autodesk Development B.V. Dutchco is a Netherlands corporation and indirect
wholly owned subsidiary of Autodesk.
Autodesk Canada Inc. ACI is an Ontario corporation and wholly owned
subsidiary of Autodesk.
9066-9771 Quebec Inc. Amalgamation Sub is a company recently organized by
Dutchco under the laws of Quebec for the purpose of effecting the Amalgamation.
It has no material assets and has not engaged in any activities except in
connection with the Amalgamation.
9066-9854 Quebec Inc. Autodesk Quebec is a company recently organized by ACI
under the laws of Quebec for the purpose of effecting the Amalgamation. At
present, it has no material assets and has not engaged in any activities except
in connection with the Amalgamation. Prior to the Effective Time, ACI will
transfer substantially all of its assets and liabilities to Autodesk Quebec,
and ACI will be Autodesk Quebec's sole shareholder.
Discreet. Discreet develops, assembles, markets and supports non-linear, on-
line digital systems and software for creating, editing and compositing imagery
and special effects for film, video, HDTV, broadcast and
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the Web. Discreet's systems and software are utilized by creative professionals
for a variety of applications, including feature films, television programs,
commercials, music and corporate videos, interactive game production, live
broadcasting as well as Web design. Discreet's systems have played key roles in
the creation of special visual effects for films such as Armageddon, Titanic,
Forrest Gump, Independence Day, The Fifth Element, Batman & Robin, Contact and
Air Force One; television programs and special events such as ABC's "World News
Tonight with Peter Jennings" and the 1996 United States Presidential elections
on ABC and CBS; music videos by artists including U2, REM, Rolling Stones and
The Beatles; and commercials for clients such as Nike, Pepsi, AT&T and
McDonald's. Discreet believes that creative professionals and designers require
tools that simplify their work, enabling them to devote more time to creative
activities and less time to technical tasks.
Discreet offers high-end turnkey systems and software focused towards three
markets: special effects, editing and broadcast production. Discreet's systems
include its inferno* and flame* systems (special effects), its fire* and smoke*
systems (editing) and its frost* system (broadcast production). Discreet's
flame* system is an uncompressed, on-line, resolution independent, non-linear,
digital system and is used to create, edit and composite special visual effects
in an on-line, real-time environment, providing instant feedback to the
creative professional. Discreet's inferno* system is an uncompressed, on-line,
resolution independent, non-linear, digital system providing all of the
features of flame* with film tools and increased film resolution and colour
control for digital film work. Discreet's fire* system is an uncompressed, on-
line, non-linear, digital video editing system with special effects
capabilities. Discreet's smoke* system is an uncompressed, on-line, non-linear,
digital video editing system with limited special effects capabilities. In the
broadcast production market, Discreet offers its frost* system, a computer-
based set of modeling, animation and rendering tools for the creation and
manipulation of 3D graphics, including virtual sets for broadcast companies.
Discreet's new media software products include its effect* and paint* products,
and its edit* and light* products. Discreet sells its systems and software
through a direct sales force as well as through distributors and resellers.
Discreet is a company organized under the laws of the province of Quebec. Its
principal executive offices are located at 10 Duke Street, Montreal, Quebec H3C
2L7, and its telephone number is (514) 393-1616.
SPECIAL MEETING OF STOCKHOLDERS OF AUTODESK
Time, Date, Place and Purpose
The Autodesk Meeting will be held at The Executive Briefing Center, Autodesk,
Inc., 111 McInnis Parkway, San Rafael, California on November [ ], 1998 at
:00 .m., local time. The purpose of the Autodesk Meeting is to approve the
Autodesk Resolution and to transact such further or other business as may
properly come before the Autodesk Meeting or any postponement or adjournment
thereof, including a proposal to adjourn the Autodesk Meeting, if necessary, to
permit further solicitation of proxies in the event there are not sufficient
votes at the time of the Autodesk Meeting to approve the Autodesk Resolution.
See "Autodesk Special Meeting--Date, Time and Place of Autodesk Meeting" and
"--Purpose."
Record Date; Vote Required and Voting Agreements
Only Autodesk Stockholders of record at the close of business on the Autodesk
Record Date are entitled to notice of and to vote at the Autodesk Meeting.
Under the DGCL and the rules of the Nasdaq National Market, the Autodesk
Resolution requires the affirmative vote of a majority of the total votes cast
regarding such proposal at a meeting at which a quorum is present or
represented by proxy. See "Autodesk Special Meeting--Record Date and
Outstanding Shares" and "--Vote Required."
As of the Autodesk Record Date, there were Autodesk Stockholders of
record and shares of Autodesk Common Stock outstanding. Each Autodesk
Stockholder will be entitled to cast one vote per share on each matter to be
acted upon at the Autodesk Meeting. Autodesk's executive officers and certain
of its directors have agreed to vote their shares in favor of the Autodesk
Resolution. See "Autodesk Special Meeting--Vote Required" and "Terms of the
Transactions--Autodesk and Discreet Voting Agreements."
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Recommendation of the Autodesk Board of Directors
The Autodesk Board has unanimously approved the Acquisition Agreement and the
Transactions and has determined that the Transactions are fair and in the best
interests of Autodesk and its stockholders. After careful consideration, the
Autodesk Board unanimously recommends that you vote FOR the Autodesk
Resolution. Autodesk Stockholders should read this Proxy Circular carefully
before voting. See "Approval of the Transactions--Background of the
Transactions," "--Joint Reasons for the Transactions," "--Autodesk's Reasons
for the Transactions," and "Autodesk Special Meeting--Recommendation of the
Autodesk Board."
SPECIAL MEETING OF SHAREHOLDERS OF DISCREET
Time, Date, Place and Purpose
The Discreet Meeting will be held at
[ ] on November [ ], 1998 at :00
.m. local time. The purpose of the Discreet Meeting is to consider and vote
upon the Discreet Resolution and to transact such further or other business as
may properly come before the Discreet Meeting or any adjournment thereof,
including a proposal to adjourn the Discreet Meeting, if necessary, to permit
further solicitation of proxies in the event there are not sufficient votes at
the time of the Discreet Meeting to approve the Discreet Resolution.
See "Discreet Special Meeting--Date, Time and Place of Discreet Meeting" and
"--Purpose."
Record Date; Vote Required and Voting Agreements
Only Discreet Shareholders of record at the close of business on the Discreet
Record Date are entitled to notice of and to vote at the Discreet Meeting. The
Discreet Resolution must be approved by the affirmative vote of not less than
sixty-six and two-thirds percent (66 2/3%) of the Discreet Common Shares
present or represented by proxy at the Discreet Meeting at which a quorum is
present. See "Discreet Special Meeting--Record Date and Outstanding Shares" and
"--Vote Required."
As of the Discreet Record Date, there were Discreet Shareholders of
record and Discreet Common Shares outstanding. Each Discreet
Shareholder will be entitled to cast one vote per share on each matter to be
acted upon at the Discreet Meeting. Discreet's executive officers and certain
of Discreet's directors have agreed to vote their shares in favor of the
Discreet Resolution. See "Discreet Special Meeting--Vote Required," "Approval
of the Transactions--Interests of Certain Persons in the Transactions" and
"Terms of the Transactions--Autodesk and Discreet Voting Agreements."
Recommendation of the Discreet Board of Directors
After careful consideration, based on the unanimous recommendation of the
Discreet Special Committee, Discreet's Board of Directors has approved the
Acquisition Agreement by the unanimous vote of all non-interested directors and
believes that the Transactions are in the best interests of Discreet and its
shareholders, and recommends that you vote FOR the Discreet Resolution.
Discreet Shareholders should read this Proxy Circular carefully prior to
voting. See "Approval of the Transactions--Background of the Transactions," "--
Joint Reasons for the Transactions," "--Discreet's Reasons for the
Transactions," and "Discreet Special Meeting--Recommendation of the Discreet
Board."
RISK FACTORS
IN CONSIDERING WHETHER TO APPROVE THE AUTODESK RESOLUTION AND THE DISCREET
RESOLUTION, AUTODESK STOCKHOLDERS AND DISCREET SHAREHOLDERS, RESPECTIVELY,
SHOULD CAREFULLY REVIEW AND CONSIDER THE INFORMATION CONTAINED BELOW UNDER THE
CAPTION "RISK FACTORS."
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REASONS FOR THE TRANSACTIONS
Autodesk and Discreet have identified several potential benefits of the
Transactions that they believe will contribute to the success of the Combined
Company. The parties believe that the business combination with Discreet will
position the Combined Company to create the premier total solutions provider of
digital content design, creation and manipulation tools for the creation of
moving images. See "Approval of the Transactions--Background of the
Transactions," "--Joint Reasons for the Transactions," "-- Autodesk's Reasons
for the Transactions" and "Discreet's Reasons for the Transactions."
PIPER JAFFRAY FAIRNESS OPINION
Piper Jaffray has delivered to the Autodesk Board its written opinion, dated
August 18, 1998, to the effect that, as of such date, the Exchange Ratio was
fair from a financial point of view to Autodesk. The full text of the opinion
of Piper Jaffray, which sets forth assumptions made and matters considered, is
attached as Appendix F to this Proxy Circular and is incorporated herein by
reference. AUTODESK STOCKHOLDERS ARE URGED TO, AND SHOULD, READ SUCH OPINION IN
ITS ENTIRETY. See "Approval of the Transactions--Opinion of Autodesk's
Financial Advisor" and Appendix F attached hereto.
VOLPE BROWN WHELAN FAIRNESS OPINION
Volpe Brown Whelan has delivered to the Discreet Board its written opinion,
dated August 20, 1998, to the effect that, as of such date, the consideration
to be received by Discreet Shareholders in connection with the Transactions was
fair from a financial point of view to the Discreet Shareholders. The full text
of the opinion of Volpe Brown Whelan, which sets forth assumptions made and
matters considered, is attached as Appendix G to this Proxy Circular and is
incorporated herein by reference. DISCREET SHAREHOLDERS ARE URGED TO, AND
SHOULD, READ SUCH OPINION IN ITS ENTIRETY. See "Approval of the Transactions--
Opinion of Discreet's Financial Advisor" and Appendix G attached hereto.
THE TRANSACTIONS
Terms of the Transactions
The Transactions will be completed by way of an Amalgamation under the Quebec
Act and certain related transactions described below. Pursuant to the Articles
of Amalgamation, Discreet will be amalgamated with Autodesk Quebec and
Amalgamation Sub to form New Discreet. Each holder of Discreet Common Shares
will receive upon the Amalgamation one New Discreet Class B Share for each
Discreet Common Share then held by such holder. Immediately following the
Amalgamation, each such New Discreet Class B Share will automatically, based
upon the prior election of the holder thereof, either (i) be redeemed by New
Discreet for 0.525 New Discreet Exchangeable Shares or (ii) be converted into
one New Discreet Unit, which will immediately thereafter be acquired by Dutchco
in exchange for 0.525 shares of Autodesk Common Stock, in either case without
any further required action on the part of the holder. Pursuant to the
Acquisition Agreement, the maximum number of New Discreet Exchangeable Shares
issuable in the Transactions may not exceed 19.99% of the Discreet Common
Shares outstanding immediately prior to the Amalgamation, multiplied by the
Exchange Ratio. In the event the number of New Discreet Exchangeable Shares
otherwise issuable to holders of the Discreet Common Shares pursuant to the
Transactions exceeds this maximum number, such Discreet Shareholders will
receive, pro rata, New Discreet Units in lieu of New Discreet Exchangeable
Shares in respect of such excess. The New Discreet Exchangeable Shares will be
exchangeable at any time at the option of the holder, and will automatically be
exchanged on the eleventh anniversary of the Effective Time (or earlier upon
the occurrence of certain events, including the liquidation, dissolution or
winding-up of Autodesk or New Discreet), for Autodesk Common Stock on a one-
for-one basis plus the Dividend Amount.
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Exchange of Discreet Share Certificates
A Letter of Transmittal and Election Form is enclosed with this Proxy
Circular for use by Discreet Shareholders (i) to elect to receive New Discreet
Exchangeable Shares and (ii) to transmit certificates representing Discreet
Common Shares should such Discreet Shareholder wish to receive New Discreet
Exchangeable Shares. DISCREET SHAREHOLDERS WHO WISH TO RECEIVE NEW DISCREET
EXCHANGEABLE SHARES SHOULD USE THE LETTER OF TRANSMITTAL AND ELECTION FORM TO
DEPOSIT THEIR DISCREET COMMON SHARES ON OR BEFORE THE ELECTION DEADLINE. If the
Transactions are not consummated, all deposited share certificates will be
returned by the Depositary forthwith to the shareholders entitled thereto.
As soon as practicable after the Effective Time, New Discreet will send
additional letters of transmittal to former Discreet Shareholders who did not
elect to receive New Discreet Exchangeable Shares and who did not deposit their
certificates prior to the Election Deadline. DISCREET SHAREHOLDERS WISHING TO
RECEIVE AUTODESK COMMON STOCK ARE ADVISED NOT TO SURRENDER THEIR CERTIFICATES
REPRESENTING DISCREET COMMON SHARES AT THE PRESENT TIME, BUT RATHER TO WAIT
UNTIL THEY HAVE BEEN ADVISED BY NEW DISCREET TO DO SO. See "Terms of the
Transactions--Procedures for Election and Exchange of Shares Certificates by
Discreet Shareholders."
Treatment of Discreet Employee Plans
In connection with the Transactions, (i) each Discreet Share Option
outstanding as of the Effective Time under the Discreet Stock Option Plans will
be assumed by Autodesk and will become an option to purchase shares of Autodesk
Common Stock, with appropriate adjustments to the number of shares issuable
thereunder and the exercise price thereof based on the Exchange Ratio and (ii)
each outstanding purchase right under the Discreet Employee Stock Purchase Plan
will be assumed by Autodesk and will become a purchase right to acquire shares
of Autodesk Common Stock, with certain adjustments to the purchase price of
such shares based on the Exchange Ratio. Autodesk has agreed to file a
registration statement on Form S-8 under the Securities Act covering the shares
of Autodesk Common Stock issuable upon exercise of Discreet Share Options to be
assumed by Autodesk and assumed rights under the Discreet Employee Stock
Purchase Plan. See "Terms of the Transactions--Treatment of Discreet Share
Options, the Discreet Employee Stock Option Plans and the Discreet Employee
Stock Purchase Plan--Discreet Stock Option Plans."
No Solicitation
Discreet has agreed that from and after the date of the Acquisition Agreement
until the earlier of the Effective Time or the termination of the Acquisition
Agreement, Discreet will not, directly or indirectly, through any officer,
director, employee, representative or agent of Discreet or any of its
subsidiaries, take any action to initiate, solicit, encourage or participate in
any discussions or negotiations with any persons who are considering or who
have made any inquiries or proposals regarding an acquisition of Discreet or
similar transaction involving Discreet or any of its subsidiaries (an
"Acquisition Proposal"), provided, however, that Discreet may, to the extent
the Discreet Board determines, in good faith, after consultation with outside
legal counsel, that the Discreet Board's fiduciary duties under applicable law
require it to do so, participate in discussions or negotiations with, and
furnish information to, any person, entity or group after such person, entity
or group has delivered to Discreet an unsolicited bona fide Acquisition
Proposal which the Discreet Board in its good faith and reasonable judgment
determines, after consultation with its independent financial advisors, would
result in a transaction more favorable to the Discreet Shareholders than the
Transactions (a "Superior Proposal"). In addition, in connection with a
possible Acquisition Proposal, Discreet may refer any third party to the no
solicitation provisions of the Acquisition Agreement or make a copy of such
provisions available to a third party. The Discreet Board may accept, approve
or recommend a Superior Proposal to the Discreet Shareholders if the Discreet
Board determines in good faith, after consultation with outside legal counsel,
that such action is required by its fiduciary duties under applicable law. In
such case, the Discreet Board may withdraw, modify or refrain from making its
recommendation of the Transactions, and, to the extent it does so, Discreet may
refrain from soliciting proxies and taking such other action as may be
necessary to secure the vote of the Discreet
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Shareholders, provided, however, that Discreet shall not accept, approve or
recommend to the Discreet Shareholders, or enter into any agreement concerning,
a Superior Proposal for a period of not less than three Business Days after
Autodesk's receipt of a copy of the Superior Proposal (or a reasonably detailed
written description of the significant terms and conditions thereof, if such
proposal is not in writing). See "Terms of the Transactions--Non-Solicitation
by Discreet of Alternative Transactions."
Conditions to the Transactions
Consummation of the Transactions is subject to the satisfaction of a number
of conditions, including but not limited to: (i) the passage of the Autodesk
Resolution and the Discreet Resolution by the Autodesk Stockholders and the
Discreet Shareholders, respectively; (ii) the absence of any restrictive court
orders or any other legal restraints or prohibitions preventing or making
illegal the consummation of the Transactions; (iii) the truth and accuracy of
the representations and warranties made by each of Discreet and Autodesk in the
Acquisition Agreement on and as of the Effective Time, subject to certain
exceptions; and (iv) the receipt by Autodesk and Discreet of certain opinions
and letters regarding tax and accounting matters. See "Terms of the
Transactions--Conditions to the Transactions."
Termination; Fees and Expenses
Notwithstanding approval of the Discreet Resolution by the Discreet
Shareholders, the Acquisition Agreement may be terminated and the Transactions
may be abandoned prior to the Effective Time under certain circumstances
specified in the Acquisition Agreement, including, without limitation, (i) by
mutual written agreement of Autodesk and Discreet, and (ii) if the Transactions
are not consummated by December 31, 1998, by either party. See "Terms of the
Transactions--Termination, Amendment and Waiver."
Under certain circumstances either Dutchco or Discreet may be required to pay
to the other a termination fee if the Acquisition Agreement is terminated. See
"Terms of the Transactions--Fees and Expenses."
Affiliate Agreements
To help ensure that the Transactions will be accounted for as a pooling of
interests and to help ensure compliance with Rule 145 under the Securities Act,
the affiliates of Autodesk and Discreet have executed agreements which, with
certain limited exceptions, prohibit such persons from disposing of their
Discreet Common Shares or Autodesk Common Stock, as the case may be, until
Autodesk publicly releases financial results covering at least 30 days of
combined operations of Autodesk and Discreet after the Transactions. See "Terms
of the Transactions--Agreements of Autodesk and Discreet Affiliates."
Interests of Certain Persons in the Transactions
In considering the recommendation of the Discreet Board with respect to the
Discreet Resolution and the Transactions, the Discreet Shareholders should be
aware that certain officers and directors of Discreet have interests in the
Transactions that present them with potential conflicts of interest. See
"Approval of the Transactions--Interests of Certain Persons in the
Transactions."
Operations of the Combined Company Following the Transactions
Following the Transactions, Autodesk plans to combine the businesses of
Discreet and its Kinetix division into a new organization headed by Discreet's
current Chairman of the Board, President and Chief Executive Officer Richard
Szalwinski, who will report to Autodesk's President, Eric Herr and will be part
of Autodesk's executive staff. The new organization, the Discreet business unit
of Autodesk, will be headquartered in Montreal, Quebec. Autodesk's Discreet
business unit will focus on developing and marketing tools for the creation of
digital content in the entertainment and creative design industries. The
combined organization will continue to develop and deliver the existing
Discreet and Kinetix product lines to a wide range of creative professionals
including those in the entertainment, design and visualization industries.
The engineering organizations of Discreet and Kinetix will be combined in
Autodesk's Discreet business unit, and certain general and administrative
functions will be integrated with similar functions at Autodesk.
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Discreet's advanced editing and effects systems will continue to be sold by
Discreet's existing direct sales force. These products will be marketed and
supported by the Combined Company's Discreet Advanced Systems division.
Discreet's new media software products and Kinetix products will be sold
through Autodesk's distribution channel and will be marketed and supported by
the Combined Company's New Media division. See "Terms of the Transactions--
Operations of the Combined Company Following the Transactions."
ACCOUNTING TREATMENT
The Transactions are intended to qualify as a pooling-of-interests for
financial reporting purposes in accordance with US GAAP. Consummation of the
Transactions is conditioned upon (i) receipt by Discreet of a letter from its
independent auditors to the effect that Discreet qualifies as an entity that
may be a party to a business combination for which the pooling-of-interests
method of accounting would be available and (ii) receipt by Autodesk of a
letter from its independent auditors regarding concurrence with Autodesk
management's conclusion as to the appropriateness of pooling-of-interests
accounting treatment for the Transactions under Accounting Principles Board
Opinion No. 16, if consummated in accordance with the Acquisition Agreement.
OFFERING OF AUTODESK COMMON STOCK
In order to qualify the Transactions for pooling-of-interests accounting
treatment, Autodesk must reissue in one or more transactions certain shares of
Autodesk Common Stock previously repurchased by Autodesk and currently held in
its treasury. Accordingly, Autodesk expects to issue approximately 3 million
shares of Autodesk Common Stock through either a public offering or private
placement to be completed prior to the Effective Time (the "Reissuance
Offering"). If the Reissuance Offering is effected by a public offering, the
offering will be made only by means of a prospectus satisfying the requirements
of the Securities Act. If the Reissuance Offering is effected by a private
placement exempt from the registration requirements of the Securities Act, the
offered shares may not be resold in the United States absent registration or an
applicable exemption from registration under the Securities Act. See "Terms of
the Transactions--Offering of Autodesk Common Stock."
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
Discreet Shareholders should read carefully the detailed information under
"Certain Canadian Federal and United States Federal Income Tax Considerations
to Discreet Shareholders--Canadian Federal Income Tax Considerations," which
qualifies the information set forth below. The following summary of Canadian
federal income tax considerations is intended as a general summary and does not
discuss all of the facts and circumstances that may affect the tax liability of
particular Discreet Shareholders. Therefore, Discreet Shareholders are urged to
consult their own tax advisers.
Residents of Canada. A holder of Discreet Common Shares will receive New
Discreet Class B Shares upon the Amalgamation. Unless such holder has elected
to have such New Discreet Class B Shares redeemed in exchange for New Discreet
Exchangeable Shares, such New Discreet Class B Shares will automatically be
converted into New Discreet Units, which will be acquired by Dutchco for shares
of Autodesk Common Stock immediately following such conversion. The holder will
generally realize, in respect of the latter exchange, a capital gain (or
capital loss).
Immediately following the Amalgamation, the New Discreet Class B Shares
received by a Discreet Shareholder who elects to have such New Discreet Class B
Shares redeemed in exchange for New Discreet Exchangeable Shares will be
redeemed by New Discreet in exchange for New Discreet Exchangeable Shares. A
holder who is an Eligible Holder and whose New Discreet Class B Shares are
redeemed for New Discreet Exchangeable Shares will be permitted to elect with
New Discreet in prescribed form pursuant to Section 85 of the Canadian Tax Act
so as generally to be treated as having engaged in a tax-free rollover for
Canadian federal income tax purposes. See "Certain Canadian Federal and United
States Federal Income Tax Considerations to
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Discreet Shareholders--Discreet Shareholders Resident in Canada." The terms and
conditions of the New Discreet Class B Shares provide that the maximum number
of New Discreet Exchangeable Shares issuable pursuant to the Transactions may
not exceed 19.99% of the number of Discreet Common Shares outstanding
immediately prior to the Amalgamation, multiplied by the Exchange Ratio. In the
event the number of New Discreet Exchangeable Shares otherwise issuable
pursuant to the Transactions exceeds this maximum number, the electing holders
of New Discreet Class B Shares will receive, pro rata, New Discreet Units in
lieu of New Discreet Exchangeable Shares in respect of such excess.
Accordingly, holders of New Discreet Class B Shares may be precluded from
engaging in a tax-free rollover for Canadian federal income tax purposes in
respect of some of their New Discreet Class B Shares.
Dividends received on the New Discreet Exchangeable Shares will be treated
for Canadian income tax purposes as ordinary taxable dividends received from a
taxable Canadian corporation. Shareholders that are corporations, other than
specified financial institutions, will be entitled to deduct such dividends in
computing taxable income, subject to certain limitations. Such dividends will
not be subject to tax under Part IV.1 of the Canadian Tax Act, but may be
subject to tax under Part IV.
A holder of New Discreet Exchangeable Shares who receives shares of Autodesk
Common Stock from New Discreet upon a redemption (including a retraction) by
New Discreet of the holder's New Discreet Exchangeable Shares will be deemed to
have received a dividend as a result of such redemption.
A holder of New Discreet Exchangeable Shares who exchanges New Discreet
Exchangeable Shares with Dutchco for shares of Autodesk Common Stock upon the
exercise of the Call Rights or the Exchange Rights generally will realize a
capital gain (or capital loss) as a result of such exchange.
Non-Residents of Canada. The New Discreet Class B Shares, Class E Shares and
Class F Shares generally should not be taxable Canadian property to a holder at
any time, provided such shares are listed on a prescribed stock exchange (which
includes the Nasdaq National Market).
A non-resident holder of Discreet Common Shares, New Discreet Class B Shares
and New Discreet Units generally should not be subject to tax under the
Canadian Tax Act on the Amalgamation, the redemption of the New Discreet Class
B Shares, the exchange of New Discreet Units for Autodesk Common Stock or the
automatic conversion of New Discreet Class B Shares into New Discreet
Exchangeable Shares.
Dividends paid (or deemed to be paid) to non-residents on the New Discreet
Exchangeable Shares will be subject to non-resident withholding tax under the
Canadian Tax Act at the rate of 25%, subject to reduction under the provisions
of an applicable income tax treaty. Under the Canada-United States Income Tax
Convention, the rate is generally reduced to 15%. A non-resident holder of New
Discreet Exchangeable Shares who receives Shares of Autodesk Common Stock from
New Discreet upon a redemption (including a retraction) of the holder's New
Discreet Exchangeable Shares will be deemed to have received a dividend as a
result of such redemption, which will be subject to non-resident withholding
tax under the Canadian Tax Act as described above.
A non-resident holder of New Discreet Exchangeable Shares who receives shares
of Autodesk Common Stock from Dutchco generally will realize a capital gain (or
a capital loss) as a result of such exchange. In circumstances where a capital
gain arises, such gain will be subject to tax under the Canadian Tax Act.
Relief may be available under the provisions of an applicable income tax
convention.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Discreet Shareholders should read carefully the detailed information under
"Certain Canadian Federal and United States Federal Income Tax Considerations
to Discreet Shareholders--Certain United States Federal Income Tax
Considerations," which qualifies the information set forth below. The following
disclosure of United
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States federal income tax considerations is intended as a general summary and
does not discuss all of the facts and circumstances that may affect the tax
liability of particular Discreet Shareholders. Therefore, Discreet Shareholders
are urged to consult their own tax advisers. This summary discusses United
States federal income tax considerations only, and does not address any United
States state or local tax consequences of the Transactions.
The following discussion applies to Discreet Shareholders who are "United
States persons" for United States federal income tax purposes ("US Holders"),
including United States citizens or residents, corporations organized under the
laws of the United States or of any state thereof, any estate the income of
which is includible in its gross income for United States federal income tax
purposes without regard to its source, and any trust if a United States court
is able to exercise primary supervision over the administration of the trust
and one or more United States persons have the authority to control all
substantial decisions of the trust.
US Holders. The exchange of Discreet Common Shares pursuant to the
Transactions generally should constitute a taxable transaction for United
States federal income tax purposes.
US Holders who receive New Discreet Class B Shares, thereafter automatically
converted into New Discreet Units which will be exchanged with Dutchco for
shares of Autodesk Common Stock, generally should recognize a taxable gain or
loss in an amount equal to the difference between (i) the sum of the fair
market value of Autodesk Common Stock received and cash received in lieu of
fractional shares and (ii) the adjusted tax basis of the Discreet Common Shares
surrendered. Such gain or loss will be a capital gain or loss if the Discreet
Common Shares exchanged were held as capital assets, and will be long-term
capital gain or loss if the Discreet Common Shares exchanged have been held for
more than one year at the Effective Time.
IT IS STRONGLY RECOMMENDED THAT US HOLDERS WHO OWN DISCREET COMMON SHARES DO
NOT ELECT TO RECEIVE NEW DISCREET EXCHANGEABLE SHARES SINCE THE OWNERSHIP AND
DISPOSITION OF SUCH SHARES MAY HAVE CERTAIN ADVERSE TAX CONSEQUENCES. Although
the issue cannot be free from doubt, the likely United States federal income
tax considerations of such an election are as follows: US Holders who receive
New Discreet Exchangeable Shares generally should recognize gain or loss in an
amount equal to the difference between (i) the sum of the fair market value of
New Discreet Exchangeable Shares received (including for this purpose the fair
market value of the Voting Rights and the Exchange Rights, if any) and cash
received in lieu of fractional shares and (ii) the adjusted tax basis of the
Discreet Common Shares surrendered. A US Holder of New Discreet Exchangeable
Shares who disposes of such stock pursuant to the exercise of rights granted
under the Articles of Amalgamation (see "Terms of the Transactions--Description
of New Discreet Exchangeable Shares"), including the exercise of rights by New
Discreet and Dutchco, should generally recognize a taxable gain or loss on that
disposition. For Canadian federal income tax purposes, such disposition may be
treated as a deemed distribution on the New Discreet Exchangeable Shares.
Generally, distributions (or deemed distributions) on the New Discreet
Exchangeable Shares will be subject to a Canadian withholding tax at the
current treaty rate of 15%. Subject to certain limitations, a US Holder will be
entitled to claim either a credit against United States federal income tax
liability or a deduction in computing United States taxable income for such
Canadian taxes withheld.
Non-US Holders. The following summary is applicable to holders of Discreet
Common Shares who are not "United States persons" for United States federal
income tax purposes ("Non-US Holders").
A Non-US Holder of Discreet Common Shares generally will not be subject to
United States federal income tax on the gain realized on the receipt of New
Discreet Class B Shares, New Discreet Units, New Discreet Exchangeable Shares,
or Autodesk Common Stock, or upon a subsequent exchange (or sale) of New
Discreet Exchangeable Shares or Autodesk Common Stock, unless such gain is
effectively connected with a United States trade or business or certain other
conditions are satisfied.
15
<PAGE>
Dividends received by a Non-US Holder with respect to Autodesk Common Stock
generally will be subject to United States withholding tax at the rate of 30%,
which rate may be subject to reduction by an applicable income tax treaty in
effect between the United States and the Non-US Holder's country of residence.
Under the Canada-United States Income Tax Convention, the rate is generally
reduced to 15%. Provided that the New Discreet Exchangeable Shares are not
treated for United States federal income tax purposes as shares of Autodesk
Common Stock, dividends received by a Non-US Holder on the New Discreet
Exchangeable Shares should not be subject to United States withholding tax.
REGULATORY MATTERS
Under the HSR Act and the rules promulgated thereunder, the Transactions may
not be consummated until notifications have been given and certain information
has been furnished to the FTC and the Antitrust Division, and specified waiting
period requirements have been satisfied or early termination has been granted.
The waiting period for the Transactions will expire at 11:59 pm. on the
thirtieth day following acceptance of the required notifications and
information by the FTC and Antitrust Division, unless such time is extended by
a request for additional information. Expiration of the applicable waiting
periods will not preclude the FTC or the Antitrust Division from taking such
action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the Transactions or seeking the
divestiture of Discreet by Autodesk, in whole or in part, or the divestiture or
compulsory licensing of substantial assets of Autodesk, Discreet or their
respective subsidiaries. See "Terms of the Transactions--Regulatory Matters."
NO APPRAISAL RIGHTS
Discreet Shareholders who vote against the Transactions will not be entitled
to appraisal or similar rights pursuant to Quebec law. See "Description of
Capital Stock--Comparison of Shareholders' Rights--Dissenters' Rights."
16
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
AUTODESK COMMON STOCK
Autodesk Common Stock has been traded on the Nasdaq National Market under
the symbol "ADSK" since May 1996, and was traded on the Nasdaq National Market
under the symbol "ACAD" from Autodesk's initial public offering in 1985 until
that time. The following table sets forth, for the periods indicated, the high
and low closing sale prices as reported on the Nasdaq National Market for
Autodesk Common Stock for the fiscal periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL YEAR ENDED JANUARY 31, 1997
First Quarter............................................. $43 1/4 $29 3/4
Second Quarter............................................ 42 21
Third Quarter............................................. 27 19 5/8
Fourth Quarter............................................ 34 1/8 21 3/8
FISCAL YEAR ENDED JANUARY 31, 1998
First Quarter............................................. $36 1/8 $28 3/4
Second Quarter............................................ 42 35
Third Quarter............................................. 50 32 3/4
Fourth Quarter............................................ 41 1/4 32 1/2
FISCAL YEAR ENDING JANUARY 31, 1999
First Quarter............................................. $49 7/8 $39
Second Quarter............................................ 48 7/8 31 1/8
Third Quarter (through , 1998)..................... 35 23
</TABLE>
The closing price for a share of Autodesk Common Stock as reported on the
Nasdaq National Market on August 20, 1998, the last trading day prior to the
public announcement of the execution of the Original Agreement, was $32.625
and on , 1998, the last practicable trading day for which information
was available before the printing of this Proxy Circular, was $ .
Autodesk paid quarterly cash dividends of $0.06 per share with respect to
fiscal 1997 and 1998 and the first two quarters of fiscal 1999, and currently
intends to continue paying such cash dividends on a quarterly basis.
DISCREET COMMON SHARES
Discreet Common Shares have been traded on the Nasdaq National Market under
the symbol "DSLGF" since Discreet's initial public offering in July 1995. The
following table sets forth, for the periods indicated, the range of high and
low closing sale prices reported on the Nasdaq National Market for Discreet
Common Shares (Discreet changed its fiscal year end from July 31 to June 30,
effective beginning with Discreet's second fiscal quarter of 1997 which ended
December 31, 1996).
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1997
First Quarter (August 1, 1996 through
October 31, 1996)........................ $ 8 $ 3 5/8
Second Quarter (November 1, 1996 through
December 31, 1996)....................... 8 1/8 5 3/4
Third Quarter (January 1, 1997 through
March 31, 1997).......................... 9 1/2 5 7/8
Fourth Quarter (April 1, 1997 through June
30, 1997)................................ 18 6 1/2
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter............................. $27 7/8 $16
Second Quarter............................ 26 3/8 15 3/4
Third Quarter............................. 25 3/4 16 1/4
Fourth Quarter............................ 21 9/16 10 19/64
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter (through September 11,
1998).................................... 15 5/8 10 7/8
</TABLE>
17
<PAGE>
The closing price for one Discreet Common Share as reported on the Nasdaq
National Market on August 20, 1998, the last trading day prior to the public
announcement of the execution of the Original Agreement, was $15.625 and on
, 1998, the last practicable trading day for which information was
available before the printing of this Proxy Circular, was $ . The market
price of the fractional share of Autodesk Common Stock issuable in exchange
for one Discreet Common Share, based upon the Exchange Ratio, would have been
$17.128 and $ on August 20, 1998 and , 1998, respectively.
Discreet has never declared or paid any cash dividends and, if the
Transactions are not consummated, does not anticipate paying any cash
dividends in the foreseeable future.
Because the Exchange Ratio is fixed, fluctuations in the market price of the
Autodesk Common Stock will affect the dollar value of the consideration to be
received by Discreet Shareholders in connection with the Transactions.
Discreet Shareholders are encouraged to obtain current market quotations for
Autodesk Common Stock and Discreet Common Shares prior to the Discreet
Meeting. See "Risk Factors--Risks Relating to the Transactions--Fixed Exchange
Ratio Despite Change in Relative Stock Prices."
18
<PAGE>
SELECTED HISTORICAL AND UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following selected historical financial information of Autodesk and
Discreet has been derived from their respective audited historical
consolidated financial statements, and should be read in conjunction with such
audited consolidated financial statements and the notes thereto. The unaudited
selected pro forma financial information of Autodesk and Discreet are derived
from the unaudited pro forma condensed combined financial statements, which
give effect to the Transactions as a pooling-of-interests, and should be read
in conjunction with such unaudited pro forma statements and notes thereto,
which are included elsewhere in this Proxy Circular.
For Autodesk and Discreet pro forma purposes, Autodesk's historical
condensed consolidated statements of income for the three fiscal years ended
January 31, 1996, 1997 and 1998, and Autodesk's unaudited condensed
consolidated statement of income for the six months ended July 31, 1998 have
been combined with the unaudited condensed consolidated statements of
operations of Discreet for the fiscal year ended July 31, 1996, the eleven
months ended June 30, 1997, the twelve months ended December 31, 1997, and the
unaudited condensed consolidated statement of operations of Discreet for the
six months ended June 30, 1998, respectively. The unaudited pro forma combined
condensed balance sheet assumes the Transactions took place on July 31, 1998
and combines Autodesk's unaudited condensed consolidated balance sheet at that
date with Discreet's historical condensed consolidated balance sheet at June
30, 1998. The unaudited selected pro forma combined financial data should be
read in conjunction with the unaudited pro forma financial statements included
elsewhere in this Proxy Circular.
Autodesk paid quarterly dividends of $0.06 per share with respect to fiscal
1996, 1997 and 1998, and in each of the first two quarters of fiscal 1999, and
currently intends to continue paying such cash dividends on a quarterly basis.
Discreet has not paid any cash dividends on the Discreet Common Shares.
Discreet currently intends to retain any earnings for future growth and
therefore does not anticipate paying any cash dividends on the Discreet Common
Shares in the foreseeable future.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Transactions had been consummated at the times
indicated, nor is it necessarily indicative of future operating results or
financial position.
AUTODESK SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED JANUARY 31, ENDED JULY 31,
-------------------------------------------- ------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $405,596 $454,612 $534,167 $496,693 $617,126 $273,080 $373,844
Income (loss) from
operations (1)(2)...... 89,703 81,911 129,027 59,817 45,355 (28,327) 59,695
Net income (loss)
(1)(2)................. 62,166 56,606 87,788 41,571 15,364 (34,910) 36,753
Basic net income (loss)
per share.............. $ 1.30 $ 1.20 $ 1.86 $ 0.91 $ 0.33 $ (0.78) $ 0.79
Diluted net income
(loss) per share....... $ 1.25 $ 1.14 $ 1.76 $ 0.88 $ 0.31 $ (0.78) $ 0.74
Shares used in computing
basic net income (loss)
per share.............. 47,770 47,320 47,090 45,540 46,760 45,045 46,500
Shares used in computing
diluted net income
(loss) per share....... 49,740 49,840 49,800 47,190 49,860 45,045 49,670
Dividends paid per
share.................. $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.12 $ 0.12
</TABLE>
<TABLE>
<CAPTION>
AS OF JANUARY 31, AS OF
-------------------------------------------- JULY 31,
1994 1995 1996 1997 1998 1998
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
BALANCE SHEET DATA:
Working capital......... $177,241 $205,735 $190,718 $147,500 $108,215 $215,400
Total assets............ 404,874 482,076 517,929 492,233 533,683 565,666
Long term liabilities... 5,679 3,602 31,306 33,948 31,064 2,499
Put warrants............ -- -- -- 64,500 -- --
Total stockholders'
equity................. 296,879 323,484 342,328 243,614 303,132 349,193
</TABLE>
19
<PAGE>
- --------
(1) Includes the effect of nonrecurring charges of $25.5 million, $4.7
million, $58.5 million and $37.7 million recorded in fiscal 1995, 1997,
1998 and for the six months ended July 31, 1998, respectively. The fiscal
1995 amount represents a federal district court judgment against Autodesk
in a trade secret lawsuit. The charges for fiscal 1997 and 1998 consist of
charges relating to the write off of purchased in-process research and
development that had not reached technological feasibility and had no
alternate future use. Nonrecurring charges for the six months ended July
31, 1998 consist primarily of a charge relating to the write off of
purchased in-process research and development that had not reached
technological feasibility and had no alternate future use, restructuring
charges for the consolidation of certain development centers, the write-
off of purchased technologies associated with these operations, staff
reductions in the Asia Pacific region and costs in relation to potential
legal settlements.
(2) Income from operations for the six months ended July 31, 1998 includes a
reversal of a portion of the litigation reserve in the amount of $18.2
million as a result of a favorable decision on appeal of the trade secret
lawsuit (see footnote 1, above). In addition to the $18.2 million, $2.7
million of interest associated with the litigation reserve was reversed
and is reflected in net income for the six months ended July 31, 1998.
SEE AUTODESK FINANCIAL STATEMENTS AND THE NOTES THERETO FOR THE YEAR ENDED
JANUARY 31, 1998 AND THE UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE SIX-
MONTH PERIOD ENDED JULY 31, 1998, INCLUDED ELSEWHERE IN THIS PROXY CIRCULAR.
20
<PAGE>
DISCREET SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ELEVEN FISCAL
MONTHS YEAR
FISCAL YEAR ENDED JULY 31, ENDED ENDED
--------------------------- JUNE 30, JUNE 30,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 15,392 $ 64,549 $ 83,997 $101,924 $151,558
Operating income (loss)(1).... 944 13,460 (44,914) (1,257) 8,177
Net income (loss)(1).......... 483 7,785 (44,141) (6,756) (611)
Basic net income (loss) per
share........................ $ 0.02 $ 0.34 $ (1.64) $ (0.24) $ (0.02)
Diluted net income (loss) per
share........................ $ 0.02 $ 0.31 $ (1.64) $ (0.24) $ (0.02)
Shares used in computing basic
net income (loss) per share.. 22,954 23,017 26,837 27,948 29,029
Shares used in computing
diluted net income (loss) per
share........................ 23,094 24,886 26,837 27,948 29,029
Dividends paid per share...... $ -- $ -- $ -- $ -- $ --
<CAPTION>
AS OF JULY 31, AS OF JUNE 30,
--------------------------- ------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
BALANCE SHEET DATA:
Working capital (deficit)..... $ (382) $ 41,847 $ 24,030 $ 18,536 $ 40,409
Total assets.................. 9,431 76,858 80,148 95,945 114,610
Long term liabilities......... 317 1,261 1,442 713 2,229
Total shareholders' equity.... 934 50,124 42,343 36,948 59,566
</TABLE>
- --------
(1) Operating income includes the effect of nonrecurring charges of $1.4
million, $26.0 million, $16.3 million and $24.1 million recorded in fiscal
1994, 1996, 1997 and 1998, respectively. The fiscal 1994 amount represents
a legal settlement by Discreet. The fiscal 1996 charges consist primarily
of the write off of in-process research and development, restructuring
charges and costs in relation to a legal settlement. Fiscal 1997 charges
consist primarily of the write off of amounts relating to in-process
research and development and a legal settlement. The fiscal 1998 charge
consists of amounts for the write off of in-process research and
development, costs in relation to the termination of a merger transaction,
a gain on the sale of an investment and the reversal of provisions no
longer required for restructuring charges and legal settlements.
SEE DISCREET FINANCIAL STATEMENTS AND NOTES THERETO FOR THE YEAR ENDED JUNE
30, 1998, INCLUDED ELSEWHERE IN THIS PROXY CIRCULAR.
21
<PAGE>
UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX
MONTHS
TWELVE MONTHS ENDED JANUARY 31, ENDED
-------------------------------- JULY 31,
1996 1997 1998 1998
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS DATA:
Net revenues...................... $ 618,164 $ 598,617 $ 754,627 $449,729
Income from operations............ 84,113 58,560 32,773 76,975
Net income (loss)................. 43,647 34,815 (6,856) 50,454
Basic net income (loss) per share. $ 0.71 $ 0.58 $ (0.11) $ 0.82
Diluted net income (loss) per
share............................ $ 0.67 $ 0.56 $ (0.11) $ 0.77
Shares used in computing basic net
income (loss) per share.......... 61,179 60,213 61,526 61,895
Shares used in computing diluted
net income (loss) per share...... 64,963 62,359 61,526 65,917
Dividends paid per share.......... $ 0.24 $ 0.24 $ 0.24 $ 0.12
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1998
--------------------------------------
AUTODESK DISCREET ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
PRO FORMA CONDENSED COMBINED BALANCE
SHEET DATA:
Working capital...................... $215,400 $ 40,409 $(13,000) $242,809
Total assets......................... 565,666 114,610 -- 680,276
Long term liabilities................ 2,499 2,229 -- 4,728
Stockholders' equity................. 349,193 59,566 (13,000) 395,759
</TABLE>
SEE UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION AND
ACCOMPANYING NOTES THERETO INCLUDED ELSEWHERE IN THIS PROXY CIRCULAR.
22
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Autodesk
and Discreet and combined basic and diluted per share data on an unaudited pro
forma basis after giving effect to the Transactions on a pooling-of-interests
basis under US GAAP, assuming the application of the Exchange Ratio. This data
should be read in conjunction with selected historical financial data, the
unaudited pro forma combined condensed financial statements and the separate
historical financial statements of Autodesk and Discreet and the notes thereto
included elsewhere in this Proxy Circular. The unaudited pro forma combined
financial data are not necessarily indicative of the operating results that
would have been achieved had the Transactions been consummated as of the
beginning of the periods presented and should not be construed as
representative of future operations.
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
-----------------
SIX MONTHS
ENDED
JULY 31,
1996 1997 1998 1998
----- ----- ----- ----------
<S> <C> <C> <C> <C>
HISTORICAL--AUTODESK:
Basic net income per share....................... $1.86 $0.91 $0.33 $0.79
Diluted net income per share..................... $1.76 $0.88 $0.31 $0.74
Book value per share (1)......................... $7.39 $5.40 $6.67 $7.53
Dividends paid per share......................... $0.24 $0.24 $0.24 $0.12
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ELEVEN MONTHS FISCAL YEAR
ENDED ENDED ENDED
JULY 31, JUNE 30, JUNE 30,
1996 1997 1998
----------- ------------- -----------
<S> <C> <C> <C>
HISTORICAL--DISCREET:
Basic net loss per share................ $(1.64) $(0.24) $(0.02)
Diluted net loss per share.............. $(1.64) $(0.24) $(0.02)
Book value per share (1)................ $ 1.53 $ 1.31 $ 2.01
Dividends paid per share................ $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED JANUARY 31, ENDED
------------------------ JULY 31,
1996 1997 1998 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
AUTODESK PRO FORMA(2):
Basic net income (loss) per share.......... $0.71 $0.58 $(0.11) $0.81
Diluted net income (loss) per share........ $0.67 $0.56 $(0.11) $0.77
Book value per share(1).................... $ 5.55 $6.39
Dividends paid per share................... $ 0.24 $0.24 $ 0.24 $0.12
DISCREET EQUIVALENT PRO FORMA(3):
Basic net income (loss) per share.......... $0.37 $0.31 $(0.06) $0.43
Diluted net income (loss) per share........ $0.35 $0.29 $(0.06) $0.41
Book value per share(1).................... $ 2.91 $3.35
Dividends paid per share................... $0.13 $0.13 $ 0.13 $0.06
</TABLE>
- --------
(1) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of Autodesk Common Stock outstanding at the
end of each period. Pro forma book value per share is computed by dividing
pro forma stockholders' equity by the pro forma number of shares of
Autodesk Common Stock outstanding at the end of each period.
(2) Refer to Note 1 of Notes to Unaudited Pro Forma Condensed Combined
Financial Statements.
(3) The Discreet equivalent pro forma per share amounts are calculated by
multiplying the Autodesk combined pro forma share amounts by the Exchange
Ratio.
23
<PAGE>
RISK FACTORS
The following risk factors should be considered by holders of Discreet
Common Shares in evaluating whether to approve the Discreet Resolution and
thereby become holders of Autodesk Common Stock or of New Discreet
Exchangeable Shares, which are exchangeable for shares of Autodesk Common
Stock, and by holders of Autodesk Common Stock in evaluating whether to
approve the Autodesk Resolution. These factors should be considered in
conjunction with the other information included in this Proxy Circular. This
Proxy Circular contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. Actual results could differ materially from those projected in these
forward-looking statements as a result of a variety of factors, including
those set forth below and elsewhere in this Proxy Circular. Some of these
factors relate directly to the Transactions, while others are present in
Autodesk's, Discreet's and the Combined Company's general business environment
independent of the Transactions.
RISKS RELATING TO THE TRANSACTIONS
Failure to Achieve Beneficial Synergies. Autodesk and Discreet have entered
into the Acquisition Agreement with the expectation that the Transactions will
result in beneficial synergies. See "Approval of the Transactions -- Joint
Reasons for the Transactions," "-- Autodesk's Reasons for the Transactions,"
"-- Discreet's Reasons for the Transactions," "Autodesk Special Meeting --
Recommendation of the Autodesk Board," and "Discreet Special Meeting --
Recommendation of the Discreet Board." These include mutual benefits from
complementary strengths in the 3D modeling and animation tools markets, the
competitive advantages resulting from offering a comprehensive suite of
integrated product offerings, combined industry experience and market
knowledge and shared distribution channels. Achieving these anticipated
synergies will depend on a number of factors including, without limitation,
the successful integration of Autodesk's and Discreet's operations and general
and industry-specific economic factors. Even if Autodesk and Discreet are able
to integrate their operations and economic conditions remain unchanged, there
can be no assurance that the anticipated synergies will be achieved. The
failure to achieve such synergies could have a material adverse effect on the
business, results of operations and financial condition of the Combined
Company.
Integration of Operations and Technologies. Achieving the anticipated
benefits of the Transactions will depend in part upon whether the integration
of the two companies' businesses is accomplished in an efficient and effective
manner, and there can be no assurance as to the extent to which this will
occur, if at all. The combination of the two companies will require, among
other things, integration of the companies' respective operations, products,
technologies, management information systems, distribution channels and key
personnel and the coordination of their sales, marketing and research and
development efforts. In particular, the Combined Company will be required to
integrate Autodesk's sales channel, which consists principally of independent
resellers, with Discreet's sales force, which typically sells product directly
to customers. As a result of these and other factors, the integration may not
be accomplished smoothly or successfully, if at all. If significant
difficulties are encountered in the integration of the existing operations,
products or technologies or the development of new products and technologies,
resources could be diverted from new product development, and delays in new
product introductions could occur. Compared to Autodesk's products, Discreet's
products have traditionally experienced longer, more complex sales cycles.
There can be no assurance that the Combined Company will be able to take full
advantage of the combined sales efforts. In addition, the difficulties of
integrating Autodesk and Discreet may be increased by the necessity of
coordinating organizations with distinct corporate cultures and widely
dispersed operations in two different countries. See "-- Integration of
Operations of a non-US Company." The consummation of the Transactions and the
integration of operations and technologies following the consummation of the
Transactions will constitute a significant challenge to Autodesk's, Discreet's
and the Combined Company's managements and will require substantial effort and
dedication of management and other personnel, which may distract their
attention from the day-to-day business of these entities, the development or
acquisition of new technologies, and the pursuit of other business
opportunities. In addition, certain Discreet systems currently include
computer hardware, which may present business issues as to which Autodesk
management has limited experience. See "--Risks Relating to the Combined
Company--Dependence on Single Workstation Vendor" and "--Reliance on Sole
Source Suppliers." Failure to successfully accomplish the
24
<PAGE>
integration of the two companies' operations, technologies and personnel would
likely have a material adverse effect on the Combined Company's business,
financial condition and results of operations. In addition, during the pre-
acquisition and integration phases, aggressive competitors may undertake
initiatives to attract customers or employees through various incentives,
which could have a material adverse effect on the business, results of
operations and financial conditions of Autodesk, Discreet and/or the Combined
Company.
Customers. The present and potential customers of Discreet and Autodesk may
not continue their current buying patterns in light of the Transactions.
Certain customers may defer purchasing decisions as they evaluate the proposed
Transactions, other recent acquisitions and product announcements in the
multimedia and design software industries, the Combined Company's future
product strategy, current and anticipated product offerings of competitors,
and any other outside forces which may affect customer buying patterns.
Customers may ultimately decide to purchase competitors' products in lieu of
the Combined Company's products. Historically, Discreet and Autodesk have had
significantly different types of customers. These different customer types may
evaluate the Combined Company differently. The decision of customers to defer
their purchasing decisions or to purchase products elsewhere could have a
material adverse effect on the business, results of operations and financial
condition of the Combined Company.
Dependence on Retention and Integration of Key Employees. The success of the
Combined Company is dependent on the retention and integration of the key
management, sales, marketing, engineering and other technical employees of
Autodesk and Discreet. Competition for qualified personnel in the multimedia
and design software industries is very intense, and competitors often use
aggressive tactics to recruit key employees during the period leading up to an
acquisition and during the integration phase following an acquisition. Stock
options, which generally become exercisable only over a period of several
years of employment, serve as an important incentive for retaining key
employees. In accordance with their original terms, certain stock options held
by several key Discreet employees will be fully exercisable or the vesting
thereof will accelerate upon the consummation of the Transactions, thus
potentially reducing the retention incentive provided by these options. While
the Combined Company will endeavor to retain key Discreet employees, there can
be no assurance that key employees will remain with the Combined Company. The
loss of services of any of the key employees of the Combined Company could
materially and adversely affect the Combined Company's business, financial
condition and results of operation. See "Approval of the Transactions--
Interests of Certain Persons in the Transactions."
Integration of Operations of a non-US Company. Cross-border acquisitions
entail certain special risks in addition to those normally encountered in a
domestic acquisition. These include the difficulty of integrating employees
from a different corporate culture into the acquiring organization; the need
to understand different incentives that motivate employees in a non-US
company; the greater difficulty of transplanting the acquiring company's
corporate culture to an organization that is physically distant; and the
difficulty and expense of relocating employees from one country to another in
the event of an internal group restructuring following an acquisition. These
factors can reduce the likelihood of the long-term success of a cross-border
acquisition. Although Autodesk derives the majority of its revenues from non-
US sales and has significant operations outside the United States, it has
limited experience integrating the management, sales, product development and
marketing organizations of a significant non-US business with its existing
operations. Although Discreet has sales and marketing operations in the United
States and derives a significant portion of its revenue from US sales, its
management and product development personnel are predominantly based in
Canada. There can be no assurance that Autodesk will be able to successfully
integrate the personnel and operations of Discreet into the existing Autodesk
organization.
Potential Dilutive Effect to Stockholders. Although Autodesk and Discreet
believe that beneficial synergies will result from the Transactions, combining
the two companies' businesses, even if the combination is achieved in an
efficient, effective and timely manner, may not result in combined results of
operations and financial condition superior to what would have been achieved
by each company independently, and may in any event require a longer period
than management of Autodesk or Discreet anticipates. In addition, based on the
capitalization of each of Autodesk and Discreet as of August 20, 1998, the
date the companies announced the
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execution of the Original Agreement, Autodesk will issue approximately
15,591,113 new shares of Autodesk Common Stock (including shares of Autodesk
Common Stock issuable upon exchange of all New Discreet Exchangeable Shares
issued in the Transactions), which shares will represent approximately 25.16%
of the Autodesk Common Stock outstanding upon consummation of the Transactions
(assuming exchange of all New Discreet Exchangeable Shares). Autodesk will
also issue approximately 3 million shares of Autodesk Common Stock in the
Reissuance Offering. The issuance of new shares of Autodesk Common Stock in
connection with the Transactions and the Reissuance Offering will have the
initial effect of reducing Autodesk's net income per share and could reduce
the market price of the Autodesk Common Stock unless and until revenue growth,
cost savings or other business synergies sufficient to offset the effect of
such issuance can be achieved. There can be no assurance that Autodesk
Stockholders and Discreet Shareholders would not achieve greater returns on
investment if Autodesk and Discreet were to remain independent of each other.
Fixed Exchange Ratio Despite Change in Relative Stock Prices. Pursuant to
the Transactions, Discreet Shareholders effectively will receive 0.525 shares
of Autodesk Common Stock for each Discreet Common Share. This Exchange Ratio
is fixed and will not be adjusted in the event of any increase or decrease in
the market price of either the Autodesk Common Stock or the Discreet Common
Shares. Consequently, the implied value of the exchange to Discreet
Shareholders will change as the market price of the Autodesk Common Stock
fluctuates. The Autodesk Common Stock and Discreet Common Shares historically
have been subject to substantial price volatility. Variations in the market
price of the Autodesk Common Stock may be the result of changes in the
business, operations or prospects of Autodesk or Discreet, market assessments
of the synergistic value of the Transactions or likelihood that the
Transactions will be consummated and the timing thereof, dilutive issuances of
additional shares of Autodesk Common Stock (including the shares to be issued
in the Reissuance Offering), general market and economic conditions or other
factors. No assurance can be given as to the market prices of Autodesk Common
Stock or Discreet Common Shares at any time before the Effective Time or as to
the market price of Autodesk Common Stock at any time thereafter. The specific
dollar value of the consideration to be received by Discreet Shareholders upon
consummation of the Transactions will depend on the market price of Autodesk
Common Stock at the Effective Time. In the event that the market price of
Autodesk Common Stock decreases or increases prior to the Effective Time, the
market value at the Effective Time of the Autodesk Common Stock to be received
by Discreet Shareholders upon consummation of the Transactions would
correspondingly decrease or increase. Discreet Shareholders are therefore
encouraged to obtain current market quotations for the Autodesk Common Stock
and the Discreet Common Shares. See "Market Price and Dividend Information."
Volatility Of Stock Prices. The markets for the Autodesk Common Stock and
Discreet Common Shares are highly volatile. The trading price of the Autodesk
Common Stock has in the past been and could in the future be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements following the development or acquisition of technological
innovations or new products by Autodesk or Discreet or their competitors,
changes in prices of Autodesk's or Discreet's or their competitors' products
and services, changes in product mix, changes in revenue and revenue growth
rates for Autodesk or Discreet as a whole or for geographic areas or business
units, and other events or factors. Statements or changes in opinions, ratings
or earnings estimates made by brokerage firms or industry analysts relating to
the markets in which Autodesk does business or relating to Autodesk or
Discreet specifically have resulted, and could in the future result, in an
immediate and adverse effect on the market price of the Autodesk Common Stock.
Statements by financial or industry analysts regarding the impact on
Autodesk's net income per share resulting from the Transactions and the extent
to which such analysts expect potential business synergies to affect reported
results in future periods can be expected to contribute to volatility in the
market price of the Autodesk Common Stock. Moreover, the issuance of
significant numbers of additional shares by Autodesk, including the issuance
of approximately 3 million shares in the Reissuance Offering, may have the
effect of reducing the market price of the Autodesk Common Stock. In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market price for the
securities of many high-technology companies and which often have been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Autodesk Common
Stock.
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Substantial Expenses Resulting from the Transactions. Autodesk, Dutchco and
Discreet estimate they will incur direct transaction costs, relating primarily
to regulatory filing costs, and the fees of financial advisors, attorneys,
accountants, financial printers and proxy solicitors, of approximately $13
million associated with the Transactions, which will be charged to operations
upon consummation of the Transactions. Autodesk and Discreet expect the
Combined Company to incur an additional significant charge to operations,
currently estimated at $6-8 million, to reflect costs associated with
integrating the two companies which will be expensed as incurred. The Combined
Company may also incur additional material charges in subsequent quarters to
reflect additional costs associated with the Transactions.
RISKS RELATING TO THE COMBINED COMPANY
As is true for technology companies generally, Autodesk, Dutchco and
Discreet currently operate, and, following consummation of the Transactions,
the Combined Company will operate, in a rapidly changing environment that
involves a number of risks, some of which are beyond their control.
Competition. The software industry has limited barriers to entry, and the
availability of desktop computers with continually expanding capabilities at
progressively lower prices contributes to the ease of market entry. Because of
these and other factors, competitive conditions in the industry are likely to
intensify in the future. Increased competition could result in price
reductions, reduced revenues and profit margins, and loss of market share, any
of which could adversely affect Autodesk's business, consolidated results of
operations, and financial condition. The design software market, in
particular, is characterized by vigorous competition in each of the vertical
markets in which Autodesk competes. This competition includes the entry of
competitors with innovative technologies and the consolidation of companies
with complementary products and technologies. Autodesk believes that the
principal factors affecting competition in its markets are product
reliability, performance, ease of use, range of useful features, continuing
product enhancements, reputation, price, and training. In addition, the
availability of third-party application software is a competitive factor
within the multimedia and design software markets. Autodesk believes that it
competes favorably in these areas and that its competitive position will
depend, in part, upon its continued ability to enhance existing products, and
to develop and market new products.
The digital imaging software market in which Discreet competes is extremely
competitive and characterized by frequent and rapid changes in technology and
customer preferences. Discreet competes with other software vendors for access
to distribution channels and customers. Competition is generally based on
product features and functionality, ease of use, quality of customer support,
timeliness of product upgrades and price, among other factors. As the market
for the software products of Discreet continues to develop and other software
vendors expand their product lines to include products that compete with those
of Discreet, competition may intensify. A number of Discreet's competitors and
potential competitors possess significantly greater financial, technical,
marketing and sales and other resources than Discreet or the Combined Company.
In addition, as desktop computers become more powerful and less expensive, a
broader group of software developers may be able to introduce products for
personal computers that would be competitive with Discreet's products in terms
of price and performance. Accordingly, there can be no assurance that the
future products produced by the Combined Company will be successful or gain
market acceptance.
The ability of the Combined Company to compete will depend on factors both
within and outside its control, including the success and timing of new
product development and product introductions by the Combined Company and its
competitors, product performance and price, distribution and customer support.
There can be no assurance that the Combined Company will be able to compete
successfully with respect to these factors. Although Autodesk and Discreet
believe that the Combined Company will have certain technological and other
advantages over its competitors, maintaining such advantages will require
continued investment by the Combined Company in research and development,
sales and marketing and customer service and support. There can be no
assurance that the Combined Company will have sufficient resources to make
such investment or that the Combined Company will be able to make the
technological advances necessary to maintain such competitive advantages. In
addition, as the Combined Company enters new markets, distribution channels,
technical requirements and levels and bases of competition may be different
from those in the Combined Company's current markets and there can be no
assurance that the Combined Company will be able to compete favorably.
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The future financial performance of Autodesk's Discreet business unit as
part of the Combined Company will depend in part on the successful
development, introduction and customer acceptance of existing and new or
enhanced products. In addition, in order for the unit to achieve sustained
growth as part of the Combined Company, the market for its systems and
software must continue to develop and the Combined Company must expand this
market to include additional applications within the film and video industries
and develop or acquire new products for use in related markets. There can be
no assurance that the Combined Company will be successful in marketing its
existing or new or enhanced products. In addition, as the Combined Company
enters new markets, distribution channels, technical requirements and levels
and bases of competition may be different from those in Discreet's current
markets; there can be no assurance that the Combined Company will be able to
compete favorably.
In April 1998, Autodesk received notice that the FTC had undertaken a
nonpublic investigation of its business practices. The FTC has not made any
claims or allegations regarding Autodesk's current business practices or
policies, nor have any charges been filed. Autodesk intends to cooperate fully
with the FTC in its inquiry. Autodesk does not believe that the investigation
will have a material adverse effect on its business or consolidated results of
operations.
Fluctuations in Quarterly Operating Results. From time to time, Autodesk
experiences fluctuations in its quarterly operations as a result of periodic
release cycles, competitive factors and general economic conditions, among
other things. In addition, Autodesk has experienced fluctuations in operating
results in interim periods in certain geographic regions due to seasonality.
In particular, Autodesk's operating results in Europe during its third fiscal
quarter are usually impacted by a slow summer period while the Asia/Pacific
region typically experiences seasonal slowing in Autodesk's third and fourth
fiscal quarters.
Autodesk receives and fulfils a majority of its orders within a particular
quarter, with the majority of the sales to distributors and dealers (value-
added resellers or "VARs"). These resellers typically carry inventory of
Autodesk's products and place volume orders equivalent to a few days or a few
weeks of sales. The timing of these orders could have a material impact on
quarterly operating results. Additionally, Autodesk's operating expenses are
based in part on its expectations of future revenues and are relatively fixed
in the short term. Accordingly, any revenue shortfall below expectations could
have an immediate and significant adverse effect on the Combined Company's
consolidated results of operations and financial conditions.
Similarly, shortfalls in Autodesk's and Discreet's revenues or earnings from
levels expected by securities analysts have in the past had an immediate and
significant adverse effect on the trading price of each company's common
stock, and any such shortfalls can be expected to have a similar effect on
Autodesk's stock price following consummation of the Transactions. Moreover,
each of Autodesk's and Discreet's stock price is, and Autodesk's stock price
will be, subject to the volatility generally associated with technology stocks
and may also be affected by broader market trends unrelated to performance.
A variety of factors have caused period-to-period fluctuations in Discreet
and Autodesk's operating results, including the integration of operations
resulting from acquisitions of companies, products or technologies, revenues
and expenses related to the introduction of new products or new versions of
existing products, changes in selling prices, delays in purchase in
anticipation of upgrades to existing products, or introduction of new products
(including products of third parties), currency fluctuations, dealer and
distributor order patterns or general economic trends. In addition, in the
future, the Combined Company is more likely to recognize a disproportionate
amount of its revenue for a given fiscal quarter or fiscal year at the end of
such fiscal quarter or fiscal year.
Autodesk and Discreet believe that the operating results of Autodesk's
Discreet business unit could vary significantly from quarter to quarter. A
limited number of system sales may account for a substantial percentage of
Discreet's quarterly revenue because of the high average sales price of such
systems and the timing of purchase orders. In addition, the timing of revenue
is influenced by a number of other factors, including the timing of individual
orders and shipments, other industry trade shows, competition, seasonal
customer buying
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patterns, changes in customer buying patterns in response to platform changes
and changes in product development, and sales and marketing expenditures.
Because Discreet's operating expenses are based on anticipated revenue levels
and a high percentage of Discreet's expenses are relatively fixed in the short
term, variations in the timing of recognition of revenue could cause
significant fluctuations in operating results from quarter to quarter and may
result in unanticipated quarterly earnings shortfalls or losses.
Product Concentration. Autodesk derives, and after consummation of the
Transactions is expected to continue to derive, a substantial portion of its
revenues from sales of AutoCAD software, AutoCAD upgrades, and adjacent
products which are interoperable with AutoCAD. As such, any factor adversely
affecting sales of AutoCAD and AutoCAD upgrades, including such factors as
product life cycle, market acceptance, product performance and reliability,
reputation, price competition, the availability of third-party applications or
the introduction of products which substitute for AutoCAD, could have a
material adverse effect on the Combined Company's business and consolidated
results of operations.
Rapidly Changing Industry. The multimedia and design software industries are
characterized by rapid growth and technological change and changes in customer
requirements. The success of the Combined Company in this industry will depend
on many factors, including the continued acceptance of Discreet's current
products, its ability to enhance and support those products, its ability to
create an effective, integrated organization to develop and introduce new
products that address changing customer needs and technological advances by
competitors on a timely basis, and its ability to establish and maintain
effective distribution channels for its products. The Combined Company may not
be successful in these efforts. The future growth of the Combined Company's
revenues for its new media products also depends in part on sustained growth
in the demand for interactive media applications, which in turn depends on a
number of factors including product acceptance, price-point sensitivities,
consumer demand for film and video content and the proliferation of high
definition television. The demand for these applications may not develop at
the pace or in the direction anticipated by the Combined Company.
Product Development and Introduction. The multimedia and design software
industries are characterized by rapid technological change as well as changes
in customer requirements and preferences. The software products offered by
Autodesk and Discreet are complex and, despite extensive testing and quality
control, may contain errors or defects ("bugs"), especially when first
introduced. There can be no assurance that defects or errors will not occur in
future releases of AutoCAD, Discreet's products, or other software products
offered by the Combined Company. Such defects or errors could result in
corrective releases to the Combined Company's software products, damage to the
Combined Company's reputation, loss of revenues, an increase in product
returns, or lack of market acceptance of its products, any of which could have
a material and adverse effect on the Combined Company's business and
consolidated results of operations.
Autodesk and Discreet believe that the Combined Company's future results
will depend largely upon its ability to offer products that compete favorably
with respect to, reliability, performance, range of useful features,
continuing product enhancements, reputation, price and training. The discovery
of product defects could result in the delay or cancellation of planned
development projects, and could have a material and adverse effect on the
Combined Company's business and consolidated results of operations. Further,
increased competition in design, mapping or multimedia software products could
also have a negative impact on the Combined Company's business and
consolidated results of operations. More specifically, gross margins may be
adversely affected if customers purchase low-end CAD products, which
historically have had lower margins, instead of the Combined Company's higher-
margin products.
Certain of Autodesk's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. Autodesk generally either owns or licenses the
software developed by third parties. Because talented development personnel
are in high demand, there can be no assurance that independent developers,
including those who have developed products for Autodesk in the past, will be
able to provide development support to the Combined Company in the future.
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Similarly, there can be no assurance that the Combined Company will be able to
obtain and renew license agreements on favorable terms, if at all, and any
failure to do so could have a material adverse effect on the Combined
Company's business and consolidated results of operations.
The success of Autodesk's Discreet business unit will depend in part upon
the Combined Company's ability to enhance Discreet's existing systems and
software and to develop and introduce new products and features which meet
changing customer requirements and emerging industry standards on a timely
basis. In addition, in connection with Discreet's recent acquisitions, the
Combined Company must fully integrate the edit*, effect*, paint* and light*
products into its product line and operations. Discreet and Autodesk have from
time to time experienced delays in introducing new products and product
enhancements and there can be no assurance that the Combined Company will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products or product
enhancements. In addition, there can be no assurance that such new products or
product enhancements will meet the requirements of the marketplace and achieve
market acceptance. Any such failure could have a material adverse effect on
the Combined Company's business and consolidated results of operations. From
time to time the Combined Company or others may announce products, features or
technologies which have the potential to shorten the life cycle of or replace
the Combined Company's then existing products. Such announcements could cause
customers to defer the decision to buy or determine not to buy the Combined
Company's products or cause the Combined Company's distributors to seek to
return products to the Combined Company, any of which could have material
adverse effect on the Combined Company's business and consolidated results of
operations. In addition, product announcements by Silicon Graphics, Inc.
("SGI") and others in the past have caused customers to defer their decision
to buy or determine not to buy Discreet's products. In addition, there can be
no assurance that products or technologies developed by others will not render
the Combined Company's products or technology noncompetitive or obsolete.
Single Market for Discreet's Systems; Risks Associated with Expansion into
New Markets. To date, Discreet's products have been purchased primarily by
creative professionals for use in production and post-production in the film
and video industries. In order for Autodesk's Discreet business unit, to
achieve sustained growth, the market for Discreet's systems and software must
continue to develop and the Combined Company must expand this market to
include additional applications within the film and video industries and
develop new products for use in related markets. Discreet recently announced
its multi-platform software initiative to develop and market software across
Apple Macintosh, Microsoft Windows NT and UNIX operating systems, in addition
to its existing real time turnkey systems solutions, targeted at two new
market segments: institutional customers and prosumer (professional
consumers). While Autodesk and Discreet believe that the market recognition
which Discreet has achieved through sales of flame*, smoke*, effect*, inferno*
and fire* systems to creative professionals will facilitate the Combined
Company's marketing efforts in new markets, there can be no assurance that
Autodesk's Discreet business unit will be able to successfully develop and
market systems and software for other markets, or, if it does so, that such
systems and software will be accepted at a rate, and in levels, sufficient to
maintain growth. Further, the distribution channels, technical requirements
and levels and bases of competition in other markets are different than those
in Discreet's current market and there can be no assurance that the Combined
Company will be able to compete favorably in those markets.
International Operations. Revenue from international operations currently
accounts for a significant portion of the consolidated revenues of Autodesk
and Discreet, and such revenue is expected to continue to account for a
significant portion of the Combined Company's consolidated revenues. Risks
inherent in Autodesk's and Discreet's international operations include the
following: unexpected changes in regulatory practices and tariffs;
difficulties in staffing and managing foreign operations; longer collection
cycles; potential changes in tax laws; greater difficulty in protecting
intellectual property; and the impact of fluctuating exchange rates between
the US dollar and foreign currencies in the markets where Autodesk and
Discreet conduct business. In particular, during the first six months of
Autodesk's fiscal 1999, changes in exchange rates from the same period of the
prior fiscal year adversely impacted Autodesk's revenues, principally due to
changes in the rate of exchange between the US dollar and the Japanese yen and
the Australian dollar.
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Autodesk's international results have been recently impacted by unfavorable
economic and political conditions in the Asian markets, and Autodesk believes
such conditions will continue over the forseeable period to negatively impact
its business. See "Autodesk Management's Discussion and Analysis of Financial
Condition and Results of Operations." There can be no assurance that the
economic crisis and currency issues currently being experienced in the Asian
markets will not have a material adverse effect on the Combined Company's
future international sales and, consequently, on the Combined Company's
business and consolidated results of operations.
Dependence on Distribution Channels. Autodesk sells its software products
primarily to VARs. Autodesk's ability to effectively distribute products
depends in part upon the financial and business condition of its VAR network.
Although Autodesk has not currently experienced any material problems with its
VAR network, computer software dealers and distributors are typically not
highly capitalized and have experienced difficulties during times of economic
contraction and may do so in the future. The loss of or a significant
reduction in business with any one of Autodesk's major international
distributors or large US resellers could have a material adverse effect on the
Combined Company's business and consolidated results of operations in future
periods.
Product Returns. With the exception of certain European distributors,
agreements with Autodesk's VARs do not contain specific product-return
privileges. However, Autodesk permits its VARs to return product in certain
instances, generally during periods of product transition and during update
cycles. Although product returns, comparing the first quarter of fiscal 1999
to the same period in the prior year, decreased as a percentage of
consolidated revenues, management anticipates that product returns in future
periods will continue to be impacted by the timing of new product releases, as
well as the quality and market acceptance of new products.
Autodesk establishes reserves, including reserves for stock balancing and
product rotation, based on estimated future returns of product and after
taking into account channel inventory levels, the timing of new product
introductions, and other factors. While Autodesk maintains strict measures to
monitor channel inventories and to provide appropriate reserves, actual
product returns may differ from Autodesk's reserve estimates, and such
differences could be material to the Combined Company's consolidated financial
statements.
Intellectual Property. Each of Autodesk's and Discreet's success is
dependent on its proprietary technology. Autodesk and Discreet rely on a
combination of patent, copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its
proprietary rights. Despite such efforts to protect proprietary rights,
unauthorized parties may attempt to copy aspects of the Combined Company's
software products or to obtain and use information that the Combined Company
regards as proprietary. Policing unauthorized use of Autodesk's and Discreet's
software products is time-consuming and costly. Although neither company is
able to measure accurately the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. There can
be no assurance that the Combined Company's means of protecting its
proprietary rights will be adequate or that its competitors will not
independently develop similar technology.
Autodesk and Discreet expect that software product developers will be
increasingly subject to infringement claims as the number of products and
competitors in its market grows and the functionality of products in different
market segments overlap. From time to time, infringement claims have been
asserted against Autodesk and Discreet, and there can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting
from infringement claims) will not be asserted against the Combined Company in
the future or that any such assertions will not have a material adverse effect
on the Combined Company's business and consolidated results of operations. Any
such claims, whether with or without merit, could be time-consuming, result in
costly litigation and diversion of resources, cause product shipment delays,
or require the Combined Company to enter into royalty or licensing agreements.
Such royalty or license agreements, if required, may not be available on
acceptable terms, if at all, which could have a material adverse effect on the
Combined Company's business and consolidated results of operations. If
infringement is alleged by any third party, the Combined Company may be
required to discontinue the use of certain software codes or processes, to
cease the manufacture, use and sale of
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infringing products, to incur significant litigation costs and expenses and to
develop non-infringing technology or to obtain licenses to use the allegedly
infringed technology. There can be no assurance that the Combined Company
would be able to develop alternative technologies or to obtain such licenses
or, if a license were obtainable, that the terms would be commercially
reasonable or acceptable to the Combined Company.
In addition, Autodesk, and in some cases Discreet, also relies on certain
software that is licensed from third parties, including software that is
integrated with internally developed software and used in its products to
perform key functions. There can be no assurance that these third-party
software licenses will continue to be available on commercially reasonable
terms, or that the software will be appropriately supported, maintained, or
enhanced by the licensors. The loss of licenses, or inability to support,
maintain, and enhance any such software, could result in increased costs, or
in delays or reductions in product shipments until equivalent software could
be developed, identified, licensed, and integrated, which could have a
material adverse effect on the Combined Company's business and consolidated
results of operations.
Discreet generally seeks to enter into confidentiality agreements with its
employees and license agreements with its distributors and to limit access to
and distribution of its systems, software, documentation and other proprietary
information. Until fiscal 1996, substantially all of Discreet's systems were
sold without written license agreements. There can be no assurance that the
Combined Company will not be involved in litigation with respect thereto or
that the outcome of any such litigation might not be more unfavorable to the
Combined Company as a result of such omissions. Discreet uses both software
and hardware keys with respect to its systems and software but otherwise does
not copy-protect its systems and software. It may be possible for unauthorized
third parties to copy Discreet's products or to reverse engineer or obtain and
use information that Discreet regards as proprietary. There can be no
assurance that the Combined Company's competitors will not independently
develop technologies that are substantially equivalent or superior to
Discreet's technologies.
Risks Associated with Recent Acquisitions and Investments. Each of Autodesk
and Discreet periodically acquires or invests in businesses, software products
and technologies which are complementary to its business through acquisitions,
strategic alliances, debt and equity investments, joint ventures and the like.
The risks associated with such acquisitions or investments include, among
others, the difficulty of integrating the operations and personnel of the
companies, the failure to realize anticipated synergies and the diversion of
management's time and attention. In addition, such investments and
acquisitions may involve significant transaction-related costs. There can be
no assurance that Autodesk or Discreet will be successful in overcoming such
risks or that such investments and acquisitions will not have a material
adverse impact upon the Combined Company's business, financial condition or
consolidated results of operations. In addition, such investments and
acquisitions may contribute to potential fluctuations in quarterly results of
operations due to acquisition-related costs and charges associated with
eliminating redundant expenses or write-offs of impaired assets recorded in
connection with acquisitions, any of which could negatively impact results of
operations for a given period or cause lack of linearity quarter to quarter in
the Combined Company's operating results or financial condition.
On May 4, 1998, Autodesk acquired the mechanical applications business of
Genius CAD Software GmbH ("Genius"), a German limited liability company, for
approximately $69 million in cash, which includes fees and expenses. In
addition, Discreet in fiscal 1997 and 1998 completed three acquisitions: the
assets of Denim Software L.L.C., D-Vision Systems, Inc. and Lightscape
Technologies, Inc. There can be no assurance that the anticipated benefits of
these acquisitions or any future acquisitions will be realized.
Attraction and Retention of Employees. The continued growth and success of
the Combined Company depends significantly on the continued service of highly
skilled employees. In particular, Discreet's success to date has depended to a
significant extent upon a number of key management and technical employees,
the loss of any of whom could have a material adverse effect on Discreet's
business and results of operations. Competition for these employees in today's
marketplace, especially in the technology industries, is intense. The Combined
Company's ability to attract and retain employees is dependent on a number of
factors including its continued ability to grant stock incentive awards. There
can be no assurance that the Combined Company will be successful in continuing
to recruit new personnel and to retain existing personnel. The loss of one or
more
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key employees or the Combined Company's inability to maintain existing
employees or recruit new employees could have a material adverse impact on the
Combined Company. In addition, the Combined Company may experience increased
compensation costs to attract and retain skilled personnel.
Impact of Year 2000. Some of the computer programs used by Autodesk and
Discreet in their internal operations rely on time-sensitive software that was
written using two digits rather than four to identify the applicable year.
These programs may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. Additionally, as Autodesk and Discreet are in the
business of software production, year 2000 issues may affect each company's
products which are being sold externally. Autodesk expects to successfully
implement a six-phase year 2000 compliance program and does not believe that
the cost of such procedures will have a material effect on Autodesk's results
of operations or financial condition. There can be no assurance, however, that
there will not be a delay in the completion of these procedures or that the
cost of such procedures will not exceed original estimates, either of which
could have a material adverse effect on future results of operations.
In addition to correcting the business and operating systems used by
Autodesk in the ordinary course of business as described above, Autodesk has
also reviewed all products it produces internally for sale to third parties to
determine compliance of its products. Products either have been found to be
compliant or are currently being tested for compliance. However, many Autodesk
products run on computer hardware and operating systems produced and sold by
third-party vendors. There can be no assurance that these application systems
will be converted in a timely manner, and any failure in this regard may cause
Autodesk products not to function as designed. Discreet has made preliminary
assessments of its products and information systems and has determined that
they are Year 2000 compliant, or that only a limited effort will be required
to achieve compliance. Discreet is currently proceeding with detailed reviews
of every application used. It is expected that some will have to be upgraded
to Year 2000 compliant applications. It is expected that some customers may
experience some difficulties related to non-Discreet products, which may
affect the performance of Discreet products and, therefore, lead to an
unusually high number of calls to the Discreet technical support department.
Any future costs associated with ensuring that Autodesk's products or the
products of Autodesk's Discreet business unit are compliant with the Year 2000
are not expected to have a material impact on Autodesk's results of operations
or financial position.
Dependence on Single Workstation Vendor. Discreet's flame*, effect*,
inferno*, fire*, smoke* and frost* systems currently include workstations
manufactured by Silicon Graphics, Inc. ("SGI"). There are significant risks
associated with this reliance on SGI, and the Combined Company may be impacted
by the timing of the development and release of products by SGI, as was the
case during fiscal 1996. In addition, there may be unforeseen difficulties
associated with adapting Discreet's products to future SGI products. Discreet
is an authorized master VAR of workstations manufactured by SGI. Discreet's
agreement with SGI is subject to annual renewal in May of each year and
termination by SGI for cause. The agreement with SGI has been extended through
December 31, 1998 and Discreet has no reason to believe that SGI will not
renew such agreement. In addition, although Discreet has no reason to believe
that it will be unable to obtain sufficient quantities of SGI workstations on
a timely basis or that its status as a master VAR will be changed, there can
be no assurance that the Combined Company will continue to be able to procure
such workstations in sufficient quantities or on a timely basis or that SGI
will continue to recognize the Combined Company as a master VAR. The success
of Autodesk's Discreet business unit also depends, in part, on the continued
market acceptance of SGI workstations by consumers in general, and by the
professional film and video industries, in particular. Although the Combined
Company intends to continue to evaluate new hardware platforms and may adapt
its products as technological advances and market demands dictate, Discreet
and Autodesk believe that Autodesk's Discreet business unit will continue to
derive a substantial portion of its revenue for the foreseeable future from
the sale and maintenance of systems designed to include SGI workstations. As a
result, financial, market and other developments adversely affecting SGI or
the sales of workstations, the introduction or acquisition by SGI
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of products which are competitive with those of Discreet, or the unanticipated
timing or pricing of SGI products that could cause customers to defer the
decision to buy or determine not to buy the Autodesk Discreet business unit's
then available products or systems, could have an adverse effect upon the
Combined Company's business and results of operations, as was the case with
respect to Discreet for the three month period ended January 31, 1996. As a
master VAR, Discreet also obtains certain advance access to SGI technology in
order to develop compatible systems and to modify and improve existing
products. If the Combined Company were unable to obtain such advance access,
it could have an adverse impact on the Combined Company's business and results
of operations.
Reliance on Sole Source Suppliers. Discreet is dependent on SGI as
Discreet's sole source for video input/output cards used in Discreet's
systems. Discreet is also dependent on a single workstation vendor. See "--
Dependence on Single Workstation Vendor." Discreet also purchases electronic
tablets manufactured by Wacom Technology Corporation and believes that while
alternative suppliers are available, there can be no assurance that
alternative electronic tablets would be functionally equivalent or be
available on a timely basis or on similar terms. Discreet generally purchases
sole source or other components pursuant to purchase orders placed from time
to time in the ordinary course of business and has no written agreements or
guaranteed supply arrangements with its sole source suppliers. Discreet has
experienced quality control problems and supply shortages for sole source
components in the past and there can be no assurance that the Combined Company
will not experience significant quality control problems or supply shortages
for these components in the future. Discreet does not maintain an extensive
inventory of these components, and an interruption in supply could have a
material adverse effect on Discreet's business and results of operations.
Because of Discreet's reliance on these suppliers, Discreet may also be
subject to increases in component costs which could adversely affect the
Combined Company's business and results of operations.
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AUTODESK SPECIAL MEETING
DATE, TIME AND PLACE OF AUTODESK MEETING
The Autodesk Meeting will be held at The Executive Briefing Center,
Autodesk, Inc., 111 McInnis Parkway, San Rafael, California, on November [ ],
1998 at :00 .m. local time.
PURPOSE
The purpose of the Autodesk Meeting is consider and vote on the Autodesk
Resolution and to transact such further or other business as may properly come
before the meeting or any adjournment or postponement thereof, including a
proposal to adjourn the Autodesk Meeting, if necessary, to permit further
solicitation of proxies in the event there are not sufficient votes at the
time of the Autodesk Meeting to approve the Autodesk Resolution.
RECORD DATE AND OUTSTANDING SHARES
Only Autodesk Stockholders of record at the close of business on the
Autodesk Record Date are entitled to notice of and to vote at the Autodesk
Meeting. As of the Autodesk Record Date, there were Autodesk Stockholders
of record holding an aggregate of shares of Autodesk Common Stock.
On or about , 1998, a notice meeting the requirements of Delaware law
was mailed to all Autodesk Stockholders of record as of the Autodesk Record
Date.
VOTE REQUIRED
Under Delaware law and Nasdaq National Market rules, approval of the
Autodesk Resolution requires the affirmative vote of a majority of the total
votes cast regarding such proposal at a meeting at which a quorum is present
or represented by proxy. Each Autodesk Stockholder of record on the Autodesk
Record Date is entitled to cast one vote per share, exercisable in person or
by properly executed proxy, on each matter properly submitted for the vote of
the Autodesk Stockholders at the Autodesk Meeting.
The required quorum for the transaction of business at the Autodesk Meeting
is a majority of the shares of Autodesk Common Stock outstanding on the
Autodesk Record Date. Shares of Autodesk Common Stock that are voted "FOR,"
"AGAINST" or "WITHHELD" from a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as being
entitled to vote on the subject matter (the "Votes Cast") with respect to such
matter.
While abstentions (votes "withheld") will be counted for purposes of
determining both the presence or absence of a quorum for the transaction of
business and the total number of Votes Cast with respect to a particular
matter, broker non-votes with respect to proposals set forth in this Proxy
Circular will not be considered Votes Cast and, accordingly, will not affect
the determination as to whether the requisite majority of Votes Cast has been
obtained with respect to a particular matter once a quorum is present.
The executive officers and certain directors of Autodesk have entered into
voting agreements with Autodesk and Dutchco (each an "Autodesk Voting
Agreement"), pursuant to which each such holder has agreed to vote in favor of
the Autodesk Resolution. In addition, each such holder has agreed, pursuant to
the Autodesk Voting Agreement, to grant to Autodesk an irrevocable proxy to
vote shares as aforesaid. The Autodesk Voting Agreements will terminate upon
termination of the Acquisition Agreement or the Effective Time, whichever
occurs earlier. The outstanding shares of Autodesk Common Stock held by
parties to the Autodesk Voting Agreement represent % of the votes entitled
to be cast by holders of shares of Autodesk Common Stock issued and
outstanding as of the Autodesk Record Date.
Proxies. Each of the persons named as proxies in the proxy is an officer of
Autodesk. All shares of Autodesk Common Stock that are entitled to vote and
are represented at the Autodesk Meeting either in person
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or by properly executed proxies received prior to or at the Autodesk Meeting
and not duly and timely revoked will be voted at the Autodesk Meeting in
accordance with the instructions indicated on such proxies. If no such
instructions are indicated, such proxies will be voted for the approval of the
Autodesk Resolution.
The Autodesk Board knows of no other matter to be presented at the Autodesk
Meeting. If any other matters are properly presented for consideration at the
Autodesk Meeting (or any adjournments or postponements thereof) including,
among other things, consideration of a motion to adjourn or postpone the
Autodesk Meeting to another time and/or place (including, without limitation,
for the purpose of soliciting additional proxies), the persons named in the
enclosed forms of proxy and voting thereunder will have the discretion to vote
on such matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Autodesk at or before the taking of the vote at the
Autodesk Meeting, a written notice of revocation bearing a later date than the
proxy; (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of Autodesk before the taking of the vote at
the Autodesk Meeting or (iii) attending the Autodesk Meeting and voting in
person. Any written notice of revocation or subsequent proxy should be sent so
as to be delivered to Autodesk, Inc. at 111 McInnis Parkway, San Rafael,
California 94903, Attention: Secretary, or hand-delivered to the Secretary of
Autodesk, in each case at or before the taking of the vote at the Autodesk
Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of proxies from Autodesk Stockholders will be
borne by Autodesk. In addition, Autodesk may reimburse brokerage firms and
other persons representing beneficial owners of shares for their expenses in
forwarding solicitation materials to such beneficial owners. Proxies may also
be solicited by certain Autodesk directors, officers and regular employees
personally or by telephone, telegram, letter, e-mail or facsimile. Such
persons will not receive additional compensation, but may be reimbursed for
reasonable out-of-pocket expenses incurred in connection with such
solicitation. Autodesk has retained Georgeson & Company, Inc. to assist in the
solicitation of proxies at an estimated fee of $10,000 plus reimbursement of
reasonable expenses.
RECOMMENDATION OF THE AUTODESK BOARD
THE AUTODESK BOARD HAS UNANIMOUSLY APPROVED THE ACQUISITION AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY AND HAS DETERMINED THAT THE TRANSACTIONS
ARE FAIR AND IN THE BEST INTERESTS OF AUTODESK AND ITS STOCKHOLDERS. AFTER
CAREFUL CONSIDERATION, THE AUTODESK BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR
THE AUTODESK RESOLUTION. SEE "APPROVAL OF THE TRANSACTIONS--JOINT REASONS FOR
THE TRANSACTIONS," "--AUTODESK'S REASONS FOR THE TRANSACTIONS" AND "--
DISCREET'S REASONS FOR THE TRANSACTIONS."
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DISCREET SPECIAL MEETING
DATE, TIME AND PLACE OF DISCREET MEETING
The Discreet Meeting will be held at [ ], on November [ ],
1998 at :00 .m. local time.
PURPOSE
The purpose of the Discreet Meeting is to consider and vote upon the
Discreet Resolution and to transact such further or other business as may
properly come before the Discreet Meeting or at any adjournment or
postponement thereof, including a proposal to adjourn the Discreet Meeting, if
necessary, to permit further solicitation of proxies in the event there are
not sufficient votes at the Discreet Meeting to approve the Discreet
Resolution.
RECORD DATE AND OUTSTANDING SHARES
Only Discreet Shareholders at the close of business on the Discreet Record
Date are entitled to notice of, and to vote at, the Discreet Meeting. As of
the Discreet Record Date, there were Discreet Shareholders of record
holding an aggregate of approximately Discreet Common Shares.
On or about , 1998, a notice satisfying the requirements of Quebec law
was mailed to all Discreet Shareholders of record as of the Discreet Record
Date.
VOTE REQUIRED
Pursuant to the Quebec Act and the articles of incorporation of Discreet, as
amended, the affirmative vote of the holders of not less than sixty-six and
two-thirds percent (66 2/3%) of the votes cast by holders of the Discreet
Common Shares present or represented by proxy at the Discreet Meeting is
required to approve the Discreet Resolution. Each Discreet Shareholder of
record on the Discreet Record Date will be entitled to cast one vote per share
on each matter to be acted upon at the Discreet Meeting.
The required quorum for the transaction of business at the Discreet Meeting
is two persons present in person, each being a shareholder entitled to vote
thereat or a duly appointed proxyholder for an absent shareholder so entitled,
and together holding or representing by proxy not less than a majority of the
outstanding Discreet Common Shares entitled to vote at the Discreet Meeting. A
Discreet Shareholder who attends or is represented by proxy at the Discreet
Meeting and who abstains from voting on any or all proposals will be included
in the number of shareholders present at the Discreet Meeting for the purpose
of determining the presence of a quorum. However, such an abstention will not
be taken into account in the votes cast at the Discreet Meeting. Under the
rules of the National Association of Securities Dealers, Inc., brokers holding
shares for the accounts of their clients may not vote their clients' proxies
for the Discreet Resolution without specific voting instructions. Any shares
not so instructed will be counted for determining the presence of a quorum but
will not be counted for any other purposes.
The executive officers and certain directors of Discreet have entered into
voting agreements with Autodesk and Dutchco (each, a "Discreet Voting
Agreement"), pursuant to which each such person has agreed to vote his
Discreet Common Shares in favor of the Discreet Resolution. In addition, each
such holder has agreed pursuant to the Discreet Voting Agreement to grant to
Autodesk an irrevocable proxy to vote such shares as aforesaid. The Discreet
Voting Agreements will terminate upon termination of the Acquisition Agreement
or the Effective Time, whichever occurs earlier. The outstanding Discreet
Common Shares subject to the Discreet Voting Agreements represent
approximately % of the votes entitled to be cast by holders of Discreet
Common Shares outstanding as of the Discreet Record Date.
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PROXIES
Unless another person is identified on the form of proxy by the Discreet
Shareholder, each of the persons named as proxies in the form of proxy is an
officer of Discreet. All Discreet Common Shares that are entitled to vote and
are represented at the Discreet Meeting either in person or by properly
executed proxies received prior to or at the Discreet Meeting and not duly and
timely revoked will be voted at the Discreet Meeting in accordance with the
instructions indicated on such proxies. If no such instructions are indicated,
such proxies will be voted for the approval and adoption of the Discreet
Resolution.
The Discreet Board knows of no other matter to be presented at the Discreet
Meeting. If any other matter upon which a vote may properly be taken should be
presented at the Discreet Meeting, including, among other matters,
consideration of a motion to adjourn the Discreet Meeting (including without
limitation for purposes of soliciting additional proxies) to another time
and/or place, shares represented by all proxies received by Discreet will be
voted with respect thereto in accordance with the judgment of the persons
named as proxies in the proxies.
Execution of a proxy does not in any way affect a shareholder's right to
attend the Discreet Meeting and vote in person. Any proxy may be revoked by a
shareholder at any time before it is exercised by delivering a written
revocation or a later-dated proxy to the Chairman of the Discreet Board, or by
attending the meeting and voting in person. Any written notice of revocation
or subsequent proxy should be sent so as to be delivered to Discreet Logic
Inc. at 10 Duke Street, Montreal, Quebec H3C 2L7, Attention: Chairman, or
hand-delivered to the Chairman of the Discreet Board, in each case at or
before the taking of the vote at the Discreet Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of proxies from Discreet Shareholders will be
borne by Discreet. Brokers, custodians and fiduciaries will be requested to
forward proxy soliciting material to the owners of shares held in their names,
and Discreet will reimburse them for their reasonable out-of-pocket costs. In
addition, proxies may also be solicited by certain directors, officers and
employees of Discreet personally or by mail, telephone, telegraph, facsimile
or e-mail following the original solicitation. Such persons will not receive
additional compensation for such solicitation. Discreet has retained
to assist in soliciting proxies at an estimated fee of $ plus
reimbursement of reasonable expenses.
RECOMMENDATION OF THE DISCREET BOARD
AFTER CAREFUL CONSIDERATION, BASED ON THE UNANIMOUS RECOMMENDATION OF THE
DISCREET SPECIAL COMMITTEE, THE DISCREET BOARD HAS APPROVED THE ACQUISITION
AGREEMENT BY THE UNANIMOUS VOTE OF ALL NON-INTERESTED DIRECTORS AND BELIEVES
THAT THE TRANSACTIONS ARE FAIR AND IN THE BEST INTERESTS OF DISCREET AND ITS
SHAREHOLDERS AND RECOMMENDS A VOTE FOR THE DISCREET RESOLUTION. SEE "APPROVAL
OF THE TRANSACTIONS--JOINT REASONS FOR THE TRANSACTIONS," "--AUTODESK'S
REASONS FOR THE TRANSACTIONS" AND "--DISCREET'S REASONS FOR THE TRANSACTIONS."
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APPROVAL OF THE TRANSACTIONS
The terms of the Acquisition Agreement and the Transactions are the result
of arm's length negotiations between representatives of Discreet, Autodesk and
Dutchco. The following is a summary of the background of these negotiations
and the review of the Transactions undertaken by the Discreet Special
Committee, the Discreet Board, the Autodesk Board and the Dutchco Board and
the parties' reasons for the Transactions. The following discussion of the
background of the Transactions and the parties' reasons for the Transactions
and the potential benefits that could result from the Transactions contains
forward-looking statements which involve risks and uncertainties. Readers are
cautioned not to place undue reliance on these forward-looking statements. The
actual results of Autodesk, Discreet and the Combined Company could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Proxy Circular.
BACKGROUND OF THE TRANSACTIONS
As a public company, from time to time, Discreet has received inquiries from
third parties relating to potential strategic transactions, including certain
preliminary discussions and exchanges of information conducted in June and
July 1998 which did not lead to any formal acquisition proposal.
During the summer and the fall of 1997, the management of Discreet and of
Kinetix, a division of Autodesk, had meetings and telephone conversations
during which they explored the possibility of a cooperative business
relationship to pursue joint marketing opportunities.
Beginning in February 1998, pursuant to a mutual nondisclosure and
confidentiality agreement, the companies began sharing certain product
development information in an effort to determine the feasibility of enhancing
the interoperability of Kinetix's 3D Studio Max product with Discreet's
effect* and paint* products for future releases of these products.
On March 6, 1998, the senior management of Autodesk and Kinetix met with the
senior management of Discreet to discuss the ongoing relationship between
Discreet and Kinetix and explore the possibility of creating a formal joint
venture or other form of strategic alliance between Autodesk and Discreet
which would combine certain activities and products of both Kinetix and
Discreet.
On March 23, 1998, Discreet and Autodesk announced a cooperative
relationship whereby 3D Studio MAX would be integrated with Discreet's paint*
and effect* products. The first integrated versions of the products were
demonstrated at the NAB trade show in April 1998.
During the month of April 1998, various telephone conversations occurred
between management of Discreet and Kinetix, and on May 1, 1998, members of the
senior management of Kinetix and Steve Cakebread, Vice President and Chief
Financial Officer of Autodesk, met with Timothy Getz, Vice President-Corporate
Development, and Francois Plamondon, Executive Vice President and Chief
Financial Officer of Discreet, to review possible structures of a formalized
joint venture between the parties and related business issues. Subsequent
conversations were held between Kinetix and Discreet management during May.
During the week of May 26, 1998, and later on June 10, 1998, Mr. Cakebread
and Mr. Plamondon held discussions to further explore the joint venture
proposal and ultimately determined not to pursue a formal joint venture at
such time, but to continue joint development efforts pursuant to the March 23
agreement.
On June 29, 1998, Autodesk's financial advisor, Piper Jaffray, called
Discreet suggesting a meeting with Autodesk to explore the possibility of a
strategic combination between the two companies. Shortly thereafter, this
discussion was followed up by a conversation between Carol Bartz, Chairman of
the Board and Chief Executive Officer of Autodesk, and Richard Szalwinski,
Chairman of the Board, President and Chief Executive Officer of Discreet.
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On July 8, 1998, Eric Herr, President and Chief Operating Officer of
Autodesk, Mr. Cakebread and a representative from Piper Jaffray met in
Montreal, Quebec with Mr. Szalwinski, Mr. Plamondon, Mr. Getz and a
representative from Volpe Brown Whelan, financial advisor to Discreet, to
discuss the possibility of a strategic transaction or strategic combination
between the two companies.
On July 10, 1998, Discreet and Autodesk executed a new mutual nondisclosure
and confidentiality agreement in anticipation of further discussions and
mutual exchange of information in connection with a possible business
transaction or strategic relationship. At this time, each party commenced its
due diligence investigation of the other party, which continued until the
execution of the Acquisition Agreement.
Between July 10 and July 27, 1998, the financial advisors of both companies
reviewed the confidential material exchanged by the parties and various
discussions occurred between management of both companies regarding such
information.
During the last two weeks of July 1998, Volpe Brown Whelan conferred with
Piper Jaffray regarding the preliminary discussions between Discreet and
Autodesk and appropriate transaction valuation ranges and potential deal
terms.
On July 28, 1998, representatives from Piper Jaffray met with Ms. Bartz, Mr.
Herr and other members of Autodesk's management to present the preliminary
results of their due diligence and to discuss valuation, deal structure and
related issues.
Between July 27, 1998 and July 31, 1998, telephone conversations were held
among Ms. Bartz, Mr. Herr, Mr. Szalwinski and Mr. Plamondon and on July 31,
1998, such individuals met in Chicago, Illinois along with Mr. Getz of
Discreet and discussed various aspects of the possible business combination,
including how the combined entity might be structured following a transaction,
the growth objectives of Autodesk, the role of the Discreet business unit in a
combined organization, the growth potential of Discreet as part of the
combined entity, the management structure of the combined entity, the
potential roles of certain key management personnel and potential deal terms.
On August 4, 1998, the Autodesk Board met by teleconference to discuss,
among other matters, the potential business combination with Discreet, which
meeting was also attended by Mr. Herr, Marcia Sterling, Autodesk's Vice
President of Business Development and General Counsel, Christine Tsingos,
Autodesk's Vice President and Treasurer, as well as representatives from Piper
Jaffray. The representatives from Autodesk's management described the then
current relationship between the Kinetix division and Discreet and the
potential for synergies from the combination of Discreet's high-end and mid-
range new media software product offerings with Kinetix's products.
Representatives from Piper Jaffray provided information concerning Discreet's
products and target markets, and reviewed the written documentation containing
preliminary valuation analyses and related financial information which had
been provided to the Autodesk Board prior to the meeting. The Autodesk Board
asked questions and discussed the strategy underlying the proposed
transaction, the risks inherent in the proposed transaction, and the
implications of the proposed transaction with regard to long term Autodesk
Stockholder value. Following significant discussion and review, the Autodesk
Board authorized management to continue its discussions and to undertake in-
depth due diligence to determine whether the proposed transaction was in the
best interests of Autodesk and its stockholders, and whether the proposed
combination could be effectively integrated and managed.
On August 4 and 5, 1998, the Discreet Board met to discuss, among other
matters, a potential transaction with Autodesk. Representatives of Volpe Brown
Whelan were also present and made a presentation to the Discreet Board, which
included materials outlining economic and other issues for consideration in
weighing the attractiveness of the potential combination with Autodesk. The
Discreet Board reviewed the qualifications and expertise of Volpe Brown Whelan
and its representatives. The Discreet Board reviewed the industry in which
Autodesk operates, and the relative strengths, weaknesses and operating
history of Autodesk in such industry. The Discreet Board reviewed with Volpe
Brown Whelan a preliminary analysis of the relevant costs, benefits and risks
of the proposed transaction and a preliminary analysis of acceptable pricing
models. The Discreet Board
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discussed the state of the industry in which Discreet operates, including
recent consolidations and other matters. The Discreet Board, following
significant discussion and review, decided that discussions with Autodesk
should be pursued. The Discreet Board determined that a special committee of
the Discreet Board should be constituted to review the proposed transaction
and to make an appropriate recommendation with regard thereto.
Between August 5 and 7, 1998, members of Autodesk's and Dutchco's executive
management, legal, financial and technical staffs and representatives from
Piper Jaffray conducted legal, financial, business and technical due diligence
in Montreal, Quebec. Autodesk conducted a detailed review of Discreet's
operations, financial outlook, legal agreements and commitments, technical
processes and development efforts and met with senior management and members
of Discreet's legal, financial and technical staff.
Commencing at this time, Discreet's outside United States legal counsel,
Testa, Hurwitz & Thibeault, LLP, conducted legal due diligence on Autodesk.
On August 8, 9 and 10, 1998, Volpe Brown Whelan conferred with Piper Jaffray
regarding appropriate transaction valuation.
On August 9, 1998, Ms. Sterling and Mr. Cakebread of Autodesk, Mr. Plamondon
of Discreet and Mark J. Macenka of Testa, Hurwitz and Thibeault, LLP held a
telephonic meeting during which a number of general and specific terms of the
proposed transaction were proposed and discussed, including the various
structural alternatives for any transaction and the tax and accounting aspects
of such alternatives.
On August 11, 1998, a draft acquisition agreement and other transaction
documents were circulated by Wilson Sonsini Goodrich & Rosati, outside United
States legal counsel to Autodesk and Dutchco, and Aird & Berlis, outside
Canadian legal counsel to Autodesk and Dutchco.
During the period between August 11 and 14, 1998, members of Discreet's
senior management, financial and technical staff, along with representatives
from Discreet's financial advisor, Volpe Brown Whelan, and attorneys from
Discreet's outside United States legal counsel, Testa, Hurwitz & Thibeault,
LLP, conducted a due diligence investigation of Autodesk in San Rafael,
California. In addition, Discreet's internal legal staff continued their due
diligence investigation of Autodesk. Discreet's due diligence team performed a
detailed review of Autodesk's operations and financial outlook, reviewed
Autodesk's legal documents and met with members of Autodesk's senior
management, financial, technical and legal staff. Additionally, discussions
continued regarding the transaction terms, possible integration plans and
transaction communication strategy. Discreet's legal, financial, technical and
business due diligence of Autodesk continued until August 20, 1998.
During the period between August 11 and 20, 1998, management of Autodesk,
Dutchco and Discreet, together with their respective legal and financial
advisers, continued their extensive negotiations of the terms and conditions
of the definitive agreements relating to the transaction.
On August 18, 1998, Autodesk held a meeting of the Autodesk Board, which was
also attended by Mr. Herr, Ms. Sterling, Mr. Cakebread, Jim Guerard,
Autodesk's Vice President of Kinetix, and representatives from Piper Jaffray.
The Autodesk Board reviewed the material terms of the draft acquisition
agreement and related agreements in detail. Representatives from Piper Jaffray
made a presentation to the Autodesk Board, which included an in-depth analysis
of the financial implications of the transaction, historical financial data,
comparable industry combinations and the potential effect of achieving all,
some or none of the expected synergies from the proposed business combination
with Discreet. The Autodesk Board asked a number of questions, and there was
extensive discussion concerning: (i) the results of legal, financial and
technical due diligence, (ii) the potential for achieving synergies from the
proposed business combination, (iii) the material terms of the agreement,
including financial disincentives for termination of the transaction by
Discreet after signing of a definitive agreement, (iv) the future strategic
direction of Autodesk's Kinetix division absent the proposed business
combination with Discreet, (v) historical information concerning the
businesses, prospects, financial performance
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and condition, operations, technology management and competitive position of
both Autodesk and Discreet, including most recent quarterly and annual filings
with the SEC, (vi) the financial condition and results of operations for
Autodesk and Discreet before and after the proposed business combination,
(vii) current financial market conditions and historical market prices,
volatility and trading information with respect to the Discreet Common Shares
and Autodesk Common Stock, (viii) the potential for other third parties to
propose or enter into strategic relationships with Discreet or Autodesk's
Kinetix division, (ix) trends within the multimedia and design software
industries which might impact the decision to proceed with the proposed
business combination with Discreet, (x) the impact of the proposed business
combination upon Autodesk's customers, partners and employees, and (xi) the
opinion of Piper Jaffray as to the fairness, from a financial point of view,
of the Exchange Ratio to Autodesk's Stockholders. At the conclusion of the
meeting, the Autodesk Board unanimously approved the proposed transaction with
Discreet, authorized management to execute and deliver the acquisition
agreement, and adopted several other resolutions necessary to enable the
mechanics of the transaction.
On the evening of August 18, 1998, the Discreet Board held a special meeting
with all directors participating by telephone. At such meeting, members of
Discreet's senior management and representatives from Volpe Brown Whelan and
Testa, Hurwitz & Thibeault, LLP discussed with the Discreet Board, and
responded to numerous questions from the Discreet Board members about, (i) the
status of the ongoing negotiations with Autodesk, (ii) the strategic rationale
for the transaction, potential synergies and benefits to Discreet and the
competitive landscape facing Discreet on a stand-alone basis, (iii) the then-
currently proposed principal terms of the acquisition agreement, the Voting
and Exchange Trust Agreement, the Autodesk Affiliate Agreement and related
documents, including the continued desire of Autodesk and Dutchco to have an
option to purchase a certain amount of Discreet Common Shares (the "Discreet
Stock Option"), the nonsolicitation provisions, the termination rights
relating to the transaction, the conditions upon which any break-up fees would
be payable and the amount of such fees, and the representations, warranties
and covenants to be made, (iv) the results of the business, financial and
legal due diligence conducted on Autodesk, (v) the financial condition and
results of operations of both Autodesk and Discreet, (vi) the future prospects
of Autodesk after consummation of the proposed Transactions, (vii) current
financial market conditions and historical market prices, volatility and
trading information with respect to the Autodesk Common Stock and Discreet
Common Shares, and (viii) the financial analyses performed by management.
Volpe Brown Whelan then reviewed, among other things, the strategic rationale
for, and certain financial analyses related to the proposed transaction. The
presentation covered a number of matters relating to both Discreet's and
Autodesk's businesses and potential business combination of Discreet and
Autodesk and the fairness opinion to be delivered by Volpe Brown Whelan,
including various financial analyses performed by them and reviewed the
financial due diligence conducted by them concerning Autodesk. Testa, Hurwitz
& Thibeault, LLP and Stikeman, Elliott, outside Canadian legal to Discreet,
discussed the Discreet Board's fiduciary duties in considering a strategic
combination. After careful consideration, the Discreet Board determined that,
because of, among other things, the terms proposed by Autodesk (including the
course of discussions concerning the exchange ratio) and the perceived
strategic advantages to such a combination, senior management should pursue a
combination between Discreet and Autodesk, and the Discreet Board authorized
and instructed senior management to continue negotiations and due diligence
review of Autodesk. Additionally, the Discreet Board established a committee
of independent directors of the Discreet Board (the "Discreet Special
Committee") to review the proposed business combination and to determine
whether it would be in the best interests of Discreet and the Discreet
Shareholders.
On August 18, 1998, following the meeting of the full Discreet Board, the
Discreet Special Committee held a meeting to review the status of negotiations
with Autodesk regarding the proposed business combination with Autodesk. The
Discreet Special Committee discussed the proposed terms of the transaction and
their fiduciary duties in relation to the proposed business combination with
Autodesk.
On the evening of August 19, 1998, the Discreet Special Committee held a
telephonic meeting with Discreet's US legal counsel to discuss the status of
negotiations with Autodesk regarding the proposed business combination. The
Discreet Special Committee reviewed and discussed various issues in relation
to the proposed business combination, including certain legal aspects of the
proposed combination, the fairness opinion to be rendered by Volpe Brown
Whelan, the business, financial and legal due diligence performed by Discreet
and its
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advisors, and the principal terms of the draft acquisition agreement and
related documents, including their continued concerns with regard to the
Discreet lock-up stock option proposed by Autodesk and Dutchco.
On the morning of August 20, 1998, the Discreet Special Committee held a
telephonic meeting, with Discreet's US and Canadian legal counsel joining
after the meeting had commenced. The Discreet Special Committee discussed the
withdrawal by Autodesk and Dutchco of the Discreet Stock Option and reviewed
with counsel the specific terms of the proposed acquisition agreement between
the parties, including the nonsolicitation provisions, the termination rights
relating to the agreement, the conditions upon which any break-up fees would
be payable to Dutchco, and the amount of such fees. Discreet's Canadian legal
counsel, Stikeman, Elliott, discussed the Discreet Special Committee's and the
Discreet Board's fiduciary duties in considering a strategic combination.
On the afternoon of August 20, 1998, the Discreet Special Committee held a
telephonic meeting with legal counsel and representatives of Volpe Brown
Whelan to discuss the status of negotiations with Autodesk and Dutchco
regarding the proposed business combination with Autodesk and to further
review and discuss the fairness opinion to be delivered by Volpe Brown Whelan
and the related analyses in connection with the proposed business combination.
Volpe Brown Whelan presented a review of the Exchange Ratio, financial
analysis and pro forma and other information regarding the two companies and
then discussed with the Discreet Special Committee the opinion of Volpe Brown
Whelan to be delivered to the Discreet Special Committee and the Discreet
Board that the consideration to be received in the transaction by the Discreet
Shareholders was fair from a financial point of view to the Discreet
Shareholders as of such date. At the conclusion of the presentation by Volpe
Brown Whelan, the Discreet Special Committee agreed that, based on the
fairness opinion and all other relevant factors in relation to the proposed
business combination with Autodesk, it would recommend that the Board of
Directors approve the transaction as in the best interests of Discreet and the
Discreet Shareholders.
On the afternoon of August 20, 1998, the Discreet Board held a special
meeting with all directors participating by telephone, with members of
Discreet's senior management and representatives from Volpe Brown Whelan and
Discreet's United States legal counsel participating. The Discreet Special
Committee informed the Discreet Board that Autodesk and Dutchco had withdrawn
the Discreet Stock Option. The Discreet Special Committee presented to the
Discreet Board its review of the terms and conditions of the business
combination with Autodesk and the related agreements, and discussed the
results of due diligence and negotiations conducted by and on behalf of
Discreet. At the conclusion of the presentation, the Discreet Special
Committee recommended that the Discreet Board approve the business combination
proposal as presented. Legal counsel then reviewed the terms of the various
agreements, particularly the proposed acquisition agreement, and discussed the
Discreet Board's fiduciary duties in reviewing and approving the business
combination. Then, Volpe Brown Whelan summarized the presentation it had
delivered to the Discreet Special Committee preceding the meeting of the full
Discreet Board regarding the Exchange Ratio and the financial analysis and pro
forma and other information regarding the two companies and then delivered to
the Discreet Special Committee and the Discreet Board the opinion, stating
that the consideration to be received in the transaction by Discreet
Shareholders was fair from a financial point of view to the Discreet
Shareholders as of such date. Senior management of Discreet then reviewed with
the Discreet Board a summary describing the due diligence investigation that
had been conducted by management and on behalf of Discreet in relation to the
proposed transaction. At the conclusion to these discussions and upon
recommendation of the Discreet Special Committee, the Discreet Board voted to
approve the Acquisition Agreement and related transaction documents (with Mr.
Szalwinski abstaining).
Following the Discreet Board meeting, Autodesk's and Discreet's senior
management and US and Canadian legal counsel continued the final negotiations
of the transaction documents. The Original Agreement was executed in the
afternoon of August 20, 1998, and a joint press release was issued by the
parties announcing the proposed business combination.
On September 23, 1998, in order to implement certain technical amendments to
the proposed transaction structure, the parties executed the Acquisition
Agreement, which superseded in its entirety the Original
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Agreement. The changes effected by the Acquisition Agreement do not affect the
economic terms of the transaction to either Autodesk's or Discreet's
respective stockholders. Further, on such date, Autodesk's and Disreet's
respective financial advisors confirmed that such changes would not have
affected their respective opinions.
JOINT REASONS FOR THE TRANSACTIONS
In reaching their decision to approve the Acquisition Agreement and the
Transactions, the Autodesk Board and the Discreet Board consulted with their
respective management teams and advisors and independently considered the
proposed Acquisition Agreement and the Transactions. Based upon their
respective independent reviews of the proposed Transactions and the business
and operations of the other party, the Autodesk Board and the Discreet Board
each approved the Acquisition Agreement and the Transactions. The Boards of
Directors of Autodesk and Discreet each believe that the Combined Company has
the potential to realize long-term improved operating and financial results
and to achieve a competitive position which is stronger than each company on a
standalone basis. There can be no assurance, however, that these results or
any of the efficiencies or opportunities described in the sections "--
Autodesk's Reasons for the Transactions" and "--Discreet's Reasons for the
Transactions," will be achieved through the consummation of the Transactions.
See "Risk Factors--Risks Relating to the Transactions."
Autodesk and Discreet also believe that the Transactions will provide
greater opportunities to develop business relationships, license technology
and engage in other strategic combinations and transactions involving their
respective products and technologies than would be the case if the companies
otherwise independently engaged in these activities. In this way, the
Transactions could provide the Combined Company with the range of products and
services required to play a defining role in the market for multimedia content
creation and manipulation software products for the entertainment and design
conceptualization and visualization industries.
The Autodesk Board and the Discreet Board have both identified several
potential benefits of the Transactions which they believe will contribute to
the success of the Combined Company. These potential benefits include the
following:
. Shared Strategic Vision. The management teams of Autodesk and Discreet
share a common strategic vision for the Combined Company: to be the premier
total solutions provider of digital content design, creation and
manipulation tools for the creation of imagery to customers within the
multimedia industry by offering a comprehensive suite of products at a
variety of price points and configurations.
. Complementary Markets and Distribution Channels. Autodesk and Discreet each
have a strong presence in a different but complementary market. Autodesk's
Kinetix division is a leading provider of PC-based 3D modeling and
animation tools, including its award winning product 3D Studio Max, which
are delivered through a well established network of distribution partners
throughout the world. Discreet is a leading supplier of turnkey systems for
creating, editing and compositing imagery for film, video, the Web, HDTV,
broadcast and interactive games, which systems are sold through Discreet's
high-end direct sales channel. Moreover, Discreet and Autodesk believe that
the Combined Company will be able to successfully distribute Discreet's
mid-range new media software products through the Kinetix distribution
channel.
. Improved Ability to Compete. Autodesk and Discreet believe that the
Combined Company will be able to offer its customers a comprehensive suite
of integrated product offerings, including digital content design, creation
and manipulation tools for the creation of moving images, and to bring to
bear a substantial amount of industry experience, sales and marketing
capability and financial and other resources, which will allow the Combined
Company to compete more effectively in a rapidly evolving and highly
competitive market, as well as to respond more effectively to technological
change and evolving customer needs.
. Complementary Technology. The strength of the combined development teams,
and the presence of substantial industry experience, as well as technical
and product vision which has been exhibited by the technical personnel and
management of Discreet and Autodesk's Kinetix division, may allow the
Combined Company to develop higher quality products containing features and
functionality which should allow the Combined Company to address customer
needs more quickly and effectively than each company on a stand-alone
basis. The breadth of technical expertise and market knowledge of the
Combined Company may allow the Combined Company to compete more effectively
in the multimedia marketplace.
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DISCREET'S REASONS FOR THE TRANSACTIONS
In addition to the anticipated joint benefits described above, the Discreet
Board (i) believes that the following are additional reasons why the
Transactions will be beneficial to Discreet and the Discreet Shareholders and
(ii) considered such factors in reaching its decision to approve the
transaction documents and to recommend the Transactions to the Discreet
Shareholders:
. The Transactions are expected to result in an ability to expand the
research and development resources of Discreet by combining, where
appropriate, its research and development programs and personnel with those
of Autodesk to improve and increase product development and introduction.
. The combination will afford Discreet access to a respected and experienced
executive leadership team and better enable current Discreet management to
focus on the design, development, marketing and sale of content creation
and manipulation tools.
. Autodesk's extensive distribution network and expertise is expected to aid
efforts already underway at Discreet to develop a worldwide distribution
channel for its new media software products.
. The resources of the Combined Company are expected to enable it to respond
more effectively to technological change and increased competition.
. The Combined Company is expected to have an improved competitive position
when compared to that of either company standing alone in the content
creation and manipulation tools market, which Discreet believes will be
characterized by increased competition, industry consolidation, rapid
technological change and increasingly larger competitors with substantially
greater resources.
. Autodesk products now exclusively address Windows/NT operating
environments. Access to Autodesk's research and development expertise in
Windows/NT operating environment is expected to benefit Discreet's research
and development efforts as Discreet continues to broaden its product and
customer base by expanding its product portfolio to Windows/NT
environments.
. The Transactions are expected to increase the ability of the Combined
Company to support the extension of new product development efforts, in
particular as a result of the integration of Autodesk's Kinetix unit into
ongoing operations of Discreet. The expanded 3-D featuring of current and
future Discreet products is expected to provide greater benefits to
customers and may enable the Combined Company to respond more effectively
to increased competition in an industry increasingly characterized by
consolidation.
. The Kinetix installed base of customers may provide an additional market
opportunity for certain of Discreet's products.
. Based on (i) the average closing prices of Autodesk Common Stock and
Discreet Common Shares for the ten trading days prior to and including
August 20, 1998, the date the companies announced the execution of the
Original Agreement, and (ii) the Exchange Ratio, the premium paid by
Autodesk for the Discreet Common Shares acquired by Autodesk in connection
with the Transactions equals approximately $5.19 per share, or 41.7% over
such average closing price.
. Discreet Shareholders are expected to have the opportunity to participate
in the potential growth of the Combined Company after the Transactions and
the increased investment liquidity that the Transactions will provide
through the larger market capitalization of the Combined Company.
The Discreet Board also considered the following information in concluding
that the Transactions are fair and in the best interests of Discreet and its
shareholders: (i) the effect on shareholder value of a combination, in light
of the business, operations, property, assets, financial condition, operating
results and prospects of Discreet and Autodesk and other possible strategic
alternatives for Discreet, including potential business combinations with
companies other than Autodesk, and in light of Discreet management's view as
to the prospects of Discreet as an independent company; (ii) current industry,
economic and market conditions and trends and its informed expectations of the
future of the industry in which Discreet operates; (iii) the results of the
due diligence investigations by Discreet's management and its legal, financial
and accounting advisors; (iv) the terms and
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conditions of the Acquisition Agreement including the termination fees,
nonsolicitation provisions, conditions to closing and termination provisions,
which terms were arrived at through extensive arm's-length negotiations, and
the Discreet Board's conclusion that these provisions were reasonable under
the circumstances and provided the ability for the Discreet Board to exercise
its fiduciary duties; (v) the impact of the structure and accounting and tax
treatment of the Transactions; (vi) the compatibility of the business
philosophies and strategies of Discreet and Autodesk, which the Discreet Board
believes is important for the successful integration of the companies; (vii)
historical information concerning Discreet's and Autodesk's respective
businesses, prospects, financial performance and condition, operations,
technology, management and competitive position, including public reports
concerning results of operations during the most recent fiscal year and fiscal
quarter for each company; (viii) the opinion of Volpe Brown Whelan rendered at
the August 20, 1998 meeting of the Discreet Board (and subsequently confirmed
in writing) that, as of the date of such opinion, the consideration to be
received by Discreet Shareholders pursuant to the Transactions is fair to such
holders from a financial point of view; (ix) current financial market
conditions and historical market prices, volatility and trading information
with respect to Autodesk Common Stock and Discreet Common Shares; (x) the
consideration to be received by Discreet Shareholders in connection with the
Transactions and the relationship between the market value of the Autodesk
Common Stock to be issued in exchange for each Discreet Common Share and a
comparison of comparable merger transactions; and (xi) the impact of the
Transactions on Discreet's customers, suppliers and employees.
In addition, the Discreet Board noted that the Transactions are expected to
be accounted for as a pooling-of-interests and that no goodwill is expected to
be created on the books of the Combined Company as a result thereof.
The Discreet Board also identified and considered a number of potentially
negative factors in its deliberations concerning the Transactions, including,
but not limited to:
(i) the risk that the potential benefits sought in the Transactions might
not be realized fully, if at all;
(ii) the possibility that the Transactions would not be consummated and
the effect of the public announcement of the Transactions on (a) Discreet's
sales and operating results and (b) Discreet's ability to attract and
retain key management, sales, marketing and technical personnel;
(iii) the risk that, despite the efforts of the Combined Company, key
technical, marketing and management personnel might choose not to remain
employed by the Combined Company;
(iv) the difficulty of managing separate operations at different
geographic locations;
(v) the potential dilutive effect of the issuance of Autodesk Common
Stock in connection with the Transactions;
(vi) the substantial charges to be incurred, primarily in the quarter in
which the Transactions are consummated, including costs of integrating the
business and transaction expenses arising from the Transactions; and
(vii) the other risks associated with Discreet's, Autodesk's and the
Combined Company's business and the Transactions described under "Risk
Factors" herein.
The Discreet Board believes that the potential benefits of the Transactions
outweigh these risks.
The foregoing discussion of the information and factors considered by the
Discreet Board is not intended to be exhaustive but is believed to include all
material factors considered by the Discreet Board. In view of the variety of
factors considered in connection with its evaluation of the Transactions, the
Discreet Board did not find it practicable to and did not quantify or
otherwise assign relative weight to the specific factors considered in
reaching its determination. In addition, individual members of the Discreet
Board may have given different weight to different factors.
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AUTODESK'S REASONS FOR THE TRANSACTIONS
Autodesk believes that the Transactions will enhance its position as a
leading technology supplier to the entertainment and design industries. The
entertainment industry, encompassing movies, film, animation, music, and
interactive games, represents a significant opportunity for increased growth
and diversification. Autodesk believes that the growth of this industry is
likely to accelerate in the coming years with the increasing availability of
powerful, cost-effective digital solutions. Integrated, high-performance
digital media authoring solutions will be a key enabler for this growth. The
design industry, encompassing architecture, civil engineering, mechanical
engineering, geographic information systems, industrial design, and graphic
design represents a large market adjacent to Discreet's in which Autodesk has
a significant presence. As this market increasingly adopts digital media,
significant opportunities exist for Autodesk to sell new digital design tools
to this industry. Integrated, cost-effective desktop digital content
production tools will be a key enabler for this growth.
The strategy of the Combined Company will be to deliver complete,
integrated, solutions that allow filmmakers, entertainment professionals and
other authors to create multimedia content in less time, at lower costs, and
in a format that can easily be deployed to other interactive media such as CD-
ROM. Autodesk also expects to deliver significant benefits for design users.
The objective of the combined business is to deliver cost-effective, desktop
content creation tools, integrated with design tools, which enable design
users to create compelling presentations and digital content. Discreet, with
its established technical expertise, products and distribution channel is well
positioned to provide customer solutions that complement Autodesk's
multimedia, design, and visualization products.
Specific factors the Autodesk Board considered in determining that the
combination will be beneficial to Autodesk and Autodesk Shareholders include
the following:
. The combination is expected to further Autodesk's strategy of
diversification into high-growth businesses and markets that are
complementary to its core design markets. Further, it is expected to
provide Autodesk with a significant new revenue stream that is not
dependent upon the AutoCAD-based family of products.
. The combination is expected to enhance Autodesk's technical leadership in
the design and multimedia markets. Discreet's products and development
staff are recognized for their technical excellence and are expected to
strengthen Autodesk's product portfolio, presence and reputation in the
multimedia and design markets.
. Discreet's direct sales force is expected to complement Autodesk's indirect
sales channels and help diversify Autodesk's sales and distribution model.
. The product lines of Discreet and Autodesk are complementary. The
combination is expected to allow Autodesk to market an integrated family of
multimedia and design visualization products that provide customers with a
more complete solution. The combined product lines are also expected to
enable Autodesk to offer customer solutions at a variety of price points
and levels of functionality.
. The Combined Company is expected to have an improved competitive position
when compared to that of either company standing alone in the multimedia
and design markets, which Autodesk believes will be characterized by
increased competition, industry consolidation, rapid technological change
and increasingly larger companies with substantially greater resources
seeking to meet customer needs by providing an extensive integrated set of
products and features.
. Certain of Discreet's products can address customer needs in Autodesk's
core design markets. Autodesk anticipates being able to market certain
Discreet products, either in their current form or with modifications, to
address the needs of a particular market segment, into its existing core
design markets.
. The Transactions are expected to allow the Combined Company to keep pace
with changes in the multimedia industry in general, which has been
characterized by increased competition, industry consolidation, rapid
technologicial change and increasingly larger companies with substantially
greater resources than those of the Combined Company.
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. The combination allows Autodesk to combine Kinetix and Discreet's strong
and complementary research and development organizations, which is expected
to expand and extend its capacity to develop innovative products.
. Discreet's new media software products are well situated to be sold through
Autodesk's established indirect distribution channel.
The Autodesk Board also considered the following information in concluding
that the Transactions are fair to Autodesk and its stockholders: (i) the
anticipated effect of the combination on short and long term stockholder
value, taking into account the business, operations, property, assets,
financial condition, operating results and prospects of Autodesk and Discreet,
trends in the design and multimedia industries, including the consolidation
occurring therein, other potential business combinations in the multimedia
industry and in other markets addressed by Autodesk, as well as the
alternative prospects of continuing to address the multimedia industry solely
through the product offerings of Kinetix; (ii) current industry, economic and
market conditions and trends and the Autodesk Board's informed expectations of
the future of the industry in which Autodesk operates; (iii) the results of
the due diligence investigations by Autodesk's management and its legal,
financial and accounting advisors; (iv) the terms and conditions of the
Acquisition Agreement and related agreements, including the fact that two
members of Discreet's executive management, Richard Szalwinski and Francois
Plamondon, have agreed to modify their current employment agreements with
Discreet to provide that each will remain with New Discreet for a period of
not less then one year following consummation of the Transactions, thereby
ensuring continuity of management during the integration period following the
consummation of the Transactions; (v) the impact of the structure, tax
treatment and accounting treatment of the Transactions; (vi) factors which
affect the potential for success in integration of the Combined Company,
including continuity of management and senior technical staff, the cultural
compatibility of the organizations, and the minimal level of redundancy in
personnel, products and functions; (vii) historical information concerning
Autodesk's and Discreet's respective businesses, prospects, financial
performance and condition, operations, technology, management and competitive
position, including public reports concerning result of operations during the
most recent fiscal year and fiscal quarter for each company; (viii) the
opinion of Piper Jaffray, rendered at the August 18 meeting of the Autodesk
Board, and subsequently confirmed in writing, that the Exchange Ratio is fair
to Autodesk from a financial point of view; (ix) current financial market
conditions and historical market prices, volatility and trading information
with respect to Autodesk Common Stock and Discreet Common Shares; (x) the
consideration to be paid to the Discreet Shareholders in connection with the
Transactions and the relationship between the market value of the Autodesk
Common Stock to be issued in exchange for each Discreet Common Share and a
comparison of comparable merger transactions; (xi) the impact of the
Transactions on Autodesk's customers, suppliers and employees.
The Autodesk Board also identified and considered the following potentially
negative factors in its deliberations concerning the Transactions, including
the following:
(i) the risk that the potential benefits sought in the Transactions might
not be fully realized, if at all;
(ii) the greater volatility of the multimedia industry as compared to the
traditional design industry, which heretofore has been the primary focus of
Autodesk's business;
(iii) the risk that financial analysts, investment bankers and other
industry analysts who provide commentary and advice concerning Autodesk's
business will react negatively to the Transactions as constituting an
extension of the Autodesk's business outside of its traditional focus on
the design industry;
(iv) the risk represented by Discreet's direct sales model, including the
heavy concentration of sales which occur at the end of each fiscal quarter
and the end of each fiscal year;
(v) the difficulties inherent in the management and integration of
geographically diverse locations and development sites, particularly in a
cross border, multi-lingual transaction;
(vi) the potential difficulty in attracting additional software
development personnel to Montreal;
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(vii) the potentially dilutive effect of the transaction of the issuance
of Autodesk Common Stock pursuant to the Transactions;
(viii) the risk that the majority of software licensed to end users by
Discreet is licensed for operation with SGI hardware on the Unix platform,
and that SGI is a key sole source supplier for Discreet's business but also
sells products which compete with certain of Discreet's product offerings.
In addition, many industry analysts believe that the industry trend is away
from Unix and towards the Windows and Windows NT operating systems. If this
trend were to accelerate, there would be a risk that the market for
Discreet's high-end Unix-based software products would shrink dramatically,
particularly if such products were not migrated to Windows NT in a timely
way, and that Discreet's high-end Unix based software products would
experience more intense competition;
(ix) the risk that the rapid pace of technological innovation in the
multimedia industry may serve to render some or all of Discreet's product
offerings obsolete in a short period of time;
(x) the risk that despite the efforts of the Combined Company, key
technical, marketing and management personnel may choose not to remain with
the Combined Company;
(xi) the risk that consolidation in the multimedia industry may result in
competitors which have significantly greater revenue and resources than the
Combined Company; and
(xii) the other risks associated the Combined Company, Discreet and
Autodesk as described under "Risk Factors" herein.
The Autodesk Board believed that these risks were outweighed by the
potential benefits of the Transactions.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
In considering the recommendation of the Discreet Board with respect to the
Transactions, Discreet Shareholders should be aware that certain officers and
directors of Discreet have potential conflicts of interests with respect to
the Transactions. The Discreet Board and the Discreet Special Committee were
aware of these potential conflicts and considered them along with the other
matters described in "--Discreet's Reasons for the Transactions."
As of the Discreet Record Date, directors and executive officers of Discreet
and their affiliates beneficially owned an aggregate of Discreet Common
Shares (including Discreet Common Shares subject to Discreet Share
Options). Based upon $[ ] the last reported sales price of Autodesk Common
Stock on , the aggregate dollar value of the shares of Autodesk Common
Stock (assuming the exchange of all New Discreet Exchangeable Shares) to be
received in connection with the Transactions by the executive officers and
directors of Discreet is approximately $ .
The executive officers and certain directors of Autodesk holding in the
aggregate approximately % of the Autodesk Common Stock outstanding as of
the Autodesk Record Date have entered into Voting Agreements with Discreet,
pursuant to which each has agreed to vote his or her shares of Autodesk Common
Stock in favor of the Autodesk Resolution and related matters. The executive
officers and certain directors of Discreet holding in the aggregate
approximately % of the Discreet Common Shares outstanding as of the Discreet
Record Date have entered into Voting Agreements pursuant to which each has
agreed to vote his or her Discreet Common Shares in favor of the Discreet
Resolution and related matters. See "Terms of the Transactions--Autodesk and
Discreet Voting Agreements."
Following the consummation of the Transactions, Mr. Szalwinski will become a
vice president of Autodesk. Messrs. Szalwinski and Plamondon have each entered
into agreements with Autodesk in which such individuals reconfirmed their
current employment arrangements with Discreet and agreed, subject to
consummation of the Transactions, to a minimum one year term of employment
with the Combined Company following the Effective Time and, in the event their
employment relationship with the Combined Company is terminated, to refrain
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(subject to certain limited exceptions) from competing with the Combined
Company and from soliciting customers and employees of the Combined Company
for a specified period after such termination. Certain other officers of
Discreet will become officers and key management employees of Autodesk
following consummation of the Transactions.
The vesting of shares pursuant to options issued to certain non-employee
directors under the Discreet 1995 Non-Employee Director Stock Option Plan and
1997 Special Limited Non-Employee Director Stock Option Plan is subject,
pursuant to the terms of such plans and the option agreements issued pursuant
thereto, to full acceleration as a result of the Transactions. In addition,
Messrs. Szalwinski and Plamondon are each party to an employment agreement
with Discreet. Each of these employment agreements provides for the
acceleration of vesting of certain of such executive officer's outstanding
Discreet Share Options upon a change in control. Upon consummation of the
Transactions, the vesting of Discreet Share Options to purchase 450,000 and
150,000 Discreet Common Shares held by Messrs. Szalwinski and Plamondon,
respectively, will accelerate. None of such provisions were amended in
connection with the negotiation of the Original Agreement or the Acquisition
Agreement.
Pursuant to the Acquisition Agreement, Autodesk and Dutchco are required to
continue to provide for an indefinite period of time indemnification to the
directors and officers of Discreet against certain liabilities. In addition,
Autodesk has agreed to maintain, or cause New Discreet to maintain, in effect
the policies of directors' and officers' liability insurance maintained by
Discreet and its subsidiaries, or policies with at least the same coverage and
amounts and terms no less advantageous to the insured parties, for a period of
five years following the Effective Time. See "Terms of the Transactions--
Indemnification."
As a result of the foregoing transactions and agreement, certain directors
and executive officers of Autodesk and Discreet may have personal interests in
the Transactions which are not identical to the interests of other Autodesk
Stockholders and Discreet Shareholders.
OPINION OF AUTODESK'S FINANCIAL ADVISOR
On June 30, 1998, Autodesk and Piper Jaffray executed an engagement letter
(the "Piper Jaffray Engagement Letter") pursuant to which Piper Jaffray was
engaged to act as Autodesk's financial advisor in connection with the proposed
business combination with Discreet. Pursuant to the Piper Jaffray Engagement
Letter, Autodesk retained Piper Jaffray to provide financial advisory and
investment banking services in connection with a possible acquisition of
Discreet and to render an opinion as to the fairness, from a financial point
of view, of any such transaction to Autodesk. See "--Background of the
Transactions."
On August 4, 1998, the Autodesk Board met (with certain directors
participating by telephone) to evaluate the proposed transaction with
Discreet, at which time representatives from Piper Jaffray provided
information concerning Discreet's products and target markets, and reviewed
the written documentation containing preliminary valuation analyses and
related financial information which had been provided to the Autodesk Board
prior to the meeting. On August 18, 1998, the Autodesk Board met (with certain
directors participating by telephone) again and approved the proposed business
combination with Discreet. At this meeting, Piper Jaffray delivered to the
Autodesk Board its oral opinion, which opinion was subsequently confirmed in
writing (the "Piper Jaffray Opinion"), that, as of August 18, 1998 and based
on the matters described therein, the Exchange Ratio was fair, from a
financial point of view, to Autodesk. The Exchange Ratio was determined
through negotiations between the respective members of management of Autodesk
and Discreet. Although Piper Jaffray did assist the management of Autodesk in
the negotiations, Piper Jaffray was not asked by, and did not recommend to,
Autodesk that any specific exchange ratio constituted the appropriate exchange
ratio for Autodesk in connection with the proposed business combination with
Discreet. In furnishing the Piper Jaffray Opinion, Piper Jaffray was not
engaged as an agent or fiduciary of Autodesk's stockholders or any other third
party.
The full text of the Piper Jaffray Opinion, which sets forth, among other
things, assumptions made, matters considered and limitations on the review
undertaken, is attached hereto as Appendix F and is incorporated herein
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by reference. Autodesk Stockholders are urged to read the Piper Jaffray
Opinion in its entirety. The Piper Jaffray Opinion was prepared for the
benefit and use of the Autodesk Board in its consideration of the proposed
business combination with Discreet and does not constitute a recommendation to
Autodesk Stockholders as to how they should vote at the Autodesk Meeting on
the Autodesk Resolution. The Piper Jaffray Opinion does not address the
relative merits of the proposed business combination with Discreet or any
other transactions or business strategies discussed by the Autodesk Board as
alternatives to the proposed business combination with Discreet or the
underlying business decision of the Autodesk Board to proceed with or effect
the proposed business combination with Discreet. The summary of the Piper
Jaffray Opinion set forth in this Proxy Circular is qualified in its entirety
by reference to the full text of the Piper Jaffray Opinion.
In connection with the preparation of the Piper Jaffray Opinion, Piper
Jaffray, among other things, (i) reviewed the draft dated August 16, 1998, of
the proposed acquisition agreement and discussed material changes to the
proposed acquisition agreement with the management of Autodesk on August 18,
1998, (ii) reviewed financial and other information, including business plans,
budgetary and other data, that was publicly available or furnished to Piper
Jaffray by Autodesk and Discreet, (iii) met with the respective members of
management of Autodesk and Discreet to discuss the business and prospects of
Autodesk and Discreet, (iv) considered certain publicly available financial
and stock market data of Discreet and compared those data with similar data
for other publicly held companies in businesses similar to Discreet,
(v) considered the financial terms of certain other business combinations and
other transactions which have recently been effected, and (vi) performed such
other analyses and considered such other information as Piper Jaffray deemed
necessary and appropriate under the circumstances.
In conducting its review and arriving at the Piper Jaffray Opinion, Piper
Jaffray relied upon and assumed the accuracy and completeness of the
information it reviewed for purposes of its opinion and did not assume
responsibility for independently verifying such information. Piper Jaffray
further relied upon the assurances of Autodesk's and Discreet's management
that the information provided was prepared on a reasonable basis in accordance
with industry practice and, with respect to financial planning data, reflected
the good faith judgments of Autodesk's and Discreet's management, and that
such parties were not aware of any information or facts that would make the
information provided to Piper Jaffray incomplete or misleading. Piper Jaffray
also relied upon, without independent verification, the assessment by the
management of each of Autodesk and Discreet of the strategic and other
benefits expected to result from the proposed business combination with
Discreet, as well as the assessment by Autodesk's management of Discreet's
products and the timing and risks associated with the integration of Discreet
with Autodesk. Without limiting the generality of the foregoing, for the
purpose of the Piper Jaffray Opinion, Piper Jaffray assumed that neither
Autodesk nor Discreet was a party to any pending transaction, including
external financing, recapitalizations, acquisitions or merger discussions,
other than the Transactions or in the ordinary course of business. Piper
Jaffray also assumed that the proposed business combination with Discreet
would result in certain United States federal tax income benefits to Autodesk,
would be taxable to certain holders of Discreet Common Shares and would be
accounted for as a pooling of interests under US GAAP. In arriving at the
Piper Jaffray Opinion, Piper Jaffray assumed that all the necessary regulatory
approvals and consents required for the proposed business combination with
Discreet would be obtained in a manner that would not change the purchase
price for Discreet.
In arriving at the Piper Jaffray Opinion, Piper Jaffray did not perform any
appraisals or valuations of specific assets or liabilities of Autodesk or
Discreet and was not furnished with any such appraisals or valuations. Without
limiting the generality of the foregoing, Piper Jaffray did not undertake any
independent analysis of any pending or threatened litigation, possible
unasserted claims or other contingent liabilities, to which Autodesk, Discreet
or any of their respective affiliates was a party or may be subject, and, at
Autodesk's direction and with its consent, the Piper Jaffray Opinion made no
assumption concerning, and therefore did not consider, the possible assertion
of claims, outcomes or damages arising out of any such matters. Although
developments following the date of the Piper Jaffray Opinion may affect the
Piper Jaffray Opinion, Piper Jaffray assumed no obligation to update, revise
or reaffirm the Piper Jaffray Opinion.
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The following is a summary of the material financial analyses performed by
Piper Jaffray in connection with rendering the Piper Jaffray Opinion:
Comparable Company Analysis. Piper Jaffray compared certain financial
information and valuation ratios relating to Discreet to corresponding
publicly-available data and ratios from a group of selected publicly traded
companies deemed comparable to Discreet. The comparable companies selected
included five publicly traded companies in the computer graphics imaging
market with market capitalizations greater than $75 million: Adobe Systems,
Avid Technology, Macromedia, Metacreations Corp. and Pinnacle Systems.
The analysis with respect to Discreet produced multiples of selected
valuation data based upon closing stock prices of the comparable companies as
of August 17, 1998, which were then compared to the equity value of Discreet
of $17.59 per share implied by the Exchange Ratio. The multiples included in
the analysis were: (i) market price per share to earnings per share recorded
over the latest twelve months of the comparable companies ranging from
negative to 31.2x, with a mean and median of 23.6x and 25.0x, respectively,
and a ratio of 22.0x for Discreet; (ii) market price per share to 1998
calendar earnings per share estimates of the comparable companies ranging from
negative to 51.3x, with a mean and median of 27.9x and 23.7x, respectively,
and a ratio of 22.0x for Discreet; (iii) market price per share to 1999
calendar earnings per share estimates of the comparable companies ranging from
11.4x to 40.7x, with a mean and median of 21.9x and 19.2x, respectively, and a
ratio of 16.8x for Discreet; (iv) market capitalization of the selected
company, plus such company's debt, less such company's cash ("Company Value"),
to revenue recorded over the latest twelve months for comparable companies
ranging from 0.7x to 4.4x, with a mean and median of 2.1x and 1.6x,
respectively, and a ratio of 3.4x for Discreet; (v) Company Value to calendar
1998 revenue estimates for comparable companies ranging from 0.9x to 3.8x,
with a mean and median of 1.9x and 1.6x, respectively, and a ratio for
Discreet of 3.2x; and (vi) Company Value to calendar 1999 revenue estimates
for comparable companies ranging from 0.6x to 2.9x, with a mean and median of
1.5x and 1.4x, respectively, and a ratio for Discreet of 2.5x. Company Value
for Discreet was based upon the implied purchase price per share multiplied by
the number of fully-diluted shares outstanding, plus outstanding debt, less
cash held. Earnings estimates for comparable companies were based on consensus
earnings per share estimates taken from First Call, an investor service that
monitors earnings estimates for publicly traded companies and for Discreet
from Piper Jaffray research analyst reports. In performing this analysis,
Piper Jaffray also considered operating margins over the last twelve months
and the estimated five-year earnings per share compound growth rates from
First Call and Piper Jaffray research analyst reports.
Comparable Transactions Analysis. Using publicly available information,
Piper Jaffray analyzed the ratio of Company Value to revenue recorded over the
last twelve months, and the ratio of the product of the total number of
Discreet Common Shares outstanding, on a fully diluted basis, multiplied by
the implied value of $17.59 per share (the "Equity Value") to net income over
the last twelve months, in 30 selected transactions involving companies in the
software industry and in a focus group of five selected transactions involving
publicly traded computer graphics imaging software companies. An analysis of
the comparable transactions produced multiples of selected valuation data with
respect to the 30 purchased companies in the larger group as follows: Company
Value to revenues recorded over the last twelve months ranging from 1.1x to
16.2x, with a mean and a median of 5.5x and 4.5x, respectively, and a multiple
for the Transactions of 3.4x, and Equity Value to net income over the last
twelve months ranging from negative to 83.5x, with a mean and median of 42.4x
and 40.6x, respectively, and a multiple for the Transactions of 22.5x. An
analysis of the comparable transactions produced multiples of selected
valuation data with respect to the five purchased companies in the focus group
as follows: Company Value to revenues recorded over the last twelve months
ranging from 4.0x to 5.3x, with a mean and a median of 4.8x and 4.9x,
respectively, and a multiple for the Transactions of 3.4x and Equity Value to
net income over the last twelve months ranging from 32.8x to 46.0x, with a
mean and median of 38.5x and 37.7x, respectively, and a multiple for the
Transactions of 22.5x. Estimated multiples paid in the comparable transactions
were based on information obtained from public filings, public company
disclosures, press releases, industry and popular press reports, databases and
other sources.
No company, transaction or business used in the Comparable Company Analysis
or Comparable Transactions Analysis as a comparison is identical to Discreet
or the Transactions. Accordingly, an analysis of
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the results of the foregoing is not entirely mathematical; rather it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading and other values of the comparable companies, comparable
transactions or the business segment, company or transactions to which they
are being compared.
Premiums Paid Analysis. Piper Jaffray reviewed the comparable transactions
described above, as well as certain other transactions to determine the
premiums paid, represented by the difference between the transaction values
and the market prices for the target companies one day, one week and one month
prior to the announcement (each, an "Announcement") of such comparable
transaction. This analysis indicated premiums as follows: (i) one day before
the Announcement, premiums ranging from -2.8% to 92.0%, with a mean and a
median of 32.3% and 27.7%, respectively, and a premium for the Transactions of
59.4%; (ii) one week before the Announcement, premiums ranging from -5.8% to
93.6%, with a mean and a median of 38.4% and 36.1%, respectively, and a
premium for the Transactions of 45.1%; and (iii) one month before the
Announcement, premiums ranging from 1.0% to 100.1%, with a mean and a median
of 46.0% and 41.2%, respectively and a premium for the Transactions of 49.7%.
Estimated premiums paid in the comparable transactions were based on
information obtained from public filings, public company disclosures, press
releases, industry and popular press reports, databases and other sources.
Pro Forma Earnings Analysis--No Synergy Adjustments. Piper Jaffray analyzed
pro forma effects resulting from the impact of the Transactions on the
estimated earnings per share ("EPS") of the Combined Company for the fiscal
years 1999 and 2000, without taking into account certain revenue and operating
cost synergies that the Combined Company may realize following consummation of
the Transactions. The results of the pro forma earnings analysis suggested
that the Transactions could be dilutive to the Combined Company's EPS in the
fiscal years 1999 and 2000. The actual results achieved by the Combined
Company after the Transactions may vary from estimated results, and the
variations may be material.
Pro Forma Earnings Analysis--Synergy Adjustments. Piper Jaffray analyzed pro
forma effects resulting from the impact of the Transactions on the estimated
EPS of the Combined Company for the fiscal years 1999 and 2000 after taking
into account certain revenue and operating cost synergies that the Combined
Company may realize following consummation of the Transactions. The results of
the pro forma earnings analysis with these synergy adjustments suggested that
the Transactions could be dilutive to the Combined Company's EPS in the fiscal
years 1999 and 2000. The actual results achieved by the Combined Company after
the Transactions may vary from estimated results, and the variations may be
material.
Contribution Analysis. Piper Jaffray analyzed the respective contributions
of Autodesk and Discreet to the estimated total sales, operating income,
pretax income and net income of the Combined Company for the fiscal years 1999
and 2000. The analysis indicated that (i) in fiscal year 1999, Autodesk would
contribute approximately 82.5% of total sales, approximately 82.1% of
operating income, approximately 82.1% of pretax income and approximately 81.6%
of net income of the Combined Company, and Discreet would contribute
approximately 17.5% of total sales, approximately 17.9% of operating income,
approximately 17.9% of pretax income and approximately 18.4% of net income, of
the Combined Company, (ii) in fiscal year 2000, Autodesk would contribute
approximately 81.7% of total sales, approximately 80.8% of operating income,
approximately 80.7% of pretax income and approximately 80.8% of net income of
the Combined Company, and Discreet would contribute approximately 18.3% of
total sales, approximately 19.2% of operating income, approximately 19.3% of
pretax income and approximately 19.2% of net income of the Combined Company.
Based on capitalizations of Autodesk and Discreet as of August 17, 1998,
stockholders of Autodesk and Discreet would own approximately 75.6% and 24.4%,
respectively, of the Combined Company upon consummation of the Transactions.
Discounted Cash Flow Analysis. Piper Jaffray estimated the present value of
the estimated future cash flows of Discreet on a stand-alone basis for the
fiscal years ending June 30, 1999 through June 30, 2002. Piper Jaffray applied
terminal value multiples of forecasted 2002 operating income of 11.0x, 12.0x
and 13.0x. In all cases, Piper Jaffray used a range of discount rates from
16% to 20%. This analysis yielded a range of estimated
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present values of Discreet's equity value from $18.97 per share to $24.38 per
share, compared to the Discreet's equity value of $17.59 per share implied by
the Exchange Ratio based on the closing price of Autodesk Common Stock on
August 17, 1998.
Historical Exchange Ratio Analysis. Piper Jaffray reviewed the ratios of
closing stock prices per share of the Autodesk Common Stock and Discreet
Common Shares over various periods ending August 17, 1998. Piper Jaffray
observed that the average of the ratios of closing stock prices of the
Autodesk Common Stock and Discreet Common Shares for the various periods
ending August 17, 1998 were 0.382x for the previous 180 days, 0.3274x for the
previous 90 days, 0.3655x for the previous 30 days and 0.3460x for the
previous ten days. Piper Jaffray also observed that the implied exchange ratio
based on the closing market prices of Autodesk Common Stock and Discreet
Common Shares on August 17, 1998 of $33.50 and $11.03, respectively, was
approximately 0.329x.
Other Factors and Comparative Analyses. In rendering its opinion, Piper
Jaffray considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of: (i) the
history of trading prices and volume for the Discreet Common Shares and
Autodesk Common Stock from August 15, 1997 through August 17, 1998; and (ii)
selected published analysts' reports on each of Discreet and Autodesk,
including analysts' estimates as to the earnings growth potential of Discreet
and Autodesk.
While the foregoing summary describes certain analyses and factors that
Piper Jaffray deemed material in its presentation to the Autodesk Board, it is
not a comprehensive description of all analyses and factors considered by
Piper Jaffray. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances, and, therefore, such an opinion is not readily
susceptible to a summary description. Piper Jaffray believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
of the factors considered by it, without considering all analyses and factors,
would create an incomplete view of the evaluation process underlying the Piper
Jaffray Opinion. Several analytical methodologies were employed, and no one
method of analysis should be regarded as critical to the overall conclusion
reached by Piper Jaffray. Each analytical technique has inherent strengths and
weaknesses, and the nature of the available information may further affect the
value of particular techniques. The conclusions reached by Piper Jaffray are
based on all analyses and factors taken as a whole and also on application of
Piper Jaffray's own experience and judgment. Such conclusions may involve
significant elements of subjective judgment and qualitative analysis. Piper
Jaffray therefore gives no opinion as to the value or merit of any one or more
parts of the analysis it performed standing alone. In performing its analyses,
Piper Jaffray considered general economic, market and financial conditions and
other matters, many of which are beyond the control of Autodesk and Discreet.
The analyses performed by Piper Jaffray are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than those suggested by such analyses. Accordingly, analyses
relating to the value of a business do not purport to be appraisals or to
reflect the prices at which the business actually may be purchased.
Furthermore, no opinion is being expressed as to the prices at which shares of
Autodesk Common Stock may trade at any future time.
Autodesk engaged Piper Jaffray pursuant to the Piper Jaffray Engagement
Letter. The Piper Jaffray Engagement Letter provides that, for its services,
Piper Jaffray is entitled to receive a non-refundable retainer of $100,000
and, contingent upon consummation of the Transactions, an amount equal to .75%
of the total transaction value (less the amounts paid as a retainer and for
the opinion described below). A payment of $750,000 (which constitutes part of
Piper Jaffray's fee based on a percentage of the total sale price described
above) became due and payable to Piper Jaffray upon delivery of its fairness
opinion to the Autodesk Board. The remainder of the Piper Jaffray fee is due
and payable upon consummation of the Transactions. Autodesk also agreed to
reimburse Piper Jaffray, regardless of whether the Transactions are
consummated, for its out of pocket expenses and to indemnify and hold harmless
Piper Jaffray and its affiliates and any person, director, employee or agent
acting on behalf of Piper Jaffray or any of its affiliates, or any person
controlling Piper Jaffray or its affiliates, for certain losses, claims,
damages, expenses and liabilities relating to or arising out of services
provided by Piper Jaffray as financial advisor to Autodesk. In addition,
following consummation of the Transactions, Autodesk and Dutchco will cause
New Discreet to issue 60,000 New Discreet Class D Shares to Piper Jaffray in
payment of a portion of the fees incurred by a predecessor of New Discreet in
connection with
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the Transactions. The terms of the fee arrangement with Piper Jaffray, which
Autodesk and Piper Jaffray believe are customary in transactions of this
nature, were negotiated at arm's length between Autodesk and Piper Jaffray,
and the Autodesk Board was aware of such fee arrangements.
Piper Jaffray was retained based on Piper Jaffray's experience as a
financial advisor in connection with mergers and acquisitions and in
securities valuations generally, as well as Piper Jaffray's investment banking
relationship and familiarity with Autodesk. Piper Jaffray has provided certain
financial advisory and investment banking services to Autodesk and Discreet
from time to time.
Piper Jaffray is a nationally recognized investment banking firm. As part of
its investment banking business, Piper Jaffray is frequently engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and other purposes. Piper Jaffray may actively trade the
equity securities of Autodesk and Discreet for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities. Piper Jaffray maintains a market in
Autodesk Common Stock and Discreet Common Shares and regularly publishes
research reports regarding the business and securities of Autodesk, Discreet
and other publicly traded companies in the industry.
OPINION OF DISCREET'S FINANCIAL ADVISOR
Discreet retained Volpe Brown Whelan to render an opinion to the Discreet
Special Committee and the Discreet Board as to the fairness, from a financial
point of view, of the consideration to be received in connection with the
proposed business combination by the Discreet Shareholders. On August 20,
1998, Volpe Brown Whelan rendered its opinion to the Discreet Special
Committee and the Discreet Board to the effect that, as of such date and based
on and subject to the matters stated in the opinion, the consideration to be
received by the Discreet Shareholders in connection with the Transactions is
fair, from a financial point of view, to the Discreet Shareholders.
THE FULL TEXT OF VOLPE BROWN WHELAN'S WRITTEN OPINION, DATED AUGUST 20,
1998, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED TO THIS PROXY CIRCULAR AS
APPENDIX G AND IS INCORPORATED HEREIN BY REFERENCE. This summary is qualified
in its entirety by reference to the full text of such opinion. Discreet
Shareholders are encouraged to, and should, read this opinion carefully in its
entirety. The engagement of Volpe Brown Whelan and its opinion are for the
benefit of the Discreet Special Committee and the Discreet Board. Volpe Brown
Whelan's opinion addressses only the fairness of the consideration to be
received by the Discreet Shareholders from a financial point of view to the
Discreet Shareholders and does not address any other aspect of the
Transactions, nor does it constitute a recommendation to any Discreet
Shareholder as to how to vote their shares with respect to the Discreet
Resolution.
In arriving at its opinion, Volpe Brown Whelan: (i) reviewed the Original
Agreement; (ii) interviewed management of Discreet and Autodesk concerning
their respective business prospects, financial outlook and operating plans as
stand-alone concerns and as a combined enterprise; (iii) reviewed certain
Discreet and Autodesk financial statements and other relevant financial and
operating data of Discreet and Autodesk provided to Volpe Brown Whelan by
Discreet and Autodesk management teams respectively; (iv) reviewed the
historical stock trading patterns of both Autodesk and Discreet and analyzed
implied historical exchange ratios; (v) reviewed the premium of the per share
consideration (which, for purposes of the written analysis, was based on the
closing price of Autodesk Common Stock on August 14, 1998, and for purposes of
the oral analysis was based on the closing price of Autodesk Common Stock on
August 20, 1998) in relation to selected merger and acquisition transactions
that Volpe Brown Whelan deemed relevant and comparable to the Transactions;
(vi) reviewed the valuation of selected publicly traded companies Volpe Brown
Whelan deemed comparable and relevant to Discreet; (vii) reviewed, to the
extent publicly available, the financial terms of selected merger and
acquisition transactions that Volpe Brown Whelan deemed comparable and
relevant to the Transactions; (viii) performed a valuation based upon
Discreet's relative contribution, adjusted to reflect the difference in
capital structures of the two companies, to Autodesk in terms of revenue,
profitability and book value; (ix) performed a
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discounted cash flow analysis of Discreet as a stand-alone entity based upon
the preliminary financial information regarding business prospects provided by
Discreet management through June 2000, and as extrapolated by Volpe Brown
Whelan thereafter; (x) performed a pro forma financial impact analysis of the
combined entity, based upon, in the case of Discreet, preliminary financial
information regarding business prospects (including with respect to both
potential financial performance and potential cost savings resulting from the
proposed business combination) provided by Discreet management through June
2000 and as extrapolated by Volpe Brown Whelan thereafter, and, in the case of
Autodesk, preliminary financial information regarding business prospects
provided by Autodesk management through January 2000 and as extrapolated by
Volpe Brown Whelan thereafter; and (xi) performed such other studies, analyses
and inquiries and considered such other information as Volpe Brown Whelan
deemed relevant.
In rendering its opinion, Volpe Brown Whelan relied without independent
verification upon the accuracy and completeness of all of the information it
reviewed for purposes of its opinion and relied upon the assurances of
Discreet that, to the best of its knowledge, all such information is complete
and accurate in all material respects and that there is no additional material
information known to Discreet that would make any of the information made
available to Volpe Brown Whelan either incomplete or misleading. Discreet
retained outside legal, accounting and tax advisors to advise on matters
relating to the proposed business combination. Accordingly, Volpe Brown Whelan
relied on their advice and did not review and expressed no opinion on such
matters. Volpe Brown Whelan was not asked to, and did not, conduct a market
survey to determine the interest of other potential acquirors in the Company.
With respect to data and discussions relating to business prospects,
financial outlook and operating plans of Discreet and Autodesk, Volpe Brown
Whelan relied upon the assurances of Discreet and Autodesk that such data,
including the preliminary financial information regarding business prospects,
were prepared in good faith on a reasonable basis reflecting the best
currently available estimates and judgments of Discreet and Autodesk
management as to the prospects of Discreet and Autodesk separately and as a
combined enterprise, and assumed that it was reasonable to extrapolate such
estimates for periods after those periods for which estimates were provided.
Volpe Brown Whelan expressed no opinion and made no investigation with respect
to the validity, accuracy or completeness of the information provided to it
and did not and does not warrant any forecasts included in such information.
Actual results that Discreet or Autodesk might achieve in the future as stand-
alone entities or as a combined company may vary materially from those used in
Volpe Brown Whelan's analysis. Volpe Brown Whelan, furthermore, did not make
any independent appraisals or valuations of any assets of Discreet or
Autodesk, nor was Volpe Brown Whelan furnished with any such appraisals or
valuations. Volpe Brown Whelan's opinion is necessarily based upon market,
economic and other conditions that exist and can be evaluated as of the date
of the opinion.
For purposes of its analysis, Volpe Brown Whelan assumed that the proposed
business combination will be consummated in accordance with the terms of the
Acquisition Agreement without waiver of any of the conditions to the parties'
obligations thereunder, that there will be no material changes to the
Acquisition Agreement and that the ratio of shares of Autodesk Common Stock to
be received for each Discreet Common Share will be 0.525. Although
developments following the date of the Volpe Brown Whelan opinion may affect
the opinion, Volpe Brown Whelan assumed no obligation to update, revise or
reaffirm the opinion.
The following is a brief summary of the material analyses performed by Volpe
Brown Whelan in rendering its opinion to the Discreet Board:
Stock Trading and Exchange Ratio Analysis. Volpe Brown Whelan analyzed the
stock trading patterns of both Discreet and Autodesk over various periods of
time and compared them historically to one another. For purposes of this
analysis Volpe Brown Whelan assumed that the per share consideration to be
received by Discreet Shareholders in connection with the Transactions would be
$16.67 (the "Per Share Consideration") which was based on the closing price of
Autodesk Common Stock of $31.75 on August 14, 1998 (four days prior to the
announcement of the proposed business combination) and the Exchange Ratio of
0.525. On August 20, 1998, Volpe Brown Whelan confirmed that the changes in
the per share consideration between August 14
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and August 20, 1998 did not affect its opinion as to the fairness of the
consideration to be received by Discreet Shareholders. From June 30, 1995 to
August 14, 1998, the closing price of Discreet Common Shares ranged from
$32.00 during the week of November 6, 1995 to $3.63 on September 11, 1996,
with a median daily closing price of $16.00. The last time the stock price
exceeded the level of the Per Share Consideration was April 30, 1998. On a
volume basis, 64.6% of Discreet's trades from June 30, 1995 to August 14, 1998
were below the Per Share Consideration, and 49.3% of trades from January 2,
1998 to August 14, 1998 were below the Per Share Consideration. The exchange
ratio implied from dividing historical Discreet share prices by Autodesk share
prices was below the Exchange Ratio prior to July 15, 1997, was generally
above the Exchange Ratio between July 15, 1997 and March 9, 1998, and was
below the Exchange Ratio thereafter. From January 2, 1997 to August 14, 1998,
the implied exchange ratio ranged from 0.1761 to 0.6688 with a mean of 0.4123.
The implied exchange ratio was 0.3740 and 0.3647 on August 14, 1998 and one
month prior to that date, respectively. The Exchange Ratio is within the range
of the implied exchange ratios and above the mean. Volpe Brown Whelan,
however, placed greater weight on the more recent implied exchange ratios on
August 14, 1998 and one month prior to that date, and noted that the Exchange
Ratio is above these levels.
Premium Analysis. Volpe Brown Whelan analyzed the premiums paid in select
digital media transactions and in merger and acquisition transactions
generally, and compared them to the premium represented by the Per Share
Consideration. The Per Share Consideration represents a premium of 40.4%
compared to Discreet's share price on August 14, 1998. For digital media
transactions deemed comparable by Volpe Brown Whelan, one day premiums ranged
from 9.7% to 45.9% with a median of 26.1%, and one month premiums ranged from
22.8% to 58.1% with a median of 38.0%. These values would imply share prices
based on one day premiums ranging from $13.03 to $17.33 with a median of
$14.98, and share prices based on one month premiums ranging from $14.58 to
$18.78 with a median of $16.39. Volpe Brown Whelan noted that the premium
represented by the Per Share Consideration is above the median and within both
ranges. For merger and acquisition transactions between $200 million and $1
billion in value that involved premiums and that were announced from January
1, 1997 through August 14, 1998, one day premiums ranged from 0.8% to 173.7%
with a median of 27.9%, and one month premiums ranged from 0.2% to 208.0% with
a median of 38.2%. These values would imply share prices based on one day
premiums ranging from $11.97 to $32.50 with a median of $15.18, and share
prices based on one month premiums ranging from $11.89 to $36.58 with a median
of $16.41. Volpe Brown Whelan noted that the premium represented by the Per
Share Consideration is above the median and within both ranges.
Comparable Publicly-Traded Company Analysis. Volpe Brown Whelan prepared a
range of values of selected publicly-traded companies it deemed comparable to
Discreet. As few companies are perfectly comparable to Discreet, the range of
comparable companies was somewhat broad and included Adobe Systems, Inc., Avid
Technology, Inc., Macromedia, Inc., Engineering Animation, Inc., Pinnacle
Systems, Inc., MetaCreations Corporation, Chyron Corporation, Media 100 Inc.,
Videonics, Inc. and Accom, Inc. Volpe Brown Whelan noted that it is difficult
to apply revenue multiples for valuation purposes in industries where the
hardware and software revenue mixes are inconsistent. Volpe Brown Whelan
indicated that in these instances it believes that it is more relevant to use
gross profit as the key "topline" value indicator. The analysis of comparable
companies yielded a wide range of per share values for Discreet of $0.90 to
$139.91 with a median of $18.04. Volpe Brown Whelan noted that the Per Share
Consideration is within this range of values but below the median. An analysis
of Avid Technology, Inc. ("Avid"), which Volpe Brown Whelan deemed to be the
most comparable company in the digital media sector, yielded a range of per
share values from $6.23 to $24.60 with a median of $16.65. Volpe Brown Whelan
noted that the Per Share Consideration is within this range of values and
roughly equal to the median.
Comparable Merger and Acquisition Transaction Analysis. Volpe Brown Whelan
prepared a valuation of Discreet based upon merger and acquisition
transactions of target companies in the digital media industry. Volpe Brown
Whelan also prepared a valuation of Discreet based upon merger and acquisition
transactions of target companies in the digital media industry that, in the
view of Volpe Brown Whelan, are most directly comparable to Discreet. These
transactions included Microsoft's acquisition of SOFTIMAGE, Silicon Graphics'
acquisitions of Alias Research and Wavefront Technologies, and Avid's recent
acquisition of SOFTIMAGE. The analysis of
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target companies involved in the Digital Media industry yielded a wide range
of per share values for Discreet of $2.18 to $239.55 with a median of $24.31.
Volpe Brown Whelan noted that the Per Share Consideration is within this range
of values but below the median. When Discreet is compared to those target
companies Volpe Brown Whelan believes are most comparable, the analysis yields
a range of per share values for Discreet of $8.47 to $95.47 with a median of
$24.72. Volpe Brown Whelan noted that the Per Share Consideration is within
this range of values but below the median. Volpe Brown Whelan observed that
this analysis is skewed toward applying a high valuation to profitability
metrics such as earnings before income tax, depreciation and amortization, and
net income, since the applied multiples are derived from targets that had very
small profitability margins. Volpe Brown Whelan placed less weight on this
analysis because Discreet is a more mature, profitable company than the
comparable targets. In addition, Volpe Brown Whelan noted that many of the
transactions analyzed occurred in 1995 or earlier when market values in the
digital media industry were particularly high, and placed less weight on this
analysis in light of such market timing differences.
Relative Contribution Analysis. Volpe Brown Whelan performed a valuation
analysis of Discreet based on Autodesk's and Discreet's relative contributions
to various measures of operational activity. This analysis was based on
historical financial data as well as the preliminary financial information
regarding business prospects for each respective business as if each were
operating independently. Volpe Brown Whelan also calculated certain
contribution percentages on an adjusted basis to reflect the differences in
the capital structures of the two companies. The analysis generated a range of
implied values for Discreet as well as a range of implied Discreet ownership
levels of the combined company. The analysis yielded a range of per share
values for Discreet of $5.98 to $15.33 with a median of $10.20. Volpe Brown
Whelan noted that the Per Share Consideration is above this range of values.
The analysis also yields a range of implied Discreet ownership levels of the
Combined Company from 9.8% to 22.6% with a median of 16.9%. Volpe Brown Whelan
noted that, based on the Exchange Ratio, Discreet Shareholders' approximately
24% ownership in the Combined Company will be above this range of ownership
levels.
Discounted Cash Flow Analysis. Volpe Brown Whelan prepared a valuation of
Discreet based on the value of its projected future cash flows, discounted to
the present ("DCF"). The DCF analysis was prepared using preliminary financial
information regarding business prospects provided by Discreet management
through June 2000 and extrapolated by Volpe Brown Whelan thereafter. Using the
capital asset pricing model, Volpe Brown Whelan calculated a weighted average
cost of capital ("WACC") for Discreet of 17.1%. Volpe Brown Whelan believes
that this WACC is in the middle of a range of relevant WACCs given Discreet's
historical and projected profitability. As such, Volpe Brown Whelan used a
range of discount rates from 15.1% to 19.1%. Given that Discreet's current
1998 price/earnings multiple was 14.3x, Volpe Brown Whelan employed a range of
exit multiples of 12.3x to 16.3x. The DCF analysis yielded a range of per
share values for Discreet from $21.08 to $30.46. Volpe Brown Whelan noted that
the Per Share Consideration is below this range. Volpe Brown Whelan placed
less weight on this analysis because it assumes Discreet's preliminary
financial information regarding business prospects through June 2000, and
Volpe Brown Whelan's extrapolations thereafter, will be achieved.
Price Payable No Dilution. Volpe Brown Whelan analyzed the maximum price it
estimated Autodesk could pay without diluting its estimated 1999 and 2000 EPS.
Based on this analysis, Volpe Brown Whelan estimated that Autodesk could pay
up to $12.36 per share without diluting 1999 EPS if no synergies were factored
into the analysis, and up to $15.64 per share if synergies are factored into
the analysis. Also based on this analysis, Autodesk could pay up to $12.72 per
share without diluting 2000 EPS if no synergies were factored into the
analysis, and up to $15.57 per share if synergies are factored into the
analysis. Volpe Brown Whelan noted that the Per Share Consideration is above
these levels.
Pro Forma Financial Impact Analysis. Volpe Brown Whelan performed a pro
forma financial impact analysis of the combined entity, based upon, in the
case of Discreet, preliminary financial information regarding business
prospects (including with respect to both potential financial performance and
potential cost savings resulting from the proposed business combination)
provided by Discreet management through June 2000 and as extrapolated by Volpe
Brown Whelan thereafter, and, in the case of Autodesk, preliminary financial
information regarding business prospects provided by Autodesk management
through January 2000 and as extrapolated by Volpe Brown Whelan thereafter.
Estimates of projected cost savings resulting from the Transactions were
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provided by the management team of Discreet. Volpe Brown Whelan expressed no
opinion as the whether the potential financial performance and cost savings
would actually be obtained. Volpe Brown Whelan noted that, based on
preliminary financial information regarding business prospects, the
Transactions would negatively impact Autodesk's overall EPS.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Volpe Brown Whelan considered the results of all of
its analyses as a whole and did not attribute any particular weight to any
analysis or factor considered by it. Furthermore, selecting portions of the
analysis, without considering all of the analyses, would create an incomplete
view of the process underlying its opinion. In addition, Volpe Brown Whelan
may have given various analyses and factors more or less weight than other
analyses and factors, and may have deemed various assumptions more of less
probable than other assumptions, so that the ranges of valuations resulting
from any particular analysis described above should not be taken to be Volpe
Brown Whelan's view of the actual value of Discreet.
The analyses performed by Volpe Brown Whelan are not necessarily indicative
of actual value, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
Volpe Brown Whelan's analysis of the fairness of the consideration from a
financial point of view to Discreet. The analyses do not purport to be
appraisals or to reflect the prices at which Discreet might actually be sold.
Because such estimates are inherently subject to uncertainty, none of
Discreet, Autodesk, Volpe Brown Whelan nor any other person assumes
responsibility for their accuracy. Consequently, the Volpe Brown Whelan
analyses described herein should not be viewed as determinative of the opinion
of the Discreet Board with respect to the value of Discreet or of whether the
Autodesk Board or the Discreet Board would have been willing to agree to a
different level of consideration.
Volpe Brown Whelan is a nationally recognized investment banking firm and
was selected by Discreet based on Volpe Brown Whelan's experience and
expertise. Volpe Brown Whelan, as a customary part of its investment banking
business, engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and valuations for corporate
and other purposes. In the ordinary course of its business, Volpe Brown Whelan
and its affiliates may actively trade the equity securities of Autodesk or
Discreet for its and their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
The engagement letter between Volpe Brown Whelan and Discreet pursuant to
which Volpe Brown Whelan was engaged provides that, for its services, Volpe
Brown Whelan is entitled to receive, contingent upon consummation of the
proposed business combination, an amount equal to 0.75% of the total
transaction value (less the amounts for the opinion described below). A
payment of $250,000 (which constitutes part of Volpe Brown Whelan's fee equal
to a percentage of the total sale price described above) became due and
payable to Volpe Brown Whelan upon delivery of its fairness opinion to the
Discreet Special Committee and the Discreet Board. The remainder of the Volpe
Brown Whelan fee is due and payable upon consummation of the proposed business
combination. Discreet also agreed to reimburse Volpe Brown Whelan, regardless
of whether the proposed business combination are consummated, for its out-of-
pocket expenses, and to indemnify and hold harmless Volpe Brown Whelan and its
affiliates and any person, director, employee or agent acting on behalf of
Volpe Brown Whelan or any of its affiliates, or any person controlling Volpe
Brown Whelan or its affiliates for certain losses, claims, damages, expenses
and liabilities relating to or arising out of services provided by Volpe Brown
Whelan as financial advisor to Discreet. The terms of the fee arrangement with
Volpe Brown Whelan, which Discreet and Volpe Brown Whelan believe are
customary in transactions of this nature, were negotiated at arm's length
between Discreet and Volpe Brown Whelan, and the Discreet Board was aware of
such fee arrangements.
PROPOSED MARKET PURCHASES OF DISCREET COMMON SHARES
Each of Autodesk and Dutchco currently intend to purchase for cash a limited
number of Discreet Common Shares (having an aggregate value in no event
greater than $1,000) prior to the Effective Time, but are under no obligation
to do so.
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TERMS OF THE TRANSACTIONS
The following is a brief summary of the material terms of the Acquisition
Agreement and the various agreements related thereto. This summary is
qualified in its entirety by reference to the Acquisition Agreement. Discreet
Shareholders and Autodesk Stockholders are urged to read the Acquisition
Agreement in its entirety for a more complete description of the Transactions.
A copy of the Acquisition Agreement is attached as Appendix A to this Proxy
Circular. Capitalized terms used, but not otherwise defined, herein shall have
the meaning ascribed to such terms in the Acquisition Agreement. In the case
of any conflict between the Acquisition Agreement and the summary set forth
herein, the Acquisition Agreement will control.
GENERAL
Upon consummation of the Transactions, Discreet Shareholders will have
received, depending upon the prior election of each Discreet Shareholder and
subject to proration, for each of their Discreet Common Shares, either 0.525
shares of Autodesk Common Stock or 0.525 New Discreet Exchangeable Shares. IT
IS STRONGLY RECOMMENDED THAT US HOLDERS (AS DEFINED BELOW) WHO OWN DISCREET
COMMON SHARES DO NOT ELECT TO RECEIVE NEW DISCREET EXCHANGEABLE SHARES SINCE
THE OWNERSHIP AND DISPOSITION OF SUCH SHARES MAY HAVE CERTAIN ADVERSE TAX
CONSEQUENCES. SEE "CERTAIN CANADIAN FEDERAL AND UNITED STATES FEDERAL INCOME
TAX CONSIDERATIONS TO DISCREET SHAREHOLDERS."
Holders of New Discreet Exchangeable Shares will have economic and voting
rights substantially identical to those possessed by holders of Autodesk
Common Stock. New Discreet Exchangeable Shares generally may be received by
Canadian residents on a tax-deferred rollover basis (provided appropriate
elections are filed with the relevant tax authorities), will be qualified
investments, and will be "foreign property" under the Canadian Tax Act. See
"Certain Canadian Federal and United States Federal Income Tax Considerations
to Discreet Shareholders--Discreet Shareholders Resident in Canada--Redemption
of New Discreet Class B Shares in Exchange for New Discreet Exchangeable
Shares--Rollover Transaction."
The Transactions will be completed by way of an amalgamation under the
Quebec Act and certain related transactions described below. Pursuant to the
Articles of Amalgamation, Discreet will be amalgamated with Autodesk Quebec
and Amalgamation Sub, both Quebec companies and indirect wholly owned
subsidiaries of Autodesk, to form New Discreet. Each holder of Discreet Common
Shares will receive upon the Amalgamation one New Discreet Class B Share for
each Discreet Common Share then held by such holder. Immediately following the
Amalgamation, each such New Discreet Class B Share will automatically, based
upon the prior election of the holder thereof, either (i) be converted into
one New Discreet Unit, which will immediately thereafter be acquired by
Dutchco in exchange for 0.525 shares of Autodesk Common Stock, or (ii) be
redeemed by New Discreet for 0.525 New Discreet Exchangeable Shares, in either
case without any further required action on the part of the holder. Pursuant
to the Acquisition Agreement, the maximum number of New Discreet Exchangeable
Shares issuable in the Transactions may not exceed 19.99% of the number of
Discreet Common Shares outstanding immediately prior to the Amalgamation,
multiplied by the Exchange Ratio. In the event the number of New Discreet
Exchangeable Shares otherwise issuable to holders of Discreet Common Shares
pursuant to the Transactions exceeds this maximum number, such Discreet
Shareholders will receive, pro rata, New Discreet Units in lieu of New
Discreet Exchangeable Shares in respect of such excess.
The New Discreet Exchangeable Shares will be exchangeable at any time at the
option of the holder for Autodesk Common Stock on a one-for-one basis plus the
Dividend Amount, and will be automatically exchanged on the eleventh
anniversary of the Effective Time or earlier upon the occurrence of certain
events, including the liquidation, dissolution or winding-up of Autodesk or
New Discreet. Dividends will be payable on New Discreet Exchangeable Shares at
the same time and in the economically equivalent amounts per share as
dividends on Autodesk Common Stock. See "--Description of New Discreet
Exchangeable Shares."
EFFECTIVE TIME OF THE AMALGAMATION
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Acquisition Agreement, the parties thereto will
cause Discreet to be amalgamated with Autodesk Quebec and Amalgamation
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Sub to form New Discreet, with New Discreet continuing as the surviving entity
and becoming a subsidiary of Dutchco and an indirect subsidiary of Autodesk by
filing Articles of Amalgamation and related documents as contemplated by
Section 123.118 of the Quebec Act with the Inspector General of Financial
Institutions of the Province of Quebec. The Amalgamation will become effective
at the Effective Time.
CONVERSION OF DISCREET COMMON SHARES
Upon consummation of the Transactions, Discreet Shareholders will receive,
depending upon the election of each Discreet Shareholder and the effects of
proration, that number of shares of Autodesk Common Stock or New Discreet
Exchangeable Shares equal to the Exchange Ratio in exchange for each of their
Discreet Common Shares. If any holder of Discreet Common Shares would be
entitled to receive a number of shares of Autodesk Common Stock or New
Discreet Exchangeable Shares that includes a fraction, then, in lieu of a
fractional share, such holder will be entitled to receive an equivalent amount
of cash. See "--Procedures for Election and Exchange of Share Certificates by
Discreet Shareholders--Fractional Shares."
TREATMENT OF DISCREET SHARE OPTIONS, THE DISCREET STOCK OPTION PLANS AND THE
DISCREET EMPLOYEE STOCK PURCHASE PLAN
Discreet Stock Option Plans. At the Effective Time, each outstanding
Discreet Share Option under the Discreet Stock Option Plans, whether vested or
unvested, will be assumed by Autodesk, and, on such assumption, the rights to
acquire Discreet Common Shares under the Discreet Stock Option Plans shall be
exchanged for the right to acquire Autodesk Common Stock under such plans.
Each Discreet Share Option assumed by Autodesk under the Acquisition Agreement
will continue to have, and be subject to, the same terms and conditions set
forth in the Discreet Stock Option Plan pursuant to which such option was
granted immediately prior to the Effective Time, except with respect to the
number of shares of Autodesk Common Stock for which such option is exercisable
and the per share exercise price of such option, as discussed below. Each
Discreet Share Option will be exercisable for that number of shares of
Autodesk Common Stock that the holder of such Discreet Share Option would have
been entitled to receive had such holder exercised such Discreet Share Option
in full immediately prior to the Effective Time, multiplied by the Exchange
Ratio and rounded down to the nearest whole number of shares of Autodesk
Common Stock. The per share exercise price for the shares of Autodesk Common
Stock issuable upon exercise of such assumed Discreet Share Option will be
equal to the quotient determined by dividing the exercise price per share at
which such option was exercisable immediately prior to the Effective Time by
the Exchange Ratio and rounding the resulting exercise price up to the nearest
whole cent.
After the Effective Time, Autodesk will issue to each holder of an
outstanding Discreet Share Option a document evidencing Autodesk's assumption
of such Discreet Share Option. It is the intention of Autodesk and Discreet
that the Discreet Share Options assumed by Autodesk qualify following the
Effective Time as incentive stock options as defined in Section 422 of the
Code to the extent (and only to the extent) such Discreet Share Options
qualified as incentive stock options prior to the Effective Time.
Employee Stock Purchase Plan. At the Effective Time, each outstanding
purchase right (each, an "Assumed Purchase Right" and, collectively, the
"Assumed Purchase Rights") under the Discreet Employee Stock Purchase Plan
will be deemed to constitute a purchase right to acquire, on the same terms
and conditions as were applicable under the Discreet Employee Stock Purchase
Plan immediately prior to the Effective Time, a number of shares of Autodesk
Common Stock determined as provided in the Discreet Employee Stock Purchase
Plan, except that the per share purchase price of such shares of Autodesk
Common Stock under each Assumed Purchase Right will be the lower of (i) the
quotient determined by dividing 85% of the fair market value of a Discreet
Common Share on the first day of the current offering period by the Exchange
Ratio and (ii) 85% of the fair market value of a share of Autodesk Common
Stock on the last day of the current offering period. Employees of Discreet as
of the Effective Time will be eligible to participate in Autodesk's Employee
Qualified Stock Purchase Plan commencing on the first enrollment date
following the Effective Time, subject to compliance with the eligibility
requirements of Autodesk's Employee Qualified Stock Purchase Plan (with
Discreet employees receiving credit, for purposes of such eligibility, for
service with Discreet).
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Registration Statement on Form S-8. Autodesk has agreed to file with the SEC
a registration statement on Form S-8 to register shares of Autodesk Common
Stock issuable as the result of the assumption of the Discreet Share Options
and Assumed Purchase Rights.
PROCEDURES FOR ELECTION AND EXCHANGE OF SHARE CERTIFICATES BY DISCREET
SHAREHOLDERS
The Letter of Transmittal and Election Form is enclosed with this Proxy
Circular for use by Discreet Shareholders (a) who wish to receive New Discreet
Exchangeable Shares (for which New Discreet Class B Shares held by such
electing Discreet Shareholders will immediately be redeemed) and (b) for
transmittal of certificates representing Discreet Common Shares, regardless of
whether they wish to receive Autodesk Common Stock or New Discreet
Exchangeable Shares. Additional copies of the Letter of Transmittal and
Election Form may be obtained from the Depositary. The details of the
procedures for the making of elections, the exchange of certificates
representing Discreet Common Shares and the deposit of such certificates with
the Depositary and the addresses of the offices of the Depositary are set out
in the Letter of Transmittal and Election Form.
The procedures for receiving certificates representing New Discreet
Exchangeable Shares and shares of Autodesk Common Stock are described
immediately below.
If the Transactions are completed, no certificates will be issued
representing New Discreet Class B Shares or the New Discreet Class E Shares or
New Discreet Class F Shares comprising New Discreet Units, all of which shares
will be exchanged for Autodesk Common Stock or New Discreet Exchangeable
Shares, as the case may be, immediately after issuance.
Receipt of Autodesk Common Stock. Discreet Shareholders who wish to receive
New Discreet Units (which will be immediately acquired by Dutchco for 0.525
shares of Autodesk Common Stock) are not required to make any formal election,
since they will be deemed to have elected to receive New Discreet Units unless
they affirmatively elect to receive New Discreet Exchangeable Shares in
respect of the New Discreet Class B Shares into which their Discreet Common
Shares will be automatically converted upon the Amalgamation. However,
following the Effective Time, holders wishing to receive Autodesk Common Stock
rather than Exchangeable Shares must nonetheless surrender their certificates
representing Discreet Common Shares to the Depositary in order to obtain
certificates representing the appropriate number of shares of Autodesk Common
Stock. The Letter of Transmittal and Election Form specifies the terms of the
exchange effected by the Transactions and the procedure for surrendering
certificates formerly representing Discreet Common Shares to the Depositary.
DISCREET SHAREHOLDERS WISHING TO RECEIVE AUTODESK COMMON STOCK RATHER THAN
EXCHANGEABLE SHARES ARE ADVISED NOT TO SURRENDER THEIR CERTIFICATES
REPRESENTING DISCREET COMMON SHARES UNTIL THEY HAVE BEEN ADVISED BY NEW
DISCREET TO DO SO.
DISCREET SHAREHOLDERS WHO WISH TO RECEIVE NEW DISCREET EXCHANGEABLE SHARES
(FOR WHICH NEW DISCREET CLASS B SHARES HELD BY SUCH ELECTING DISCREET
SHAREHOLDERS WILL IMMEDIATELY BE REDEEMED) MUST USE THE LETTER OF TRANSMITTAL
AND ELECTION FORM TO DEPOSIT THEIR DISCREET COMMON SHARES ON OR BEFORE THE
ELECTION DEADLINE. SEE "--ELECTION TO RECEIVE NEW DISCREET EXCHANGEABLE
SHARES," BELOW.
As soon as practicable after the Effective Time, New Discreet will send
additional letters of transmittal to former Discreet Shareholders who did not
elect to receive New Discreet Exchangeable Shares and who did not deposit
their certificates prior to the Election Deadline, in order to allow them to
exchange their Discreet Common Share certificates for certificates
representing shares of Autodesk Common Stock.
As soon as practicable after the surrender of certificates representing
Discreet Common Shares, the Depositary will deliver certificates for Autodesk
Common Stock in accordance with the instructions set forth in the Letter of
Transmittal and Election Form or the additional letter of transmittal, as the
case may be. Pending
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the surrender of certificates formerly representing Discreet Common Shares and
in respect of which the election to receive New Discreet Exchangeable Shares
was not duly made, such certificates will, subject to the provisions set out
under "--Failure to Deposit Certificates Representing Discreet Common Shares"
below, be deemed to represent Autodesk Common Stock.
Election to Receive New Discreet Exchangeable Shares. Discreet Shareholders
who wish to receive New Discreet Exchangeable Shares following conversion of
their Discreet Common Shares into New Discreet Class B Shares must complete
the Letter of Transmittal and Election Form, indicate their election to
receive New Discreet Exchangeable Shares in paragraph 4 thereof and return it,
together with the certificate(s) representing the Discreet Common Shares in
respect of which the election is made, to the Depositary prior to the Election
Deadline. The maximum number of New Discreet Exchangeable Shares issuable in
the Transactions may not exceed a number equal to 19.99% of the number of
Discreet Common Shares outstanding immediately prior to the Amalgamation,
multiplied by the Exchange Ratio. In the event that the number of New Discreet
Exchangeable Shares otherwise issuable to holders of Discreet Common Shares
pursuant to the Transactions exceeds this maximum number, such Discreet
Shareholders will receive, pro rata, New Discreet Units in lieu of New
Discreet Exchangeable Shares in respect of such excess. Holders of former
Discreet Common Shares in respect of which an election to receive New Discreet
Exchangeable Shares has not been duly made (which shares, at the Effective
Time, will have been automatically converted into New Discreet Class B Shares)
will be deemed to have elected to receive New Discreet Units.
Each Discreet Shareholder may elect to receive New Discreet Exchangeable
Shares in respect of all or any portion of the Discreet Common Shares held.
Where a shareholder desires to receive New Discreet Exchangeable Shares in
respect of only a part of the Discreet Common Shares represented by a single
share certificate, he or she must deposit such certificate with a Depositary
upon making such election, and the Depositary will, after the consummation of
the Transactions, forward to such shareholder certificates representing the
appropriate number of shares of Autodesk Common Stock which such shareholder
is entitled to receive by virtue of not electing to receive New Discreet
Exchangeable Shares for part of the shares represented by the deposited
certificate. See "Certain Canadian Federal and United States Federal Income
Tax Considerations to Discreet Shareholders" for a description of certain of
the Canadian federal and United States federal income tax consequences of
electing to receive New Discreet Exchangeable Shares.
Fractional Shares. No certificates or scrip representing fractional New
Discreet Exchangeable Shares or shares of Autodesk Common Stock will be
issued. In lieu of any such fractional interests, each person entitled to a
fractional interest in New Discreet Exchangeable Shares or Autodesk Common
Stock will receive an equivalent amount in cash from New Discreet or Dutchco,
as the case may be, equal to the product of (i) such fraction, multiplied by
(ii) the average of the closing price for Autodesk Common Stock on the Nasdaq
National Market as of each of the thirty (30) consecutive trading days
immediately preceding the Effective Time.
If the Transactions are not consummated, all deposited share certificates
will be returned forthwith to the shareholders entitled thereto.
Failure to Deposit Certificates Representing Discreet Common Shares. Any
certificate formerly representing Discreet Common Shares not deposited with
all other necessary documents prior to the seventh anniversary of the
Effective Time shall cease to represent a claim or interest of any kind or
nature against New Discreet or Autodesk, as the case may be. On such date, the
New Discreet Exchangeable Shares or the Autodesk Common Stock, as the case may
be, to which the former registered holder of such certificate was entitled
shall be deemed to have been surrendered to New Discreet or Autodesk together
with all dividends, distributions and interests held for such former
registered holder.
OPERATIONS OF THE COMBINED COMPANY FOLLOWING THE TRANSACTIONS
Following consummation of the Transactions, Autodesk plans to combine the
businesses of Discreet and its Kinetix division into a new organization headed
by Discreet's current Chairman of the Board, President and Chief Executive
Officer Richard Szalwinski who will report to Autodesk's President, Eric Herr,
and will be part
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of Autodesk's executive staff. The new organization, the Discreet business
unit of Autodesk, will be headquartered in Montreal, Quebec. Autodesk's
Discreet business unit will focus on developing and marketing tools for the
creation of digital content in the entertainment and creative design
industries. The combined organization will continue to develop and deliver the
existing Discreet and Kinetix product lines to a wide range of creative
professionals including those in the entertainment, and design and
visualization industries.
The engineering organizations of Discreet and Kinetix will be combined in
Autodesk's Discreet business unit, and certain general and administrative
functions will be integrated with similar functions at Autodesk. Discreet's
advanced editing and effects systems will continue to be sold by Discreet's
existing direct sales force. These products will be marketed and supported by
the Combined Company's Discreet Advanced Systems division. Discreet's New
Media Software products and Kinetix products will be sold through Autodesk's
distribution channel and will be marketed and supported by the Combined
Company's Discreet New Media Division.
TRANSACTION MECHANICS
The Amalgamation and Resulting Share Exchanges. Pursuant to the terms of the
Acquisition Agreement, the Amalgamation Agreement and the provisions attaching
to the shares in the share capital of New Discreet, the following events will
occur:
(a) Discreet, Autodesk Quebec and Amalgamation Sub will amalgamate to
form New Discreet by filing Articles of Amalgamation;
(b) Each holder of Discreet Common Shares will receive upon the
Amalgamation one New Discreet Class B Share for each Discreet Common Share
then held by such holder;
(c) Immediately following the Amalgamation, the New Discreet Class B
Shares held by persons who have elected to receive New Discreet
Exchangeable Shares will be redeemed by New Discreet for 0.525 New Discreet
Exchangeable Shares, without any required action on the part of the holder,
provided that if the aggregate percentage of New Discreet Exchangeable
Shares otherwise issuable pursuant to the Transactions exceeds 19.99% of
the number of Discreet Common Shares outstanding immediately prior to the
Amalgamation, multiplied by the Exchange Ratio, the holders of such New
Discreet Class B Shares will receive, pro rata, New Discreet Units in
respect of such excess in lieu of New Discreet Exchangeable Shares;
(d) Immediately following the redemption by New Discreet of New Discreet
Class B Shares for New Discreet Exchangeable Shares, the New Discreet
Class B Shares held by persons who have not elected to receive New Discreet
Exchangeable Shares will be converted into one New Discreet Unit which will
immediately thereafter be acquired by Dutchco (pursuant to the exercise of
its right to purchase such units) in exchange for 0.525 shares of Autodesk
Common Stock, without any required action on the part of the holder;
(e) Dutchco will receive one New Discreet Class A Share for each
outstanding common share of Amalgamation Sub it holds prior to the
Effective Time. Such New Discreet Class A Shares will not be further
converted or exchanged after the Amalgamation; and
(f) ACI will receive one New Discreet Class C Share for each outstanding
common share of Autodesk Quebec it holds prior to the Effective Time.
Pursuant to the Voting and Exchange Trust Agreement, (i) New Discreet has
made a covenant in favor of the holders of New Discreet Units, enforceable by
the Trustee, that it will redeem the New Discreet Class E Shares and New
Discreet Class F Shares, and (ii) Dutchco has made a covenant in favor of the
holders of New Discreet Units, enforceable by the Trustee, that, upon the
proposed exercise by New Discreet of its redemption right with respect to the
New Discreet Units, Dutchco will exercise its right to purchase the New
Discreet Units.
Former Discreet Shareholders will not receive separate share certificates in
respect of the New Discreet Class B Shares, or of the New Discreet Class E
Shares and New Discreet Class F Shares which comprise
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New Discreet Units. Share certificates receivable by former Discreet
Shareholders will, on the shareholder's election and subject to proration, be
for either (i) shares of Autodesk Common Stock or (ii) New Discreet
Exchangeable Shares.
The Exchange Ratio will be proportionally adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any
dividend or distribution of securities convertible into Autodesk Common Stock
or Discreet Common Shares), reorganization, recapitalization or other change
with respect to Autodesk Common Stock or Discreet Common Shares prior to the
Effective Time. Following the Effective Time, the rate at which New Discreet
Exchangeable Shares may be exchanged for Autodesk Common Stock is subject to
adjustment or modification in the event of stock splits or other changes to
the capital structure of Autodesk so as to maintain the initial relationship
between the New Discreet Exchangeable Shares and the Autodesk Common Stock.
Immediately following consummation of the Transactions and pursuant to pre-
existing binding obligations, New Discreet will issue 150,000 New Discreet
Class D Shares in payment of a portion of the fees incurred by a predecessor
of New Discreet in connection with the Transactions.
In addition, immediately after the Effective Time, Autodesk, Dutchco (or a
subsidiary to which Dutchco may assign its rights under the Acquisition
Agreement) and New Discreet will enter into the Support Agreement and
(together with the Trustee) the Voting and Exchange Trust Agreement. See
"Terms of the Transactions--Support Agreement" and "--Voting and Exchange
Trust Agreement."
POST-COMBINATION SHARE OWNERSHIP
Upon completion of the Transactions, Dutchco will be the beneficial owner of
all of the issued and outstanding New Discreet Class A Shares, New Discreet
Class E Shares and New Discreet Class F Shares, and ACI will be the beneficial
owner of all of the issued and outstanding New Discreet Class C Shares. The
New Discreet Class A Shares and the New Discreet Class E Shares will be the
only classes of voting securities of New Discreet. As a result of the
Transactions, based on the capitalization of the two companies as of
August 31, 1998, the former Discreet Shareholders will own or will have the
right to acquire (through ownership of New Discreet Exchangeable Shares)
approximately 25.16% of the shares of Autodesk Common Stock (including shares
issuable to holders of the New Discreet Exchangeable Shares) and the present
Autodesk Stockholders will own approximately 74.84% of the shares of Autodesk
Common Stock (including shares issuable to holders of the New Discreet
Exchangeable Shares).
ACCOUNTING TREATMENT
The Transactions are expected to be treated by Autodesk as a "pooling-of-
interests" for accounting purposes under US GAAP. This accounting method
permits the recorded assets and liabilities of both Autodesk and Discreet to
be carried forward on a consolidated basis to Autodesk, after giving effect to
the Transactions, at their recorded historical amounts. No recognition of
goodwill will be required as a result of the Transactions and consequently,
there will be no amortization of goodwill from the Transactions reflected in
Autodesk's future financial periods.
Consummation of the Transactions is conditioned upon (i) receipt by Discreet
of a letter from its independent auditors to the effect that Discreet
qualifies as an entity that may be a party to a business combination for which
the pooling-of-interests method of accounting would be available and (ii)
receipt by Autodesk of a letter from its independent auditors regarding
concurrence with Autodesk management's conclusion as to the appropriateness of
pooling-of-interests accounting treatment for the Transactions under
Accounting Principles Board Opinion No. 16, if consummated in accordance with
the Acquisition Agreement.
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OFFERING OF AUTODESK COMMON STOCK
In order to qualify the Transactions for pooling-of-interests accounting
treatment, Autodesk must reissue in one or more transactions certain shares of
Autodesk Common Stock previously repurchased by Autodesk and currently held in
its treasury. Accordingly, Autodesk expects to issue approximately 3 million
shares of Autodesk Common Stock through the Reissuance Offering. If the
Reissuance Offering is effected by a public offering, the offering will be
made only by means of a prospectus satisfying the requirements of the
Securities Act. If the Reissuance Offering is effected by a private placement
exempt from the registration requirements of the Securities Act, the offered
shares may not be resold in the United States absent registration or an
applicable exemption from registration under the Securities Act.
DESCRIPTION OF NEW DISCREET EXCHANGEABLE SHARES
Voting Rights. Holders of New Discreet Exchangeable Shares will generally
not be permitted to vote at meetings of the shareholders of New Discreet
(except, where required by law, as a separate class). Autodesk (or a
subsidiary of Autodesk) and Dutchco will be the only voting shareholders of
New Discreet.
As of the Effective Time, Autodesk, New Discreet, Dutchco and the Trustee
will enter into the Voting and Exchange Trust Agreement under which Autodesk
will issue the Special Voting Share to the Trustee for the benefit of the
holders of the New Discreet Exchangeable Shares (the "Beneficiaries"). The
Special Voting Share will carry the number of votes, exercisable at any
meeting at which Autodesk Stockholders are entitled to vote, equal to the
number of votes that the outstanding New Discreet Exchangeable Shares not
owned by Autodesk or its subsidiaries and affiliates would be entitled to vote
if exchanged for Autodesk Common Stock. The Voting Rights attaching to Special
Voting Share will be similarly exercisable with respect to any written consent
sought from the Autodesk Stockholders.
Each Beneficiary on the record date for any meeting at which Autodesk
Stockholders are entitled to vote will be entitled to instruct the Trustee to
exercise that number of the votes attached to the Special Voting Share for
each New Discreet Exchangeable Share held by such Beneficiary equal to the
number of votes that such New Discreet Exchangeable Share would be entitled to
if exchanged for Autodesk Common Stock. The Trustee will exercise each vote
attached to the Special Voting Share only as directed by the relevant
Beneficiary and, in the absence of instructions from a Beneficiary as to
voting, will not exercise such votes. Each Beneficiary may, upon instructing
the Trustee, obtain a proxy from the Trustee entitling the Beneficiary to vote
directly at the relevant meeting the votes attached to the Special Voting
Share to which the Beneficiary is entitled.
The Trustee will send to the Beneficiaries the notice of each meeting at
which Autodesk Stockholders are entitled to vote, together with the related
meeting materials and a statement as to the manner in which the Beneficiary
may instruct the Trustee to exercise the votes attaching to the Special Voting
Share, at the same time as Autodesk sends such notice and materials to the
Autodesk Stockholders. The Trustee will also send to the Beneficiaries copies
of all information statements, interim and annual financial statements,
reports and other materials sent by Autodesk to the Autodesk Stockholders at
the same time as such materials are sent to the Autodesk Stockholders. To the
extent such materials are provided to the Trustee by Autodesk, the Trustee
will also send to the Beneficiaries all materials sent by third parties to
Autodesk Stockholders, including dissident proxy circulars and tender and
exchange offer circulars, as soon as possible after such materials are first
sent to Autodesk Stockholders or received by Autodesk.
All rights of a Beneficiary to exercise or cause to be exercised votes
attached to the Special Voting Share will cease upon the exchange, redemption
or other cancellation of New Discreet Exchangeable Shares for Autodesk Common
Stock.
Dividend Rights. Under the share provisions of the New Discreet Exchangeable
Shares, holders of New Discreet Exchangeable Shares will be entitled to
receive dividends which are intended, so far as possible, to be functionally
and economically equivalent to those declared on Autodesk Common Stock as
follows:
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(i) in the case of a cash dividend declared on Autodesk Common Stock,
holders of each New Discreet Exchangeable Share will be entitled to receive
the Canadian Dollar Equivalent of the dividend declared on each share of
Autodesk Common Stock;
(ii) in the case of a stock dividend declared on Autodesk Common Stock
which is payable in Autodesk Common Stock, holders of each New Discreet
Exchangeable Share will be entitled to receive such number of New Discreet
Exchangeable Shares as is equal to the number of shares of Autodesk Common
Stock to be paid as a dividend on each share of Autodesk Common Stock; and
(iii) in the case of a dividend declared on Autodesk Common Stock in
property other than in cash or Autodesk Common Stock, holders of each New
Discreet Exchangeable Share will be entitled to receive such type and
amount of property as is the same or economically equivalent to (as
determined by the board of directors of New Discreet) the type and amount
of property declared as a dividend on each share of Autodesk Common Stock.
The record date for the determination of the holders of New Discreet
Exchangeable Shares entitled to receive payment of, and the payment date for,
any dividend declared on New Discreet Exchangeable Shares shall be the same
dates as the record date and payment date, respectively, for the corresponding
dividend on Autodesk Common Stock.
Retraction Rights of Holder and Dutchco Retraction Call Rights. Pursuant to
the share provisions of the New Discreet Exchangeable Shares, subject to
applicable law and the overriding Retraction Call Right of Dutchco described
below, holders of New Discreet Exchangeable Shares shall be entitled at any
time to require New Discreet to retract any or all such New Discreet
Exchangeable Shares and to receive, for each New Discreet Exchangeable Share,
an amount equal to the market price of a share of Autodesk Common Stock plus
an additional amount equal to the Dividend Amount, which shall be satisfied by
New Discreet causing to be delivered to such holder one share of Autodesk
Common Stock for each such New Discreet Exchangeable Share and paying to such
holder the Dividend Amount.
Holders of New Discreet Exchangeable Shares may effect such retraction by
presenting a certificate or certificates to New Discreet or its transfer agent
representing the number of New Discreet Exchangeable Shares the holder desires
to retract, together with a written request (a "Retraction Request")
specifying the number of New Discreet Exchangeable Shares the holder wishes
New Discreet to retract and the date upon which the holder desires to receive
shares of Autodesk Common Stock (which date shall be not less than five
Business Days nor more than ten Business Days after the date on which such
Retraction Request is received by New Discreet, provided that in the event
that no such Business Day is specified in the Retraction Request, the
Retraction Date shall be the tenth Business Day after receipt of the
Retraction Request by New Discreet) (the "Retraction Date"), and such other
documents as may be required to effect the retraction of the New Discreet
Exchangeable Shares.
Upon receipt of a Retraction Request, New Discreet shall immediately notify
Autodesk and Dutchco of such request. Autodesk or Dutchco shall thereafter
have two Business Days in which to notify New Discreet that Dutchco intends to
exercise its overriding Retraction Call Right to purchase all, but not less
than all, of the New Discreet Exchangeable Shares submitted by the holder
thereof for retraction. The purchase price for each such New Discreet
Exchangeable Share purchased by Dutchco shall be the amount equal to the
market price of a share of Autodesk Common Stock plus an additional amount
equal to the Dividend Amount, and shall be satisfied by Dutchco causing to be
delivered to such holder one share of Autodesk Common Stock for each such New
Discreet Exchangeable Share and paying to such holder the Dividend Amount.
Redemption Rights of New Discreet and Dutchco Redemption Call
Rights. Pursuant to the share provisions of the New Discreet Exchangeable
Shares, subject to applicable law, certain limited exceptions and the
overriding Redemption Call Right of Dutchco described below, on a date eleven
years from the Effective Time (the "Final Redemption Date"), New Discreet
shall redeem all, but not less than all, of the then outstanding New Discreet
Exchangeable Shares by payment of an amount equal to the market price of a
share of Autodesk
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Common Stock plus an additional amount equal to the Dividend Amount for each
New Discreet Exchangeable Share so redeemed, which shall be satisfied by New
Discreet causing to be delivered to such holder one share of Autodesk Common
Stock for each such New Discreet Exchangeable Share and paying to such holder
the Dividend Amount.
Dutchco shall have the overriding redemption call right, notwithstanding any
proposed redemption of the New Discreet Exchangeable Shares by New Discreet as
outlined above, to purchase on the Final Redemption Date all, but not less
than all, of the outstanding New Discreet Exchangeable Shares by payment of an
amount equal to the market price of a share of Autodesk Common Stock plus an
additional amount equal to the Dividend Amount for each New Discreet
Exchangeable Share so redeemed, which shall be satisfied by Dutchco causing to
be delivered to such holder one share of Autodesk Common Stock for each such
New Discreet Exchangeable Share and paying to such holder the Dividend Amount.
New Discreet shall, at least 120 days before the Final Redemption Date,
provide Autodesk, Dutchco and each holder of New Discreet Exchangeable Shares
with written notice of New Discreet's intended redemption of the New Discreet
Exchangeable Shares and/or Dutchco's exercise of Dutchco's Redemption Call
Right, as the case may be.
Liquidation Exchange Rights of Holders and Dutchco Liquidation Call
Rights. Pursuant to the Voting and Exchange Trust Agreement, upon the
occurrence and during the continuance of an "Insolvency Event" with respect to
New Discreet, a Beneficiary may instruct the Trustee to require Dutchco to
purchase any or all of the New Discreet Exchangeable Shares held by the
Beneficiary. "Insolvency Event" will be defined to include (i) any insolvency
or bankruptcy proceeding instituted by or against New Discreet, including any
such proceeding under the Companies Creditors' Arrangement Act (Canada) and
the Bankruptcy and Insolvency Act (Canada), (ii) the admission in writing by
New Discreet of its inability to pay its debts generally as they become due
and (iii) the inability of New Discreet, as a result of solvency requirements
of applicable law, to redeem any New Discreet Exchangeable Shares tendered for
retraction. Immediately upon the occurrence of an Insolvency Event or any
event which may, with the passage of time or the giving of notice, become an
Insolvency Event, New Discreet, Autodesk and/or Dutchco, will give written
notice thereof to the Trustee. As soon as practicable thereafter, the Trustee
will then notify each Beneficiary of such event or potential event and will
advise the Beneficiary of its rights as described above.
Under the terms of the Articles of Amalgamation, Dutchco will be granted the
overriding right, in the event of and notwithstanding the proposed voluntary
or involuntary liquidation, dissolution or winding-up of New Discreet, to
purchase all, but not less than all, of the New Discreet Exchangeable Shares
then outstanding and, upon the exercise by Dutchco of such right, the holders
of New Discreet Exchangeable Shares will be obligated to sell such shares to
Dutchco. The purchase by Dutchco of all the outstanding New Discreet
Exchangeable Shares upon the exercise of such right will occur on the
Effective Time of the voluntary or involuntary liquidation, dissolution or
winding-up of New Discreet. The purchase price payable by Dutchco for each New
Discreet Exchangeable Share will be equal to the market price of a share of
Autodesk Common Stock plus an additional amount equal to the Dividend Amount,
and shall be satisfied by Dutchco causing to be delivered to such holder one
share of Autodesk Common Stock for each such New Discreet Exchangeable Share
and paying to such holder the Dividend Amount.
If, as a result of solvency provisions of applicable law, New Discreet is
unable to redeem all New Discreet Exchangeable Shares specified in a
Retraction Request and provided that Dutchco has not exercised its Retraction
Call Right with respect to such shares and the Beneficiary has not revoked the
Retraction Request, the Beneficiary will be deemed to have exercised its right
to instruct the Trustee to require Dutchco to purchase the unredeemed New
Discreet Exchangeable Shares and Dutchco will be required to purchase such
shares from the Beneficiary in the manner set forth above.
Automatic Exchange Rights in the Event of the Insolvency of Autodesk. Under
the Voting and Exchange Trust Agreement, in the event of the voluntary or
involuntary liquidation, dissolution or winding-up of Autodesk,
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Dutchco will be required to purchase each outstanding New Discreet
Exchangeable Share for a purchase price equal to the market price of a share
of Autodesk Common Stock plus an additional amount equal to the Dividend
Amount, which shall be satisfied by Dutchco causing to be delivered to such
holder one share of Autodesk Common Stock for each such New Discreet
Exchangeable Share and paying to such holder the Dividend Amount.
REPRESENTATIONS AND WARRANTIES
In the Acquisition Agreement, Discreet, on the one hand, and each of
Autodesk, Dutchco, ACI, Autodesk Quebec and Amalgamation Sub, on the other
hand, have made customary representations and warranties to the other
regarding, among other things, (i) its due incorporation and qualification and
the due incorporation and qualification of each of its subsidiaries; (ii) its
capitalization; (iii) its articles of incorporation and by-laws; (iv) its
corporate power and authority to enter into, and its due authorization,
execution and delivery of, the Acquisition Agreement; (v) receipt of required
governmental approvals; (vi) the absence of any material adverse changes in
its business or condition; (vii) its securities laws filings; (viii) the
performance of its obligations under the Acquisition Agreement and the
consummation of the Transactions not violating its articles and by-laws,
applicable law and certain material agreements (and the current compliance
therewith); (ix) its financial statements; (x) its intellectual property; (xi)
its insurance; (xii) absence of material litigation; (xiii) its tax returns
and the payment of certain taxes; (xiv) the possession of and compliance with
certain governmental licenses; (xv) the material accuracy of this Proxy
Circular and the Form S-3 and Form S-4; (xvi) the absence of certain
restrictions on material business practices; (xvii) the absence of undisclosed
brokers; (xviii) the absence of certain transactions with officers and
directors; (xix) the absence of any actions taken which would affect the
treatment of the Transactions as a pooling transaction for accounting
purposes; and (xx) the votes required to approve the Transactions. In
addition, Discreet has made representations and warranties to Autodesk with
respect to title to its properties and assets, labor and employment relations,
employee benefit plans, the binding nature of its material contracts and
certain environmental matters. Autodesk has additionally made representations
and warranties to Discreet with respect to the Autodesk Board's recommendation
to the Autodesk Stockholders with respect to the Autodesk Resolution. Each of
the parties has also agreed to give the other prompt notice of any
inaccuracies in its representations and warranties, as well as notice of any
events that may result in the failure of any conditions or covenants under the
Acquisition Agreement to be satisfied. Such representations and warranties
will not survive consummation of the Transactions.
BUSINESS OF AUTODESK PENDING CONSUMMATION OF THE TRANSACTIONS
During the period from the date of the Acquisition Agreement until the
termination of the Acquisition Agreement or the Effective Time, except as
otherwise consented to by Discreet in writing which consent shall not be
unreasonably withheld, Autodesk has agreed that Autodesk will, among other
things, operate its business in accordance in the ordinary course, pay debts
and Taxes when due subject to good faith disputes over such debts or Taxes and
perform other obligations when due, except to the extent failure to do any of
the foregoing would not have a Material Adverse Effect (as such term is
defined in the Acquisition Agreement and in "--Conditions to the
Transactions," below).
BUSINESS OF DISCREET PENDING CONSUMMATION OF THE TRANSACTIONS
Under the terms of the Acquisition Agreement, for a period from the date of
the Acquisition Agreement and continuing until the earlier of the termination
of the Acquisition Agreement or the Effective Time, and except for certain
disclosed actions and otherwise agreed to by Dutchco in writing, Discreet has
agreed that Discreet and its subsidiaries will, among other things, conduct
their businesses in accordance with their ordinary course of business or in
accordance with the provisions of the Acquisition Agreement and in a manner
consistent with past practices, and use commercially reasonable efforts to
preserve substantially intact their respective business organizations, to keep
available the services of their present officers, employees and consultants,
to take all commercially reasonable action necessary to prevent the loss,
cancellation, abandonment, forfeiture or expiration
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of any Discreet intellectual property and to preserve their present
relationships with customers, suppliers and other persons with whom they have
significant business relations, except in each case where the failure to do so
could not reasonably be expected to have a "Material Adverse Effect" (as such
term is defined in the Acquisition Agreement and in "--Conditions to the
Transactions," below) on the business of Discreet or its subsidiaries.
In particular, subject to certain exceptions set forth in a disclosure
schedule provided by Discreet to Autodesk and Dutchco, Discreet and its
subsidiaries have agreed, among other things, not to take any of the following
actions without the prior written consent of Dutchco, which shall not be
unreasonably withheld: (i) amend or otherwise change Discreet's articles of
incorporation (the "Discreet Articles") or by-laws (the "Discreet By-laws");
(ii) issue, sell, pledge, dispose of or encumber, or authorized the issuance,
sale, pledge, disposition or encumbrance of any class of shares in the share
capital of Discreet, or any options, warrants convertible securities or other
rights of any kind to acquire any shares of Discreet's share capital, or any
other ownership interest of Discreet, subject to certain exceptions;
(iii) sell, pledge, dispose of or encumber material assets except in the
ordinary course of business and in a manner consistent with past practice and
dispositions of obsolete or worthless assets; (iv) amend or change the period
(or permit any acceleration, amendment or change) of exercisability of options
or restricted stock granted under the Discreet Stock Option Plans or the
Discreet Employee Stock Purchase Plan or authorize cash payments in exchange
for any options granted under such plans; (v) declare, set aside, make or pay
any dividend or other distribution with respect to any shares in the share
capital of Discreet, except that a wholly owned subsidiary may declare and pay
a dividend to its parent; (vi) split, combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock;
(vii) amend the terms of, repurchase, redeem or otherwise acquire any of its
securities; (viii) dispose of any intellectual property of Discreet or its
subsidiaries, or amend or modify any existing agreements with respect to any
such intellectual property or third party intellectual property rights, other
than nonexclusive object and source code licenses in the ordinary course of
business consistent with past practice or industry standards for such
licensing or distribution; (ix) acquire any business organization or material
amount of assets; (x) incur any material indebtedness or liability for
indebtedness except in the ordinary course of business consistent with past
practice; (xi) authorize any capital expenditures or purchase of fixed assets
which are, in the aggregate, in excess of US$6,000,000 for Discreet and its
subsidiaries, taken as a whole; (xii) increase the compensation payable to its
officers or employees, except for increases in accordance with past practice,
or grant severance or termination pay to, or enter into any employment or
severance agreement with, any director, officer or other Discreet employee, or
establish, adopt, enter into or amend any employee plan of Discreet or its
subsidiaries, except as may be required by applicable law; (xiii) take any
action to change material Tax or accounting policies or procedures, other than
as required by law or US GAAP; (xiv) make any material Tax election
inconsistent with past practices or settle or compromise a material federal,
state, local or foreign Tax liability or agree to an extension of a statute of
limitations, except to the extent the amount of any such settlement has been
reserved for on the Discreet balance sheet; (xv) pay, discharge or satisfy any
material claims, liabilities or obligations, other than the payment, discharge
or satisfaction of liabilities reflected or reserved against in the Discreet
financial statements or incurred in the ordinary course of business and
consistent with past practice; (xvi) take any action to amend or terminate any
of its employee plans, except as may be required by law (xvii) take or allow
to be taken or fail to take any act or omission which would jeopardize the
treatment of the Transactions as a pooling of interests for accounting
purposes under US GAAP; (xviii) modify, amend or terminate any Covered
Agreement, other than in the ordinary course of business consistent with past
practice; or (xix) take, or agree in writing or otherwise to take, any of the
actions described in clauses (i) through (xviii) above, or that would make any
of the representations or warranties of Discreet contained in the Acquisition
Agreement untrue or incorrect or prevent Discreet from performing or cause
Discreet not to perform its covenants thereunder or result in any of the
conditions to the Transactions not being satisfied.
NON-SOLICITATION BY DISCREET OF ALTERNATIVE TRANSACTIONS
Discreet has agreed that from and after the date of the Acquisition
Agreement until the earlier of the Effective Time or the termination of the
Acquisition Agreement, Discreet shall not, directly or indirectly, through
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any officer, director, employee, representative or agent of Discreet or any of
its subsidiaries, take any action to initiate, solicit or encourage (including
by way of furnishing any person any non-public information, except as
permitted in Section 4.2(e) of the Acquisition Agreement) or, subject to the
terms of the immediately following sentence, participate in any discussions or
negotiations with any persons who are considering or who have made any
inquiries or proposals regarding any merger, amalgamation, take-over bid, sale
of substantial assets, sale of shares of capital stock (including without
limitation by way of a tender offer) or similar transactions involving
Discreet or any of its subsidiaries (any of the foregoing inquiries or
proposals being referred to herein as an "Acquisition Proposal").
Notwithstanding anything to the contrary contained in Section 4.2(a) of the
Acquisition Agreement or in any other provision of the Acquisition Agreement,
Discreet may, to the extent the Discreet Board determines, in good faith,
after consultation with outside legal counsel, that the Discreet Board's
fiduciary duties under applicable law require it to do so, participate in
discussions or negotiations with, and, subject to the requirements of Section
4.2(d) of the Acquisition Agreement furnish information to any person, entity
or group after such person, entity or group has delivered to Discreet an
unsolicited bona fide Acquisition Proposal which the Discreet Board in its
good faith and reasonable judgment determines, after consultation with its
independent financial advisors, would result in a transaction more favorable
to the Discreet Shareholders than the transactions contemplated by the
Acquisition Agreement (a "Superior Proposal"). In addition, notwithstanding
any other provision of the Acquisition Agreement, in connection with a
possible Acquisition Proposal, Discreet may refer to any third party to
Section 4.2 of the Acquisition Agreement or make a copy of the No Solicitation
provisions of the Acquisition Agreement available to a third party. In the
event Discreet receives a Superior Proposal, nothing contained in the
Acquisition Agreement (but subject to the terms of the No Solicitation
provisions of the Acquisition Agreement) will prevent the Discreet Board from
accepting, approving or recommending such Superior Proposal to the Discreet
Shareholders, if the Discreet Board determines in good faith, after
consultation with outside legal counsel, that such action is required by its
fiduciary duties under applicable law. In such case, the Discreet Board may
withdraw, modify or refrain from making its recommendation of the Transactions
and, to the extent it does so, Discreet may refrain from making soliciting
proxies and taking such other action necessary to secure the vote of the
Discreet Shareholders, provided however, that Discreet shall not accept,
approve or recommend to the Discreet Shareholders, or enter into any agreement
concerning, a Superior Proposal for a period of not less than three business
days after Autodesk's receipt of a copy of the Superior Proposal (or a
reasonably detailed written description of the significant terms and
conditions thereof, if such proposal is not in writing).
Notwithstanding the foregoing, nothing contained in the Acquisition
Agreement shall prohibit Discreet from complying with Rules 14d-9 and 14e-2
under the Securities Exchange Act; provided, however, that, in complying with
Rules 14d-9 and 14e-2, Discreet will not make or authorize any recommendation
of any Acquisition Proposal unless such proposal constitutes a Superior
Proposal.
Discreet shall immediately (and no later than 24 hours) notify Autodesk and
Dutchco after receipt of any written Acquisition Proposal or any request for
nonpublic information relating to Discreet in connection with an Acquisition
Proposal or for access to the properties, books or records of Discreet or any
subsidiary by any person or entity that informs the Discreet Board of such
subsidiary that it is considering making, or has made, an Acquisition
Proposal. Such notice to Autodesk and Dutchco shall be made orally and in
writing and shall indicate in reasonable detail the terms and conditions of
such proposal, inquiry or contact.
If the Discreet Board receives a request for material nonpublic information
by a party who makes a bona fide Acquisition Proposal and the Discreet Board
determines that such proposal is a Superior Proposal, then, and only in such
case, Discreet may, subject to the execution of a confidentiality agreement
substantially similar to that then in effect between Discreet and Autodesk,
provide such party with access to information regarding Discreet, which access
shall be no more extensive than that provided to Autodesk.
Discreet shall immediately cease and cause to be terminated any existing
discussions or negotiations with any parties (other than Autodesk, Dutchco,
and Amalgamation Sub) conducted heretofore with respect to any of the
foregoing. Discreet agrees not to release any third party from any
confidentiality or standstill agreement with respect to any of the foregoing
to which Discreet is a party.
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Discreet shall ensure that the officers, directors, employees and agents of
Discreet and its subsidiaries any investment bankers or other agents,
advisors, or representatives retained by Discreet are aware of the no
solicitation restrictions, and shall be responsible for any breach of Section
4.2 of the Acquisition Agreement by such bankers, officers, directors,
employees, agents, advisors or representatives.
INDEMNIFICATION
From and after the Effective Time, (i) New Discreet and Autodesk will
fulfill and honor in all respects the obligations of Discreet and its
subsidiaries pursuant to the indemnification provisions in the Discreet
Articles and the Discreet By-laws existing as in effect on the date of the
Acquisition Agreement with respect to Discreet's directors and officers
(including without limitation advancement of legal and other expenses to the
extent provided for in the Discreet Articles and Discreet By-Laws), and (ii)
in the event any of Discreet's directors or officers is or becomes involved in
any capacity in any action, proceeding or investigation in connection with any
matter relating to the Acquisition Agreement or the transactions contemplated
thereby occurring on or prior to the Effective Time, Autodesk will, or will
cause New Discreet to, pay as incurred such reasonable legal and other
expenses (including the cost of any investigation and preparation) incurred in
connection therewith, subject to an undertaking to repay such amounts as
required by applicable law.
Autodesk and New Discreet will indemnify each present director, officer,
employee, fiduciary and agent of Discreet or any of its subsidiaries
(collectively, the "Indemnified Parties"), to the fullest extent permitted
under applicable law or under Autodesk's or New Discreet's, as the case may
be, Bylaws, against any costs or expenses (including attorneys' fees),
judgments, fines, losses, claims, damages, liabilities and amounts paid in
settlement in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to any action or omission occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by the Acquisition Agreement), and to pay as incurred such legal
and other expenses (including the costs of any investigation and preparation)
incurred in connection therewith, subject to an undertaking to repay such
amounts as required by applicable law.
For a period of five years after the Effective Time, Autodesk and Dutchco
will, or will cause New Discreet to, provide officers' and directors'
liability insurance in respect of acts or omissions occurring on or prior to
the Effective Time covering each person covered by Discreet's officers' and
directors' liability insurance policy prior to the Effective Time on terms
substantially similar to those of the policy in effect as of the date of the
Acquisition Agreement.
CONDITIONS TO THE TRANSACTIONS
General Conditions to the Transactions. Consummation of the Transactions is
subject to the satisfaction of various conditions, including (i) the
effectiveness of the Form S-4, (ii) if no exemption from registration under
the Securities Act is available, the effectiveness of the Form S-3 (iii) the
absence of any stop order or proceedings seeking a stop order initiated or
threatened by the SEC or any provincial securities regulatory authority in
Canada or any similar proceedings relating to the Form S-4 or Form S-3, if
any, or this Proxy Circular; (iv) the approval and adoption of the Autodesk
Resolution and the Discreet Resolution by the requisite affirmative vote of
the Autodesk Stockholders and the Discreet Shareholders, respectively; (v) the
waiting period under the HSR Act applicable to the consummation of the
Transactions having expired or having been terminated; (vi) the receipt by
each of Autodesk, Dutchco and Discreet of a notice (if required) from the
responsible Minister under the Investment Canada Act (Canada) that he is
satisfied or deemed to be satisfied that the Transactions are likely to be of
net benefit to Canada; (vii) the filing by Autodesk, Dutchco and Discreet of a
notice and information (if required) under the Competition Act (Canada) and
the expiration of the applicable waiting period; (viii) the absence of any
temporary restraining order, preliminary or permanent injunction or other
legal restraints, or prohibitions, statutes, rules, regulations or orders
preventing consummation of the Transactions, and the absence of any
proceedings brought by any governmental authority making consummation of the
Transactions illegal; (ix) the approval for listing, subject to notice of
issuance, of the Autodesk Common Stock to be issued in the Transactions and
any additional shares to be issued as a result of the exercise of rights
attaching to the New
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Discreet Exchangeable Shares; (x) the receipt by Autodesk, Dutchco and
Discreet of written opinions of their respective Canadian tax counsel to the
effect that, provided that (i) the adjusted cost base to a holder of New
Discreet Class B Shares that are redeemed by New Discreet for New Discreet
Exchangeable Shares in connection with the Transactions exceeds the aggregate
of (A) the fair market value of the Voting Rights and Exchange Rights received
by the holder in respect of such holder's New Discreet Exchangeable Shares and
(B) any cash received by such holder in lieu of a fraction of a New Discreet
Exchangeable Share and (ii) the holder files the appropriate elections with
the relevant tax authorities within the required time such that the holder's
proceeds of disposition do not exceed the adjusted cost base to the holder of
such New Discreet Class B Shares, such holder will not realize a capital gain
or a capital loss for purposes of the Canadian Tax Act on the Amalgamation or
on the redemption of such New Discreet Class B Shares; (xi) New Discreet being
a "public corporation" under the Canadian Tax Act; (xii) the receipt by
Autodesk, Dutchco and Discreet of the Affiliate Agreements (as defined below)
(xiii) Autodesk shall have received a letter from Autodesk's independent
auditors regarding concurrence with Autodesk management's conclusion as to the
appropriateness of pooling-of-interests accounting treatment for the
Transactions and Discreet shall have received a letter from Discreet's
independent auditors to the effect that Discreet qualifies as an entity that
may be a party to a business combination for which the pooling-of-interests
method of accounting would be available (xiv) the representations and
warranties made by each of Autodesk and Discreet being true and correct in all
respects on and as of the Effective Time, except (A) for changes contemplated
in the Acquisition Agreement, (B) for those representations and warranties
which address matters only as of a particular date (which shall remain true as
of that date), or (C) where the failure to be true and correct would not have
and could not reasonably be expected to have a Material Adverse Effect (as
defined below) on the party making such representation, and each of Autodesk,
Dutchco and Discreet have received of an officer's certificate from the other
party to this effect; (xv) all agreements and covenants required by the
Acquisition Agreement to have been performed or complied with prior to or on
the Effective Date having been so performed or complied with in all material
respects, and each of Autodesk, Dutchco and Discreet having received an
officer's certificate from the other party to this effect; (xvi) the obtaining
by Autodesk, Dutchco and Discreet of all material consents, waivers,
approvals, authorizations or orders required to be obtained and filings
required to be made for the authorization, execution and delivery of the
Acquisition Agreement, the Ancillary Agreement and the Amalgamation Agreement,
as applicable, and the Ancillary Documents and the consummation of the
transactions contemplated thereby; and (xvii) the absence of any temporary
restraining order, preliminary or permanent injunction or other order issued
by any court of competent jurisdiction or other legal regulatory restraint
provision, materially limiting or restricting Autodesk's conduct or operation
of the business of Discreet following consummation of the Transactions or any
of the other transactions contemplated by the Acquisition Agreement, the
absence of any investigation or other inquiry that is reasonably likely to
result in the foregoing and the absence of any pending or threatened
proceeding of an administrative agency or commission or other governmental
entity, domestic, or foreign, seek the foregoing.
Any of the conditions in the Acquisition Agreement may be waived by the
party benefitted thereby.
Definition of Material Adverse Effect. The term Material Adverse Effect is
defined in the Acquisition Agreement to mean any change or effect that,
individually or when taken together with all other such changes or effects
that have occurred prior to the date of determination of the occurrence of the
Material Adverse Effect, is or is reasonably likely to be materially adverse
to the business, assets (including intangible assets), financial condition or
results of operations of Discreet and its subsidiaries or Autodesk and its
subsidiaries, as the case may be, in each case taken as a whole. None of the
following shall be deemed to constitute a Material Adverse Effect with respect
to either party: (a) any change in the market price or trading volume of the
Discreet Common Shares or Autodesk Common Stock, as appropriate; (b) any
adverse effect on the bookings, revenues or earnings of Discreet or Autodesk,
or any delay in or reduction or cancellation of such party's product orders,
following the execution of the Original Agreement or the Acquisition Agreement
which is reasonably attributable to the announcement of the execution of the
Original Agreement or the Acquisition Agreement and the transactions
contemplated thereby; (c) any change arising out of conditions affecting the
economy or industry of such party in general; (d) the failure, in and of
itself, to meet analysts' expectations (it being understood that the
underlying causes of such failure will not be excluded from the definition of
Material Adverse Effect except as otherwise provided in this definition); or
(e) employee attrition under certain circumstances.
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TERMINATION, AMENDMENT AND WAIVER
The Acquisition Agreement may be terminated and the Transactions may be
abandoned prior to the Effective Time, notwithstanding the obtaining of
requisite approval by the Autodesk Stockholders and the Discreet Shareholders,
under the following circumstances: (i) by mutual written consent duly
authorized by the boards of directors of Autodesk, Discreet and Dutchco (ii)
by any of Autodesk, Discreet or Dutchco, if the Transactions shall not have
been consummated by December 31, 1998 (such date to be extended (x) on a day-
by-day basis due to certain governmental delays, or (y) by mutual agreement of
Discreet, Autodesk and Dutchco) and if the terminating party has not caused
the failure of the Transactions to be consummated by its own failure to
fulfill any of its obligations under the Acquisition Agreement and the
Amalgamation Agreement to occur on or before such date; (iii) by any of
Autodesk, Discreet or Dutchco if a court of competent jurisdiction or a
governmental, regulatory or administrative agency or commission shall have
issued a non-appealable final order, decree, ruling or any other action
permanently prohibiting the Transactions, provided that the terminating party
has complied with its obligations regarding access to information and
confidentiality under the Acquisition Agreement; (iv) by any of Autodesk,
Discreet or Dutchco, if the Discreet Stockholders or the Autodesk Shareholders
fail to approve the Autodesk Resolution or the Discreet Resolution,
respectively, provided that the terminating party has complied with its
obligations regarding this Proxy Circular and such party's shareholders'
meeting; (v) by Autodesk or Dutchco if the Discreet Board withdraws, modifies
or changes its recommendation of the Transactions in a manner adverse to
Autodesk or Dutchco, or has recommended to the Discreet Shareholders or
publicly announced a "neutral" position with respect to an Acquisition
Proposal or shall have failed to reject as inadequate or shall have failed to
reaffirm its recommendation of the Acquisition Agreement and the Transactions
within ten business days of announcement or commencement of an Acquisition
Proposal; (vi) by Discreet, if the Autodesk Board or the Board of Directors of
Dutchco withdraws, modifies or changes its recommendation in favor of issuance
of the Autodesk Resolution or shall have resolved to do so; (vii) by Autodesk,
Dutchco or Discreet, as the case may be, in the event of a breach by Discreet,
on the one hand, or Autodesk, Amalgamation Sub, ACI, Autodesk Quebec and/or
Dutchco, on the other hand, respectively, of any representation or warranty,
or failure to perform any covenant, term or provision of the Acquisition
Agreement (provided that if such breach or failure to perform is curable prior
to the expiration of 30 days from its occurrence (but in no event later than
December 31, 1998), Autodesk, Dutchco and Discreet may not terminate the
Acquisition Agreement on this basis as long as Discreet, on the one hand, or
Autodesk, Amalgamation Sub, ACI, Autodesk Quebec and/or Dutchco, on the other
hand, respectively, continue to exercise reasonable efforts to cure such
breach or failure unless and until the earlier of December 31, 1998 and the
date such 30 day period expires without such breach having been cured); and
(viii) by any of Autodesk, Discreet or Dutchco if the Discreet Board shall
have recommended, resolved to accept or accepted a Superior Proposal.
The Acquisition Agreement may be amended by an agreement in writing among
the parties thereto at any time prior to the Effective Time; provided,
however, that, after approval of the Discreet Resolution, no amendment may be
made which by law requires further approval of the Discreet Shareholders,
without such further approval. At any time prior to the Effective Time, any
party to the Acquisition Agreement may with respect to any other party
thereto, (a) extend the time for the performance of any of the obligations or
other acts, (b) waive any inaccuracies in the representations and warranties
contained in the Acquisition Agreement or in any document delivered pursuant
thereto and (c) waive compliance with any of the agreements or conditions
contained in the Acquisition Agreement. Any such extension or waiver shall be
valid if set forth in an instrument in writing signed by the party or parties
to be bound thereby.
FEES AND EXPENSES
Except as set forth below, all fees and expenses incurred in connection with
the Acquisition Agreement and the Amalgamation Agreement and the transactions
contemplated thereby shall be paid by the party incurring such expenses,
whether or not the Transactions are consummated.
Payments by Discreet to Dutchco. Discreet has agreed to pay Dutchco (i) all
out-of-pocket fees and expenses reasonably incurred by Autodesk and Dutchco in
connection with the Acquisition Agreement and the
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Transactions up to a maximum of $2,000,000 within one business day of the
earlier to occur of termination of the Acquisition Agreement under Section
7.1(b) of the Acquisition Agreement, as a result of Discreet's failure to
consummate the Transactions by December 31, 1998 or such later date agreed to
by the parties to the Acquisition Agreement, Section 7.1(e) of the Acquisition
Agreement, as a result of the Discreet Board withdrawing, modifying or
changing its recommendation of the Transactions, recommending to the Discreet
Shareholders, or taking a "neutral" position with respect to, an Acquisition
Proposal or failing to reject as inadequate, or failing to reaffirm its
recommendation of the Transactions, within ten Business Days after public
announcement or commencement of such Acquisition Proposal or Section 7.1(h),
as a result of the Discreet Board's recommendation, resolution to accept, or
acceptance of a Superior Proposal, or a Discreet Negative Vote (as defined
below), plus (ii) $15,000,000 less any out-of-pocket fees paid pursuant to the
preceding clause (i), in the event any Acquisition Proposal is consummated
within nine months of the payment referred to in clause (i), if the
Acquisition Agreement is terminated because: (a) the Discreet Board shall have
withheld, withdrawn or modified in a manner adverse to Autodesk its
recommendation in favor of adoption and approval of the Acquisition Agreement
and approval of the Transactions, and at or prior to the time of such action
by the Discreet Board (x) there shall not have occurred a Material Adverse
Effect on Autodesk and (y) there shall have occurred a Superior Proposal which
shall have been publicly disclosed and not withdrawn; (b) the Discreet Board
shall have recommended a Superior Proposal (other than Autodesk's) to the
Discreet Shareholders; (c) Discreet shall have failed to convene the Discreet
Meeting by December 24, 1998 and there is an Acquisition Proposal outstanding
at such time; or (d) the vote of the Discreet Shareholders approving and
adopting the Discreet Resolution shall not have been obtained by reason of the
failure to obtain the required vote at the Discreet Meeting (a "Discreet
Negative Vote"), and prior to such Discreet Negative Vote there shall have
occurred an Acquisition Proposal with respect to Discreet which shall have
been publicly disclosed and not withdrawn.
If no payment shall have been required by the circumstances described in the
previous paragraph and the Discreet Board shall have withheld, withdrawn or
modified in a manner adverse to Autodesk its recommendation in favor of
adoption and approval of the Acquisition Agreement and approval of the
Transactions, and at or prior to the time of such action by the Discreet Board
there shall not have occurred a Material Adverse Effect on Autodesk and there
shall not be a Superior Proposal at that time outstanding, then Discreet shall
pay to Dutchco $6,000,000 following the earlier of termination of the
Acquisition Agreement pursuant to Section 7.1(e) of the Acquisition Agreement,
as a result of the Discreet Board withdrawing, modifying or changing its
recommendation of the Transactions, recommending to the Discreet Shareholders,
or taking a "neutral" position with respect to, an Acquisition Proposal or
failing to reject as inadequate, or failing to reaffirm its recommendation of
the Transactions, within ten Business Days after public announcement or
commencement of such Acquisition Proposal, or a Discreet Negative Vote.
If no payment shall have been required by the circumstances described in the
previous two paragraphs and (i) there shall be a Discreet Negative Vote and at
or prior to the time of such vote there shall not have occurred a Material
Adverse Effect with respect to Autodesk or (ii) the Acquisition Agreement is
terminated by Dutchco pursuant to Section 7.1(g) of the Acquisition Agreement
upon a breach of any representation, warranty, covenant or agreement by
Discreet, and such breach is not cured within the earlier of 30 days or
December 31, 1998, then Discreet shall pay to Dutchco an amount equal to all
out-of-pocket fees and expenses reasonably incurred by Autodesk and Dutchco in
connection with the Acquisition Agreement and the Transactions up to a maximum
of $2,000,000 within one Business Day following the earlier to occur of
termination of the Acquisition Agreement pursuant to Section 7.1(g) of the
Acquisition Agreement or a Discreet Negative Vote.
Payments by Dutchco to Discreet. If the Autodesk Board shall have withheld,
withdrawn or adversely modified its recommendation in favor of the Autodesk
Resolution, and at or prior to the time of such action by Autodesk there shall
not have occurred a Material Adverse Effect on Discreet, then Dutchco shall
pay Discreet $6,000,000 within one Business Day following the earlier of (i)
the date of termination of the Acquisition Agreement pursuant to Section
7.1(f) of the Acquisition Agreement due to such withholding, withdrawal or
adverse modification or (ii) the failure to obtain the required vote of
Autodesk Stockholders in favor of the Autodesk Resolution upon a vote taken at
the Autodesk Meeting (an "Autodesk Negative Vote").
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If (i) at or prior to the time of the Autodesk Negative Vote there shall not
have occurred a Material Adverse Effect with respect to Discreet, (ii) the
Acquisition Agreement is terminated by Discreet pursuant to Section 7.1(f) of
the Acquisition Agreement upon a breach of any representation, warranty,
covenant or agreement on the part of any of Autodesk, Dutchco, ACI, Autodesk
Quebec or Amalgamation Sub, and such breach is not cured within the earlier of
30 days or December 31, 1998 or (iii) Autodesk shall have failed to convene
the Autodesk Meeting by December 24, 1998, then Dutchco shall pay to Discreet
an amount equal to all out-of-pocket fees and expenses reasonably incurred by
Discreet in connection with the Acquisition Agreement and the Transactions up
to a maximum of $2,000,000 within one Business Day following the earlier to
occur of termination of the Acquisition Agreement or an Autodesk Negative
Vote.
Payment of the amounts described above shall not be in lieu of damages
incurred by a party for breach of the Acquisition Agreement.
ASSIGNMENT
Each of Autodesk, ACI, Amalgamation Sub, Autodesk Quebec and Dutchco may
assign any of its respective rights under the Acquisition Agreement to any
other subsidiary of Autodesk, provided that no such assignment will relieve
the assigning party of its obligations under the Acquisition Agreement.
Accordingly, Dutchco may assign certain of its rights under the Acquisition
Agreement to an existing or newly formed subsidiary of Autodesk.
CONFIDENTIALITY AGREEMENT
Autodesk and Discreet has each agreed to keep confidential, pursuant to the
confidentiality agreement between the two parties dated July 10, 1998 (the
"Confidentiality Agreement"), information provided to the other party with
respect to the business, properties and personnel of the party furnishing such
information. The Confidentiality Agreement contains terms restricting the
disclosure and use of confidential information exchanged between the two
parties in evaluating the Transactions and otherwise.
AGREEMENTS OF AUTODESK AND DISCREET AFFILIATES
Discreet Affiliate Agreements. Rule 145 promulgated under the Securities Act
regulates the disposition of securities of "affiliates" of Discreet in
connection with the Transactions. Discreet has delivered to Autodesk a letter
(the "Affiliate Letter") identifying all persons who are or may be deemed to
be, at the time of the Discreet Meeting, "affiliates" of Discreet for purposes
of Rule 145 under the Securities Act (each such person, a "Discreet
Affiliate"). Discreet has also agreed to use its best efforts to cause each
person who is identified as a Discreet Affiliate in the Affiliate Letter to
deliver to Autodesk, as promptly as possible but in no event later than the
date of this Proxy Circular, a written agreement (a "Discreet Affiliate
Agreement"). Under such Discreet Affiliate Agreements, each Discreet Affiliate
will represent that he or she has been advised that he or she may not sell,
transfer or otherwise dispose of Autodesk Common Stock or New Discreet
Exchangeable Shares issued to the Discreet Affiliate in connection with the
Transactions unless such sale, transfer or other disposition (i) has been
registered under the Securities Act, (ii) is made in compliance with the
requirements of Rule 145 under the Securities Act, or (iii) in the opinion of
counsel reasonably acceptable to Autodesk, is otherwise exempt from
registration under the Securities Act. Every Discreet Affiliate will also
agree to restrict sales of such shares prior to and following the consummation
of the Transactions to comply with the requirements of pooling-of-interests
accounting treatment.
Autodesk Affiliate Agreements. Autodesk has also agreed to use its best
efforts to cause each of its affiliates ("Autodesk Affiliates"), as promptly
as possible but in no event later than the date of this Proxy Circular, an
agreement in which each Autodesk Affiliate will agree to restrict sales of
shares of Autodesk Common Stock held by such Autodesk Affiliate prior to and
following the consummation of the Transactions to comply with the requirements
of pooling-of-interests accounting treatment.
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AUTODESK AND DISCREET VOTING AGREEMENTS
Certain directors and executive officers of Autodesk and Discreet, subject
to such directors' and executive officers' fiduciary duties and
responsibilities to their respective corporation, have agreed to vote or cause
to be voted all of their shares of Autodesk Common Stock or Discreet Common
Shares in favor of the adoption of the Autodesk Resolution and the Discreet
Resolution, respectively, and in favor of any other matter that could
reasonably be expected to facilitate the transaction contemplated by the
Acquisition Agreement and have granted proxies to certain officers of the
other corporation to vote their shares as aforesaid.
SUPPORT AGREEMENT
In connection with the Transactions, Autodesk, Dutchco and New Discreet will
enter into the Support Agreement. The Support Agreement provides that no
dividends will be declared or paid on the Autodesk Common Stock unless New
Discreet simultaneously declares and pays an economically equivalent dividend
(after appropriate adjustments for currency translations) on the New Discreet
Exchangeable Shares. The Support Agreement also provides that Autodesk and
Dutchco will do all things necessary to ensure that New Discreet will be able
to make all payments on the New Discreet Exchangeable Shares required in the
event of (a) the liquidation, dissolution or winding-up of New Discreet, (b)
the retraction of New Discreet Exchangeable Shares by a holder or (c) the
redemption of the New Discreet Exchangeable Shares by New Discreet.
The Support Agreement also provides that, without the prior approval of New
Discreet and the holders of the New Discreet Exchangeable Shares, Autodesk
will not distribute additional Autodesk Common Stock or rights to subscribe
therefor or other assets or evidences of indebtedness to all or substantially
all holders of Autodesk Common Stock nor change the Autodesk Common Stock nor
effect any reorganization or other transaction affecting the Autodesk Common
Stock, unless the same or an economically equivalent distribution on, or
change to, the New Discreet Exchangeable Shares (or in the rights of the
holders thereof) is made simultaneously. The Board of Directors of New
Discreet is conclusively empowered to determine in good faith and in its sole
discretion whether any corresponding distribution on or change to the New
Discreet Exchangeable Shares is the same as or economically equivalent to any
proposed distribution on or change to the Autodesk Common Stock.
The Support Agreement also provides that so long as there remain outstanding
any New Discreet Exchangeable Shares not owned by Autodesk or any of its
Affiliates, Autodesk will be and remain the direct or indirect beneficial
owner of all outstanding shares of New Discreet other than New Discreet
Exchangeable Shares and the New Discreet Class D Shares.
With the exception of administrative changes for the purposes of adding
covenants for the protection of the holders of the New Discreet Exchangeable
Shares, making certain necessary amendments or curing ambiguities or clerical
errors (in each case provided that the board of directors of each of Autodesk,
Dutchco and New Discreet is of the opinion that such amendments are not
prejudicial to the interests of the holders of the New Discreet Exchangeable
Shares), the Support Agreement may not be amended without the approval of the
holders of the New Discreet Exchangeable Shares.
Autodesk has agreed that it will not, and it will cause its subsidiaries and
affiliates not to, exercise any voting rights attached to New Discreet
Exchangeable Shares owned by it or any of its subsidiaries or Affiliates on
any matter considered at meetings of holders of New Discreet Exchangeable
Shares (including any approval sought from such holders in respect of matters
arising under the Support Agreement.)
VOTING AND EXCHANGE TRUST AGREEMENT
In connection with the Acquisition Agreement, Autodesk, Dutchco, New
Discreet and the Trustee will enter into the Voting and Exchange Trust
Agreement, pursuant to which the Trustee will be granted, for and on behalf
of, and for the use and benefit of, the holders of New Discreet Exchangeable
Shares (i) voting rights with respect
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to matters presented to Autodesk Stockholders and (ii) rights relating to the
exchange of New Discreet Exchangeable Shares for shares of Autodesk Common
Stock. See "--Description of New Discreet Exchangeable Shares." The Trustee
will also be granted, for and on behalf of the holders of New Discreet Units,
the right to enforce New Discreet's covenant to redeem such units following
the Amalgamation and the right to enforce Dutchco's covenant to purchase such
units following the Amalgamation for shares of Autodesk Common Stock. See "--
Transaction Mechanics."
NASDAQ NATIONAL MARKET LISTINGS
New Discreet Securities. Autodesk will make application to the Nasdaq
National Market to list the New Discreet Class B Shares, the New Discreet
Class E Shares and the New Discreet Class F Shares, subject to notice of
issuance.
There is no current intention to list the New Discreet Class B Shares, the
New Discreet Class E Shares, New Discreet Class F Shares or the New Discreet
Exchangeable Shares on any other stock exchange in Canada or the United
States.
Autodesk Common Stock. The Nasdaq National Market has indicated that it will
approve the listing of the additional shares of Autodesk Common Stock issuable
in connection with the Transactions and upon the exchange of New Discreet
Exchangeable Shares in the future, subject to notice of issuance.
There is no current intention to list the shares of Autodesk Common Stock on
any other stock exchange in Canada or the United States.
ELIGIBILITY FOR INVESTMENT IN CANADA
New Discreet Exchangeable Shares, Voting Rights and Exchange Rights. So long
as New Discreet remains a "public corporation" for purposes of the Canada Tax
Act, the New Discreet Exchangeable Shares will be a qualified investment for
trusts governed by registered retirement savings plans, registered retirement
income funds and deferred profit sharing plans. The New Discreet Exchangeable
Shares will be foreign property to such trusts and certain other tax exempt
persons. Such holders should consult their own tax advisors as to the timing
of including the cost of the New Discreet Exchangeable Shares in the holder's
cost of foreign property. The Voting Rights and the Exchange Rights will not
be qualified investments and will be foreign property under the Canadian Tax
Act. However, as indicated under "Certain Canadian Federal and United States
Federal Income Tax Considerations to Discreet Shareholders--Canadian Federal
Income Tax Considerations--Discreet Shareholders Resident in Canada--
Redemption of New Discreet Class B Shares in exchange for New Discreet
Exchangeable Shares," Autodesk and Discreet are of the view that the fair
market value of these rights is nominal.
Autodesk Common Stock. The Autodesk Common Stock will be a qualified
investment under the Canadian Tax Act for trusts governed by registered
retirement savings plans, registered retirement income funds and deferred
profit sharing plans so long as such shares remain listed on the Nasdaq
National Market or another prescribed stock exchange. The Autodesk Common
Stock will be foreign property under the Canadian Tax Act.
REGULATORY MATTERS
Under the HSR Act and the rules promulgated thereunder by the FTC, certain
acquisition transactions may not be consummated unless notice has been given
and certain information has been furnished to the Antitrust Division and to
the FTC and specified waiting period requirements have been satisfied.
Autodesk and Discreet have each filed with the Antitrust Division and the FTC
an HSR Notice with respect to the Transactions on August 26, 1998. The waiting
periods for the Transactions expired at 11:59 p.m. on the thirtieth day
following the day on which Autodesk's and Discreet's HSR Notices were accepted
by the Antitrust Division and the FTC. Expiration of the applicable waiting
periods will not preclude the FTC or the Antitrust Division from taking such
78
<PAGE>
action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the Transactions or seeking the
divestiture of Discreet by Autodesk, in whole or in part, or the divestiture
or compulsory licensing of substantial assets of Autodesk, Discreet or their
respective subsidiaries. State attorneys general and private parties may also
bring legal actions under the federal or state antitrust laws under certain
circumstances.
RESALE OF NEW DISCREET EXCHANGEABLE SHARES AND AUTODESK COMMON STOCK RECEIVED
IN CONNECTION WITH THE TRANSACTIONS
Autodesk and Discreet have applied for a ruling of certain provincial
securities regulatory authorities in Canada (the "Commissions") permitting
Canadian residents who are recipients of Autodesk Common Stock (including
those issuable upon exchange of New Discreet Exchangeable Shares), to resell
such securities without being required to file a prospectus with the
Commissions if any such first trade is executed (i) through the facilities of
a stock exchange outside of their province of residence or (ii) on the Nasdaq
National Market. The resale of the New Discreet Exchangeable Shares or the
Autodesk Common Stock within these provinces of Canada is subject to certain
restrictions. Canadian residents who are holders of such securities should
refer to applicable provisions of the securities legislation of their
respective province or consult with their legal advisor.
United States. The Autodesk Common Stock issued upon exchange of the New
Discreet Units and the New Discreet Exchangeable Shares will be registered
under the Securities Act on the Form S-4. The shares of Autodesk Common Stock
issued from time to time upon exchange of New Discreet Exchangeable Shares
will be registered on the Form S-3 pursuant to Rule 415 under the Securities
Act.
All Autodesk Common Stock received by Discreet Shareholders in connection
with the Transactions and upon exchange of the New Discreet Exchangeable
Shares will be freely transferable under the United States federal securities
laws, except as set forth below. Autodesk Common Stock received by persons who
are deemed to be "affiliates" (as such term is defined under the Securities
Act) of Discreet may be resold by such affiliates only in transactions
permitted by the resale provisions of Rule 145(d)(1), (2) or (3) promulgated
under the Securities Act (or Rule 145(d)(1) alone in the case of such persons
who become affiliates of Autodesk upon the completion of the Transactions) or
as otherwise permitted under the Securities Act. Rule 145(d)(1) generally
provides that the "affiliates" of a combining company may not sell securities
of the issuer unless pursuant to an effective registration statement or unless
pursuant to the volume, current public information, manner of sale and timing
limitations of Rule 144 (excluding the holding period requirements of Rule
144). These limitations generally require that (a) any sales made by an
affiliate in any three month period not exceed the greater of (i) 1% of the
outstanding shares of the issuer or (ii) the average weekly reported volume of
trading in such shares on all national securities exchanges and/or reported
through an automated quotation system of a registered securities association
over a four week period and (b) that such sales be made in unsolicited, open
market "brokers transactions" or in transactions directly with a market maker.
Rules 145(d)(2) and (3) generally provide that the foregoing limitations lapse
for non-affiliates of the issuer after a period of one or two years has
elapsed since the date the securities were acquired from the issuer,
respectively. Persons who may be deemed to be affiliates of an issuer
generally include individuals or entities that directly or indirectly control,
are controlled by, or are under common control with, such issuer and generally
include certain officers and directors of such issuer as well as principal
stockholders of such issuer. See "Terms of the Transactions--Agreements of
Autodesk and Discreet Affiliates." Autodesk Common Stock received by persons
who become affiliates of Autodesk upon completion of the Transactions will
also be subject to the requirements of Rule 144, which as to such stock, will
include the requirements of Rule 145(d)(1) listed above in addition to the
requirement of delivery of a Notice of Proposed Sale as set forth in paragraph
(h) of Rule 144. This Proxy Circular does not cover any resales of Autodesk
Common Stock received by Discreet affiliates in the Transactions.
79
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
give effect to the combination of Autodesk and Discreet on a pooling of
interests basis. The unaudited pro forma combined condensed balance sheet
assumes the Transactions took place on July 31, 1998 and combines Autodesk's
unaudited condensed consolidated balance sheet at that date with Discreet's
historical condensed consolidated balance sheet at June 30, 1998. The
unaudited pro forma combined condensed statements of operations assume that
the Transactions took place as of the beginning of each of the periods
presented and combine Autodesk's unaudited condensed statement of income for
the six months ended July 31, 1998 and the historical consolidated statements
of income for the three fiscal years ended January 31, 1998, 1997 and 1996 and
Discreet's unaudited condensed statement of operations for the six months
ended June 30, 1998 and the twelve months ended December 31, 1997 and the
historical condensed statements of operations for the eleven months ended June
30, 1997, and the fiscal year ended July 31, 1996, respectively. Autodesk has
not yet determined which period will be combined for inclusion in its audited
consolidated statement of income after consummation of the Transactions.
The unaudited pro forma combined condensed statements of operations are not
necessarily indicative of operating results which would have been achieved had
the Transactions been consummated as of the beginning of such periods and
should not be construed as representative of future operations.
Autodesk paid quarterly dividends of $0.06 per share with respect to fiscal
years 1996, 1997 and 1998, and in each of the first two quarters of fiscal
year 1999, and currently intends to continue paying such cash dividends on a
quarterly basis. Discreet has never paid any cash dividends on its Common
Shares. Discreet currently intends to retain any earnings for future growth
and therefore does not anticipate paying any cash dividends on its Common
Shares in the foreseeable future.
These unaudited pro forma combined condensed financial statements should be
read in conjunction with the respective audited historical consolidated
financial statements, the unaudited interim financial statements and the notes
thereto of Autodesk and Discreet which are included elsewhere in this Proxy
Circular.
80
<PAGE>
AUTODESK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JULY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUTODESK DISCREET PRO FORMA PRO FORMA
JULY 31, 1998 JUNE 30, 1998 ADJUSTMENTS COMBINED
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.. $ 43,402 $ 43,746 $ -- $ 87,148
Marketable securities...... 249,998 -- -- 249,998
Accounts receivable, net... 84,079 32,102 -- 116,181
Inventories................ 6,358 12,657 -- 19,015
Deferred income taxes...... 28,486 -- -- 28,486
Prepaid expenses and other
current assets............ 17,051 4,719 -- 21,770
-------- -------- ------- --------
Total current assets..... 429,374 93,224 -- 522,598
Computer equipment,
furniture, and leasehold
improvements, net........... 39,302 9,576 -- 48,878
Purchased technologies and
capitalized software, net... 36,241 5,042 -- 41,283
Goodwill, net................ 36,751 902 -- 37,653
Deferred income taxes........ 7,086 878 -- 7,964
Other assets................. 16,912 4,988 -- 21,900
-------- -------- ------- --------
$565,666 $114,610 $ -- 680,276
======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable........... $ 27,500 $ 23,266 $ -- $ 50,766
Accrued compensation....... 30,054 6,857 -- 36,911
Accrued income taxes....... 84,575 9,883 -- 94,458
Deferred revenues.......... 17,747 6,545 -- 24,292
Other accrued liabilities.. 54,098 6,264 13,000 73,362
-------- -------- ------- --------
Total current
liabilities............. 213,974 52,815 13,000 279,789
Deferred income taxes........ 492 2,229 -- 2,721
Other liabilities............ 2,007 -- -- 2,007
Stockholders' equity:
Common stock............... 337,284 106,841 -- 444,125
Retained earnings
(deficit)................. 30,612 (43,251) (13,000) (25,639)
Foreign currency
translation adjustment.... (18,703) (4,024) -- (22,727)
-------- -------- ------- --------
Total stockholders'
equity.................. 349,193 59,566 (13,000) 395,759
-------- -------- ------- --------
$565,666 $114,610 $ -- $680,276
======== ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
81
<PAGE>
AUTODESK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUTODESK
FISCAL DISCREET
YEAR ENDED TWELVE MONTHS
JANUARY ENDED PRO FORMA PRO FORMA
31, 1998 DECEMBER 31, 1997 ADJUSTMENTS COMBINED
---------- ----------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues................ $617,126 $137,501 $-- $754,627
Costs and expenses:
Cost of revenues.......... 70,858 58,109 -- 128,967
Marketing and sales....... 237,107 28,419 -- 265,526
Research and development.. 122,432 12,868 -- 135,300
General and
administrative........... 83,287 7,587 -- 90,874
Nonrecurring charges, net. 58,087 43,100 -- 101,187
-------- -------- ---- --------
Total costs and
expenses............... 571,771 150,083 -- 721,854
-------- -------- ---- --------
Income (loss) from
operations................. 45,355 (12,582) -- 32,773
Interest and other income,
net........................ 9,644 761 -- 10,405
-------- -------- ---- --------
Income (loss) before income
taxes...................... 54,999 (11,821) -- 43,178
Provision for income taxes.. 39,635 10,399 -- 50,034
-------- -------- ---- --------
Net income (loss)........... $ 15,364 $(22,220) $-- $ (6,856)
======== ======== ==== ========
Basic net income (loss) per
share...................... $ 0.33 $ (0.79) $-- $ (0.11)
======== ======== ==== ========
Diluted net income (loss)
per share.................. $ 0.31 $ (0.79) $-- $ (0.11)
======== ======== ==== ========
Shares used in computing
basic net income (loss) per
share...................... 46,760 28,125 61,526
======== ======== ========
Shares used in computing
diluted net income (loss)
per share.................. 49,860 28,125 61,526
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
82
<PAGE>
AUTODESK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DISCREET
AUTODESK ELEVEN MONTHS
FISCAL YEAR ENDED ENDED PRO FORMA PRO FORMA
JANUARY 31, 1997 JUNE 30, 1997 ADJUSTMENTS COMBINED
----------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues............. $496,693 $101,924 $ -- $598,617
Costs and expenses:
Cost of revenues....... 64,217 47,571 -- 111,788
Marketing and sales.... 199,939 23,206 -- 223,145
Research and
development........... 93,702 9,708 -- 103,410
General and
administrative........ 74,280 6,396 -- 80,676
Nonrecurring charges... 4,738 16,300 -- 21,038
-------- -------- ----- --------
Total costs and
expenses............ 436,876 103,181 -- 540,057
-------- -------- ----- --------
Income (loss) from
operations.............. 59,817 (1,257) -- 58,560
Interest and other
income, net............. 6,695 990 -- 7,685
-------- -------- ----- --------
Income (loss) before
income taxes............ 66,512 (267) -- 66,245
Provision for income
taxes................... 24,941 6,489 -- 31,430
-------- -------- ----- --------
Net income (loss)........ $ 41,571 $ (6,756) $ -- $ 34,815
======== ======== ===== ========
Basic net income (loss)
per share............... $ 0.91 $ (0.24) $ -- $ 0.58
======== ======== ===== ========
Diluted net income (loss)
per share............... $ 0.88 $ (0.24) $ -- $ 0.56
======== ======== ===== ========
Shares used in computing
basic net income (loss)
per share............... 45,540 27,948 60,213
======== ======== ========
Shares used in computing
diluted net income
(loss) per share........ 47,190 27,948 62,359
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
83
<PAGE>
AUTODESK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUTODESK DISCREET PRO
FISCAL YEAR ENDED FISCAL YEAR ENDED PRO FORMA FORMA
JANUARY 31, 1996 JULY 31, 1996 ADJUSTMENTS COMBINED
----------------- ----------------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues............ $534,167 $ 83,997 $-- $618,164
Costs and expenses:
Cost of revenues....... 66,812 49,333 -- 116,145
Marketing and sales.... 183,550 26,088 -- 209,638
Research and
development........... 78,678 16,902 -- 95,580
General and
administrative........ 76,100 10,582 -- 86,682
Nonrecurring charges... -- 26,006 -- 26,006
-------- -------- ---- --------
Total costs and
expenses............. 405,140 128,911 -- 534,051
-------- -------- ---- --------
Income (loss) from
operations............. 129,027 (44,914) -- 84,113
Interest and other
income, net............ 9,253 2,208 -- 11,461
-------- -------- ---- --------
Income (loss) before
income taxes........... 138,280 (42,706) -- 95,574
Provision for income
taxes.................. 50,492 1,435 -- 51,927
-------- -------- ---- --------
Net income (loss)....... $ 87,788 $(44,141) -- $ 43,647
======== ======== ==== ========
Basic net income (loss)
per share.............. $ 1.86 $ (1.64) $-- $ 0.71
======== ======== ==== ========
Diluted net income
(loss) per share....... $ 1.76 $ (1.64) -- $ 0.67
======== ======== ==== ========
Shares used in computing
basic net income (loss)
per share.............. 47,090 26,837 61,179
======== ======== ========
Shares used in computing
diluted net income
(loss) per share....... 49,800 26,837 64,963
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
84
<PAGE>
AUTODESK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUTODESK DISCREET
SIX MONTHS ENDED SIX MONTHS ENDED PRO FORMA PRO FORMA
JULY 31, 1998 JUNE 30, 1998 ADJUSTMENTS COMBINED
---------------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues............ $373,844 $75,885 $-- $449,729
Costs and expenses:
Cost of revenues...... 37,983 31,206 -- 69,189
Marketing and sales... 130,698 18,480 -- 149,178
Research and
development.......... 70,510 7,434 -- 77,944
General and
administrative....... 55,466 4,181 -- 59,647
Nonrecurring charges.. 37,692 (2,696) -- 34,996
Litigation accrual
reversal............. (18,200) -- -- (18,200)
-------- ------- ---- --------
Total costs and
expenses........... 314,149 58,605 -- 372,754
-------- ------- ---- --------
Income from operations.. 59,695 17,280 -- 76,975
Interest and other
income, net............ 8,646 1,403 -- 10,049
-------- ------- ---- --------
Income before income
taxes.................. 68,341 18,683 -- 87,024
Provision for income
taxes.................. 31,588 4,982 -- 36,570
-------- ------- ---- --------
Net income.............. $ 36,753 $13,701 $-- $ 50,454
======== ======= ==== ========
Basic net income per
share.................. $ 0.79 $ 0.47 $-- $ 0.82
======== ======= ==== ========
Diluted net income per
share.................. $ 0.74 $ 0.44 $-- $ 0.77
======== ======= ==== ========
Shares used in computing
basic net income per
share.................. 46,500 29,324 61,895
======== ======= ========
Shares used in computing
diluted net income per
share.................. 49,670 30,947 65,917
======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
85
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1)PERIODS COMBINED
The Autodesk condensed consolidated statements of income for the three years
ended January 31, 1998 have been combined with the Discreet condensed
consolidated statements of operations for the fiscal year ended July 31, 1996,
the eleven months ended June 30, 1997 and the unaudited twelve months ended
December 31, 1997, respectively. Additionally, the Autodesk unaudited
condensed consolidated statement of income for the six months ended July 31,
1998 has been combined with the Discreet unaudited condensed consolidated
statement of operations for the six months ended June 30, 1998.
Autodesk's July 31, 1998 unaudited condensed consolidated balance sheet has
been combined with Discreet's June 30, 1998 condensed consolidated balance
sheet.
Operating results for the period from January 1, 1997 to June 30, 1997 for
Discreet are duplicated in the pro forma condensed consolidated statement of
income of the Combined Company for the years ended January 31, 1998 and 1997.
Net revenues, net loss and basic and diluted net loss per share for the six
month period January 1, 1997 through June 30, 1997 for Discreet were $61.8
million, $7.9 million and $0.28, respectively.
(2)PRO FORMA BASIS OF PRESENTATION
These unaudited pro forma condensed combined financial statements reflect
the issuance of 15,549,000 shares of Autodesk Common Stock in exchange for an
aggregate of 29,618,000 of Discreet Common Shares (outstanding as of June 30,
1998) in connection with the Transactions, assuming an Exchange Ratio of 0.525
as set forth in the following table (in thousands, except Exchange Ratio):
<TABLE>
<S> <C>
Discreet Common Shares outstanding as of June 30, 1998............... 29,618
Exchange Ratio....................................................... 0.525
------
Number of shares of Autodesk Common Stock exchanged.................. 15,549
Number of shares of Autodesk Common Stock outstanding as of July 31,
1998................................................................ 46,348
------
Number of shares of Autodesk Common Stock outstanding upon
consummation of the Transactions.................................... 61,897
======
</TABLE>
The actual number of shares of Autodesk Common Stock to be issued (including
shares issuable upon exchange of New Discreet Exchangeable Shares) will be
determined at the Effective Time by multiplying the Exchange Ratio (0.525) by
the number of Discreet Common Shares outstanding on that date.
(3)TRANSACTION COSTS AND RELATED EXPENSES
Autodesk and Discreet estimate they will incur direct transaction costs of
approximately $6-$8 million and $5-$7 million, respectively, associated with
the Transactions consisting of transaction fees for investment bankers,
attorneys, accountants, financial printing and other related charges. These
nonrecurring transaction costs will be charged to operations in the quarter in
which they are incurred.
It is expected that following consummation of the Transactions, the Combined
Company will incur an additional charge to operations, currently estimated at
$6-$8 million, to reflect costs associated with integrating the two companies,
which will be expensed as incurred. There can be no assurance that the
Combined Company will not incur additional charges to reflect costs associated
with the Transactions, or that management will be successful in its efforts to
integrate the two companies.
86
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--
(CONTINUED)
The unaudited pro forma condensed combined balance sheet gives effect to
estimated direct transaction costs totaling $13 million, as if such costs and
expenses had been incurred as of July 31, 1998. These costs and expenses are
not reflected in the unaudited pro forma condensed combined statement of
income.
(4)CONFORMING ADJUSTMENTS
No adjustments have been made to conform the accounting policies of the
combined companies. The nature and extent of such adjustments, if any, will be
based upon further study and analysis and are not expected to be significant.
(5)NON-RECURRING TRANSACTIONS
(a) Nonrecurring Transactions of Autodesk
Included in Net Income for Autodesk are nonrecurring charges of $4.7
million, $58.5 million and $37.7 million recorded in fiscal years 1997 and
1998 and for the six months ended July 31, 1998, respectively. The charges for
fiscal years 1998 and 1997 consist of charges relating to the write off of
purchased in-process research and development that had not reached
technological feasibility and had no alternative future use. The nonrecurring
charges for the six months ended July 31, 1998 consist of:
(1) a write-off of purchased in-process technology that had not yet reached
technological feasibility and had no alternative future use; and
(2) expenses relating to the restructuring charges associated with the
consolidation of certain development centers, the write-off of
purchased technologies associated with these operations, staff
reductions in Asia Pacific and costs in relation to potential legal
settlements.
(b) Nonrecurring Transactions of Discreet
Included in net income for Discreet are nonrecurring charges of $43.1
million, $16.3 million and $26.0 million for the twelve month period ended
December 31, 1997, eleven month period ended June 30, 1997 and fiscal year
ended July 31, 1996, respectively. These charges consist primarily of charges
relating to the write-off of purchased in-process research and development
that had not yet reached technological feasibility and had no alternative use,
restructuring charges and legal settlements.
Included in nonrecurring charges for the six month period ended June 30,
1998 is a net credit relating to the gain on sale of an investment, costs
related to a terminated merger transaction and the reversal of restructuring
and litigation provisions which were no longer required.
87
<PAGE>
CERTAIN CANADIAN FEDERAL AND UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS TO DISCREET SHAREHOLDERS
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Stikeman, Elliott, counsel to Discreet, the following is a
fair and adequate summary of the principal Canadian federal income tax
considerations generally applicable to Discreet Shareholders who deal at arm's
length with Discreet, Autodesk, Dutchco, Autodesk Quebec and Amalgamation Sub,
and hold their Discreet Common Shares and will hold their New Discreet
Exchangeable shares and/or Autodesk Common Stock as capital property. Discreet
Common Shares will generally be considered to be capital property to a holder
unless the holder holds the shares in the course of carrying on a business or
acquired them in a transaction or transactions considered to be an adventure
in the nature of trade. Certain holders whose Discreet Common Shares might not
otherwise qualify as capital property may be able to qualify them as such by
making the irrevocable election permitted by subsection 39(4) of the Canadian
Tax Act. This summary does not apply to a Discreet Shareholder with respect to
whom Autodesk is or will be a foreign affiliate within the meaning of the
Canadian Tax Act nor does it apply to a Discreet Shareholder that is a
"financial institution" within the meaning of subsection 142.2(1) of the
Canadian Tax Act as such definition is proposed to be amended by the federal
budget dated February 24, 1998.
This summary is based upon the current provisions of the Canadian Tax Act,
the regulations thereunder and counsel's understanding of the current
published administrative practices and policies of Revenue Canada Customs,
Excise and Taxation ("Revenue Canada"). The summary also takes into account
all specific proposals to amend the Canadian Tax Act publicly announced prior
to the date hereof (the "Proposed Amendments"), and assumes that the Proposed
Amendments will be enacted substantially as proposed. This summary does not
otherwise take into account or anticipate any changes in law, whether by way
of legislative, judicial or governmental action or interpretation, nor does it
address any provincial or foreign income tax considerations.
For purposes of the Canadian Tax Act, all amounts must be expressed in
Canadian dollars, including dividends, adjusted cost base and proceeds of
disposition; amounts denominated in US dollars must be converted into Canadian
dollars based on the prevailing United States dollar exchange rate generally
at the time such amounts arise.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR DISCREET
SHAREHOLDER. DISCREET SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE INCOME TAX CONSEQUENCES TO THEM OF THE TRANSACTIONS.
DISCREET SHAREHOLDERS RESIDENT IN CANADA
The following portion of the summary is applicable to a Discreet Shareholder
who is a Canadian resident and who will continue to be a Canadian resident for
purposes of the Canadian Tax Act at all times while such Shareholder holds New
Discreet Exchangeable Shares or Autodesk Common Stock.
Amalgamation of Discreet, Autodesk Quebec and Amalgamation Sub. On the
Amalgamation, Discreet Shareholders will be deemed to dispose of their
Discreet Common Shares for proceeds of disposition equal to their adjusted
cost base to the holder and to have acquired New Discreet Class B Shares for a
cost equal to such proceeds of disposition.
Redemption of New Discreet Class B Shares in exchange for New Discreet
Exchangeable Shares
Non-Rollover Transaction. A holder of New Discreet Class B Shares whose
Class B Shares are redeemed by New Discreet in exchange for New Discreet
Exchangeable Shares, Voting Rights and Exchange Rights may, unless such holder
makes a joint election under subsection 85(1) or 85(2) of the Canadian Tax Act
as discussed
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below, be considered to have disposed of such New Discreet Class B Shares for
proceeds of disposition equal to the sum of (i) any cash received by such
holder in respect of a fractional New Discreet Exchangeable Share, (ii) the
fair market value of the New Discreet Exchangeable Shares acquired by such
holder on the redemption, and (iii) the fair market value of the Voting Rights
and Exchange Rights acquired by such holder on the redemption and, as a
result, the holder will in general realize a capital gain (or capital loss) to
the extent that such proceeds of disposition, less any reasonable costs of
disposition, exceed (or are less than) the adjusted cost base to the holder of
such New Discreet Class B Shares. The cost to a holder of New Discreet
Exchangeable Shares, Voting Rights and Exchange Rights acquired on the
redemption will be equal to the fair market value of such shares and rights at
the time of the redemption. Holders of New Discreet Class B Shares who do not
make a joint election under section 85 of the Canadian Tax Act should consult
with their own tax advisors as to the possible application of other rollover
provisions contained in the Canadian Tax Act.
Rollover Transaction. An Eligible Holder of New Discreet Class B Shares
whose Class B Shares are redeemed by New Discreet in exchange for New Discreet
Exchangeable Shares, Voting Rights and Exchange Rights may make a joint
election with New Discreet pursuant to subsection 85(1) of the Canadian Tax
Act (or, in the case of an Eligible Holder that is a partnership, pursuant to
subsection 85(2) of the Canadian Tax Act) and thereby obtain a full or partial
tax deferred "rollover" for Canadian income tax purposes, depending on the
Elected Amount and the adjusted cost base to the Eligible Holder of its New
Discreet Class B Shares at the time of the redemption. So long as, at the time
of the redemption, the adjusted cost base to the Eligible Holder of the
Eligible Holder's New Discreet Class B Shares equals or exceeds the sum of (i)
any cash received in respect of a fractional New Discreet Exchangeable Share
and (ii) the fair market value of the Voting Rights and the Exchange Rights
acquired by such holder on the redemption, the Eligible Holder may elect so as
to not realize a capital gain for the purposes of the Canadian Tax Act on the
redemption. The terms and conditions of the New Discreet Class B Shares
provide that the maximum number of New Discreet Exchangeable Shares issuable
upon redemption of the New Discreet Class B Shares is equal to 19.99% of the
Discreet Common Shares outstanding immediately prior to the Amalgamation,
multiplied by the Exchange Ratio. Accordingly, holders of New Discreet Class B
Shares may be precluded from engaging in a tax-free rollover for Canadian
federal income tax purposes in respect of some of their New Discreet Class B
Shares.
IN ORDER TO MAKE AN ELECTION, AN ELIGIBLE HOLDER MUST PROVIDE TO MONTREAL
TRUST COMPANY OF CANADA, ON BEHALF OF NEW DISCREET, AT 6TH FLOOR, 1800 MCGILL
COLLEGE AVENUE, MONTREAL, QUEBEC, H3A 3K9, TWO SIGNED COPIES OF THE NECESSARY
ELECTION FORMS ON OR BEFORE 90 DAYS AFTER THE EFFECTIVE TIME, DULY COMPLETED
WITH THE DETAILS OF THE NUMBER OF NEW DISCREET CLASS B SHARES TRANSFERRED AND
THE APPLICABLE ELECTED AMOUNT FOR THE PURPOSES OF THE ELECTION. Subject to the
election forms complying with the provisions of the Canadian Tax Act (or
applicable provincial income tax law), the forms will be returned to such
holders, signed by New Discreet, for filing by the Eligible Holder with
Revenue Canada (or the applicable provincial tax authority).
The relevant tax election form is Revenue Canada form T2057 (or, in the
event that the New Discreet Class B Shares are held as partnership property,
Revenue Canada form T2058). For Eligible Holders required to file in Quebec,
Quebec form TP-518V (or, in the event that the New Discreet Class B Shares are
held as partnership property, Quebec form TP-529V) will also be required. A
tax election package, consisting of the relevant tax election forms and a
letter of instructions, may be obtained from New Discreet. AN ELIGIBLE HOLDER
INTERESTED IN MAKING AN ELECTION SHOULD SO INDICATE ON THE LETTER OF
TRANSMITTAL AND ELECTION FORM ACCOMPANYING THIS PROXY CIRCULAR IN THE SPACE
PROVIDED THEREIN AND A TAX ELECTION PACKAGE WILL BE SENT TO SUCH HOLDER.
Where New Discreet Class B Shares are held in joint ownership and two or
more of the co-owners wish to elect, one of the co-owners designated for such
purpose should file the designation and a copy of the Revenue Canada election
form T2057 (and where applicable, the corresponding Quebec form) for each co-
owner along with a list of all co-owners electing, which list should contain
the address and social insurance number or tax account number of each co-
owner. Where the New Discreet Class B Shares are held as partnership property,
a partner designated by the partnership must file one copy of Revenue Canada
election form T2058 on behalf of all members of the partnership (and where
applicable, the corresponding form in duplicate with the Quebec
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taxation authorities). Such Revenue Canada election form T2058 (and Quebec
form, if applicable) must be accompanied by a list containing the name,
address, social insurance number or tax account number of each partner as well
as the letter signed by each partner authorizing the designated partner to
complete and file the form.
In general, where an election is made, the Elected Amount must comply with
the following rules:
1. The Elected Amount may not be less than the sum of (i) any cash received
in respect of a fractional New Discreet Exchangeable Share and (ii) the fair
market value of the Voting Rights and the Exchange Rights acquired on the
redemption.
2. The Elected Amount may not be less than the lesser of the adjusted cost
base to the Eligible Holder of the Eligible Holder's New Discreet Class B
Shares redeemed, determined immediately before the time of the redemption, and
the fair market value of the New Discreet Class B Shares at that time.
3. The Elected Amount may not exceed the fair market value of the New
Discreet Class B Shares at the time of the redemption.
Where an Eligible Holder and New Discreet make an election, the tax
treatment to the Eligible Holder generally will be as follows:
1. The Eligible Holder's New Discreet Class B Shares will be deemed to have
been disposed of for proceeds of disposition equal to the Elected Amount.
2. If the proceeds of disposition of the New Discreet Class B Shares are
equal to the aggregate of the adjusted cost base to the Eligible Holder of the
Eligible Holder's shares, determined immediately before the redemption, and
any costs of disposition, no capital gain or capital loss will be realized by
the Eligible Holder.
3. To the extent that the proceeds of disposition of the New Discreet Class
B Shares exceed (or are less than) the aggregate of the adjusted cost base
thereof to the Eligible Holder and any costs of disposition, the Eligible
Holder will in general realize a capital gain (or capital loss).
4. The cost to an Eligible Holder of the Voting Rights and the Exchange
Rights received on the redemption will be equal to the fair market value
thereof at that time and the cost to an Eligible Holder of New Discreet
Exchangeable Shares received on the redemption will be equal to the amount by
which the proceeds of disposition of the New Discreet Class B Shares redeemed
from the Eligible Holder exceeds the amount of any cash received in respect of
a fractional New Discreet Exchangeable Share and the fair market value of the
Voting Rights and the Exchange Rights received on the redemption.
New Discreet will make an election under Section 85 of the Canadian Tax Act
(and the corresponding provisions of any provincial tax legislation) at the
amount selected by the Eligible Holder subject to the limitations set out in
the Canadian Tax Act (and any applicable provincial tax legislation). New
Discreet will not be responsible for the proper completion or filing of any
election and the Eligible Holder will be solely responsible for the payment of
any late filing penalty. New Discreet agrees only to execute any properly
completed election and to forward such election by mail (within 60 days after
the receipt thereof) to the Eligible Holder. WITH THE EXCEPTION OF EXECUTION
OF THE ELECTION BY NEW DISCREET, COMPLIANCE WITH THE REQUIREMENTS FOR A VALID
ELECTION WILL BE THE SOLE RESPONSIBILITY OF THE ELIGIBLE HOLDER MAKING THE
ELECTION. ACCORDINGLY, NEW DISCREET WILL NOT BE RESPONSIBLE OR LIABLE FOR
TAXES, INTEREST, PENALTIES, DAMAGES OR EXPENSES RESULTING FROM THE FAILURE BY
ANYONE TO PROPERLY COMPLETE ANY ELECTION OR TO PROPERLY FILE IT WITHIN THE
TIME PRESCRIBED AND IN THE FORM PRESCRIBED UNDER THE CANADIAN TAX ACT (OR THE
CORRESPONDING PROVISIONS OF ANY APPLICABLE PROVINCIAL LEGISLATION).
In order for Revenue Canada (and where applicable, the Ministere du Revenu
du Quebec) to accept a tax election without a late filing penalty being paid
by an Eligible Holder, the election must be received by such revenue
authorities on or before the day that is the earliest of the days on or before
which either New Discreet or the Eligible Holder is required to file an income
tax return for the taxation year in which the redemption occurs.
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New Discreet's taxation year is scheduled to end on January 31, 1999. Thus,
where the redemption occurs in 1998, the tax election will, in the case of an
Eligible Holder who is an individual, generally have to be received by the
revenue authorities by April 30, 1999 (being generally the last day for filing
the tax returns for the 1998 taxation year of individuals). Eligible Holders
other than individuals are urged to consult their own advisers as soon as
possible respecting the deadlines applicable to their own particular
circumstances. However, regardless of such deadline, the tax election forms of
an Eligible Holder must be received by New Discreet no later than the 90th day
after the Effective Time. Because New Discreet has agreed to execute and
return the election to the Eligible Holder within 60 days of its receipt, to
avoid late filing penalties certain Eligible Holders may be required to
forward their tax election forms to New Discreet earlier than the 90th day
after the Effective Time.
Any Eligible Holder who does not ensure that New Discreet has received a
duly completed election on or before the 90th day after the Effective Time,
will not be able to benefit from the rollover provisions contained in Section
85 of the Canadian Tax Act. Accordingly, all Eligible Holders who wish to
enter into an election with New Discreet should give their immediate attention
to this matter. The instructions for requesting a tax election package are set
out in the Letter of Transmittal and Election Form. Eligible Holders are
referred to Information Circular 76-19R3 and Interpretation Bulletin IT-291R2
issued by Revenue Canada for further information respecting the election.
Eligible Holders wishing to make the election should consult their own tax
advisers. The comments herein with respect to such election are provided for
general assistance only. The law in this area is complex and contains numerous
technical requirements.
A Discreet Shareholder who receives New Discreet Class B Shares that are
redeemed in exchange for New Discreet Exchangeable Shares will be required to
determine the fair market value of the Voting Rights and Exchange Rights on a
reasonable basis for purposes of the Canadian Tax Act. Autodesk and Discreet
are of the view and have advised counsel that the Voting Rights and Exchange
Rights have only nominal value. The tax election forms will be executed by New
Discreet on the basis that the fair market value of the Voting Rights and
Exchange Rights is a nominal amount per New Discreet Exchangeable Share issued
on the redemption of the New Discreet Class B Shares. Such amount will be
provided to Eligible Holders in the letter of instructions included in the tax
election package. Such determination of value is not binding on Revenue
Canada, and counsel can express no opinion on matters of factual determination
such as this.
Exchange of New Discreet Units for Autodesk Common Stock. A holder who, in
connection with the Transactions, receives New Discreet Units upon the
conversion of New Discreet Class B Shares which Units are acquired by Dutchco
for Autodesk Common Stock will be considered to have disposed of the New
Discreet Class E Shares and New Discreet Class F Shares comprising such New
Discreet Units for total proceeds of disposition equal to the fair market
value of the Autodesk Common Stock plus any cash received by such holder in
respect of a fractional interest in Autodesk Common Stock, and will realize a
capital gain (or capital loss) equal to the amount by which such proceeds of
disposition exceed (or are less than) the aggregate adjusted cost base to the
holder of the New Discreet Class E Shares and New Discreet Class F Shares
comprising such New Discreet Units. Generally, the aggregate adjusted cost
base to the holder of New Discreet Class E Shares and New Discreet Class F
Shares comprising such New Discreet Units will be equal to the adjusted cost
base of the holder's New Discreet Class B Shares that were converted into such
New Discreet Units pursuant to the Transactions. The cost to a holder of
Autodesk Common Stock acquired on the exchange will be equal to the fair
market value of such shares at the time of the exchange, and will be averaged
with the adjusted cost base of any other Autodesk Common Stock held by the
holder as capital property.
Call Rights. Autodesk and Discreet are of the view and have advised counsel
that no amount has been allocated to the value of the Call Rights. In
particular, Autodesk and Discreet are of the view that the Liquidation Call
Right, the Redemption Call Rights and the Retraction Call Right and the call
rights contained in the New Discreet Class E Share Provisions and the New
Discreet Class F Share Provisions have nominal value. On this basis, no
Discreet Shareholder or New Discreet Shareholder should realize a capital gain
at the time that any of such rights are granted to Dutchco. Such determination
of value is not binding on Revenue Canada and counsel can express no opinion
on matters of factual determination such as this.
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Dividends on New Discreet Exchangeable Shares. In the case of a holder who
is an individual, dividends received or deemed to be received on the New
Discreet Exchangeable Shares will be included in computing the holder's
income, and will be subject to the gross-up and dividend tax credit rules
normally applicable to taxable dividends received from taxable Canadian
corporations.
The New Discreet Exchangeable Shares will be "taxable preferred shares" and
"short-term preferred shares" for purposes of the Canadian Tax Act. Dividends
received or deemed to be received on New Discreet Exchangeable Shares will not
be subject to the 10% tax under Part IV.1 of the Canadian Tax Act applicable
to certain corporations.
In the case of a holder that is a corporation, other than a "specified
financial institution" as defined in the Canadian Tax Act, dividends received
or deemed to be received on the New Discreet Exchangeable Shares will normally
be deductible in computing the holder's taxable income.
In the case of a holder that is a specified financial institution, such
dividends will be deductible in computing the holder's taxable income only if
either:
(a) the holder did not acquire the New Discreet Exchangeable Shares in
the ordinary course of its business; or
(b) at the time of the receipt of the dividend by the holder, the New
Discreet Exchangeable Shares are listed on a prescribed stock exchange in
Canada and the holder, either alone or together with persons with whom it
does not deal at arm's length, does not receive (and is not deemed to
receive) dividends in respect of more than 10% of the issued and
outstanding New Discreet Exchangeable Shares. At the present time, there is
no intention to list the New Discreet Exchangeable Shares on a prescribed
stock exchange in Canada.
A holder that is a "private corporation" (as defined in the Canadian Tax
Act) or any other corporation resident in Canada and controlled by or for the
benefit of an individual or a related group of individuals may be liable under
Part IV of the Canadian Tax Act to pay a refundable tax of 33 1/3% on
dividends received or deemed to be received on the New Discreet Exchangeable
Shares to the extent such dividends are deductible in computing the holder's
taxable income. A holder that is a Canadian-controlled private corporation may
be liable to pay an additional refundable tax of 6 2/3% on dividends or deemed
dividends that are not deductible in computing taxable income.
Dividends on Autodesk Common Stock. Dividends on Autodesk Common Stock will
be included in the recipient's income for purposes of the Canadian Tax Act.
Such dividends received by an individual holder will not be subject to the
gross-up and dividend tax credit rules in the Canadian Tax Act. A holder that
is a corporation will include such dividends in computing its income and
generally will not be entitled to deduct the amount of such dividends in
computing its taxable income. A holder that is a Canadian-controlled private
corporation may be liable to pay an additional refundable tax of 6 2/3% on
such dividends. United States non-resident withholding tax on such dividends
will be eligible for foreign tax credit or deduction treatment where
applicable under the Canadian Tax Act.
Redemption or Exchange of New Discreet Exchangeable Shares. Because of the
existence of the Retraction Call Right, a holder exercising the right of
retraction in respect of a New Discreet Exchangeable Share cannot control
whether such holder will receive a share of Autodesk Common Stock by way of
redemption of the New Discreet Exchangeable Share by New Discreet or by way of
purchase of the New Discreet Exchangeable Share by Dutchco. As described
below, the Canadian federal income tax consequences of a redemption differ
from those of a purchase. A holder who exercises the right of retraction will
be notified if the Retraction Call Right will not be exercised by Dutchco, and
if such holder does not wish to proceed, such holder may cancel the notice of
retraction and retain such holder's New Discreet Exchangeable Share.
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On the redemption (including a retraction) of a New Discreet Exchangeable
Share by New Discreet (as described under "Terms of the Transactions--
Description of New Discreet Exchangeable Shares"), the holder will be deemed
to have received a dividend equal to the amount by which the redemption
proceeds (i.e. the fair market value at the time of the redemption of the
Autodesk Common Stock received by the holder from New Discreet on the
redemption plus the Dividend Amount) exceeds the paid-up capital (for purposes
of the Canadian Tax Act) at that time of the New Discreet Exchangeable Share
so redeemed. The amount of any such deemed dividend will be subject to the
normal tax treatment accorded to dividends described above under "--Dividends
on New Discreet Exchangeable Shares." In the case of a holder that is a
corporation, the amount of any such deemed dividend, in certain circumstances,
may be required to be treated as proceeds of disposition in computing a
capital gain from the disposition of the New Discreet Exchangeable Share, and
not as a dividend.
On the redemption, the holder will also be considered to have disposed of
the New Discreet Exchangeable Share for proceeds of disposition equal to the
redemption proceeds less the amount of such deemed dividend, and will realize
a capital gain (or capital loss) equal to the amount by which such proceeds of
disposition exceed (or are less than) the adjusted cost base of such New
Discreet Exchangeable Share to the holder.
On the exchange of a New Discreet Exchangeable Share by the holder thereof
with Dutchco for a share of Autodesk Common Stock as described under "Terms of
the Transactions--Description of New Discreet Exchangeable Shares," the holder
generally will realize a capital gain (or capital loss) equal to the amount by
which the holder's proceeds of disposition (i.e., the fair market value at the
time of the exchange of the Autodesk Common Stock received by the holder plus
the Dividend Amount received by the holder as part of the exchange
consideration), net of any reasonable costs of disposition, exceed (or are
less than) the adjusted cost base of the New Discreet Exchangeable Share to
the holder.
Any capital gain or capital loss realized by the holder on the redemption
(including a retraction) or exchange of a New Discreet Exchangeable Share will
be subject to the tax treatment described below under "--Taxation of Capital
Gains and Capital Losses."
The cost of a share of Autodesk Common Stock received on the redemption
(including a retraction) or exchange of a New Discreet Exchangeable Share will
be equal to the fair market value of such share of Autodesk Common Stock at
the time of such event and will be averaged with the adjusted cost base of any
other Autodesk Common Stock held at that time by the holder as capital
property.
A disposition or deemed disposition of Autodesk Common Stock by a holder
will generally result in a capital gain (or capital loss) to the extent that
the proceeds of disposition, net of reasonable costs of disposition, exceed
(or are less than) the adjusted cost base to the holder of Autodesk Common
Stock immediately before the disposition. Any such capital gain or capital
loss will be subject to the tax treatment described below under "--Taxation of
Capital Gains and Capital Losses."
Taxation of Capital Gains and Capital Losses. In general, three-quarters of
any capital gain (the "taxable capital gain") must be included in the holder's
income for the year in which the disposition occurs and three-quarters of any
capital loss (the "allowable capital loss") may be deducted by the holder from
taxable capital gains realized in that taxation year. Any excess of allowable
capital losses over taxable capital gains of the holder for the year of
disposition may be carried back up to three taxation years or forward
indefinitely and deducted against net taxable capital gains in those other
taxation years to the extent and in the circumstances described in the
Canadian Tax Act. A holder that is a "Canadian-controlled private corporation"
(as defined in the Tax Act) may be liable to pay an additional refundable tax
of 6 2/3% on taxable capital gains.
Capital gains realized by an individual or a trust other than certain
specified trusts, may give rise to alternative minimum tax under the Canadian
Tax Act.
In the case of a holder that is a corporation, any capital loss realized on
the disposition of a New Discreet Class E Share, a New Discreet Class F Share
or a New Discreet Exchangeable Share will be reduced by the
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amount of dividends received or deemed to have been received by the holder on
such shares to the extent and under the circumstances prescribed by the
Canadian Tax Act. Similar rules may apply where a corporation is a member of a
partnership or a beneficiary of a trust that owns any such shares or where a
trust or partnership of which a corporation is a beneficiary or a member is a
member of a partnership or a beneficiary of a trust that owns any such shares.
Foreign Property. The New Discreet Exchangeable Shares and Autodesk Common
Stock will be foreign property under the Canadian Tax Act for trusts governed
by registered pension plans, registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans or for certain other
tax-exempt persons. Such holders should consult their own tax advisors as to
the timing of including the cost of the New Discreet Exchangeable Shares in
the holder's cost of foreign property. The Voting Rights and Exchange Rights
will also be foreign property under the Canadian Tax Act. However, as
indicated above, Discreet is of the view that the fair market value of these
rights is nominal.
Qualified Investments. So long as New Discreet remains a "public
corporation" for purposes of the Canadian Tax Act, the New Discreet
Exchangeable Shares will be qualified investments under the Canadian Tax Act
for trusts governed by registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans. Autodesk Common
Stock will be qualified investments under the Canadian Tax Act for such plans
so long as such shares remain listed on the Nasdaq National Market (or are
listed on certain other exchanges). The Voting Rights and Exchange Rights will
not be qualified investments under the Canadian Tax Act. However, as indicated
above, Discreet is of the view that the fair market value of these rights is
nominal.
DISCREET SHAREHOLDERS NOT RESIDENT IN CANADA
The following summary is applicable to Discreet Shareholders who, for
purposes of the Canadian Tax Act, have not been and will not be resident or
deemed to be resident in Canada at any time while they have held Discreet
Common Shares or will hold Autodesk Common Stock and to whom such shares are
not "taxable Canadian property" (as defined in the Canadian Tax Act) and who
do not use or hold and are not deemed to use or hold such shares in carrying
on a business in Canada. The Discreet Common Shares will not constitute
taxable Canadian property to a holder at any time provided the holder does not
use or hold, and is not deemed to use or hold, such shares in carrying on a
business in Canada and the holder, persons with whom the holder does not deal
at arm's length, or the holder and such persons, has not owned (or had under
option) 25% or more of the issued shares of any class or series of the capital
stock of Discreet or New Discreet at any time within the five years preceding
that time.
The New Discreet Class B Shares, New Discreet Class E Shares and the New
Discreet Class F Shares generally should not be taxable Canadian property to a
holder at any time provided such shares are listed on a prescribed stock
exchange (which includes the Nasdaq National Market).
As a result, a holder of Discreet Common Shares, New Discreet Class B shares
and New Discreet Units generally should not be subject to tax under the
Canadian Tax Act on the Amalgamation, the conversion of New Discreet Class B
Shares into New Discreet Units, the exchange of New Discreet Units with
Dutchco for Autodesk Common Stock or the redemption of New Discreet Class B
Shares for New Discreet Exchangeable Shares.
Dividends paid or deemed to be paid on the New Discreet Exchangeable Shares
to non-residents will be subject to non-resident withholding tax under the
Canadian Tax Act at the rate of 25%, subject to reduction under the provisions
of an applicable income tax treaty. Under the Canada-United States Income Tax
Convention, the rate is generally reduced to 15% in respect of dividends paid
to a person who is a beneficial owner thereof and who is a resident of the
United States for the purposes of the Convention.
A holder whose New Discreet Exchangeable Shares are redeemed by New Discreet
(including pursuant to the exercise by the holder of the retraction right)
will be deemed to receive a dividend as described above under "--Discreet
Shareholders Resident in Canada--Redemption or Exchange of New Discreet
Exchangeable Shares," which deemed dividend will be subject to withholding tax
as described in the preceding paragraph.
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A holder whose New Discreet Exchangeable Shares are redeemed by New Discreet
(including pursuant to the exercise by the holder of the retraction right) or
exchanged with Dutchco for Autodesk Common Stock may realize a capital gain as
described above under "--Discreet Shareholders Resident in Canada--Redemption
or Exchange of New Discreet Exchangeable Shares." The New Discreet
Exchangeable Shares will constitute taxable Canadian property and, therefore,
any capital gain so realized will be subject to tax under the Canadian Tax Act
subject to the availability of an exemption under the provisions of an
applicable income tax treaty.
Under the provisions of the Canada-United States Income Tax Convention,
holders resident in the United States would be exempt from Canadian tax
provided that the New Discreet Exchangeable Shares do not derive their value
principally from real property situated in Canada. However, whether or not the
holder is entitled to relief under the provisions of an applicable income tax
convention, the holder is required to provide the acquiror of the New Discreet
Exchangeable Shares (either New Discreet or Dutchco) with a certificate under
section 116 of the Canadian Tax Act on or prior to the time of the disposition
with a certificate limit at least equal to the proceeds of disposition of the
New Discreet Exchangeable Shares. If a holder does not provide the acquiror
with such a certificate at or prior to the time of disposition, the acquiror
will withhold 33 1/3% of the cost to the acquiror of the New Discreet
Exchangeable Shares and will remit such amount to the Government of Canada on
behalf of the holder.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain of the United States federal
income tax consequences of the Transactions to holders of Discreet
Shareholders ("Holders"). This summary does not discuss all US federal income
tax considerations that may be relevant to Holders in light of their
particular circumstances (including but not limited to Holders who own or have
owned 10% or more of the Discreet Common Shares, directly, indirectly or by
attribution) or to certain Holders that may be subject to special treatment
under US federal income tax laws (for example, insurance companies, regulated
investment companies, real estate investment trusts, tax-exempt entities,
financial institutions, dealers in securities, persons who hold Discreet
Common Shares as part of a straddle, hedging, constructive sale or conversion
transaction, persons whose functional currency is not the US dollar, Holders
who are subject to the alternative minimum tax provisions of the Code, and
Holders who acquired such shares through exercise of employee stock options or
otherwise as compensation for services). Furthermore, this summary does not
discuss aspects of United States federal income taxation that may be
applicable to holders of Discreet Options as a result of the Transactions, nor
does it address any aspects of foreign, state or local taxation. Furthermore,
this summary does not address certain of the United States federal income tax
consequences of the receipt of Autodesk Rights or of owning Autodesk Common
Stock or Autodesk Rights, including but not limited to the United States
federal income tax consequences of selling or otherwise disposing of shares of
Autodesk Common Stock or Autodesk Rights. This summary is based on
interpretations of current provisions of the Code, existing, temporary and
proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, all of which are subject to change, possibly with
retroactive effect. No advance income tax ruling has been sought or obtained
from the United States Internal Revenue Service ("IRS") regarding the tax
consequences of the transactions described herein and the IRS is not precluded
from successfully asserting a contrary result.
For purposes of this discussion, it is assumed that: (i) Holders hold
Discreet Common Shares as capital assets within the meaning of Section 1221 of
the Code; (ii) stock received by Discreet Holders pursuant to the Transactions
(including New Discreet Class E Shares, New Discreet Class F Shares, New
Discreet Class B Shares, Autodesk Common Stock and New Discreet Exchangeable
Shares) will be held as capital assets within the meaning of Section 1221 of
the Code; (iii) some Holders will choose to receive New Discreet Exchangeable
Shares; (iv) the exchange of New Discreet Class B Shares for New Discreet
Exchangeable Shares will occur immediately following the Effective Time; (v)
the exchange of New Discreet Units for Autodesk Common Stock will occur
immediately following the Effective Time; (vi) neither Autodesk nor Discreet
are or will be United States real property holding corporations, as defined in
the Code; (vii) the fair market value of the New Discreet Units equals the
fair market value of the Autodesk Common Stock and any cash for which they are
exchanged;
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(viii) the fair market value of the New Discreet Class B Shares equals the
fair market value of the New Discreet Exchangeable Shares and any cash for
which they are exchanged; (ix) Discreet is not and has not been, and New
Discreet will not be, a "passive foreign investment company," as defined in
Section 1297 of the Code; (x) Discreet is not and has not been, and New
Discreet will not be, a "controlled foreign corporation," as defined in
Section 957 of the Code; (xi) Discreet is not and has not been, and New
Discreet will not be, a "foreign personal holding company," as defined in
Section 552 of the Code; (xii) Discreet is not and has not been, and New
Discreet will not be, a "foreign investment company," as defined in Section
1246 of the Code; and (xiii) Discreet is not and has not been, and New
Discreet will not be, a "collapsible corporation," as defined in Section 341
of the Code.
THIS SUMMARY IS FOR GENERAL PURPOSES ONLY AND IS NOT INTENDED TO ADDRESS ALL
OF THE UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS THAT MAY APPLY TO A
PARTICULAR DISCREET SHAREHOLDER. DISCREET SHAREHOLDERS SHOULD CONSULT THEIR
TAX ADVISORS WITH RESPECT TO THE UNITED STATES FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF THE TRANSACTIONS.
US HOLDERS IN GENERAL
The following discussion summarizes certain of the US federal income tax
consequences of the Transactions to Holders who are US persons ("US Holders").
For purposes of this discussion, a "US Holder" is a beneficial owner of
Discreet Common Shares who is (a) citizen or resident of the United States,
(b) a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or any political
subdivision thereof, (c) an estate the income of which is includible in its
gross income for US federal income tax purposes without regard to its source,
or (d) a trust if a US court is able to exercise primary supervision over the
administration of the trust and one or more US persons have the authority to
control all the substantial decisions of the trust.
The exchange of Discreet Common Shares pursuant to the Transactions
generally should constitute a taxable transaction for United States federal
income tax purposes. As a result, US Holders generally should recognize
income, gain or loss as described below.
Discreet Shareholders Who Receive New Discreet Units. Discreet Shareholders
who do not choose to receive New Discreet Exchangeable Shares will receive one
New Discreet Unit for each Discreet Common Share. Immediately thereafter, each
New Discreet Unit owned by a Discreet Shareholder will be exchanged for a
number of shares of Autodesk Common Stock determined according to the Exchange
Ratio; cash will be paid in lieu of fractional shares. A US Holder who
receives New Discreet Units and exchanges such units for shares of Autodesk
Common Stock generally should recognize taxable gain or loss in an amount
equal to the difference between (i) the sum of the fair market value of
Autodesk Common Stock received and the amount of cash received in lieu of
fractional shares of Autodesk Common Stock, and (ii) the adjusted tax basis of
the Discreet Common Shares surrendered in the exchange. Such gain or loss will
be capital gain or loss and will be long-term capital gain or loss if the
Discreet Common Shares exchanged have been held for more than one year at the
time of the Transactions.
A US Holder who receives Autodesk Common Stock in exchange for New Discreet
Units will take a tax basis in such Autodesk Common Stock equal to the fair
market value of the Autodesk Common Stock at the Effective Time. The holding
period of the Autodesk Common Stock will begin on the day after the time of
the Transactions.
Cash distributions on the shares of Autodesk Common Stock paid out of
current or accumulated earnings and profits as determined under United States
federal income tax principles will be subject to tax as ordinary dividend
income. Cash distributions paid by Autodesk in excess of its current or
accumulated earnings and profits will be treated as a tax-free return of
capital to the extent of the US Holder's adjusted tax basis in the US Holder's
shares of Autodesk Common Stock, and thereafter as gain from the sale or
exchange of a capital asset.
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Discreet Shareholders Who Receive New Discreet Exchangeable Shares. There
may be Canadian federal income tax disadvantages for a US Holder who chooses
to receive New Discreet Exchangeable Shares in that Canadian withholding tax
will be imposed at the rate of 15% on dividends distributed to US Holders with
respect to the New Discreet Exchangeable Shares. In addition, as more fully
described above, a U.S. Holder may be subject to Canadian withholding tax on
the redemption of such New Discreet Exchangeable Shares by New Discreet. See
"Certain Canadian Federal and United States Federal Income Tax Consideration
to Discreet Shareholders--Canadian Federal Income Tax Considerations" and "--
Discreet Shareholders Not Resident in Canada." IT IS STRONGLY RECOMMENDED THAT
US HOLDERS WHO OWN DISCREET COMMON SHARES DO NOT ELECT TO RECEIVE NEW DISCREET
EXCHANGEABLE SHARES SINCE THE OWNERSHIP AND DISPOSITION OF SUCH SHARES MAY
HAVE CERTAIN ADVERSE TAX CONSEQUENCES. Although the issue is not free from
doubt, if a US Holder chooses to receive New Discreet Exchangeable Shares, the
likely United States federal income tax consequences should be as described
below.
Receipt of New Discreet Exchangeable Shares. US Holders who wish to receive
New Discreet Exchangeable Shares will elect to do so with respect to their New
Discreet Class B Shares. Immediately thereafter, each Electing Discreet Class
B Share owned by a Discreet Shareholder will be exchanged for a number of New
Discreet Exchangeable Shares determined according to the Exchange Ratio; cash
will be paid in lieu of fractional shares. Although the issue cannot be free
from doubt, a US Holder who receives New Discreet Class B Shares and exchanges
such shares for New Discreet Exchangeable Shares should recognize gain or loss
in an amount equal to the difference between (i) the sum of the fair market
value of New Discreet Exchangeable Shares received and the amount of cash
received in lieu of fractional New Discreet Exchangeable Shares, and (ii) the
adjusted tax basis of Discreet Common Shares surrendered in the exchange. Such
gain or loss should be capital gain or loss and should be long-term capital
gain or loss if the Discreet Common Shares exchanged are held as capital
assets and have been held for more than one year at the time of the
Transactions.
US Holders who choose to receive New Discreet Exchangeable Shares will be
entitled to the benefit of certain rights granted pursuant to the provisions
of the Transactions (including, but not limited to, rights under the Voting
and Exchange Trust Agreement). Autodesk and Discreet believe that the value of
such rights is nominal. If such rights are determined to have value in excess
of a nominal value, such value will constitute additional consideration that a
US Holder will be required to take into account in determining gain or loss
upon the receipt of New Discreet Class B Shares and the exchange of such
shares into New Discreet Exchangeable Shares.
Although the issue is not free from doubt, a US Holder who receives New
Discreet Exchangeable Shares should take as its tax basis in such shares the
fair market value of the New Discreet Exchangeable Shares at the time of the
Transactions. The holding period of the New Discreet Exchangeable Shares
should begin on the day after the time of the Transactions.
Distributions on the New Discreet Exchangeable Shares. A US Holder of New
Discreet Exchangeable Shares generally will be required to include in gross
income as ordinary dividend income the amount of distributions received on the
New Discreet Exchangeable Shares to the extent paid out of current or
accumulated earnings and profits of New Discreet, as determined under United
States federal income tax principles. Distributions in excess of current or
accumulated earnings and profits will be treated as a tax-free return of
capital to the extent of the US Holder's adjusted tax basis, and thereafter as
gain from the sale or exchange of a capital asset. If a US Holder receives a
dividend in Canadian dollars, the amount of the dividend for US federal income
tax purposes will be the US dollar value of the dividend (determined at the
spot rate on the date of such payment) regardless of whether the payment is
later converted into US dollars. In such case, US Holders may recognize
ordinary income or loss as a result of currency fluctuations between the date
on which the dividend is paid and the date the dividend amount is converted
into US dollars. Such dividends generally will be treated as foreign source
dividend income and generally will be either "passive" or "financial services"
income, depending on the US Holder's particular circumstances. Under the
current United States-Canada Income Tax Convention, such distributions
generally will be subject to a Canadian withholding tax at a rate of 15%.
Subject to certain limitations of United States federal income tax law, a US
Holder will be entitled to claim either a credit against United States federal
income tax liability or a deduction in computing United States taxable income
for Canadian
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taxes withheld from distributions with respect to the New Discreet
Exchangeable Shares. Dividends on New Discreet Exchangeable Shares generally
will not be eligible for the dividends received deduction allowed to
corporations.
Exchange or Redemption of the New Discreet Exchangeable Shares. Although the
issue is not free from doubt, upon the disposition by a US Holder of New
Discreet Exchangeable Shares pursuant to the exercise of rights described
under "Terms of the Transactions--Description of New Discreet Exchangeable
Shares" (including the exercise of rights granted to New Discreet and
Dutchco), such US Holder generally should recognize taxable gain or loss in an
amount equal to the difference between (i) the sum of the fair market value of
Autodesk Common Stock received and cash received, if any, and (ii) such US
Holder's adjusted tax basis in the New Discreet Exchangeable Shares
surrendered. Any such gain or loss should be long-term capital gain or loss if
the holding period of the New Discreet Exchangeable Shares is more than one
year at the date such shares are exchanged for shares of Autodesk Common
Stock. The US Holder should take as its tax basis in the Autodesk Common Stock
the fair market value of the Autodesk Common Stock at the time of the
exchange. The holding period for the Autodesk Common Stock received should
begin on the day after the date on which the New Discreet Exchangeable Shares
are exchanged for Autodesk Common Stock.
If the disposition of the New Discreet Exchangeable Shares results in a
deemed dividend for Canadian tax purposes, such deemed dividend generally will
be subject to a Canadian withholding tax at the current United States-Canada
Income Tax Convention rate of 15%. The amount of the deemed dividend will be
treated as United States source gain to a US Holder. A US Holder may be
entitled to claim a credit against United States federal income tax liability
for Canadian taxes withheld on the deemed dividend. The use of such a credit
may be limited or precluded entirely if the US Holder has no income which is
treated as non-US source income for United States federal income tax purposes.
In lieu of claiming a tax credit, a US Holder may claim a deduction for
Canadian taxes paid in computing United States taxable income.
Holders who are considering making an election to receive New Discreet
Exchangeable Shares are urged to take into account all applicable tax
considerations prior to making such election.
NON-US HOLDERS
The following summary is applicable to holders of Discreet Common Shares who
are not US Holders ("Non-US Holders").
A Non-US Holder of Discreet Common Shares generally will not be subject to
United States federal income tax on gain realized on the receipt of the New
Discreet Units, the New Discreet Class B Shares, the New Discreet Exchangeable
Shares, the Autodesk Common Stock or upon a subsequent exchange (or sale) of
the New Discreet Exchangeable Shares or the Autodesk Common Stock, unless such
gain is effectively connected with a United States trade or business; or, in
the case of gain recognized by an individual Non-US Holder, such individual is
present in the United States for 183 days or more during the taxable year and
certain other conditions are satisfied.
Dividends received by a Non-US Holder with respect to Autodesk Common Stock
generally will be subject to United States withholding tax at the rate of 30%,
which rate may be subject to reduction by an applicable income tax treaty in
effect between the United States and the Non-US Holder's country of residence.
Under the Canada-United States Income Tax Convention, the rate of withholding
tax is generally reduced to 15% in respect of dividends paid to a person who
is the beneficial owner thereof and who is a resident of Canada for the
purposes of the Convention.
Provided that the New Discreet Exchangeable Shares are not treated as
Autodesk Common Stock for US federal income tax purposes, dividends received
by a Non-US Holder with respect to the New Discreet Exchangeable Shares should
not be subject to United States withholding tax and Discreet and Autodesk do
not intend that New Discreet will withhold any United States withholding tax
from such dividends. The possibility
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remains, however, that the IRS may assert that United States withholding tax
is payable with respect to dividends paid on New Discreet Exchangeable Shares
to Non-US Holders, in which case Non-US Holders of New Discreet Exchangeable
Shares could be subject to United States withholding tax at a rate of 30%,
subject to reduction by an applicable income tax treaty.
BACKUP WITHHOLDING
United States federal backup withholding may apply to amounts received by a
Holder in the Amalgamation, amounts received by a Holder on the disposition of
New Discreet Exchangeable Shares or shares of Autodesk Common Stock, or
dividends paid to a Holder on New Discreet Exchangeable Shares (if the New
Discreet Exchangeable Shares are treated as Autodesk Common Stock for United
States federal income tax purposes) or the shares of Autodesk Common Stock.
Backup withholding will apply to a US Holder only if the US Holder fails to
furnish its taxpayer identification number or otherwise fails to comply with
the applicable requirements of the backup withholding rules. Backup
withholding will apply to a Non-US Holder only if the Non-US Holder fails to
certify that it is not subject to backup withholding or otherwise fails to
comply with the applicable requirements of the backup withholding rules. Any
amounts withheld under these backup withholding rules will be creditable
against the Holder's United States federal income tax liability.
In 1997, the IRS issued final regulations relating to withholding,
information reporting and backup withholding that unify certain certification
procedures and forms and clarify reliance standards (the "Final Regulations").
The Final Regulations will be effective with respect to payments made after
December 31, 1999. The Final Regulations eliminate the general prior legal
presumption that dividends paid to an address in a foreign country are paid to
a resident of that country. In addition, the Final Regulations impose certain
certification and documentation requirements on Non-US Holders claiming the
benefit of a reduced withholding tax rate with respect to dividends under a
tax treaty or otherwise claiming a reduction of, or exemption from, the
withholding obligations described above. Non-US Holders are urged to consult
their own tax advisors as to the effect, if any, of the Final Regulations on
their ownership and disposition of New Discreet Exchangeable Shares and
Autodesk Common Stock.
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AUTODESK
BUSINESS
BACKGROUND
Autodesk was incorporated in California in April 1982 and was reincorporated
in Delaware in May 1994. Its principal executive offices are located at 111
McInnis Parkway, San Rafael, California 94903 and its telephone number is
(415) 507-5000. Autodesk's two-dimensional ("2D") and three-dimensional ("3D")
products are used across industries and in the home for architectural design,
mechanical design, spatial data management and mapping, animation, and
visualization applications. Autodesk's flagship product, AutoCAD, is one of
the world's leading computer-aided design ("CAD") tools, with an installed
base of more than 2 million units worldwide. Autodesk's software products are
sold worldwide, primarily through a network of dealers and distributors.
In February 1995, Autodesk realigned its internal marketing and development
organizations around key market groups that most closely match Autodesk's
customer base. During fiscal year 1998, Autodesk defined a new market group,
the Personal Solutions Group ("PSG"), whose products are targeted to
individual users as well as professionals. Each market group incorporates
product development, quality assurance, technical publications, and product
industry marketing. Autodesk's market groups are discussed below.
Architecture, Engineering, and Construction ("AEC"). The architecture,
engineering, construction, and facilities management industries utilize
software from Autodesk and third-party developers to manage every phase of a
building's life cycle--from conceptual design through construction,
maintenance, and renovation. During fiscal year 1998, Autodesk expanded its
product offerings for the AEC Market Group by acquiring Softdesk, Inc. in
March 1997. AEC products include AutoCAD + S8 Architectural Suite, Softdesk 8
AEC Tools, and AEC Professional Suite.
Mechanical Computer-Aided Design ("MCAD"). Autodesk's Mechanical CAD Market
Group is dedicated to providing mechanical engineers, designers, and drafters
with advanced, value-based software solutions that are designed to solve their
professional design challenges. Autodesk's premier MCAD product is Mechanical
Desktop. In May 1998, Autodesk expanded its mechanical CAD products through
the purchase of various software technologies and applications from Genius CAD
Software GmbH, a German limited liability company.
Geographic Information Systems ("GIS"). Autodesk's GIS Market Group strategy
is to provide easy-to-use mapping and GIS technology to help businesses and
governments manage their assets and infrastructure. The GIS Market Group is
assisting automated mapping/facilities managers, as well as GIS and CAD users,
to share mapping, GIS, and associated information in a corporate environment.
Autodesk's current GIS products include AutoCAD Map, Autodesk MapGuide, and
Autodesk World.
Personal Solutions Group ("PSG"). The PSG Market Group develops easy-to-use,
affordable tools for professionals, occasional users, or consumers who design,
draft, and diagram, thus expanding Autodesk's traditional customer base of
architects and engineers. PSG products include AutoCAD LT and AutoSketch.
Kinetix. The Kinetix division of Autodesk is devoted to bringing powerful 3D
content-creation software to computer-industry professionals focused on two
markets: entertainment (film, broadcast video, and interactive games) and
design conceptualization and visualization. Kinetix provides two core platform
products--3D Studio MAX and 3D Studio VIZ, that specifically focus on these
markets.
PRODUCTS
Autodesk has aligned its market groups into three segments: the Design
Solutions segment (which includes the AEC, MCAD, and GIS market groups, as
well as AutoCAD products), the Personal Solutions segment, and Kinetix (the
multimedia segment). Autodesk's Design Solutions segment includes the
following products:
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AutoCAD
AutoCAD software is a general-purpose CAD tool used independently and in
conjunction with specific applications designed to work with AutoCAD in fields
ranging from architecture and mechanical design to plant design and mapping.
Professionals utilize AutoCAD for design, modeling, drafting, mapping,
rendering, and management tasks. AutoCAD runs on Windows 95, Windows 98, and
Windows 3.1. Because AutoCAD software's DWG files are portable across many
platforms and operating systems, it is a viable solution for customers with
multiple computer systems who need to exchange drawing files in such an
environment.
The most current version, AutoCAD Release 14, was introduced in May 1997.
Built for speed and efficiency, AutoCAD Release 14 includes enhancements in
areas that most influence productivity, including: precision drawing tools
such as AutoSnap, data-sharing features like raster image and reference file
clipping, photorealistic rendering, solid fills, and TrueType fonts.
AutoCAD software's open-system architecture allows users to adapt AutoCAD to
unique professional requirements with any of more than 5,000 independently
developed add-on applications. Many of these applications are based on
ObjectARX technology, a new generation of C++-based application programming
interfaces ("APIs"). ObjectARX-based applications utilize AutoCAD software's
object-oriented capabilities.
Sales of AutoCAD and AutoCAD upgrades accounted for approximately 70 percent
of Autodesk's revenues in fiscal years 1998 and 1997 as compared to
approximately 80 percent in fiscal year 1996. During fiscal year 1998,
approximately 244,000 new AutoCAD licenses were added worldwide, compared to
207,000 licenses and 233,000 licenses added during fiscal years 1997 and 1996,
respectively.
AutoCAD OEM
AutoCAD OEM ("Original Equipment Manufacturer") for Windows-based operating
systems is a selectively licensed CAD engine offering a complete application-
development environment for creating and delivering targeted or niche
solutions with scaled feature sets. It is for developers, system integrators,
and commercial software developers who require an embeddable CAD system which
gives them the ability to scale and control the application feature set.
AutoCAD OEM provides developers with a complete toolkit of AutoCAD features
and APIs including ObjectARX capabilities, a full suite of drawing and editing
functions as well as AutoLISP, a LISP API, and the AutoCAD Development System,
a C programming interface. These capabilities enable development of new
products for new markets untapped by traditional CAD products and solutions.
Mechanical Desktop
Mechanical Desktop software is an integrated software application that
unites advanced 2D and 3D mechanical design capabilities for PCs. The
Mechanical Desktop contains integrated modules for fully parametric feature-
based solid modeling, surface modeling, and assembly modeling; 2D
design/drafting and bidirectional associative drafting; as well as a built-in
Autodesk IGES Translator, which enables users to accurately exchange IGES
(Initial Graphics Exchange Specification) data with other systems. Mechanical
Desktop Release 2.0, which was released in December 1997, includes an Express
User Interface, Edit-in-Place assembly functionality, and improved integration
with Autodesk's AutoCAD Release 14 for mechanical drafting, and 3D Studio MAX
for 3D photorealistic rendering and animation. Advanced ordinate dimensioning,
editing and display of crosshatch patterns, surface scaling, section view, and
associative bill-of-materials generation are among the features included in
the latest release of Mechanical Desktop software.
AutoCAD Map
AutoCAD Map software is the first AutoCAD-based automated-mapping product
for professional planners, utility managers, and technicians who create and
maintain their own maps and use their data for engineering-
based analysis and planning. Built with AutoCAD software, AutoCAD Map focuses
on five key areas: digital map creation, analysis, maintenance of up-to-date
maps, data exchange, and publishing. The API in AutoCAD
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Map lets developers build vertical applications for industries such as
telecommunications, utilities, oil and gas, state and local government, and
natural resource and environmental engineering. AutoCAD Map also contains
ObjectARX capabilities.
Autodesk MapGuide
MapGuide is a Web-based GIS technology that is designed to allow corporate
customers and developers to use the Internet and business intranets to rapidly
deploy decision support systems with a geographic component. Suited for a wide
range of users--from GIS professionals to the casual computer user--MapGuide
software enables users to access and query digital maps and permits users to
display and analyze geographic data for applications that include tracking
customers, allocating resources, and managing facilities infrastructure.
Autodesk World
Autodesk World allows for the management of geographic-based data. It offers
capture, edit, analysis, integration, and presentation functionality for
spatial data, including raster, vector (CAD and GIS), and attributes. It also
includes Object Linking and Embedding ("OLE"), which allows users to link
drawings to other Windows applications such as Microsoft Word or Excel,
application programming interfaces, and an integrated Visual Basic for
Applications 5.0 scripting environment for easy customization and application
development.
AEC Professional Suite
Autodesk AEC Professional Suite 2.0, introduced in June 1997, is an
integrated set of design tools created for professionals in the fields of
Architecture, Engineering, Construction, Facility Management, and Plant Design
and Management. It includes AutoCAD Release 14 software, specialized AEC
AutoCAD enhancements, Architectural Symbols, Autodesk WalkThrough,
DesignBlocks, and Autodesk View. The AEC Professional Suite Release 2.0 serves
a variety of needs of the AEC professional via improved customization and
ease-of-use, integration of visualization tools into the design process and
CAD applications, access to standard manufacturer data, and a lower cost for
the overall design solution. Enhancements to the Suite enable the user to
detect and mend lines and arcs that are coincident or overlapping, create and
control perspective view with Camera Object, and provide access to more than
300 ready-made textures from multiple AEC-specific materials libraries.
Softdesk 8 Civil/ Survey Special Edition
The Softdesk 8 Civil/Survey Special Edition is a focused set of programs for
professionals in the Civil Engineering, Land Planning, and Surveying
industries. These products extend AutoCAD Release 14 or AutoCAD Map 2.0 by
addressing common surveying requirements such as Surface Modeling and
Contouring, Point Manipulation, Data Input and Analysis, Base Map Creation,
and the incorporation of raster imagery. The solution also offers design and
analysis capabilities for site and transportation, storm and sanitary drain
systems, grading, parking, and landscape design.
AutoCAD + S8 Architectural Suite
The AutoCAD + S8 Architectural Suite includes other AEC products such as S8
Architectural Professional Special Edition, AEC Tools, and Auto-Architect.
Auto-Architect includes landscape tools and utilities to generate structural
foundation/framing plans and elevations in addition to space planning, walls,
doors and windows, roofs and stairs. In this suite, AEC Tools is used to
manage project and office standards and to create and manage details and other
productive utilities.
Autodesk's Personal Solutions segment includes the following products:
AutoCAD LT
AutoCAD LT 97 is a low-cost 2D CAD application intended for CAD managers,
designers, and engineers who need a powerful, stand-alone CAD tool, but who do
not require the advanced feature set in AutoCAD.
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AutoCAD LT 97 software contains an extensive 2D drafting toolset as well as 3D
lines and polylines with quick shading and hidden-line removal. Other features
include a Start-Up dialog box and Drawing Set-Up wizards to help the user
create or open a drawing quickly; real-time pan and zoom; a Drag-and-Drop
Content Explorer featuring hundreds of industry-standard symbols; and
Integrated Internet Tools to open or save drawings directly to the Internet.
AutoCAD LT operates in the Windows environment with pull-down menus,
customizable toolbar, toolbox, menus, and scripts, as well as dialog boxes and
icons. It supports the Windows Clipboard, as well as OLE. AutoCAD LT 97 is
fully compatible with Windows 95 and Windows NT 4.0 and has built-in Microsoft
Office 97 compatibility.
AutoSketch
AutoSketch Release 95 is a precision drawing program that can be used for
creating technical diagrams, architectural layouts, electrical drawings,
mechanical plans, information graphics, and presentations. The Application
Wizards customize their interfaces based on the type of drawing to allow for
the creation of drawings, diagrams, and sketches.
The principal product offerings from the Kinetix segment are discussed
below:
3D Studio MAX
3D Studio MAX R2 software, which began shipping in the third quarter of
fiscal year 1998, is a 3D modeling and animation software package specifically
written to take advantage of advanced features offered by the Windows NT
operating system. With a real-time interface, multiple-processor support, and
3D graphics acceleration capabilities, 3D Studio MAX delivers workstation-
class performance and functionality to PCs.
The intuitive interface eliminates many of the commonly accepted boundaries
between modeling, rendering, and animation, and offers instant feedback; users
can see the results of their actions in real time, as they are applied. Shaded
views with real-time feedback allows users to visualize natural, real-world
environments in which they can directly manipulate objects, regardless of
scene complexity. Because 3D Studio MAX software maintains a data history of
geometry creation and modification, users can return to and change any step,
at any time, without having to redo prior work. 3D Studio MAX is also the only
environment that can run Character Studio, a powerful character-animation and
skinning plug-in software product offered by Kinetix.
3D Studio VIZ
3D Studio VIZ, introduced in May 1997, is a design tool that enables users
to express ideas on-screen, in full 3D. Architectural models, engineering
samples, and construction-site previews all become a quick reality with this
new Kinetix software tool. Real-world feedback can be incorporated into the
design, and users can explore more options with their customers more cost-
effectively. 3D Studio VIZ and AutoCAD files are easily exchanged and allow
for the development of advanced engineering or architectural visualizations.
3D Studio VIZ animates, so clients can take a simulated walkthrough of a site,
understand a structure, or view a part as it will operate in the final
assembly. The VIZ user interface employs CAD-like creation tools including
fillets, trims, and chamfers.
PRODUCT DEVELOPMENT AND ENHANCEMENT
The computer industry is characterized by rapid technological change in
computer hardware, operating systems, and software. To keep pace with this
change, Autodesk maintains an aggressive program of new product development.
Autodesk dedicates considerable resources to research and development to
further enhance its existing products and to create new products and
technologies. During fiscal years 1998, 1997, and 1996, Autodesk incurred
$122,432,000, $93,702,000, and $78,678,000, respectively, for software design,
development, product localization, and project-management activities
(excluding capitalized software development costs of
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approximately $2,200,000 in fiscal year 1998; no software development costs
were capitalized during fiscal years 1997 and 1996).
The majority of Autodesk's basic research and product development has been
performed in the United States, while translation and localization of foreign-
market versions are generally performed by development teams or contractors in
the local markets. Autodesk's product-related functions in Europe, including
software development, localization, quality assurance, and technical
publications, are centralized in Neuchatel, Switzerland. Production in Europe
is centralized in Ireland, and production in Asia Pacific is centralized in
Singapore.
Autodesk intends to continue recruiting and hiring experienced software
developers and to consider the licensing and acquisition of complementary
software technologies and businesses. In addition, Autodesk will continue to
actively collaborate with and support independent software developers who
offer products that enhance and complement AutoCAD software and other products
offered by Autodesk.
The software products offered by Autodesk are internally complex. Despite
extensive testing and quality control, these products may contain errors or
defects ("bugs"), especially when first introduced. In fiscal year 1996,
Autodesk experienced quality and performance issues associated with AutoCAD
Release 13, including issues related to compatibility with certain hardware
platforms and peripheral equipment, interoperability problems with products
designed to work in conjunction with AutoCAD Release 13, and other issues
associated with the software's object-oriented design. These factors resulted
in a high rate of product returns in fiscal year 1996. There can be no
assurance that defects or errors will not occur in future releases of AutoCAD
or other software products offered by Autodesk. Such defects or errors could
result in corrective releases to Autodesk's software products, damage to
Autodesk's reputation, loss of revenues, an increase in product returns, or
lack of market acceptance of its products, any of which could have a material
and adverse effect on Autodesk's business and consolidated results of
operations.
Autodesk believes that its future results will depend largely upon its
ability to offer products that compete favorably with respect to price,
reliability, performance, range of useful features, continuing product
enhancements, reputation, and training. Delays or difficulties may result in
the delay or cancellation of planned development projects, and could have a
material and adverse effect on Autodesk's business and consolidated results of
operations. Further, increased competition in the market for design, mapping,
or multimedia software products could also have a negative impact on
Autodesk's business and consolidated results of operations. More specifically,
gross margins may be adversely affected if sales of low-end CAD products,
which historically have had lower margins, grow at a faster rate than
Autodesk's higher-margin products.
Certain of Autodesk's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. Autodesk generally either owns or licenses the
software developed by third parties. Because talented development personnel
are in high demand, there can be no assurance that independent developers,
including those who have developed products for Autodesk in the past, will be
able to provide development support to Autodesk in the future. Similarly,
there can be no assurance that Autodesk will be able to obtain and renew
existing license agreements on favorable terms, if at all, which could have a
material and adverse effect on Autodesk's business and consolidated results of
operations.
Autodesk's business strategy has historically depended in large part on its
relationships with third-party developers, who provide products that expand
the functionality of Autodesk's design software. There can be no assurance
that certain developers will not elect to support other products or otherwise
experience disruption in product development and delivery cycles. Such
disruption in particular markets could negatively impact these third-party
developers and end users, which could have a material adverse effect on
Autodesk's business and
consolidated results of operations. Further, increased merger and acquisition
activity currently experienced in the technology industry could affect
relationships with other third-party developers, and thus adversely affect
operating results.
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Additionally, there can be no assurance that Autodesk's development efforts
will result in the timely introduction of new products or that such new
products will be commercially successful. Failure to successfully develop new
products, delays in the introduction of these new products, or lower-than-
anticipated demand for these products could have a material and adverse effect
on Autodesk's business and consolidated results of operations.
MARKETING AND SALES
Autodesk's customer-related operations are divided into three geographic
regions: the Americas, Europe, and Asia Pacific. Autodesk's products are
marketed worldwide through a network of domestic and foreign offices. Autodesk
sells its software products primarily through distributors and dealers (value-
added resellers or "VARs") who distribute Autodesk's products to end-users in
more than 150 countries. VARs, including both independent owners and computer
store franchisees, are supported by Autodesk and its subsidiaries through
technical training, periodic publications, and Autodesk's Home Page on the
Internet.
In addition, Autodesk works directly with dealer and distributor sales
organizations, computer manufacturers, other software developers, and
peripherals manufacturers through cooperative advertising, promotions, and
trade-show presentations. Autodesk also holds annual "Expos" throughout the
world. These dedicated trade shows, incorporated within major industry trade
shows, highlight Autodesk's products, as well as a number of third-party
products. Autodesk also employs mass-marketing techniques such as direct
mailings and advertising in business and trade journals. Further, Autodesk
supports user groups dedicated to the exchange of information related to the
use of Autodesk's products.
Domestically, Autodesk distributes its products primarily through its
authorized dealer network. Other domestic sales are made principally to large
corporations, governmental agencies, educational institutions, and, for
certain low-end CAD products, to end users. Substantially all of Autodesk's
international sales are made to dealers and distributors, which are supported
by Autodesk's foreign subsidiaries and international sales organizations.
Certain international sales result from direct exports from the United States.
Fluctuations in foreign exchange rates, specifically the stronger value of the
dollar, relative to certain international currencies, negatively impacted
foreign revenues during fiscal year 1998. These foreign currency fluctuations,
as well as any slowdowns in any of Autodesk's geographical markets, including
the recent economic instability experienced in certain Asia Pacific countries,
could have a material adverse effect on Autodesk's business and future
consolidated results of operations.
Autodesk's ability to effectively distribute its products depends in part
upon the financial and business condition of its VAR network. Although
Autodesk has not to date experienced any material problems with its VAR
network, computer software dealers and distributors are typically not highly
capitalized, have tended to experience difficulties during times of economic
contraction and during periods of technology-market price pressure, and may do
so in the future. While no single customer accounted for more than 10 percent
of Autodesk's consolidated revenues in fiscal years 1998, 1997, or 1996, the
loss of, or a significant reduction in, business with any one of Autodesk's
major international distributors or large U.S. resellers could have a material
adverse effect on Autodesk's business and consolidated results of operations.
Autodesk intends to continue to make its products available in foreign
languages and expects that foreign sales will continue to contribute a
significant portion of its consolidated revenues. Foreign revenues, including
export sales from the United States to foreign customers, accounted for
approximately 58 percent, 65 percent, and 64 percent of revenues in fiscal
years 1998, 1997, and 1996, respectively.
CUSTOMER AND DEALER SUPPORT
During fiscal year 1998, Autodesk realigned its customer and dealer support
network around its market groups to better provide services related to
specific industry segments. Autodesk requires each authorized dealer and
distributor to provide a professional level of technical support to customers
by employing full-time, trained,
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technical-support personnel. Autodesk supports its dealers and distributors
through technical product training, sales training classes, and direct
telephone support. During fiscal year 1998, Autodesk began to offer more end-
user support in addition to services which had historically been offered such
as the online support available through the Autodesk Home Page on the
Internet. These new support services include the Web-Based Learning program, a
fee-based distance learning program that provides lessons and tutorials that
highlight critical components of Autodesk's products, and the Multimedia
Learning Assistance program, which provides lessons related to design projects
through an interactive multimedia tool.
Autodesk offers phone support through authorized Autodesk dealers under two
programs: the Autodesk Premier Support Program ("APSP") and the Autodesk
Systems Center Program ("ASCP"). Under the APSP, participating dealers act as
dedicated account managers to Autodesk customers that have technical questions
related to a specific vertical industry. The ASCP requires dealers to provide
superior industry-specific application training to end users of Autodesk's
products. In addition, Autodesk provides direct phone support to end users
under the new Safety Net Program ("SNP"). Under the SNP, Autodesk support
staff provide technical support for customers with questions about AutoCAD and
products offered by Autodesk's market groups.
As of January 31, 1998, Autodesk had authorized more than 900 independent
Autodesk Training Centers ("ATCs") throughout the world. These accredited
training centers offer in-depth education and training in computer-aided
design skills on AutoCAD and other Autodesk products, as well as on related,
independently developed software.
Customers have formed Autodesk user groups as forums for education and to
suggest product enhancements and development of new products. The Autodesk
User Group International ("AUGI"), officially recognized by Autodesk, sponsors
an annual meeting held concurrently with the Autodesk University user show;
publishes a quarterly newsletter; independently evaluates Autodesk products;
compiles user feature and functionality requirements; and offers telecourses
taught by its membership on CompuServe. In addition, there are local user
groups in Europe, Asia Pacific, and the Americas focused on expanding the use
of Autodesk products.
DEVELOPER PROGRAMS
One of Autodesk's key strategies is to maintain an open-architecture design
of its software products to facilitate third-party development of peripheral
and complementary products which enhance sales of Autodesk products. This
approach enables customers and third parties to customize Autodesk's products
for a wide variety of highly specific uses. The Autodesk Developer Network
program offers several programs that provide marketing, sales, and technical
support and programming tools to nearly 3,000 participating developers
worldwide, who have, to date, developed more than 5,000 commercially available
add-on applications for Autodesk products. Although Autodesk derives no direct
revenue from these application developers, Autodesk believes that the
availability and use of their add-on products enhance sales opportunities for
Autodesk's core products.
Under the Autodesk Developer Channel, Autodesk offers three programs to
third-party developers that are interested in licensing Autodesk software and
technology. The Unique Application Reseller program ("UAR") allows software
developer partners the ability to sell and support Autodesk software when
bundled with specifically defined vertical applications. The OEM program
provides the technology for qualified developers to create and deliver suites
of scalable products that focus on solving customer needs in specialized
markets. The Solution Integrator ("SI") allows solution provider partners the
ability to sell and support Autodesk software when bundled with specifically
defined vertical solutions.
To support the growth of third-party developers, whose applications extend
and enhance the functionality of Autodesk's products worldwide, Autodesk
established the Virtual Corporation Partner Program ("VCPP") during fiscal
year 1995. The VCPP is a business network comprised of dealers, independent
application developers, Autodesk Training Centers, and customers. This program
provides sales, marketing, technical, product, management, and financial
support to Autodesk Strategic Developers and dealers.
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During fiscal year 1998, Autodesk continued to expand the Mechanical
Applications Initiative ("MAI") by adding new partners. This program, which
was introduced in fiscal year 1996, is aimed at the development and marketing
of products which can be integrated with Autodesk's MCAD products. MAI
partners participate with Autodesk in product marketing and development
activities.
BACKLOG
Autodesk typically ships products within one to two weeks after receipt of
an order, which is common in the computer software industry. Accordingly,
Autodesk does not maintain significant backlog, and backlog as of any
particular date gives no indication of actual sales for any succeeding period.
COMPETITION
The software industry has limited barriers to entry, and the availability of
desktop computers with continually expanding capabilities at progressively
lower prices contributes to the ease of market entry. Because of these and
other factors, competitive conditions in the industry are likely to intensify
in the future. Increased competition could result in price reductions, reduced
revenues and profit margins, and loss of market share, any of which could
adversely affect Autodesk's business, consolidated results of operations and
financial condition. The design software market in particular is characterized
by vigorous competition in each of the vertical markets in which Autodesk
competes, both by entry of competitors with innovative technologies and by
consolidation of companies with complementary products and technologies.
The AEC family of products competes directly with software offered by
companies such as Bentley Systems, Inc. ("Bentley"); Computervision
Corporation (a subsidiary of Parametric Technologies, Inc.); CADAM Systems
Company, Inc.; Diehl Graphsoft, Inc.; EaglePoint Software; International
Microcomputer Software, Inc. ("IMSI"); Intergraph Corporation; Ketiv
Technologies; Nemetschek Systems, Inc.; and Visio Corporation ("Visio").
Autodesk's MCAD products compete with products offered by a number of
competitors, including Bentley; Visionary Design Systems; Hewlett-Packard
Corporation; Parametric Technologies, Inc.; Structural Dynamics Research
Corporation; Unigraphics; Computervision Corporation (a subsidiary of
Parametric Technologies); Dassault Systemes; SolidWorks Corporation (a
subsidiary of Dassault); and Baystate Technologies, Inc. Autodesk's GIS Market
Group faces competition from companies such as Bentley; Intergraph
Corporation; MapInfo Corporation; Earth Sciences Research Institute; and MCI
Systemhouse. Kinetix product offerings compete with products offered by other
multimedia companies such as Adobe Systems Inc.; Macromedia, Inc.; and Silicon
Graphics, Inc. The Personal Solutions Group family of products competes with
IMSI; The Learning Company; Visio; Micrografx Inc. and others. Certain of the
competitors of Autodesk have greater financial, technical, sales and
marketing, and other resources than Autodesk.
Autodesk believes that the principal factors affecting competition in its
markets are product reliability, performance, ease of use, range of useful
features, continuing product enhancements, reputation, price and training. In
addition, the availability of third-party application software is a
competitive factor within the CAD market. Autodesk believes that it competes
favorably in these areas and that its competitive position will depend, in
part, upon its continued ability to enhance existing products, and to develop
and market new products.
In April 1998, Autodesk received notice that the FTC has undertaken a
nonpublic investigation of its business practices. The FTC had not made any
claims or allegations regarding Autodesk's current business practices or
policies, nor have any charges been filed. Autodesk intends to cooperate fully
with the FTC in its inquiry. Autodesk does not believe that the investigation
will have a material impact on its business or consolidated results of
operations.
INTELLECTUAL PROPERTY AND LICENSES
Autodesk protects its intellectual property through copyright, trade secret,
patent, and trademark laws. For substantially all AutoCAD sales outside of
North America, Autodesk uses software protection locks to inhibit unauthorized
copying. Nonetheless, there can be no assurance that Autodesk's intellectual
property rights can be successfully asserted in the future or will not be
invalidated, circumvented, or challenged. In addition, the laws of certain
foreign countries where Autodesk's products are distributed do not protect
Autodesk's intellectual
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property rights to the same extent as U.S. laws. The inability of Autodesk to
protect its proprietary information could have a material adverse effect on
Autodesk's business and consolidated results of operations.
From time to time, Autodesk receives claims alleging infringement of a third
party's intellectual property rights, including patents. Any disputes
involving Autodesk's intellectual property rights or those of another party
could lead to costly litigation which could have a material adverse effect on
Autodesk's business and consolidated results of operations.
Autodesk retains ownership of software it develops. All software is licensed
to users and provided in object code pursuant to either shrink-wrap, embedded
or on-line licenses, or executed license agreements. These agreements contain
restrictions on duplication, disclosure, and transfer.
Autodesk believes that because of the limitations of laws protecting its
intellectual property and the rapid, ongoing technological changes in both the
computer hardware and software industries, it must rely principally upon
software engineering and marketing skills to maintain and enhance its
competitive market position.
Autodesk has an in-house antipiracy program focused on pursuing companies
and individuals who illegally duplicate, sell, or install Autodesk's software
products. Software piracy is in some cases a felony under U.S. federal law,
which allows copyright and patent holders to protect and enforce their rights
as owners of intellectual property. Additionally, Autodesk is a member and co-
founder of the Business Software Alliance ("BSA"), an organization comprised
of member software companies whose purpose is to advance favorable public
policy for the technology industry and promote the importance of honoring
software copyrights.
PRODUCTION
Production of Autodesk's software products involves duplication of the
software media and the printing of user manuals. The purchase of media and the
transfer of the software programs onto media for distribution to customers are
performed by Autodesk and by licensed subcontractors. Media for Autodesk's
products include CD-ROMs and disks which are available from multiple sources.
User manuals for Autodesk's products and packaging materials are produced to
Autodesk specifications by outside sources. Domestic production is performed
in leased facilities operated by Autodesk. Certain product assembly is also
performed by independent third-party contractors. International production is
performed by independent third-party contractors in Ireland and Singapore. To
date, Autodesk has not experienced any material difficulties or delays in the
production of its software and documentation.
EMPLOYEES
As of July 31, 1998, Autodesk had 2,587 full-time employees, of which 1,981
were based in the Americas, 390 in Europe, and 216 in Asia Pacific. The
continued growth and success of Autodesk depends significantly on the
continued service of highly skilled employees. Competition for these employees
in today's marketplace, especially in the technology industries, is intense.
Autodesk's ability to attract and retain employees is dependent on a number of
factors, including its continued ability to grant stock incentive awards.
There can be no assurance that Autodesk will be successful in continuing to
recruit new personnel and to retain existing personnel. The loss of one or
more key employees or Autodesk's inability to maintain existing employees or
recruit new employees could have a material adverse impact on Autodesk. None
of Autodesk's employees in the United States is subject to a collective
bargaining agreement, and Autodesk has never experienced a work stoppage.
Management believes that its relations with its employees are good.
PROPERTIES
Autodesk's executive offices and those related to product development,
domestic marketing and sales, and production are located in leased office
space in northern California. Autodesk also leases office space in various
locations throughout the United States for local sales, development, and
technical support personnel. Autodesk's
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foreign subsidiaries lease office space for their operations. Autodesk owns
substantially all equipment used in its facilities.
LEGAL PROCEEDINGS
In May 1997, Autodesk settled a lawsuit filed by Tektronix, Inc. alleging a
patent infringement, pursuant to which all of Tektronix's claims have been
dismissed.
In December 1994, Autodesk recorded a $25.5 million litigation charge as a
result of a judgment against Autodesk on a claim of a trade secret
misappropriation brought by Vermont Microsystems, Inc. ("VMI"). Autodesk
appealed that judgment and, upon remand to the Federal District Court, a
reduced judgment was entered against Autodesk in the amount of $14.2 million
plus interest. On February 23, 1998, the U.S. Court of Appeals for the Second
Circuit reduced the judgment to $7.8 million.
In May 1998, final judgment was entered in the Vermont Microsystems, Inc.
("VMI") trade secret litigation in the amount of $7.8 million plus accrued
interest. Final payment of approximately $8.4 million was made to VMI and
charged against a previously recorded litigation accrual. During the quarter
ended July 31, 1998, Autodesk credited $18.2 million and $2.7 million to
operating income and interest income, respectively, to record the gain on the
litigation settlement and remaining unutilized interest accruals.
Autodesk is a party to various legal proceedings arising from the normal
course of business activities. While the outcome of these matters cannot be
predicted with certainty, in management's opinion, resolution of these matters
is not expected to have a material adverse impact on Autodesk's consolidated
results of operations or its financial position. However, depending on the
amount and timing, an unfavorable resolution of a matter could materially
affect Autodesk's future results of operations or cash flows in a particular
period.
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AUTODESK MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion in "Autodesk Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains trend analysis and
other forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Actual results could
differ materially from those set forth in the forward-looking statements as a
result of the factors set forth elsewhere herein, including "--Certain Risk
Factors Which May Impact Future Operating Results" and "Risk Factors."
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues,
consolidated statement of income data for the periods indicated. These
operating results are not necessarily indicative of results for any future
periods.
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
JANUARY 31, JULY 31,
----------------- -------------
1998 1997 1996 1998 1997
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues................................ 100% 100 % 100% 100% 100 %
Costs and expenses:
Costs of revenues......................... 12 13 13 10 13
Marketing and sales....................... 38 40 34 35 41
Research and development.................. 20 19 15 19 21
General and administrative................ 14 15 14 14 14
Nonrecurring charges...................... 9 1 -- 5 21
--- --- --- ----- -----
Total costs and expenses................ 93 88 76 83 110
--- --- --- ----- -----
Income (loss) from operations............... 7 12 24 17 (10)
Interest and other income, net.............. 2 1 2 2 2
--- --- --- ----- -----
Income (loss) before income taxes........... 9 13 26 19 (8)
Provision for income taxes.................. 6 5 9 8 4
--- --- --- ----- -----
Net income (loss)....................... 3% 8% 17% 11% (12)%
=== === === ===== =====
</TABLE>
SIX MONTHS ENDED JULY 31, 1998 AND 1997
Net revenues. Autodesk's net revenues for the six months ended July 31, 1998
were $373.8 million, which represented a 37 percent increase from the same
period of the prior fiscal year. Autodesk achieved significant net revenue
growth in the Americas and Europe when compared to the same period in the
prior fiscal year, while net revenues decreased in Asia Pacific. This net
revenue growth was the result of strong demand for products offered by
Autodesk's Design Solutions and Personal Solutions operating segments such as
AutoCAD Mechanical Desktop 2.0, AutoCAD LT97, AutoCAD Map 2.0, and incremental
revenues associated with the May 1998 acquisition of Genius CAD Software GmbH
(see Note 2 to the Autodesk Condensed Consolidated Interim Financial
Statements). Sales of AutoCAD and AutoCAD upgrades accounted for approximately
71 percent and 81 percent of Autodesk's consolidated net revenues for the six
months ended July 31, 1998 and 1997, respectively. The stronger value of the
US dollar, relative to certain international currencies, primarily the
Japanese yen and the Australian dollar, negatively impacted net revenues in
the first six months of fiscal year 1999 by $8.7 million when compared to the
same period in the prior fiscal year. International sales, including exports
from the U.S., accounted for approximately 57 percent of Autodesk's revenues
in the first six months of fiscal year 1999 as compared to 60 percent in the
same period of the prior fiscal year.
Autodesk experienced a decline in Asia Pacific net revenues during the first
six months of fiscal year 1999 compared to the corresponding period of the
prior year due to weak economic conditions in the region, most
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notably Japan and South Korea. Autodesk expects that these adverse conditions
in Asia Pacific will continue in the short term, and that they may continue to
adversely affect Autodesk's revenue and earnings.
Autodesk derives a substantial portion of its revenues from sales of AutoCAD
software, AutoCAD upgrades, and adjacent products which are interoperable with
AutoCAD. As such, any factor adversely affecting sales of AutoCAD and AutoCAD
upgrades, including such factors as product life cycle, market acceptance,
product performance and reliability, reputation, price competition, and the
availability of third-party applications, could have a material adverse effect
on Autodesk's business and consolidated results of operations. Additionally,
slowdowns in any of Autodesk's geographical markets could also have a material
adverse impact on Autodesk's business and consolidated results of operations.
Product returns, consisting principally of stock rotation, are recorded as a
reduction of revenues and represented approximately 4 percent and 6 percent of
consolidated revenues in the first six months of fiscal years 1999 and 1998,
respectively. The decrease in product returns as a percentage of revenues is
primarily due to Autodesk's continued focus on channel inventory management
and sell through sales activities and programs. Although product returns
decreased as a percentage of consolidated revenues, comparing the first half
of fiscal year 1999 to the same period in the prior fiscal year, management
anticipates that the level of product returns in future periods will continue
to be impacted by the timing of new product releases, as well as the quality
and market acceptance of new products.
Cost of revenues. Cost of revenues as a percentage of net revenues for the
six months ended July 31, 1998 was 10 percent, compared to 13 percent in the
same period in the prior fiscal year. This reduction is largely due to
efficiencies in production and distribution activities. Cost of revenues as a
percentage of net revenues has been and may continue to be impacted by the mix
of product sales, software amortization, royalty rates for licensed technology
embedded in Autodesk's products, and the geographic distribution of sales.
Marketing and sales. As a percentage of net revenues, marketing and sales
expenses decreased from 41 percent in the six months ended July 31, 1997 to 35
percent in the corresponding period of the current fiscal year. Actual
spending for this period increased 17 percent as a result of higher employee
costs as well as increased marketing costs associated with the launch of
products acquired from Genius and other new and enhanced product offerings.
Research and development. Research and development expenses as a percentage
of net revenues for the six months ended July 31, 1998 decreased to 19 percent
from 21 percent for the same period in the prior fiscal year. Actual research
and development spending (including capitalized software costs of $2,184,000
recorded during the first six months of fiscal year 1998) increased 17 percent
as compared to the same period in the prior fiscal year. The absolute dollar
increase is due primarily to the addition of software engineers, expenses
associated with the development and translation of new products including
AutoCAD Release 14, and incremental research and development personnel
expenses associated with the acquisition of certain assets from Genius during
May, 1998. Autodesk anticipates that research and development expenses will
increase in future periods as a result of product development efforts by
Autodesk's market groups and incremental personnel costs. Additionally,
Autodesk intends to continue recruiting and hiring experienced software
developers and to consider the licensing and acquisition of complementary
software technologies and businesses.
General and administrative. General and administrative expenses were 15
percent of net revenues for the six months ended July 31, 1998, and 14 percent
of net revenues in the same period of the prior fiscal year. In absolute
dollar terms, general and administrative expenses increased 42 percent for the
six months ended July 31, 1998 from the same period of the prior fiscal year,
primarily because of increased employee-related expenses, amortization of
intangibles recorded in connection with the merger with Softdesk, Inc. and the
acquisition of Genius, costs incurred to ensure that Autodesk's infrastructure
is year 2000 compliant, and costs incurred in the ongoing nonpublic FTC
investigation. Autodesk currently expects that general and administrative
expenses will increase in future periods to support spending on
infrastructure, including continued investment in Autodesk's worldwide
information systems and making any additional corrections to Autodesk's
infrastructure in
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connection with its Year 2000 compliance program; and to amortize goodwill and
other intangible assets associated with recent business combinations.
Nonrecurring charges--Genius acquisition. On May 4, 1998, Autodesk entered
into an agreement with Genius CAD Software GmbH ("Genius"), a German limited
liability company to purchase various mechanical computer-aided-design ("CAD")
software applications and technologies (the "acquisition"). In consideration
for this acquisition, Autodesk paid Genius approximately $69 million in cash.
The acquisition has been accounted for using the purchase method of
accounting.
In connection with the acquisition, Autodesk recorded a charge for in-
process research and development of $29 million, all of which was recorded
during the six months ended July 31, 1998. The value was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product sales. The discounted cash flow analysis was based on management's
forecast of future revenues, costs of revenues and operating expenses related
to the products and technologies purchased from Genius which represent the
process and expertise employed to develop mechanical design application
software designed to work in conjunction with Autodesk's mechanical CAD
products. The Genius technology and product families identified includes
Genius Desktop, Genius AutoCAD and Genius AutoCAD LT.
Revenues and related expenses for the in-process technology were estimated
from the acquisition date through the end of Autodesk's fiscal year 2004.
Management's analysis considered anticipated product release dates for
Autodesk's mechanical CAD products, as well as release dates for the various
acquired Genius products and technologies which are interoperable with
Autodesk's mechanical CAD products. The overall technology life was estimated
to be approximately three years for the Genius Desktop products, and
approximately six years for all other Genius products and technologies
purchased by Autodesk. Management's aggregate projections reflect moderate
revenue growth in earlier periods resulting from expansion in Autodesk's
existing channels, particularly in North America and Asia Pacific which
historically have not been significant for the Genius products, as well as
anticipated growth in the overall mechanical CAD market.
The cost to complete the in-process technology was also based on
management's estimates, which considered the number of man-months required to
reach technological feasibility for each of the Genius projects classified as
"in-process"; the type of professional and engineering staff involved in the
completion process and their fully burdened monthly salaries. Management
estimated the direct costs to achieve technological feasibility to be
approximately $2.5 million, covering a period of time extending into the first
half of Autodesk's fiscal year 2000. Beyond this period, management estimates
significantly less expense in supporting and maintaining active products
identified at the acquisition date to be in-process technology. The effective
tax rate utilized in the analysis of in-process technology was 34 percent,
which reflects Autodesk's current combined federal and state statutory tax
rate, exclusive of nonrecurring charges.
Management discounted the net cash flows of the in-process technology to its
present value using a discount rate of 20 percent, which was determined to be
higher than Autodesk's weighted average cost of capital ("WACC") due to the
fact that the technology had not yet reached technological feasibility as of
the date of valuation. In utilizing a discount rate greater than Autodesk's
WACC, management has reflected the risk premium associated with achieving the
forecasted cash flows associated with these projects.
If the in-process projects contemplated in management's forecast are not
successfully developed, future revenue and profitability of Autodesk may be
adversely affected. Additionally, the value of other intangible assets
acquired from Genius may become impaired.
Revenues for developed technology were estimated by management for the
remainder of fiscal year 1999 through fiscal year 2004. Management's estimates
reflect a gradual decline in revenues from developed technologies after
considering historical product life cycles and anticipated product release
dates. While revenues derived from both developed and in-process technologies
are estimated to decline over the next several fiscal years, overall revenues
attributable to the Genius products and technologies are anticipated to grow
in absolute
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dollars and as a percentage of aggregate revenue to reflect the growth of
future (yet-to-be-developed) technologies. Operating expenses, including
general and administrative, marketing and sales, were based on anticipated
costs after the Genius operations were merged into Autodesk's operating
structure. Because Autodesk and Genius share the same marketing and
distribution channel, operating expenses related to the developed technology
were estimated to be lower than the historical operating expense structure of
Autodesk.
Management discounted the net cash flows for developed technology to its
present value using a discount rate of 15 percent which reflects Autodesk's
current weighted average cost of capital.
If the projects contemplated in management's forecast are not successfully
developed, future revenue and profitability of Autodesk may be adversely
affected. Additionally, the value of other intangible assets acquired from
Genius may become impaired.
Nonrecurring charges--Other. During the three months ended July 31, 1998,
Autodesk recorded charges of approximately $8.9 million relating to
restructuring charges associated with the consolidation of certain development
centers; the write-off of purchased technologies associated with these
operations; staff reductions in Asia Pacific in response to current economic
conditions in the region; and costs in relation to potential legal
settlements.
On March 31, 1997, Autodesk exchanged 2.9 million shares of Autodesk Common
Stock for all of the outstanding stock of Softdesk, Inc. Based on the value of
the Autodesk Common Stock and options exchanged, the transaction, including
transaction costs, was valued at approximately $94 million. This transaction
was accounted for using the purchase method of accounting with the purchase
price being principally allocated to capitalized software, purchased
technologies, and intangible assets. Approximately $55.1 million of the total
purchase price represented the value of in-process research and development
that had not yet reached technological feasibility and had no alternative
future use. Approximately $3.0 million of technology acquired from 3D/Eye
during the first quarter of fiscal year 1998 also represented the value of in-
process research and development that had not yet reached technological
feasibility and had no alternative future use. The $55.1 million and the $3.0
million were charged to operations in the first quarter of fiscal year 1998.
Litigation accrual reversal. Autodesk recorded a $25.5 million nonrecurring
charge during fiscal year 1995 on a claim of trade-secret misappropriation
brought by Vermont Microsystems, Inc. ("VMI"). As of the end of the first
quarter of fiscal year 1999, the total amount accrued related to the initial
judgment plus accrued interest was approximately $29.3 million. Autodesk
appealed this decision, and in May 1998, final judgment was entered in the VMI
litigation and a corresponding final payment of approximately $8.4 million was
made to VMI. During the quarter ended July 31, 1998, Autodesk recognized $18.2
million and $2.7 million to operating income and interest income,
respectively, to reflect the remaining unutilized litigation and related
interest accruals.
Interest and other income. Interest and other income for the six months
ended July 31, 1998 was $8.6 million as compared to $4.8 million for the same
period in the prior fiscal year. The increase is largely due to the interest
portion of the VMI settlement (see Note 3 to the Autodesk Condensed
Consolidated Financial Statements) and the net gain on the disposition of one
of Autodesk's business units.
Provision for income taxes. Autodesk's effective income tax rate, excluding
the one-time charge for acquired in-process research and development, was 34.0
percent for the first half of fiscal year 1999 as compared to 36.0 percent for
the same period in the prior fiscal year. The decrease in the effective income
tax rate was due to incremental tax benefits associated with Autodesk's
foreign sales corporation and foreign earnings that are taxed at rates
different than the US statutory rate. The $1.6 million benefit from the $29
million charge for in-process research and development associated with the
acquisition of certain assets from Genius is less than the U.S. statutory rate
as a portion of it will not be deductible for US tax purposes. Additionally, a
valuation allowance has been established for a portion of the deferred tax
asset which is deductible for US tax purposes over an extended period of time.
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Autodesk's United States income tax returns for fiscal years ended January
31, 1992 through 1996, are under examination by the IRS. On August 27, 1997,
the IRS issued a Notice of Deficiency proposing increases to the amount of
Autodesk's federal income taxes for fiscal years 1992 and 1993. On November
25, 1997, Autodesk filed a petition with the United States Tax Court to
contest these alleged tax deficiencies. Resolution of these alleged tax
deficiencies and any adjustments that may ultimately result from these
examinations are not expected to have a material adverse impact on the
Autodesk's consolidated results of operations or its financial position.
FISCAL YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
Net Revenues. Autodesk's consolidated net revenues in fiscal year 1998 were
$617.1 million, which represented a 24.2 percent increase from fiscal year
1997 net revenues of $496.7 million. Revenues in the Americas and Europe
increased $101.0 million or 54 percent and $19.3 million or 10 percent,
respectively, from the prior fiscal year, while remaining flat in Asia
Pacific. These increases were due largely to higher sales of AutoCAD software,
Autodesk's flagship product, and significant growth in Autodesk's market group
revenues. The most recent release of AutoCAD software, AutoCAD Release 14
("AutoCAD R14"), was released in the United States in May 1997 and in most
other regions shortly thereafter. Also contributing to the increased revenues
in fiscal year 1998 were revenues contributed by Softdesk, Inc., which was
acquired by Autodesk in March 1997. Net revenues in fiscal year 1997 decreased
7 percent from the $534.2 million posted in fiscal year 1996, reflecting
primarily slowdowns in the US dealer channel, Germany, Switzerland, and
France. The lower fiscal 1997 revenues reflected slowing sales of AutoCAD and
AutoCAD update software as the then most recent version of the product,
Release 13, entered the end of its product life cycle.
AutoCAD and AutoCAD updates represented approximately 70 percent, 70
percent, and 80 percent of total consolidated revenues in fiscal years 1998,
1997, and 1996, respectively. During fiscal year 1998, approximately 244,000
new AutoCAD licenses were added worldwide, compared to 207,000 and 233,000
licenses added during fiscal years 1997 and 1996, respectively. AutoCAD
upgrade revenues were $108 million, $45 million, and $49 million in fiscal
years 1998, 1997, and 1996, respectively.
Foreign revenues, including exports from the United States, accounted for
approximately 58 percent, 65 percent, and 64 percent of consolidated revenues
in fiscal years 1998, 1997, and 1996, respectively. The stronger value of the
US dollar, relative to international currencies, primarily the Japanese yen
and German mark, negatively affected international revenues by approximately
$30 million in fiscal year 1998 compared to fiscal year 1997 and $17 million
in fiscal year 1997 compared to fiscal year 1996. Fluctuations in foreign
exchange rates positively impacted international operating expenses by $11
million in fiscal year 1998, and did not materially impact operating expenses
in fiscal years 1997 and 1996. A summary of revenues by geographic area is
presented in Note 9 to the Autodesk Consolidated Financial Statements.
Autodesk records product returns as a reduction of revenues. In fiscal years
1998, 1997, and 1996, product returns, consisting principally of stock
rotation, totaled $35.4 million, $44.3 million, and $51.2 million (or
6 percent, 9 percent, and 9 percent of total consolidated revenues,
respectively). Total product returns decreased $8.9 million from fiscal year
1997 to fiscal year 1998 due largely to continued management focus on the
level of inventories with Autodesk's resellers, sell-through sales activities
and programs in Autodesk's distribution channel, and fewer returns associated
with AutoCAD R14 compared to the prior version. Returns of AutoCAD products
accounted for 40 percent, 61 percent, and 79 percent of total product returns
in fiscal years 1998, 1997, and 1996, respectively. The lower level of product
returns in fiscal year 1998 compared to fiscal years 1997 and 1996 reflected a
lower level of product rotation that had previously been associated with
performance issues relating to AutoCAD Release 13 and customers' perception
issues associated with this product.
The nature and technical complexity of Autodesk's software is such that
defect corrections have occurred in the past and may occur in future releases
of AutoCAD and other products offered by Autodesk. As is the case with most
complex software, Autodesk has experienced performance issues with previous
releases of its
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AutoCAD software, and performance issues could occur in future releases of
AutoCAD and other products offered by Autodesk.
Delays in the introduction of planned future product releases, or failure to
achieve significant customer acceptance of these new products, may have a
material adverse effect on Autodesk's revenues and consolidated results of
operations in future periods. Additionally, slowdowns in any of Autodesk's
geographical markets, including the recent economic instability in certain
countries of the Asia Pacific region, could also have a material adverse
effect on Autodesk's business and consolidated results of operations. The
foregoing forward-looking information is based upon Autodesk's current
expectations. Actual results could differ materially for the reasons noted and
due to other risks, including, but not limited to, those mentioned above and
otherwise discussed under "--Certain Risk Factors Which May Impact Future
Operating Results."
Cost of Revenues. Cost of revenues includes the purchase of disks and
compact disks (CD-ROMs), costs associated with transferring Autodesk's
software to electronic media, printing of user manuals and packaging
materials, freight, royalties, amortization of purchased technology and
capitalized software, and, in certain foreign markets, software protection
locks. When expressed as a percentage of net revenues, cost of revenues
decreased approximately 1 percent in fiscal year 1998 as compared to the prior
fiscal year. Gross margins in fiscal year 1998 were positively impacted by
continued operational efficiencies, lower royalties for licensed technology
embedded in Autodesk's products, and the geographic distribution of sales. The
one-half of 1 percent decrease in gross margins between fiscal year 1996 and
1997 was largely due to the mix of product sales, particularly the fact that a
smaller portion of revenues was contributed by AutoCAD and a larger portion
was contributed by AutoCAD LT, and, to a lesser extent, the impact of
increased fixed costs on a lower net revenue base. In the future, cost of
revenues as a percentage of net revenues may be impacted by the mix of product
sales, royalty rates for licensed technology embedded in Autodesk's products,
and the geographic distribution of sales.
Marketing and Sales. Marketing and sales expenses include salaries, sales
commissions, travel, and facility costs for Autodesk's marketing, sales,
dealer training, and support personnel. These expenses also include programs
aimed at increasing revenues, such as advertising, trade shows, and
expositions, as well as various sales and promotional programs designed for
specific sales channels and end users. When expressed as a percentage of net
revenues, marketing and sales expenses decreased from 40 percent in fiscal
year 1997 to 38 percent in fiscal year 1998. Actual fiscal year 1998 marketing
and sales expenses of $237.1 million increased by 19 percent from the $199.9
million of expense incurred in the prior fiscal year. The increase in spending
was largely due to higher employee costs and increases in advertising and
promotional costs associated with the launch of AutoCAD Release 14 during the
second quarter and other new and enhanced products released throughout the
year. Fiscal year 1997 marketing and sales expenses of $199.9 million
increased 9 percent over fiscal year 1996 expenses of $183.6 million due to
higher employee costs as well as marketing and sales costs associated with the
launch of certain new products introduced by Autodesk's market groups during
fiscal year 1997. Autodesk expects to continue to invest in marketing and
sales of its products, to develop market opportunities, and to promote
Autodesk's competitive position. Accordingly, Autodesk expects marketing and
sales expenses to continue to be significant, both in absolute dollars and as
a percentage of net revenues.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software engineers, contract
development fees, expenses associated with product translations, costs of
computer equipment used in software development, and facilities expenses.
During fiscal years 1998, 1997, and 1996, Autodesk incurred $122.4 million,
$93.7 million, and $78.7 million, respectively, of research and development
expenses (excluding capitalized software development costs of $2.2 million
during fiscal year 1998; no software development costs were capitalized during
fiscal years 1997 and 1996). Research and development expenses increased both
in absolute dollars and as a percentage of net revenues in fiscal year 1998
due to the addition of software engineers, expenses associated with the
development of new and enhanced products, and incremental research and
development personnel expenses associated with the March 1997 business
combination with Softdesk. The increase in research and development expenses
between fiscal years 1996 and 1997 was due to the addition of software
engineers and fiscal year 1997 business combinations. Autodesk anticipates
that
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research and development expenses will increase in fiscal year 1999 as a
result of product development efforts by Autodesk's market groups and
incremental personnel costs. Additionally, Autodesk intends to continue
recruiting and hiring experienced software developers and to consider the
licensing and acquisition of complementary software technologies and
businesses.
General and Administrative. General and administrative expenses include
Autodesk's information systems, finance, human resources, legal, purchasing,
and other administrative operations. Fiscal year 1998 general and
administrative expenses of $83.3 million increased 12 percent from the $74.3
million recorded in the prior fiscal year, primarily due to higher employee-
related costs and amortization expense associated with intangible assets
recorded in connection with the acquisition of Softdesk, Inc. Fiscal year 1997
general and administrative expenses decreased 2 percent from fiscal year 1996
spending of $76.1 million reflecting lower professional fees, partially offset
by increased expenses to maintain and expand Autodesk's worldwide information
systems. Autodesk currently expects that general and administrative expenses
in the coming year will increase to support spending on infrastructure,
including continued investment in Autodesk's worldwide information systems and
making any additional corrections to Autodesk's hardware, software, and
products for compliance in the year 2000.
Nonrecurring Charges. Nonrecurring charges represent charges for purchased
in-process research and development associated with Autodesk's acquisition of
Softdesk, Inc. ($55.1 million) and licensing of 3D/Eye technology ($3.0
million) in fiscal year 1998 and acquisitions of Teleos Research ($3.2
million) and Argus Technologies, Inc. ($1.5 million) in fiscal year 1997. For
additional information, see "Business Combinations" in Note 1 of the Autodesk
Consolidated Financial Statements.
As discussed in Note 4 to the Autodesk Consolidated Financial Statements, a
$25.5 million judgment was entered against Autodesk in fiscal year 1995 on a
claim of trade secret misappropriation brought by Vermont Microsystems, Inc.
("VMI"). Autodesk recorded this nonrecurring charge in the fourth quarter of
fiscal year 1995. Autodesk appealed and a reduced judgment was entered against
Autodesk in February 1998 in the amount of $7.8 million. In May 1998, final
judgment was entered in the VMI litigation. See Notes to the Autodesk Interim
Unaudited Financial Statements as of July 31, 1998.
Interest and Other Income. Interest income was $9.8 million, $8.8 million,
and $10.6 million for fiscal years 1998, 1997, and 1996, respectively. The
increase in fiscal year 1998 interest income over fiscal year 1997 interest
income was largely due to an increase in average cash, cash equivalents, and
marketable securities balances. The decrease in fiscal year 1997 interest
income from the prior fiscal year resulted from a lower average balance of
cash, cash equivalents, and marketable securities, partially offset by higher
interest rates on Autodesk's international investment portfolio when compared
to the same period in the prior fiscal year. Interest and other income for
fiscal years 1998, 1997, and 1996 was net of interest expense of $0.2 million,
$1.8 million, and $1.8 million, respectively.
Autodesk has a hedging program to minimize foreign exchange gains or losses,
where possible, from recorded foreign-denominated assets and liabilities. This
program involves the use of forward foreign exchange contracts in the primary
European and Asian currencies. Autodesk does not hedge anticipated foreign-
denominated revenues and expenses not yet incurred. Gains (losses) resulting
from foreign currency transactions primarily in Europe and Asia Pacific, which
are included in interest and other income, were ($68,000), ($197,000), and
$554,000 in fiscal years 1998, 1997, and 1996, respectively.
Provision for Income Taxes. Autodesk's effective income tax rate, excluding
one-time charges for acquired in-process research and development associated
with the March 1997 acquisition of Softdesk, Inc. and fiscal year 1997
acquisitions, was 36.0 percent in fiscal year 1998 compared to 35.5 percent
and 36.5 percent in fiscal years 1997 and 1996, respectively. The increase in
the effective income tax rate in fiscal year 1998 compared to fiscal year 1997
was principally due to the amortization of certain intangible assets not
deductible for tax purposes and foreign earnings which are taxed at rates
different from the US statutory rate. The decrease in the tax rate between
fiscal years 1997 and 1996 was due largely to a decrease in Autodesk's
effective state income tax rate.
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See Note 3 to the Autodesk Consolidated Financial Statements for an analysis
of the differences between the US statutory and the effective income tax
rates.
Autodesk's United States income tax returns for fiscal years ended January
31, 1992 through 1996 are under examination by the Internal Revenue Service.
On August 27, 1997, the Internal Revenue Service issued a Notice of Deficiency
proposing increases to the amount of Autodesk's United States income taxes for
fiscal years 1992 and 1993. On November 25, 1997, Autodesk filed a petition
with the United States Tax Court to contest these alleged tax deficiencies.
Management believes that adequate amounts have been provided for any
adjustments that may ultimately result from these examinations.
Recently Issued Accounting Standards. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements and which is required to be adopted by
Autodesk beginning in its fiscal year 1999. Additionally, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way public business
enterprises report information in annual statements and interim financial
reports regarding operating segments, products and services, geographic areas,
and major customers. SFAS 131 will first be reflected in Autodesk's fiscal
year 1999 Annual Report and will apply to both annual and interim financial
reporting subsequent to this date. Autodesk is currently evaluating the impact
of SFAS 130 and SFAS 131 on its financial disclosures.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), which supersedes SOP 91-1. SOP 97-2 will be effective beginning
in fiscal year 1999. In March 1998, the AICPA issued Statement of Position 98-
4 ("SOP 98-4"), which amends certain provisions of SOP 97-2. Autodesk believes
it is in compliance with the provisions of SOP 97-2 as amended by SOP 98-4.
However, detailed implementation guidelines for this standard have not been
issued. Once issued, such guidance could lead to unanticipated changes in
Autodesk's current revenue recognition practices and such changes could be
material to Autodesk's results of operations.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This standard requires companies to
capitalize qualifying computer software costs which are incurred during the
application development stage and amortize them over the software's estimated
useful life. Autodesk is required to adopt this standard in fiscal year 2000
and is currently evaluating the impact that its adoption will have on the
consolidated financial position and results of operations of Autodesk.
CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
Autodesk operates in a rapidly changing environment that involves a number
of risks, some of which are beyond Autodesk's control. The following
discussion highlights some of these risks and the possible impact of these
factors on future results of operations.
Competition. The software industry has limited barriers to entry, and the
availability of desktop computers with continually expanding capabilities at
progressively lower prices contributes to the ease of market entry. Because of
these and other factors, competitive conditions in the industry are likely to
intensify in the future. Increased competition could result in price
reductions, reduced revenues and profit margins, and loss of market share, any
of which could adversely affect Autodesk's business, consolidated results of
operations, and financial condition. The design software market in particular
is characterized by vigorous competition in each of the vertical markets in
which Autodesk competes, both by entry of competitors with innovative
technologies and by consolidation of companies with complementary products and
technologies.
The AEC family of products competes directly with software offered by
companies such as Bentley Systems, Inc. ("Bentley"); Computervision
Corporation (a subsidiary of Parametric Technologies, Inc.)
("Computervision"); CADAM Systems Company, Inc.; Diehl Graphsoft, Inc.;
EaglePoint Software;
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International Microcomputer Software, Inc. ("IMSI"); Intergraph Corporation;
Ketiv Technologies; Nemetschek Systems, Inc.; and Visio Corporation ("Visio").
Autodesk's MCAD products compete with products offered by Bentley; Visionary
Design Systems; Hewlett-Packard Corporation; Parametric Technologies, Inc.;
Structural Dynamics Research Corporation; Unigraphics; Computervision;
Dassault Systemes ("Dassault"); Solidworks Corporation (a subsidiary of
Dassault); and Baystate Technologies, Inc. Autodesk's GIS Market Group faces
competition from Bentley; Intergraph; MapInfo Corporation; Earth Sciences
Research Institute ("ESRI"); and MCI Systemhouse. Kinetix product offerings
compete with products offered by other multimedia companies such as Adobe
Systems Inc.; Macromedia, Inc.; and Silicon Graphics, Inc. The Personal
Solutions Group family of products competes with; IMSI; The Learning Company;
Visio; Micrografx Inc. and others. Certain of the competitors of Autodesk have
greater financial, technical, sales and marketing, and other resources than
Autodesk.
Autodesk believes that the principal factors affecting competition in its
markets are product reliability, performance, ease of use, range of useful
features, continuing product enhancements, reputation, price and training. In
addition, the availability of third-party application software is a
competitive factor within the CAD market. Autodesk believes that it competes
favorably in these areas and that its competitive position will depend, in
part, upon its continued ability to enhance existing products, and to develop
and market new products.
In April 1998, Autodesk received notice that the FTC has undertaken a
nonpublic investigation of its business practices. The FTC has not made any
claims or allegations regarding Autodesk's current business practices or
policies, nor have any charges been filed. Autodesk intends to cooperate fully
with the FTC in its inquiry. Autodesk does not believe that the investigation
will have a material impact on its business or consolidated results of
operations.
Fluctuations in Quarterly Operating Results. Autodesk has experienced
fluctuations in operating results in interim periods in certain geographic
regions due to seasonality. Autodesk's operating results in Europe during the
third fiscal quarter are usually impacted by a slow summer period while the
Asia Pacific operations typically experience seasonal slowing in the third and
fourth fiscal quarters.
The technology industry is particularly susceptible to fluctuations in
operating results within a quarter. While Autodesk experienced more linear
operating results within fiscal year 1998 compared to prior years,
historically the majority of Autodesk's orders within a fiscal quarter have
frequently been concentrated within the last weeks or days of that quarter.
These fluctuations are caused by a number of factors, including the relatively
long sales cycle of some of Autodesk's products, the timing of the
introduction of new products by Autodesk or its competitors, and other
economic factors experienced by Autodesk's customers and the geographic
regions in which Autodesk does business. Additionally, Autodesk's operating
expenses are based in part on its expectations for future revenues and are
relatively fixed in the short term. Accordingly, any revenue shortfall below
expectations could have an immediate and significant adverse effect on
Autodesk's consolidated results of operations and financial condition.
Similarly, shortfalls in Autodesk's revenues or earnings from levels
expected by securities analysts could have an immediate and significant
adverse effect on the trading price of Autodesk's common stock. Moreover,
Autodesk's stock price is subject to the volatility generally associated with
technology stocks and may also be affected by broader market trends unrelated
to performance.
Product Concentration. Autodesk derives a substantial portion of its
revenues from sales of AutoCAD software, AutoCAD updates, and adjacent
products which are interoperable with AutoCAD. As such, any factor adversely
affecting sales of AutoCAD and AutoCAD updates, including such factors as
product life cycle, market acceptance, product performance and reliability,
reputation, price competition, and the availability of third-party
applications, could have a material adverse effect on Autodesk's business and
consolidated results of operations.
Product Development and Introduction. The software industry is characterized
by rapid technological change as well as changes in customer requirements and
preferences. The software products offered by Autodesk
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are internally complex and, despite extensive testing and quality control, may
contain errors or defects ("bugs"), especially when first introduced. In
fiscal year 1996, Autodesk experienced quality and performance issues
associated with AutoCAD Release 13, including issues related to compatibility
with certain hardware platforms and peripheral equipment, interoperability
problems with products designed to work in conjunction with AutoCAD Release
13, and other issues associated with the software's object-oriented design.
These factors resulted in a high rate of product returns in fiscal year 1996.
There can be no assurance that defects or errors will not occur in future
releases of AutoCAD or other software products offered by Autodesk. Such
defects or errors could result in corrective releases to Autodesk's software
products, damage to Autodesk's reputation, loss of revenues, an increase in
product returns, or lack of market acceptance of its products, any of which
could have a material and adverse effect on Autodesk's business and
consolidated results of operations.
Autodesk believes that its future results will depend largely upon its
ability to offer products that compete favorably with respect to reliability,
performance, ease of use, range of useful features, continuing product
enhancements, reputation, price and training. Delays or difficulties may
result in the delay or cancellation of planned development projects, and could
have a material and adverse effect on Autodesk's business and consolidated
results of operations. Further, increased competition in the market for
design, mapping, or multimedia software products could also have a negative
impact on Autodesk's business and consolidated results of operations. More
specifically, gross margins may be adversely affected if sales of low-end CAD
products, which historically have had lower margins, grow at a faster rate
than Autodesk's higher-margin products.
Certain of Autodesk's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. Autodesk generally either owns or licenses the
software developed by third parties. Because talented development personnel
are in high demand, there can be no assurance that independent developers,
including those who have developed products for Autodesk in the past, will be
able to provide development support to Autodesk in the future. Similarly,
there can be no assurance that Autodesk will be able to obtain and renew
license agreements on favorable terms, if at all, and any failure to do so
could have a material adverse effect on Autodesk's business and consolidated
results of operations.
Autodesk's business strategy has historically depended in large part on its
relationships with third-party developers, who provide products that expand
the functionality of Autodesk's design software. There can be no assurance
that certain developers will not elect to support other products or otherwise
experience disruption in product development and delivery cycles. Such
disruption in particular markets could negatively impact these third-party
developers and end users, which could have a material adverse effect on
Autodesk's business and consolidated results of operations. Further, increased
merger and acquisition activity currently experienced in the technology
industry could affect relationships with other third-party developers, and
thus adversely affect operating results.
International Operations. Autodesk anticipates that international operations
will continue to account for a significant portion of its consolidated
revenues. Risks inherent in Autodesk's international operations include the
following: unexpected changes in regulatory practices and tariffs;
difficulties in staffing and managing foreign operations; longer collection
cycles; potential changes in tax laws; greater difficulty in protecting
intellectual property; and the impact of fluctuating exchange rates between
the US dollar and foreign currencies in markets where Autodesk does business.
During fiscal year 1998, changes in exchange rates from the same period of the
prior fiscal year adversely impacted revenues, principally due to changes in
the Japanese yen and the German mark. As more fully described in Note 2 to the
Autodesk consolidated financial statements, Autodesk's risk management
strategy uses derivative financial instruments in the form of forward foreign
exchange contracts for the purpose of hedging foreign currency market
exposures of underlying assets, liabilities, and other obligations which exist
as a part of its ongoing business operations. Autodesk does not enter into
derivative contracts for the purpose of trading or speculative transactions.
Autodesk's international results may also be impacted by general economic and
political conditions in these foreign markets. Autodesk's international
results have been impacted by recent unfavorable economic and political
conditions in the Asian markets. There can be no assurance that
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the economic crisis and currency issues currently being experienced will not
have a material adverse effect on Autodesk's future international operations
and, consequently, on Autodesk's business and consolidated results of
operations.
Dependence on Distribution Channels. Autodesk sells its software products
primarily to distributors and resellers (value-added resellers, or "VARs").
Autodesk's ability to effectively distribute products depends in part upon the
financial and business condition of its VAR network. Although Autodesk has not
to date experienced any material problems with its VAR network, computer
software dealers and distributors are typically not highly capitalized and
have experienced difficulties during times of economic contraction and may do
so in the future. While no single customer accounted for more than 10 percent
of Autodesk's consolidated revenues in fiscal years 1998, 1997, or 1996, the
loss of or a significant reduction in business with any one of Autodesk's
major international distributors or large US resellers could have a material
adverse effect on Autodesk's business and consolidated results of operations
in future periods.
Product Returns. With the exception of certain European distributors,
agreements with Autodesk's VARs do not contain specific product-return
privileges. However, Autodesk permits its VARs to return product in certain
instances, generally during periods of product transition and during update
cycles. While Autodesk experienced a decrease in the overall level of product
returns in fiscal year 1998 compared to fiscal years 1997 and 1996, management
anticipates that product returns in future periods will continue to be
impacted by product update cycles, new product releases, and software quality.
Autodesk establishes reserves, including reserves for stock balancing and
product rotation, based on estimated future returns of product and after
taking into account channel inventory levels, the timing of new product
introductions, and other factors. While Autodesk maintains strict measures to
monitor channel inventories and to provide appropriate reserves, actual
product returns may differ from Autodesk's reserve estimates, and such
differences could be material to Autodesk's consolidated financial statements.
Intellectual Property. Autodesk relies on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality procedures, and contractual
provisions to protect its proprietary rights. Despite such efforts to protect
Autodesk's proprietary rights, unauthorized parties may attempt to copy
aspects of Autodesk's software products or to obtain and use information that
Autodesk regards as proprietary. Policing unauthorized use of Autodesk's
software products is time-consuming and costly. Although Autodesk is unable to
measure the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. There can be no assurance
that Autodesk's means of protecting its proprietary rights will be adequate or
that its competitors will not independently develop similar technology.
Autodesk expects that software product developers will be increasingly subject
to infringement claims as the number of products and competitors in its
industry segments grows and the functionality of products in different
industry segments overlaps. There can be no assurance that infringement or
invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted against Autodesk or that any such assertions will
not have a material adverse effect on its business. Any such claims, whether
with or without merit, could be time-consuming, result in costly litigation
and diversion of resources, cause product shipment delays, or require Autodesk
to enter into royalty or licensing agreements. In addition, such royalty or
license agreements, if required, may not be available on acceptable terms, if
at all, which could have a material adverse effect on Autodesk's business and
consolidated results of operations.
Autodesk also relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in its products to perform key functions. There can be no
assurance that these third-party software licenses will continue to be
available on commercially reasonable terms, or that the software will be
appropriately supported, maintained, or enhanced by the licensors. The loss of
licenses to, or inability to support, maintain, and enhance any such software,
could result in increased costs, or in delays or reductions in product
shipments until equivalent software could be developed, identified, licensed,
and integrated, which could have a material adverse effect on Autodesk's
business and consolidated results of operations.
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Risks Associated with Acquisitions and Investments. Autodesk periodically
acquires or invests in businesses, software products, and technologies which
are complementary to Autodesk's business through strategic alliances, debt and
equity investments, joint ventures, and the like. The risks associated with
such acquisitions or investments include, among others, the difficulty of
assimilating the operations and personnel of the companies, the failure to
realize anticipated synergies, and the diversion of management's time and
attention. In addition, such investments and acquisitions may involve
significant transaction-related costs. There can be no assurance that Autodesk
will be successful in overcoming such risks or that such investments and
acquisitions will not have a material adverse impact on Autodesk's business,
financial condition, or results of operations. In addition, such investments
and acquisitions may contribute to potential fluctuations in quarterly results
of operations due to merger-related costs and charges associated with
eliminating redundant expenses or write-offs of impaired assets recorded in
connection with acquisitions, any of which could negatively impact results of
operations for a given period or cause lack of linearity quarter to quarter in
Autodesk's operating results or financial condition.
During the first quarter of fiscal year 1998, Autodesk completed its
acquisition of all of the outstanding stock of Softdesk, Inc. Autodesk
continues to integrate the operations acquired in the Softdesk merger with its
own. There can be no assurance that the anticipated benefits of the Softdesk
merger and any future mergers or acquisitions will be realized.
Attraction and Retention of Employees. The continued growth and success of
Autodesk depends significantly on the continued service of highly skilled
employees. Competition for these employees in today's marketplace, especially
in the technology industries, is intense. Autodesk's ability to attract and
retain employees is dependent on a number of factors including its continued
ability to grant stock incentive awards, which are described in more detail in
Note 6 to the Autodesk consolidated financial statements. There can be no
assurance that Autodesk will be successful in continuing to recruit new
personnel and to retain existing personnel. The loss of one or more key
employees or Autodesk's inability to maintain existing employees or recruit
new employees could have a material adverse impact on Autodesk. In addition,
Autodesk may experience increased compensation costs to attract and retain
skilled personnel.
Impact of Year 2000. Some of the computer programs used by Autodesk in its
internal operations rely on time-sensitive software that was written using two
digits rather than four to identify the applicable year. These programs may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Additionally, as Autodesk is in the business of software production, year 2000
issues may affect Autodesk's products which are being sold externally.
Autodesk launched a six-phase year 2000 compliance program in the third
quarter of fiscal year 1998. The first and second phases, respectively,
included conducting preliminary and detailed assessments of vendor hardware
and software to determine Autodesk's overall exposure to the year 2000 issue.
The third phase included implementing a year 2000-compliant procurement
process and testing the current desktop operating environment. These three
phases were complete as of the end of fiscal year 1998 and cost approximately
$500,000. These costs have been charged to expense as incurred.
The fourth phase of the compliance program involves determining a working
plan, including defining the future analyses needed, the scope, and total
budget for required compliance actions. The fifth phase involves the repair or
replacement of any noncompliant hardware or software currently purchased or
developed internally. The sixth and final phase will involve a final systems
check to ensure that all hardware and software in use by Autodesk is
compliant. Autodesk expects to spend between $5 million and $6 million during
fiscal year 1999 to complete phases four, five, and six. Of the total cost,
Autodesk plans to capitalize up to $1.7 million as it relates primarily to the
purchase of new software. The remaining $3.3 million to $4.3 million relates
to modifying existing software and will be expensed as incurred in accordance
with EITF 96-14, "Accounting for
121
<PAGE>
the Costs Associated with Modifying Computer Software for the Year 2000."
There can be no assurance, however, that there will not be a delay in the
completion of these procedures or that the cost of such procedures will not
exceed original estimates, either of which could have a material adverse
effect on future results of operations.
In addition to correcting the business and operating systems used by
Autodesk in the ordinary course of business as described above, Autodesk has
also reviewed all products it produces internally for sale to third parties to
determine compliance of its products. Products either have been found to be
compliant or are currently being tested for compliance. However, many Autodesk
products run on computer hardware and operating systems produced and sold by
third-party vendors. There can be no assurance that these computer hardware
and operating systems will be converted in a timely manner, and any failure in
this regard may cause Autodesk products not to function as designed. Any
future costs associated with ensuring that Autodesk's products are compliant
with the year 2000 are not expected to have a material impact on Autodesk's
results of operations or financial position. Autodesk anticipates that all
compliance procedures will be completed before the beginning of Autodesk's
fiscal year 2000, which begins February 1, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and marketable securities, which consist primarily
of high-quality municipal bonds, tax-advantaged money market instruments, and
US treasury bills, totaled $301.3 million at January 31, 1998, compared to
$286.3 million at January 31, 1997. The $15.0 million increase in cash, cash
equivalents, and marketable securities was due primarily to cash generated
from operations ($158.6 million) and cash proceeds from the issuance of shares
through employee stock option and stock purchase programs ($80.1 million).
This increase was partially offset by cash used to repurchase shares of
Autodesk's common stock ($174.9 million), to acquire complementary software
technologies and businesses ($19.8 million), to purchase computer equipment,
furniture, and leasehold improvements ($15.0 million), and to pay dividends on
Autodesk's common stock ($11.3 million).
During fiscal years 1998, 1997, and 1996, Autodesk repurchased and retired a
total of 2,332,500, 1,659,500, and 2,671,000 shares of Autodesk Common Stock
at average repurchase prices of $38.39, $32.44, and $40.43, respectively,
pursuant to an ongoing and systematic repurchase plan ("Systematic Plan")
approved by Autodesk Board to reduce the dilutive effect of common shares to
be issued under Autodesk's employee stock plans. In December 1997, the
Autodesk Board authorized the purchase of an additional 4 million shares under
the Systematic Plan.
In August 1996, Autodesk announced another stock repurchase program under
which Autodesk may purchase up to 5 million shares of Autodesk Common Stock in
open market transactions as market and business conditions warrant -- the
"Supplemental Plan." In December 1997, the Autodesk Board authorized the
purchase of an additional 5 million shares under the Supplemental Plan.
Autodesk may also utilize equity options as part of the Supplemental Plan.
In connection with the Supplemental Plan, Autodesk sold put warrants to an
independent third party in September 1996 and purchased call options from the
same independent third party. The premiums received with respect to the equity
options equaled the premiums paid. Consequently, there was no exchange of
cash. Autodesk exercised the call options, repurchasing 2,000,000 shares of
Autodesk Common Stock during the third quarter of fiscal year 1998 for $51
million. The put warrants expired unexercised in September 1997 and were
reclassified from put warrants to stockholders' equity during the third
quarter of fiscal year 1998. For additional information, see Note 7 to the
Autodesk consolidated financial statements. In addition to the exercise of the
call options in fiscal year 1998, Autodesk repurchased an additional 1,000,000
shares in the open market at an average per share repurchase price of $34.37.
During fiscal year 1997, Autodesk repurchased 557,500 shares of Autodesk
Common Stock at an average per share repurchase price of $24.09 subject to the
Supplemental Plan.
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<PAGE>
In December 1997, Autodesk sold put warrants to an independent third party
that entitle the holder of the warrants to sell 1.5 million shares of Autodesk
Common Stock at $38.12 per share. Additionally, Autodesk purchased call
options from the same independent third party that entitle Autodesk to buy 1
million shares at $39.88 per share. The premiums received with respect to the
equity options totaled $4.5 million and equaled the premiums paid.
Consequently, there was no exchange of cash. The outstanding put warrants at
January 31, 1998, permitted a net share settlement at Autodesk's option. As a
result, the transaction did not result in a put warrant liability on the
consolidated balance sheet.
Autodesk has an unsecured $40 million bank line of credit, of which $20
million is guaranteed, that may be used from time to time to facilitate short-
term cash flow. At January 31, 1998, there were no borrowings outstanding
under this credit agreement, which expires in January 1999.
Autodesk's principal commitments at January 31, 1998, consisted of
obligations under operating leases for facilities. For additional information,
see Note 5 to the Autodesk Consolidated Financial Statements.
Longer-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancement of
existing products; financing anticipated growth; dividend payments;
repurchases of Autodesk Common Stock; and the acquisition of businesses,
software products, or technologies complementary to Autodesk's business.
Autodesk believes that its existing cash, cash equivalents, marketable
securities, available line of credit, and cash generated from operations will
be sufficient to satisfy its currently anticipated cash requirements.
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<PAGE>
AUTODESK MANAGEMENT, EXECUTIVE
COMPENSATION AND PRINCIPAL STOCKHOLDERS
AUTODESK MANAGEMENT
The following sets forth certain information regarding the executive
officers and directors of Autodesk as of August 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Carol A. Bartz (1)...... 50 Chairman of the Board and Chief Executive Officer
Eric B. Herr............ 50 President and Chief Operating Officer
Joseph H. Astroth, 43 Vice President, GIS Market Group
Ph.D...................
Carl Bass............... 41 Vice President, Engineering and Chief Technical Officer
Steve Cakebread......... 46 Vice President and Chief Financial Officer
Dominic J. Gallello..... 43 Vice President, Mechanical CAD Market Group
Stephen McMahon......... 57 Vice President, Human Resources and Facilities
Tom Norring............. 52 Vice President, Asia Pacific
Michelle Pharr.......... 49 Vice President, the Americas
Marcia K. Sterling...... 54 Vice President, Business Development and General Counsel
Godfrey R. Sullivan..... 45 Vice President, Personal Solutions Group
Michael E. Sutton....... 53 Vice President, Europe/Middle East/Africa
Mark A. Bertelsen (3)... 54 Director
Crawford W. Beveridge 52 Director
(1)(2).................
J. Hallam Dawson (3).... 61 Director
Paul S. Otellini (2).... 47 Director
Mary Alice Taylor (3)... 48 Director
Morton Topfer (1)(2).... 61 Director
</TABLE>
- --------
(1) Member of the Nominating Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
CAROL A. BARTZ joined Autodesk in April 1992 and has served as Chief
Executive Officer and Chairman of the Board since May 1992. Ms. Bartz served
as President from May 1992 through September 1996. Ms. Bartz is a director of
AirTouch Communications, Inc., Network Appliance, Inc., and BEA Systems, Inc.
ERIC B. HERR has been Autodesk's President and Chief Operating Officer since
September 1996, having also served as the Acting Vice President, AEC Market
Group, from September 1996 through March 1997. Mr. Herr served as the Chief
Financial Officer from the time he joined Autodesk in May 1992 until September
1996. From December 1992 through January 1995, Mr. Herr served as Vice
President, Emerging Businesses. From January 1995 to May 1995, Mr. Herr served
as Vice President, Finance and Administration.
DR. JOSEPH H. ASTROTH has served as Vice President, GIS Market Group, since
joining Autodesk in January 1996. From September 1989 through December 1995,
Dr. Astroth held various positions with Graphic Data Systems Corporation
including Director, Environmental Market Group, from January 1993 to June
1994, and Vice President of Product Management, Engineering, from June 1994 to
December 1995.
CARL BASS was named Vice President of Engineering in October 1997. He was
named Chief Technical Officer in December 1996. From November 1995 to December
1996, Mr. Bass served as a Senior Technical Fellow for the AutoCAD family of
products. Mr. Bass served as Chief Architect for AutoCAD from September 1993
to October 1995. Before joining Autodesk, Mr. Bass was cofounder and Chief
Technical Officer of Ithaca Software from May 1986 to August 1993.
STEVE CAKEBREAD joined Autodesk in April 1997 as Vice President and Chief
Financial Officer. From April 1993 through March 1997 he served as Vice
President, Finance World Trade Corporation at Silicon Graphics.
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<PAGE>
Mr. Cakebread held various finance and general management positions at
Hewlett-Packard from January 1972 through March 1993.
DOMINIC J. GALLELLO has served as Vice President, MCAD Market Group, since
January 1995. Mr. Gallello served as Vice President, Asia Pacific, from the
time he joined Autodesk in October 1992 until July 1996. From February 1995 to
August 1995, Mr. Gallello served as Acting Vice President, MCAD Market Group.
STEPHEN MCMAHON has served as Vice President, Human Resources, since joining
Autodesk in July 1992. From July 1987 to July 1992, Mr. McMahon served as
Senior Director, Human Resources, for Apple Computer, Inc.
TOM NORRING has served as Vice President, Asia Pacific, since joining
Autodesk in June 1996. Prior to joining Autodesk, Mr. Norring served as Vice
President of Asia Pacific and Latin America and in a variety of international
management positions for Hitachi Data Systems from 1978 to 1996.
MICHELLE PHARR was appointed Vice President, the Americas, in October 1997.
Ms. Pharr joined Autodesk in November 1995 as Regional Director of the Western
Region of the United States. Before joining Autodesk, Ms. Pharr was the
Director of Western Operations at Aspect Development from July 1993 to
November 1995.
MARCIA K. STERLING joined Autodesk in October 1995 as Vice President,
Business Development and General Counsel. From September 1982 to October 1995,
she practiced corporate and securities law at Wilson Sonsini Goodrich &
Rosati, where she was a member.
GODFREY R. SULLIVAN was named Vice President, Personal Solutions Group, in
September 1997. Mr. Sullivan served as Vice President, the Americas, since
joining Autodesk in October 1992 and as Acting Vice President, AEC/FM Market
Group, from February 1995 to September 1995.
MICHAEL E. SUTTON has served as Vice President, Europe/Middle East/Africa,
since June 1993. Mr. Sutton joined Autodesk in October 1987 as a sales and
marketing director in the United Kingdom. Mr. Sutton was the Managing Director
of Autodesk's United Kingdom subsidiary from January 1990 to January 1992.
From January 1992 to February 1993, Mr. Sutton served as Northern Region
Manager, Europe, and from February 1993 to May 1993, he served as Acting Vice
President, Europe.
MARK A. BERTELSEN has been a director of Autodesk since 1992. Mr. Bertelsen
joined the law firm of Wilson Sonsini Goodrich & Rosati, outside legal counsel
to Autodesk, in January 1972 and became a member of the firm in January 1977.
CRAWFORD W. BEVERIDGE has been a director of Autodesk since 1993. Mr.
Beveridge served as the Chief Executive Officer of Scottish Enterprise, an
economic development company, since January 1991. Mr. Beveridge is a director
of U.S. Smaller Companies Investment Trust and Clydeport plc.
J. HALLAM DAWSON has been a director of Autodesk since 1988. Mr. Dawson has
served since September 1986 as Chairman of IDI Associates, a private
investment bank specializing in Latin America.
PAUL S. OTELLINI has been a director of Autodesk since 1997. Mr. Otellini
has served as Executive Vice President and General Manager of the Intel
Architecture Business Group at Intel Corporation since January 1998. Mr.
Otellini was promoted to Executive Vice President of Sales and Marketing of
Intel Corporation in April 1996 and served as Senior Vice President of Sales
and Marketing of Intel Corporation from May 1993 to May 1996. Mr. Otellini is
a director of Fritz Companies.
MARY ALICE TAYLOR has been a director of Autodesk since 1995. Ms. Taylor has
served as Executive Vice President of Global Operations and Technology for
CitiCorp since January 1997. Ms. Taylor served as Senior Vice President of
Federal Express Corporation from September 1991 until December 1996. Ms.
Taylor is a director of Perrigo, Inc. and Allstate Insurance, Inc.
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<PAGE>
MORTON TOPFER has been a director of Autodesk since 1995. Mr. Topfer has
served as Vice Chairman of Dell Computer Corporation since June 1994. From
March 1971 to June 1994, Mr. Topfer was the Executive Vice President of
Motorola, Inc.
COMPENSATION OF DIRECTORS
Autodesk pays an annual fee of $25,000 to each director who is not an
employee of or consultant to Autodesk (currently six persons), of which not
more than fifty percent can be cash and the balance must be restricted stock
issued at the rate of $1.20 worth of stock for each $1.00 of cash compensation
foregone. Directors do not receive fees for Board or Board Committee meetings
attended.
Autodesk's 1990 Directors' Option Plan provides for the automatic grant of
nonstatutory options to outside directors of Autodesk. Upon being elected or
appointed to the Autodesk Board, each outside director is granted an option to
purchase 20,000 shares of Autodesk Common Stock, with subsequent annual grants
of 10,000 shares. Each option granted under the 1990 Directors' Option Plan
vests cumulatively as to one-third of the shares subject to the option on each
anniversary of the date of grant, for a total vesting period of three years.
The exercise price of options granted under the 1990 Directors' Option Plan is
equal to the fair market value of the Autodesk Common Stock on the date of
grant.
AUTODESK EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to or earned by
Autodesk's Chief Executive Officer and Autodesk's four other most highly
compensated officers whose salary plus bonus exceeded $100,000 during the last
fiscal year (collectively the "Autodesk Named Officers") for services rendered
to Autodesk during the fiscal years ended January 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
----------------- ------------
SECURITIES
NAME AND PRINCIPAL FISCAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS(1) OPTIONS(#) COMPENSATION(2)
------------------ ------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Carol A. Bartz........... 1998 $515,000 $490,125 -- $ 39,000
Chairman of the Board 1997 515,000 -- 560,000 39,000
and Chief Executive
Officer 1996 475,000 229,284 -- 38,500
Eric B. Herr............. 1998 $320,000 $260,000 -- $ 3,000
President and Chief
Operating Officer 1997 320,000 -- 280,000 3,000
1996 310,000 124,926 -- 2,500
Dominic J. Gallello...... 1998 $275,000 $173,125 -- $ 13,576
Vice President,
Mechanical CAD 1997 275,000 -- 210,000 3,000
Market Group 1996 250,000 125,500 20,000 2,500
Godfrey R. Sullivan...... 1998 $260,000 $173,750 -- $ 3,000
Vice President, Personal
Solutions 1997 260,000 -- 191,000 3,000
Group 1996 260,000 104,858 20,000 2,500
Michael E. Sutton........ 1998 $250,000 $160,000 -- $139,135
Vice President,
Europe/Middle 1997 250,000 -- 70,000 179,241
East/Africa 1996 222,500 89,806 20,000 99,000
</TABLE>
- --------
(1) Represents incentive bonuses for achievement of corporate, individual and
organizational objectives in fiscal years 1996 and 1998.
126
<PAGE>
(2) Amounts reported for fiscal year 1998 consist of: (i) matching
contributions by Autodesk to one of Autodesk's pre-tax savings plans (Ms.
Bartz $2,500, Mr. Herr $2,500, Mr. Gallello $2,500 and Mr. Sullivan
$2,500); (ii) Autodesk contributions to one of Autodesk's pre-tax plans
(Ms. Bartz $500, Mr. Herr $500, Mr. Gallello $500 and Mr. Sullivan $500);
(iii) $36,000 paid to Ms. Bartz for the purpose of reimbursing her for
certain transportation expenses; (iv) $10,576 paid to Mr. Gallello for
vacation cashout; (v) $100,000 paid to Mr. Sutton as a cost of living
adjustment related to his location in Switzerland; (vi) $3,621 paid by
Autodesk for health insurance premiums on behalf of Mr. Sutton; and (vii)
$35,514 paid by Autodesk into an employee retirement fund on behalf of Mr.
Sutton. Amounts reported for fiscal year 1997 consist of: (i) matching
contributions by Autodesk to one of Autodesk's pre-tax savings plans (Ms.
Bartz $2,500, Mr. Herr $2,500, Mr. Gallello $2,500 and Mr. Sullivan
$2,500); (ii) Autodesk contributions to one of Autodesk's pre-tax plans
(Ms. Bartz $500, Mr. Herr $500, Mr. Gallello $500 and Mr. Sullivan $500);
(iii) $36,000 paid to Ms. Bartz for the purpose of reimbursing her for
certain transportation expenses; (iv) $100,000 paid to Mr. Sutton as a
cost of living adjustment related to his location in Switzerland;
(v) $3,104 paid by Autodesk for health insurance premiums on behalf of Mr.
Sutton; and (vi) $76,137 paid by Autodesk into an employee retirement fund
on behalf of Mr. Sutton. Amounts reported for fiscal year 1996 consist of:
(i) matching contributions by Autodesk to one of Autodesk's pre-tax
savings plans (Ms. Bartz $2,000, Mr. Herr $2,000, Mr. Gallello $2,000 and
Mr. Sullivan $2,000; (ii) Autodesk contributions to one of Autodesk's pre-
tax plans (Ms. Bartz $500, Mr. Herr $500, Mr. Gallello $500 and Mr.
Sullivan $500); (iii) $36,000 paid to Ms. Bartz for the purpose of
reimbursing her for certain transportation expenses; and (iv) $99,000 paid
to Mr. Sutton as a cost of living adjustment related to his location in
Switzerland.
OPTION GRANTS
Autodesk did not grant any options to purchase shares of Autodesk Common
Stock to the Autodesk Named Officers during the fiscal year ended January 31,
1998. The total number of options granted to all employees during fiscal year
1998 was 3,227,808.
OPTION EXERCISES AND HOLDINGS
The following table sets forth, for each of the Autodesk Named Officers,
certain information concerning stock options exercised during Autodesk's 1998
fiscal year, and the number of shares of Autodesk Common Stock subject to both
exercisable and unexercisable stock options as of January 31, 1998. Also
reported are values for "in-the-money" options that represent the positive
spread between the respective exercise prices of outstanding stock options and
the fair market value of Autodesk Common Stock as of January 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES YEAR END(#) FISCAL YEAR END
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Carol A. Bartz.......... 300,000 $7,217,376 1,080,000 440,000 $24,032,500 $6,285,000
Eric B. Herr............ 225,000 $5,937,344 199,000 206,000 $ 3,190,125 $1,320,500
Dominic J. Gallello..... -- -- 203,334 206,666 $ 2,431,251 $2,169,999
Godfrey R. Sullivan..... 120,000 $2,077,877 150,334 190,666 $ 1,924,876 $2,002,249
Michael E. Sutton....... 30,000 $ 382,500 86,694 97,786 $ 885,771 $1,087,339
</TABLE>
127
<PAGE>
AUTODESK PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Autodesk Common Stock as of August 31, 1998 (i) by each person
who is known by Autodesk to own beneficially more than five percent (5%) of
Autodesk Common Stock ("Autodesk Principal Stockholders"), (ii) by each of
Autodesk's directors, (iii) by each of the Autodesk Named Officers and (iv) by
all directors and executive officers who served as directors or executive
officers at July 31, 1998 as a group.
<TABLE>
<CAPTION>
DIRECTORS,
OFFICERS AND SHARES BENEFICIALLY OWNED
FIVE PERCENT --------------------------
(5%) NUMBER(1) PERCENT(2)
STOCKHOLDERS ------------ -------------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS:(3)
J.P. Morgan & Co. Incorporated............................... 4,964,220 10.12%
525 Fifth Avenue
New York, NY 10036
DIRECTORS:
Carol A. Bartz(4)............................................ 1,205,397 2.53%
Mark A. Bertelsen(5)......................................... 46,477 *
Crawford W. Beveridge(6)..................................... 51,269 *
J. Hallam Dawson(7).......................................... 63,243 *
Paul S. Otellini(8).......................................... 30,766 *
Mary Alice Taylor(9)......................................... 46,808 *
Morton Topfer(10)............................................ 49,043 *
OTHER AUTODESK NAMED OFFICERS:
Eric B. Herr(11)............................................. 162,397 *
Dominic J. Gallello(12)...................................... 265,475 *
Godfrey R. Sullivan(13)...................................... 205,996 *
Michael E. Sutton(14)........................................ 149,245 *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (19
PERSONS)(15):................................................ 2,778,223 5.66%
</TABLE>
- --------
* Represents less than 1% of the outstanding shares.
(1) The number and percentage of shares beneficially owned is determined
under the rules of the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares as to which the
individual has sole or shared voting power or investment power and also
any shares which the individual has the right to acquire within sixty
days of August 31, 1998, through the exercise of any stock option or
other right.
(2) Number of shares deemed outstanding includes 46,381,804 outstanding as of
August 31, 1998, plus any shares subject to stock options held by the
person or persons in question that are exercisable within 60 days of
August 31, 1998.
(3) This information was obtained from filings made with the SEC pursuant to
Sections 13(d) or 13(g) of the Exchange Act.
(4) Includes options to purchase 1,200,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(5) Includes options to purchase 43,332 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(6) Includes options to purchase 50,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(7) Includes options to purchase 60,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
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<PAGE>
(8) Includes options to purchase 30,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(9) Includes options to purchase 45,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(10) Includes options to purchase 45,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(11) Includes options to purchase 147,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(12) Includes options to purchase 260,200 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(13) Includes options to purchase 200,800 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(14) Includes options to purchase 148,080 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(15) Includes options to purchase 2,707,826 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
EMPLOYMENT CONTRACTS AND CERTAIN TRANSACTIONS
In April 1992, Autodesk entered into an agreement with Carol A. Bartz,
Autodesk's Chairman of the Board and Chief Executive Officer, which provides,
among other things, for a severance payment equal to two years' base salary
and incentive compensation in the event Ms. Bartz's employment is terminated
without cause within two years after commencement of employment or one year
after a change of control of Autodesk not approved by the Autodesk Board or
two years' base compensation in the event Ms. Bartz's employment is terminated
without cause under any other circumstances.
129
<PAGE>
PRO FORMA STOCK OWNERSHIP OF AUTODESK PRINCIPAL STOCKHOLDERS AND DIRECTORS
The following table sets forth certain information regarding the beneficial
ownership of Autodesk Common Stock on a pro forma basis for the Autodesk
Principal Stockholders, each of Autodesk's directors and all directors and
executive officers of Autodesk as a group. This table is based on the
capitalizations of Autodesk and Discreet as of August 31, 1998 and assumes
that 15,591,113 shares of Autodesk Common Stock are issued in connection with
the Transactions. Because the actual number of shares of Autodesk Common Stock
to be issued pursuant to the Transactions will not be fixed until the
Effective Time, the beneficial ownership at the Effective Time of the persons
and entities listed in the following table may differ from the information
presented in the table:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENTAGE BENEFICIALLY
OWNED AFTER OWNED AFTER
CONSUMMATION OF CONSUMMATION OF
NAME THE TRANSACTIONS(1) THE TRANSACTIONS(2)
---- -------------------- -----------------------
<S> <C> <C>
AUTODESK PRINCIPAL
STOCKHOLDERS:(3)
J.P. Morgan & Co. Incorporated.. 4,694,220 7.57%
525 Fifth Avenue
New York, NY 10036
DIRECTORS:
Carol A. Bartz(4)............... 1,205,397 1.91%
Mark A. Bertelsen(5)............ 46,477 *
Crawford W. Beveridge(6)........ 51,269 *
J. Hallam Dawson(7)............. 63,243 *
Paul S. Otellini(8)............. 30,766 *
Mary Alice Taylor(9)............ 46,808 *
Morton Topfer(10)............... 49,043 *
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (19 PERSONS)
(11)............................. 2,778,223 4.30%
</TABLE>
- --------
* Represents less than 1% of the outstanding shares.
(1) The number and percentage of shares beneficially owned is determined
under rules of the SEC, and the information is not necessarily indicative
of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the individual has
sole or shared voting power or investment power and also any shares which
the individual has the right to acquire within sixty days of August 31,
1998, through the exercise of any stock option or other right.
(2) Number of shares deemed outstanding includes 61,972,917 shares that would
be outstanding after consummation of the Transactions, assuming the
issuance of 15,591,113 shares of Autodesk Common Stock in the
Transactions, plus any shares subject to stock options held by the person
or persons in question that are exercisable within 60 days of August 31,
1998.
(3) This information was obtained from filings made with the SEC pursuant to
Sections 13(d) or 13(g) of the Exchange Act.
(4) Includes options to purchase 1,200,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(5) Includes options to purchase 43,332 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(6) Includes options to purchase 50,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(7) Includes options to purchase 60,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(8) Includes options to purchase 30,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
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(9) Includes options to purchase 45,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(10) Includes options to purchase 45,000 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
(11) Includes options to purchase 2,707,826 shares of Autodesk Common Stock
exercisable within 60 days of August 31, 1998.
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DISCREET
In this section, "Discreet" refers to, depending on the context, Discreet,
its subsidiaries and its ventures collectively, or Discreet and its
subsidiaries.
BUSINESS
BACKGROUND
Discreet develops, assembles, markets and supports non-linear, on-line
digital systems and software for creating, editing and compositing imagery and
special effects for film, video, HDTV, broadcast and the Web. Discreet's
systems and software are utilized by creative professionals for a variety of
applications, including feature films, television programs, commercials, music
and corporate videos, interactive game production, live broadcasting, as well
as Web design. Discreet's systems have played key roles in the creation of
special visual effects for films such as Armageddon, Titanic, Forrest Gump,
Independence Day, The Fifth Element, Batman & Robin, Contact and Air Force
One; television programs and special events such as ABC's "World News Tonight
with Peter Jennings" and the 1996 United States Presidential elections on ABC
and CBS; music videos by artists including U2, REM, Rolling Stones and The
Beatles; and commercials for clients such as Nike, Pepsi, AT&T and McDonald's.
Discreet believes that creative professionals and designers require tools that
simplify their work, enabling them to devote more time to creative activities
and less time to technical tasks.
Discreet offers turnkey systems for high end post production and broadcast
facilities focused towards three markets: special effects, editing and
broadcast production (its "Advanced Systems"). Discreet's Advanced Systems are
comprised of proprietary software utilizing workstations manufactured by SGI,
scalable disk arrays and other peripherals. These can be networked together to
enable users to manage data more efficiently and collaborate in an integrated
production environment. Discreet's systems include its inferno* and flame*
systems (special effects), its fire* and smoke* systems (editing), and its
frost* system (broadcast production). Discreet's special effects and editing
Advanced Systems are used to manipulate digital media in an on-line, real-time
environment, providing instant feedback to the creative professional. These
systems are currently or are currently being designed to be resolution
independent and to allow users to work on uncompressed images from a variety
of media sources in the full range of resolutions necessary for film, video
and HDTV. In the broadcast production market, Discreet offers its frost*
system, a set of modeling, animation and rendering tools for the creation and
manipulation of 3D environments, including virtual sets, for broadcast
companies. Discreet sells its Advanced Systems worldwide through a direct
sales force as well as through high-end, sophisticated distributors.
During the last 18 months, Discreet has entered the new media marketplace
through a series of acquisitions and now offers editing and special effects
software which runs on the Microsoft Windows NT, the Apple Macintosh and/or
the Unix operating systems. The new media market is characterized by
institutional and educational customers, designers and prosumers. Discreet's
desktop or new media software (its "New Media Software") products include its
edit* software (formerly D-Vision OnLine) (video editing), its effect*
software (formerly Flint and Illuminaire Composition) (special effects), its
paint* software (formerly Illuminaire Paint) (special effects), and its light*
software (formerly Lightscape) (radiosity). Discreet's New Media Software is
primarily used to create, manipulate, and finish computer graphics images,
interactive and on-line content. effect* provides 3D video composition, clip
animation, and visual effects enabling artists to combine, enhance and modify
video frames or sequences of frames with a very high level of efficiency and
interactivity. paint* is a vector-based, object-oriented painting and
animation system for the manipulation and enhancement of both multi-frame
clips and single-frame graphic images. edit* is a real-time non-linear,
compressed editing software solution which performs compositing, keying and
visual effects on the desktop. light* is a 3D rendering solution that uses
advanced radiosity techniques to significantly enhance realism and lighting
accuracy in 3D environments created for virtual sets, film and video effects,
interactive games and architectural design projects.
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Discreet's goal is to become a leading supplier of digital tools used to
manipulate still and moving pictures to the high-end professional, post-
production and broadcast markets, the desktop or new media market, and the
consumer markets. To achieve this goal, Discreet plans to further expand and
leverage its technology base, customer relationships and existing reputation,
extend its product line to include other aspects of the content creation
process, and expand its worldwide sales and distribution organization.
Discreet is a company incorporated by Articles of Incorporation on September
10, 1991 under Part IA of the Quebec Act whose head office is located at 10
Duke Street, Montreal, Quebec, Canada H3C 2L7. Discreet has sales offices in
the United States in New York, Chicago, Los Angeles; Rio de Janeiro, Brazil;
London, England; Paris, France; Munich, Germany; Singapore; Bombay, India;
Hong Kong, China; Madrid, Spain; and Tokyo, Japan. As of August 31, 1998,
Discreet had 405 employees.
PRODUCTS
The following table sets forth the Discreet products, their market, the date
of first shipment by Discreet, and their platform or operating system.
<TABLE>
<CAPTION>
DATE OF FIRST
SHIPMENT BY
PRODUCT MARKET DISCREET PLATFORM/OPERATING SYSTEM
------- -------------------- ------------- --------------------------------
<S> <C> <C> <C>
ADVANCED SYSTEMS
inferno*................ Special effects October 1995 SGI Onyx2/Unix
flame*.................. Special effects January 1993 SGI Octane/Unix
fire*................... Editing October 1996 SGI Onyx2/Unix
smoke*.................. Editing October 1997 SGI Octane/Unix
frost*(includes product
formerly sold as
Vapour)................ Broadcast Production October 1995 SGI Onyx2 and SGI Octane/Unix
NEW MEDIA SOFTWARE
effect* (formerly
Flint)................. Special effects December 1993 SGI O2/Unix
effect* (formerly
Illuminaire
Composition)........... Special effects June 1997 Microsoft NT and Apple Macintosh
paint* (formerly
Illuminaire Paint)..... Special effects June 1997 Microsoft NT and Apple Macintosh
edit* (formerly D-Vision
OnLine)................ Editing July 1997 Microsoft NT
light* (formerly
Lightscape)............ Radiosity December 1997 Microsoft NT
</TABLE>
ADVANCED SYSTEMS
Discreet's systems are designed to be intuitive and easy to use. Discreet's
systems provide the speed and operational flexibility demanded by the
professional film and video industries. The systems use a consistent interface
through which operations are controlled via on-screen menus (which users can
organize to fit their preferences) and a pressure-sensitive stylus. Discreet's
systems include a Sparks developers kit, which allows customers to integrate
their own proprietary software or third party software into Discreet's
systems' environments. Discreet's systems also offer comprehensive image
input/output ("I/O") functions, allowing image or object data to be captured
and exchanged between workstations in a studio environment in a variety of
formats. For sites with multiple systems, work generated on other platforms
can be imported and placed directly onto Discreet's systems' local disk array
for integration into the current production. In addition, Discreet's image
files can be transferred among local disk arrays. For example, if a user
prepares a production on an effect* system, the user can transfer video or
film data to the flame* or inferno* systems or video data to the fire* system,
for finishing with the client. The flexible systems architecture can result in
different system configurations and enables clients to differentiate
themselves from their competitors by allowing them to customize their systems.
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Special Effects Systems
flame*--flame* is an on-line, resolution-independent, non-linear,
uncompressed digital system. The system is used by creative professionals to
create, edit and composite special visual effects in an on-line, real-time
environment. Easily integrated into a suite environment and possessing the
power and features necessary to serve as the core of a fully digital suite,
flame* is designed to allow the operator to create desired effects with near
instantaneous feedback. A complete flame* system includes the flame* software,
an SGI Octane workstation, a stone* disk array and various I/O devices.
inferno*--inferno* is an on-line, non-linear, resolution-independent,
uncompressed digital system providing all the features of flame* with film
tools, and increased image resolution and color control for digital film work.
The system also features tools for grain management, wire and scratch removal
and colour calibration. A complete inferno* system includes the inferno*
software, an SGI Onyx2 workstation, a stone* disk array and various I/O
devices.
Editing Systems
fire*--fire* is an uncompressed, on-line, non-linear, digital video editing
system with special effects capabilities. fire* includes a sophisticated
toolset and a gestural, picture-based editing interface, which Discreet
believes specifically address the new and expanding requirements needed for
on-line finishing. In the fourth fiscal quarter of 1998, Discreet released a
resolution independent (including HDTV resolution) fire* system. A complete
fire* system includes the fire* software, an SGI Onyx2 workstation, stone*
disk arrays and various I/O devices.
smoke*--smoke*, like fire*, is an uncompressed, on-line, non-linear, digital
video editing system with more limited special effects capabilities. smoke*
uses the same gestural, picture-based editing interface as fire*. The primary
difference in the two systems is the greater speed of interactivity and
processing of fire* as well as greater special effects capabilities than those
of smoke*. However, smoke*'s special effects capabilities are modular; effects
modules may be purchased separately by the customer to augment the special
effects capabilities of the baseline smoke* system. A complete smoke* system
includes the smoke* software, an SGI Octane workstation, a stone* disk array
and various I/O devices.
Broadcast Production Systems
frost*--frost* is a computer-based set of modeling, animation and rendering
tools for the creation and manipulation of 3D graphics, including virtual
sets, for broadcast. Virtual sets are computer generated locales typically
used for news, sports and entertainment programming. frost* is designed to
operate on the SGI Onyx2 or SGI Octane workstation and allows the user to work
completely in real-time or through a combination of real-time and post-
produced components.
SYSTEM COMPONENTS
The Workstation
inferno*, fire*, and frost* run on SGI Onyx2 workstations, typically
configured with four or eight processors. flame*, smoke* and frost* run on the
SGI Octane workstation. The SGI hardware platforms are scaleable and
upgradeable (within the same machine) to fit the price and performance
criteria of the customer. Each system can be connected to other Discreet
systems and to numerous third party software, systems and devices.
Disk Arrays
Discreet offers stone*, a disk-based storage system for use with its video
and high-performance film applications, which is targeted at the production,
post-production and broadcast markets. stone* is designed to allow real-time
playback of uncompressed video frames in any order, efficiently store any mix
of resolutions and
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ensure image integrity by remaining operational in the event of disk or power
supply failure. A disk array is comprised of a number of disks working co-
operatively to handle high speed data flows. flame*, inferno*, fire*, smoke*,
and frost* must be used with Discreet's stone* disk arrays.
Networking
Discreet offers wire*, a high-performance transport system for digital film
and video for use with multiple stone* disk arrays. wire* builds on Discreet's
disk technology and is designed, if the network provides sufficient bandwidth,
to provide real-time CCIR-601 instant access to images located on a disk
anywhere within a post-production facility. wire* can be configured as a
centralized or distributed network, or both.
I/O
Third party video tape recorders can be controlled with flame*, inferno*,
fire* and smoke*'s stylus and tablet. I/O edits can be implemented
sequentially using the EDL capabilities of the flame*, inferno*, fire* and
smoke* systems. Other third party devices, such as film scanners and
recorders, can also be used with Discreet systems for HDTV and film transfers.
NEW MEDIA SOFTWARE
Through acquisitions made in fiscal years 1997 and 1998, Discreet now offers
software-only solutions which run on the Windows NT and the Apple Macintosh
platforms. These acquisitions are part of Discreet's strategy to expand the
range of creative professionals served by Discreet and to extend its product
line to include other aspects of the content creation process. See "--Recent
Acquisitions." Discreet's New Media Software is primarily used to create,
manipulate, and finish computer graphics images, interactive and on-line
content.
Special Effects Software
effect*--Discreet offers two versions of its effect* software: effect* on
the SGI O2 workstation (formerly Flint) and effect* on the Apple Macintosh and
Microsoft Windows NT operating systems (formerly Illuminaire Composition).
effect* is a resolution-independent, non-linear, uncompressed digital system
used by creative professionals to create, edit and composite special visual
effects. effect* provides 3D video composition, clip animation, and visual
effects enabling artists to combine, enhance and modify video frames or
sequences of frames with a very high of level of efficiency and interactivity.
Discreet acquired the Illuminaire product line as part of Discreet's
acquisition of substantially all of the assets of Denim Software L.L.C.
("Denim") in June 1997 (the "Denim Acquisition").
paint* (formerly Illuminaire Paint)--paint* is an Apple Macintosh and
Microsoft Windows NT-based paint software for effects, interactive content and
graphic design creation. paint* is resolution-independent, vector-based,
object-oriented painting and animation system for the manipulation and
enhancement of both multi-frame clips and single-frame graphic images.
Discreet acquired the Illuminaire product line as part of the Denim
Acquisition.
Editing Software
edit* (formerly D-Vision OnLine)--edit* is a real-time non-linear,
compressed editing software solution which performs compositing, keying and
visual effects on the desktop and runs on the Microsoft Windows NT operating
system. Discreet acquired edit* as part of the acquisition of all the
outstanding shares of capital stock of D-Vision Systems, Inc. ("D-Vision") in
July 1997 (the "D-Vision Acquisition").
Radiosity Software
light* (formerly Lightscape)--light* is a 3D rendering solution that uses
advanced radiosity techniques to significantly enhance realism and lighting
accuracy in 3D environments created for virtual sets, film and video
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effects, interactive games and architectural design projects. light* runs on
the Microsoft Windows NT operating system. Discreet acquired light* as part of
the acquisition of all the outstanding shares of capital stock of Lightscape
Technologies, Inc. in December 1997 (the "Lightscape Acquisition").
CUSTOMERS
Discreet's Advanced Systems are sold primarily to film and video production,
post-production and broadcast companies. Discreet's New Media Software
products are sold in these markets as well as to institutional and educational
customers, designers and professional consumers.
No customer accounted for 10% or more of Discreet's total revenues in fiscal
1996, 1997 or 1998.
MARKETING AND SALES
Marketing Strategy. To date, Discreet has marketed its Advanced Systems
products primarily to production and post-production companies in the film,
video, and broadcast industries. Discreet's principal marketing strategy has
been to create awareness of its systems and software through appearances at
major international computer graphics and broadcasting tradeshows, such as
NAB, ACM SIGGRAPH (U.S.), International Broadcasters Convention ("IBC")
(Europe), INTERBEE (Japan) and Montreaux (Europe). Discreet has supported this
marketing strategy with direct-mail advertising and advertisements in trade
publications. In addition, Discreet believes that the high quality of computer
images generated using its products results in significant industry awareness.
With permission from its customers, Discreet creates promotional materials
utilizing content created using Discreet's products.
Discreet is marketing its New Media Software products primarily through
direct mail advertising, advertising in trade publications, seminars and
roadshows, as well as at both international and local tradeshows. In addition,
Discreet provides co-operative advertising funding to a number of its
distributors who locally advertise its products. As Discreet broadens the
markets for these products, Discreet intends to expand its marketing efforts
accordingly.
Sales and Distribution. In North America, sales activities are conducted
from Discreet's Montreal headquarters, sales offices in Los Angeles, Chicago
and New York and field representatives based in Boston, San Francisco, and
Atlanta. In markets outside of North America, sales activities are conducted
from sales offices located in the United Kingdom, Spain, France, Germany,
Japan, Singapore, India, Hong Kong and Brazil. Discreet's headquarters and
each of its sales offices have sales and demonstration capabilities. Since the
beginning of fiscal 1997, Discreet has pursued a strategy of increasing the
number of distributors and resellers qualified to sell its products.
Distributors and resellers may sell Advanced Systems products, New Media
Software products, or both. Generally, customers purchasing Discreet's
products and/or peripherals from the distributors will also purchase the
workstation hardware from the distributors. Discreet currently has
distribution relationships with over 340 distributors and resellers in over 80
countries. As of August 31, 1998, Discreet employed 51 Advanced Systems and 13
New Media Software sales and sales support personnel and 34 demonstration
artists worldwide.
Discreet's Advanced Systems products are sold through its direct sales
organization in its primary markets. In the United States, Discreet maintains
a direct sales presence in its primary markets including New York, Chicago and
Los Angeles. Outside of the United States, Discreet maintains a direct sales
presence in its primary markets, including London, Paris, Munich, Singapore
and Tokyo. In geographic areas generally not served by Discreet's direct sales
organization, Discreet's Advanced Systems products are sold through high-end
distributors and resellers, who are managed by Discreet's sales managers.
Discreet's strategy of marketing its products directly to customers and
indirectly through distributors may result in distribution channel conflicts
as Discreet's direct sales efforts may compete with those of its indirect
channels. Some of these distributors or resellers may receive a finder's fee
for customer system purchases from Discreet's direct sales organization.
Discreet's New Media Software products are sold through distributors and
resellers, who are managed by Discreet's sales managers.
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International Revenues. For fiscal 1996, 1997 and 1998, revenues from
customers outside North America accounted for approximately 57%, 57% and 53%,
respectively, of Discreet's total revenues. Discreet expects that revenues
from customers outside North America will continue to account for a
substantial portion of its revenues.
Reseller Arrangements. Discreet is a master value added reseller ("VAR") of
SGI workstations. There are significant risks associated with this reliance on
SGI and Discreet may be impacted by the timing of the development and release
of products by SGI, as was the case during fiscal 1996. In addition, Discreet
has faced and may in the future face unforeseen difficulties associated with
adapting Discreet's products to future SGI products. In May 1994, Discreet
entered into a Value-Added Reseller Agreement with SGI. The agreement grants
to Discreet a non-exclusive right to purchase and license certain hardware
products from SGI, including the SGI Onyx2, Octane, and O2 workstations for
remarketing by Discreet in the United States. Although the agreement contains
no minimum purchase requirements, the volume of systems purchased from SGI
affects the percentage discount received by Discreet. The agreement is subject
to annual renewal in May of each year and may be terminated by SGI for cause.
The agreement with SGI has been extended through December 31, 1998, and
Discreet has no reason to believe that SGI will not renew such agreement.
Discreet also acts as a reseller and systems integrator of certain peripheral
devices used in Discreet's systems, including audio and video I/O cards and
electronic tablets. Discreet receives discounts for the purchase price of
these products.
Backlog. Discreet has no significant backlog and does not believe that its
backlog at any particular point in time is indicative of future sales levels.
SYSTEMS INTEGRATION, SERVICE AND SUPPORT
Discreet provides its customers with a variety of systems integration,
support and training services including on-site and telephone support, and in-
house and on-site training in the use of Discreet's products. These services
are generally provided under separately priced arrangements with Discreet's
customers. In some markets, these services are provided by Discreet's
distributors who are compensated for such services directly by the customer.
Discreet maintains a staff of persons dedicated to training its distributors
in the performance of these services. Discreet believes that its focus on
customer service provides it with important information about the evolving
needs of its customers. Discreet derived revenues of approximately
$11,713,000, $13,606,000 and $14,050,000 from these services in fiscal 1996,
1997 and 1998, respectively.
Discreet supports its customers in North and South America from Discreet's
Montreal and other North American offices, and through its distributors.
Customers in Europe and the Pacific Rim are supported from the offices of
Discreet's European and Asian subsidiaries and by distributors. As of August
31, 1998, Discreet employed a total of 104 persons worldwide in its customer
support organization.
RESEARCH AND DEVELOPMENT
Discreet's research and product development efforts are focused on the
continued enhancement of its Advanced Systems and its New Media Software
products and the development of new products. Discreet employs a modular
development approach which it believes allows it to bring innovative
technology to market more rapidly than traditional analog or proprietary
hardware-based digital solutions and enables it to take advantage of advances
in general purpose workstation technology as they become available. Discreet
intends to continue to enhance and upgrade these products on a regular basis.
In fiscal 1996, 1997 and 1998, Discreet spent approximately $16,902,000,
$9,708,000 and $14,847,000 (net of tax credits), respectively, on research
and development, representing 20%, 10% and 10%, respectively, of total
revenues. Discreet's research and development staff consisted of 113 persons
as of August 31, 1998.
The markets for Discreet's systems and software are characterized by
evolving industry standards, changing technologies and frequent new product
introductions. Discreet believes that its future success will depend in part
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on its ability to enhance its existing systems and software and to develop and
introduce new products and features which meet changing customer requirements
and emerging industry standards on a timely basis. In addition, as a master
VAR of SGI workstations, Discreet obtains certain advance access to SGI
technology which facilitates its efforts to develop compatible systems and to
modify and improve existing products. If Discreet were unable to obtain such
advance access, it could have an adverse impact on Discreet's business and
results of operations.
On March 4, 1998, Discreet entered into a Strategic Development Agreement
with Intel to develop a new high-end special effects product. Discreet Logic
plans to develop new visual effects software for demanding real-time
compositing and image processing functions. The software will be designed to
run on multi-processor workstations based on the IA-64 processors and is
expected to deliver powerful performance capabilities for the visual effects
industry. Intel will provide access to IA-64 technology, aid in optimization
of the software, and design components of Merced processor-based workstations
to run the software optimally.
PROPRIETARY RIGHTS
Discreet's success is dependent upon its proprietary technology. Although
Discreet currently has seven patents and has 78 patent applications on its
technology, it relies principally on unregistered copyrights and trade secrets
to protect its intellectual property. Discreet generally seeks to enter into
confidentiality agreements with its employees and license agreements with its
distributors and to limit access to and distribution of its systems, software,
documentation and other proprietary information. Until fiscal 1996,
substantially all of Discreet's systems were sold without written license
agreements. There can be no assurance that Discreet will not be involved in
litigation with respect thereto or that the outcome of any such litigation
might not be more unfavorable to Discreet as a result of such omissions. Any
such litigation could have a material adverse effect on Discreet's business
and results of operations. Discreet licenses its New Media Software products
under "shrink-wrap" licenses (i.e., licenses included as part of the product
packaging). Shrink-wrap licenses are not negotiated with or signed by
individual licensees, and purport to take effect upon the opening of the
product package. Certain provisions of such licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program, may be unenforceable under the laws of many jurisdictions.
Discreet uses both software and hardware keys with respect to its systems and
software but otherwise does not copy-protect its systems and software. It may
be possible for unauthorized third parties to copy Discreet's products or to
reverse engineer or obtain and use information that Discreet regards as
proprietary. There can be no assurance that Discreet's competitors will not
independently develop technologies that are substantially equivalent or
superior to Discreet's technologies. In addition, the laws of certain
countries in which Discreet's products are or may be distributed do not
protect Discreet's products and intellectual property rights to the same
extent as the laws of Canada or the United States. As the number of software
products in the industry increases and the functionality of these products
further overlaps, Discreet believes that software products generally may
increasingly become the subject of claims that such software products infringe
the rights of others.
Significant and protracted litigation may be necessary to protect Discreet's
intellectual property rights, to determine the scope of the proprietary rights
of others or to defend against claims of infringement. Discreet is not
currently involved in any litigation with respect to intellectual property
rights. Discreet receives letters from third parties, from time to time,
inquiring about Discreet's products and discussing intellectual property
matters, which Discreet reviews to determine the appropriate response, if any.
There can be no assurance that third-party claims alleging infringements will
not be asserted against Discreet in the future. For example, Discreet received
a letter from Avid Technology, Inc. ("Avid") stating its belief that certain
of Discreet's acquired products in connection with the acquisition of the
outstanding shares of the share capital of D-Vision practice inventions
claimed in a patent on a media editing system. Discreet has responded to
Avid's letter stating Discreet's belief that it is not infringing upon any
valid claim of Avid's patent. To Discreet's knowledge, Avid has not initiated
any suit, action, or other proceeding alleging any infringement by Discreet of
such patent. If infringement is alleged by Avid, or any other holder of
protected intellectual property rights, Discreet could be required to
discontinue the use of certain software code or processes, to cease the
manufacture, use and sale of infringing products, to incur significant
litigation costs and expenses, to develop non-infringing technology or to
obtain licenses to use the allegedly infringed technology. There can be no
assurance that Discreet would be able to
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develop alternative technologies or to obtain such licenses or, if a license
were obtainable, that the terms would be commercially reasonable or acceptable
to Discreet. Moreover, there may be pending or issued patents that extend to
Discreet's products, which, together with the growing use of patents to
protect technology, increase the risk that third parties may assert
infringement claims against Discreet in the future. There can be no assurance
that a court to which any infringement claims are submitted would not find
that Discreet's products infringe any third party's intellectual property
rights. Further, such litigation, regardless of its outcome, could result in
substantial costs to and diversion of efforts by Discreet. Litigation may also
be necessary to enforce Discreet's intellectual property rights. Any
infringement claim or other litigation against or by Discreet could have a
material adverse effect on Discreet's business and results of operations.
MANUFACTURING AND SUPPLIERS
Discreet has historically relied on third-party vendors to manufacture and
supply all of the hardware components used in Discreet's systems.
Manufacturing at Discreet consists of assembly (including disk array
assembly), testing, and value added systems integration. Discreet's
manufacturing staff consisted of 15 persons as of August 31, 1998.
Discreet's flame*, effect*, inferno*, fire*, smoke* and frost* software
currently run on workstations manufactured by SGI. There are significant risks
associated with this reliance on SGI and Discreet may be impacted by the
timing of the development and release of products by SGI, as was the case
during fiscal 1996. In addition, there may be unforeseen difficulties
associated with adapting Discreet's products to future SGI products. Discreet
is an authorized master VAR of workstations manufactured by SGI. Discreet's
agreement with SGI is subject to annual renewal in May of each year and
termination by SGI for cause. The agreement with SGI has been extended through
December 31, 1998 and Discreet has no reason to believe that SGI will not
renew such agreement. In addition, although Discreet has no reason to believe
that it will be unable to obtain sufficient quantities of SGI workstations on
a timely basis or that its status as a master VAR will be changed, there can
be no assurance that Discreet will continue to be able to procure such
workstations in sufficient quantities on a timely basis or that SGI will
continue to recognize Discreet as a master VAR. The success of Discreet also
depends, in part, on the continued market acceptance of SGI workstations, in
general, and by the professional film and video industries, in particular.
Although Discreet intends to continue to evaluate new hardware platforms and
may adapt its products as technological advances and market demands dictate,
and although Discreet has now entered the market for content creation software
which runs on the Apple Macintosh and Windows NT operating systems, Discreet
believes that it will continue to derive substantially all of its revenue for
the foreseeable future from the sale and maintenance of systems designed to
include SGI workstations. As a result, financial, market and other
developments adversely affecting SGI or the sales of workstations, the
introduction or acquisition by SGI of products which are competitive with
those of Discreet, or the unanticipated timing or pricing of SGI products that
could cause customers to defer the decision to buy or determine not to buy
Discreet's then available products or systems, could have an adverse effect
upon Discreet's business and results of operations. As a master VAR, Discreet
also obtains certain advance access to SGI technology in order to develop
compatible systems and to modify and improve existing products. If Discreet
were unable to obtain such advance access, it could have an adverse impact on
Discreet's business and results of operations.
Discreet is dependent on SGI as Discreet's sole source for video I/O cards
used in Discreet's systems. Discreet also purchases electronic tablets
manufactured by Wacom Technology Corporation and believes that, while
alternative suppliers are available, there can be no assurance that
alternative electronic tablets would be functionally equivalent or be
available on a timely basis or on similar terms. Discreet generally purchases
sole source or other components pursuant to purchase orders placed from time
to time in the ordinary course of business and has no written agreements or
guaranteed supply arrangements with its sole source suppliers. Discreet has
experienced quality control problems and supply shortages for sole source
components in the past and there can be no assurance that Discreet will not
experience significant quality control problems or supply shortages for these
components in the future. Discreet does not maintain an extensive inventory of
these components, and an interruption in supply could have a material adverse
effect on Discreet's business and results
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of operations. Because of Discreet's reliance on these vendors, Discreet may
also be subject to increases in component costs which could adversely affect
Discreet's business and results of operations.
COMPETITION
The market in which Discreet competes is characterized by intense
competition. In the high-end of the special effects market, Discreet's flame*
system competes with Quantel Limited's ("Quantel") Henry product. In certain
applications in the non-real-time segment of the market, Discreet's effect* on
the SGI O2 workstation competes with Avid's Illusion product. Discreet's
inferno* system competes with Quantel's Domino product. Discreet's fire* and
smoke* systems competes with Quantel's Editbox product and Sony Corporation's
("Sony") range of proprietary editing equipment. In addition, the products
gained from the Denim Acquisition and the D-Vision Acquisition compete with
Adobe Systems Incorporated's ("Adobe") special effects products and Avid's and
Media 100 Inc.'s ("Media 100") range of editing products. Many of Discreet's
current and prospective competitors, including Quantel, Avid, Sony, and Adobe,
have significantly greater financial, technical, manufacturing and marketing
resources than Discreet. Moreover, these companies may introduce additional
products that are competitive with those of Discreet, and there can be no
assurance that Discreet's products would compete effectively with such
products. In addition, as personal computers become more powerful, software
suppliers may be able to introduce products for personal computers that would
be competitive with Discreet's products in terms of price and performance for
professional users.
Discreet believes that its ability to compete depends on elements both
within and outside its control, including the success and timing of new
product development and introduction by Discreet and its competitors, product
performance and price, distribution and customer support. There can be no
assurance that Discreet will be able to compete successfully with respect to
these factors. Although Discreet believes that it has certain technological
and other advantages over its competitors, maintaining such advantages will
require continued investment by Discreet in research and development, sales
and marketing and customer service and support. There can be no assurance that
Discreet will have sufficient resources to make such investments or that
Discreet will be able to make the technological advances necessary to maintain
such competitive advantages. In addition, as Discreet enters new markets,
distribution channels, technical requirements and levels and bases of
competition may be different than those in Discreet's current markets and
there can be no assurance that Discreet will be able to compete favorably.
Furthermore, competitive pressures or other factors, including Discreet's
entry into new markets, may result in significant price erosion that could
have a material adverse effect on Discreet's business and results of
operations.
EMPLOYEES
As of August 31, 1998, Discreet had 405 full-time employees. Of such
employees, 113 were employed in research and development, 98 in sales, 18 in
marketing, 104 in customer support, 15 in manufacturing and 57 in
administration and finance. Discreet believes that its future success will
depend in large part upon its ability to attract and retain highly skilled
technical, management and sales and marketing personnel. Moreover, because the
development and marketing of Discreet's Advanced Systems and New Media
Software requires knowledge of film and video production and post-production,
key technical personnel must be proficient in a number of disciplines.
Competition for such technical personnel is intense, and the failure of
Discreet to hire and retain talented technical personnel or the loss of one or
more key employees could have an adverse effect on Discreet's business and
results of operations. Discreet's employees are not represented by a labor
union, and Discreet considers its employee relations to be good.
PROPERTIES
In July 1997, Discreet signed an agreement to rent space for its new
headquarters in Montreal from TGR Zone Corporation ("TGR Zone"), a company
indirectly owned by Discreet's Chairman, President and Chief Executive
Officer. As part of this agreement, TGR Zone assumed Discreet's lease
commitment at its previous Montreal location. The agreement provides that
Discreet leases approximately 55,000 square feet of space at
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approximately Cdn$13.00 (or approximately $8.86 at June 30, 1998) per square
foot per annum subject to normal escalation clauses. The lease is set to
expire in July 2007. The lease was signed in October 1997. As of August 31,
1998, Discreet leased sales offices, research and development facilities
and/or warehouse space in the United States, Brazil, France, the United
Kingdom, Spain, Germany, Singapore, India, Hong Kong and Japan, pursuant to
leases which expire from September 1998 through February 2003. Discreet's
current aggregate annual rental expense for these additional facilities is
approximately $1,175,000.
In August 1995, Discreet purchased an approximately 10,000 square foot
office building in London, England for use as a sales facility for
approximately (Pounds)1,148,000 (or approximately $1,916,000 at June 30,
1998). Subsequently, in December 1995, Discreet purchased an approximately
50,000 square foot office building in Montreal, Quebec for Cdn$1,730,000
(approximately $1,250,000 at June 30, 1997). The carrying values of the
Montreal building and the London building were written down to their estimated
fair market values and the buildings were classified as assets held for resale
in fiscal 1996. In September 1997, Discreet sold the Montreal office building
for a price not materially different from its carrying value.
LEGAL PROCEEDINGS
On May 29, 1996, June 13, 1996 and April 29, 1997, certain of Discreet's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against Discreet and certain of its officers
and directors, among others. The three lawsuits were filed in the Superior
Court of the State of California, the United States District Court, District
of Massachusetts and the United States District Court, Northern District of
California, respectively. On or about November 25, 1997, a settlement of all
three shareholder class actions received final court approval. Under the
$10,800,000 settlement, Discreet contributed approximately $7,400,000 from its
own funds, with the remainder provided by insurance.
On June 2, 1998, Discreet was named as a defendant in a breach of warranty
action filed in the Supreme Court of the State of New York for the County of
New York entitled Griffith & Tekushan, Inc. v. Discreet Logic, Inc. (Index No.
602684/98) (the "Action"). The complaint alleges, among other things, that
Discreet breached certain warranties arising out of a software licensing
agreement and seeks damages of $1 million. On July 10, 1998, the Action was
removed from state court to the United States District Court for the Southern
District of New York (Case No. 98 Civ. 4909 (BSJ)). On July 17, 1998, Discreet
filed a motion to dismiss the Action in its entirety. The motion to dismiss is
currently pending. Discreet intends to contest this case vigorously; however,
the ultimate outcome of the case cannot be predicted at this point.
On August 28, 1998 a complaint was filed in the Marin County, California,
Superior Court, entitled Jerry Krim, on Behalf of Himself and All Others
Similarly Situated, vs. Discreet Logic Inc., et al., case No. 174792. The
lawsuit relates to the proposed Transactions and names as defendants certain
of Discreet's directors and certain unidentified "John Does." The complaint
alleges that the defendants breached their fiduciary duties to shareholders in
connection with the proposed Transactions. The complaint asks the court to
enjoin the consummation of the Transactions or, alternatively, seeks to
rescind the Transactions or an award of unspecified damages from the
defendants in the event the Transactions are consummated. Discreet believes
the claims asserted in the complaint are without merit and intends to
vigorously contest them.
RECENT ACQUISITIONS
On July 15, 1997, Discreet acquired all of the outstanding shares of capital
stock of D-Vision pursuant to a Stock Purchase Agreement dated as of July 10,
1997, among Discreet, D-Vision, the former stockholders of D-Vision and
certain other individuals. As a result of the D-Vision acquisition, Discreet
acquired the D-Vision OnLINE and PRO software products for non-linear video
and digital media editing solutions including related know-how and goodwill.
The purchase price was paid in a combination of 555,000 newly issued Discreet
Common Shares and approximately $10,750,000 in cash. In addition,
approximately $4,000,000 of the cash consideration is being held in escrow
until September 30, 1999, subject to (i) earlier release from escrow of up
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to $1,900,000 on September 30, 1998, pending satisfactory resolution of a
dispute regarding an indemnification claim against such escrow, and (ii) the
resolution of any indemnification claims made by Discreet pursuant to the
Stock Purchase Agreement. The D-Vision acquisition was accounted for as a
purchase. The cash used by Discreet to fund the acquisition was derived
primarily from cash flow from operations. A substantial portion of the
purchase price, net liabilities of D-Vision and transaction costs was
allocated to purchased in-process research and development, that had not yet
reached technical feasibility and had no alternative use, for which Discreet
incurred a one-time charge against earnings in the amount of $21,000,000
($0.72 per share), in the quarter ending September 30, 1997, based on an
independent appraisal. The terms of the transaction and the consideration
received by the D-Vision stockholders were the result of arms-length
negotiations between the representatives of Discreet and D-Vision. D-Vision
develops Microsoft Windows NT-based non-linear, digital editing solutions.
On December 2, 1997, Discreet entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") with Lantern Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Discreet ("Merger Sub"),
and Lightscape Technologies, Inc., a Delaware corporation ("Lightscape"). On
December 30, 1997, pursuant to the Merger Agreement, and upon the satisfaction
of certain closing conditions, Merger Sub merged (the "Lightscape Merger")
with and into Lightscape with Lightscape as the surviving corporation and a
wholly-owned subsidiary of Discreet. As a result of the Lightscape Merger,
Discreet acquired, among other products, the Lightscape product, a software
application which integrates radiosity and raytracing with physically based
lighting, including related know-how and goodwill. The aggregate purchase
price for Lightscape includes the assumption of approximately $5,700,000 of
net liabilities (of which approximately $3,400,000 was paid at the closing),
not including costs associated with the transaction, and up to $6,800,000 in
contingent consideration to be paid only if certain revenue objectives are
achieved by Lightscape in calendar 1998 and 1999. The Lightscape Merger has
been accounted for as a purchase. A substantial portion of the purchase price
and transaction costs was allocated to purchased in-process research and
development, that had not yet reached technical feasibility and had no
alternative use, for which Discreet incurred a one-time charge against
earnings in the amount of $5,800,000 ($0.20 per share), based on an
independent appraisal, in the quarter ended December 31, 1997 and
approximately $1,087,000 was allocated to intangible assets, which include
goodwill and acquired technology, and is being amortized on a straight-line
basis over their estimated useful lives of three to five years. The terms of
the transaction were the result of arm's-length negotiations between the
representatives of Discreet and Lightscape.
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DISCREET MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and Notes thereto included elsewhere herein.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The success of Discreet is subject to a number of risks and uncertainties,
including, without limitation, Discreet's ability to successfully develop,
introduce and gain customer acceptance of existing and new or enhanced
products; the need for the continued development of the market for Discreet's
systems; the ability of Discreet to expand its current market to include
additional applications and develop new products for related markets; the risk
that as Discreet enters new markets, the distribution channels, technical
requirements and levels and basis of competition may be different from those
in Discreet's current markets; the presence of competitors with greater
financial, technical, manufacturing, marketing and distribution resources; the
risk that the products and technologies acquired by Discreet through
acquisitions will not be successful, achieve market acceptance or be
successfully integrated with Discreet's existing products and business; the
risk of quarterly fluctuations in Discreet's operating results; the risk of
Discreet's reliance on SGI for the workstations included in Discreet's systems
including the impact of the timing of the development and release of SGI
products as well as unforeseen difficulties associated with adapting
Discreet's products to future SGI products; the risk that Discreet derives a
significant portion of its revenues from foreign sales; Discreet's reliance
principally on unregistered copyrights and trade secrets to protect its
intellectual property; the risk that Discreet's direct sales efforts may
compete with those of its indirect channels; the risk of Discreet's reliance
on SGI as the sole source for video input/output cards used in Discreet's
systems; Discreet's dependence on key management and technical employees;
market price fluctuations due to quarter-to-quarter variations in Discreet's
operating results, announcements of technological innovations or new products
by Discreet or its competitors and the historical fluctuations in market
prices of technology companies generally; and other risks detailed from time
to time in Discreet's filings with the SEC, including this Proxy Circular.
Information provided by Discreet from time to time including statements in
this Proxy Circular which are not historical facts, are so-called forward-
looking statements, and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 and releases of the SEC. In
particular, statements contained in the section entitled "Discreet
Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are not historical facts (including, but not limited to,
statements regarding Discreet's anticipated cost of revenues, statements
concerning anticipated expense levels and such expenses as a percentage of
revenues, statements about the portion of revenues from customers outside
North America and statements regarding the adequacy of cash to meet cash
operations and capital expenditures), as well as statements contained in
"Discreet--Business--Background," "--Marketing and Sales," "--Research and
Development," "--Proprietary Rights," "--Manufacturing and Suppliers," "--
Competition," "--Employees" and "--Legal Proceedings" which are not historical
facts, may constitute forward-looking statements. Discreet's actual future
results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not
limited to, the factors discussed immediately above and below under the
heading "--Certain Factors That May Affect Future Results," and elsewhere in
this Proxy Circular, as well as from time to time in Discreet's other filings
with the SEC.
Discreet's future results are subject to substantial risks and
uncertainties. Discreet's future financial performance will depend in part on
the successful development, introduction and customer acceptance of its
existing and new or enhanced products. In addition, in order for Discreet to
achieve sustained growth, the market for Discreet's systems and software must
continue to develop and Discreet must expand this market to include additional
applications within the film and video industries and develop or acquire new
products for use in related markets. There can be no assurance that Discreet
will be successful in marketing its existing or any new or enhanced products.
In addition, as Discreet enters new markets, distribution channels, technical
requirements
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and levels and bases of competition may be different from those in Discreet's
current markets and there can be no assurance that Discreet will be able to
compete favorably. The markets in which Discreet competes are characterized by
intense competition and many of Discreet's current and prospective competitors
have significantly greater financial, technical, manufacturing and marketing
resources than Discreet. These companies may introduce additional products
that are competitive with those of Discreet, and there can be no assurance
that Discreet's products would compete effectively with such products.
Furthermore, competitive pressures or other factors, including Discreet's
entry into new markets, may result in significant price erosion that could
have a material adverse effect on Discreet's business and results of
operations. Discreet has recently completed the purchase of certain products
and technology through acquisitions. There can be no assurance that the
products and technologies acquired from these companies will be successful or
will achieve market acceptance, or that Discreet will not incur disruptions
and unexpected expenses in integrating the operations of the acquired
businesses with those of Discreet.
Discreet's flame*, effect*, inferno*, fire*, smoke* and frost* systems
currently include workstations manufactured by SGI. There are significant
risks associated with this reliance on SGI and Discreet may be impacted by the
timing of the development and release of products by SGI, as was the case
during fiscal 1996. In addition, there may be unforeseen difficulties
associated with adapting Discreet's products to future SGI products. Discreet
derives a significant portion of its total revenues from foreign sales.
Foreign sales are subject to significant risks, including unexpected legal,
tax and exchange rate changes (including the recent currency volatility in
Asia) and other barriers. In addition, foreign customers may have longer
payment cycles and the protection of intellectual property in foreign
countries may be more difficult to enforce. Discreet currently relies
principally on unregistered copyrights and trade secrets to protect its
intellectual property. Any invalidation of Discreet's intellectual property
rights or lengthy and expensive defense of those rights could have a material
adverse effect on Discreet. Discreet receives letters from third parties, from
time to time, inquiring about Discreet's products and discussing intellectual
property matters, which Discreet reviews to determine the appropriate
response, if any. For example, Discreet received a letter from Avid stating
its belief that certain of Discreet's recently acquired D-Vision products
practice inventions claimed in a patent on a media editing system. Discreet
has responded to Avid's letter stating Discreet's belief that Discreet is not
infringing any valid claim of Avid's patent. To Discreet's knowledge, Avid has
not initiated any suit, action or other proceeding alleging any infringement
by Discreet of such patent. Discreet currently markets its systems through its
direct sales organization and through distributors. This marketing strategy
may result in distribution channel conflicts as Discreet's direct sales
efforts may compete with those of its indirect channels. Discreet currently
relies on SGI as the sole source for video input/output cards used in
Discreet's systems. An interruption of the supply or increase in the price of
these components could have a material adverse effect on Discreet's business
and results of operations. To date, Discreet has depended to a significant
extent upon a number of key management and technical employees and Discreet's
ability to manage its operations will require it to continue to recruit and
retain senior management personnel and to motivate and effectively manage its
employee base. The loss of the services of one or more of these key employees
could have a material adverse effect on Discreet's business and results of
operations. There can be no assurance that these factors will not have a
material adverse effect on Discreet's future international sales and
consequently, on Discreet's business and results of operations.
The market price of Discreet Common Shares could be subject to significant
fluctuations in response to quarter-to-quarter variations in Discreet's
operating results, announcements of technological innovations or new products
by Discreet, its competitors or suppliers and other events or factors. In
addition, the stock market in recent years has experienced extreme price and
volume fluctuations that have particularly affected the market prices of many
technology companies and that have often been unrelated or disproportionate to
the operational performance of these companies. These fluctuations, as well as
general economic and market conditions, may materially and adversely affect
the market price of Discreet Common Shares.
Discreet believes that its operating results could vary significantly from
quarter to quarter. A limited number of systems sales may account for a
substantial percentage of Discreet's quarterly revenue because of the high
average sales price of such systems and the timing of purchase orders.
Historically, Discreet has generally experienced greater revenues during the
period following the completion of the annual conference of the NAB,
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which is typically held in April. Discreet's expense levels are based, in
part, on its expectations of future revenues. Therefore, if revenue levels are
below expectations, particularly following NAB, Discreet's operating results
are likely to be adversely affected as was the case for the three-month
periods ended April 30, 1996 and July 31, 1996. In addition, the timing of
revenue is influenced by a number of other factors, including: the timing of
individual orders and shipments, other industry trade shows, competition,
seasonal customer buying patterns, changes to customer buying patterns in
response to platform changes and changes in product development and sales and
marketing expenditures. Because Discreet's operating expenses are based on
anticipated revenue levels and a high percentage of Discreet's expenses are
relatively fixed in the short term, variations in the timing of recognition of
revenue could cause significant fluctuations in operating results from quarter
to quarter and may result in unanticipated quarterly earnings shortfalls or
losses. There can be no assurance that Discreet will be successful in
maintaining or improving its profitability or avoiding losses in any future
period. Discreet believes that quarter-to-quarter comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance.
OVERVIEW
General
Discreet develops, assembles, markets and supports non-linear, on-line
digital systems and software for creating, editing and compositing imagery and
special effects for film, video, HDTV, broadcast and the Web. Discreet's
systems and software are utilized by creative professionals for a variety of
applications, including feature films, television programs, commercials, music
and corporate videos, interactive game production, live broadcasting as well
as Web design. Discreet's revenues consist of product revenues (including
licensing of its software, sales of Discreet's proprietary hardware, and
resale of third party hardware) and revenues from maintenance and other
services (including consulting and training). Effective January 1, 1998,
Discreet has recognized revenue in accordance with Statement of Position (SOP)
97-2, entitled "Software Revenue Recognition," issued by the American
Institute of Certified Public Accountants. The adoption of SOP 97-2 has not
had a material impact on revenue recognition.
Proposed Transaction with Autodesk
On August 20, 1998, Discreet announced that it has entered into a definitive
agreement providing for the acquisition of Discreet by Autodesk. Under the
terms of the agreement, Autodesk will exchange 0.525 shares of its common
stock for each outstanding share of Discreet. The transaction is intended to
be accounted for as a pooling of interests. Subject to several conditions,
including regulatory approvals and approval of the shareholders of both
companies, the transaction is expected to close by December 31, 1998. Until
this transaction is finalized, both companies will operate as separate
entities.
Private Placement of Shares to Intel Corporation
On March 4, 1998, Discreet completed a private placement sale to Intel
Corporation of 645,000 Discreet Common Shares for proceeds to Discreet of
approximately $13,527,000, net of issuance costs.
Legal Proceedings
On May 29, 1996, June 13, 1996 and April 29, 1997 certain of Discreet's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against Discreet and certain of its officers
and directors, among others. The three lawsuits were filed in the Superior
Court of the State of California, the United States District Court, District
of Massachusetts and the United States District Court, Northern District of
California, respectively. On or about November 25, 1997, a settlement of all
three shareholder class actions received final court approval. Under the
$10,800,000 settlement, Discreet contributed approximately $7,400,000 from its
own funds, with the remainder provided by insurance.
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On June 2, 1998, Discreet was named as a defendant in a breach of warranty
action filed in the Supreme Court of the State of New York for the County of
New York entitled Griffith & Tekushan, Inc. v. Discreet Logic Inc. (Index No.
602684/98) (the "Action"). The complaint alleges, among other things, that
Discreet breached certain warranties arising out of a software licensing
agreement and seeks damages of $1 million. On July 10, 1998, the Action was
removed from state court to the United States District Court for the Southern
District of New York (Case No. 98 Civ. 4909 (BSJ)). On July 17, 1998, Discreet
filed a motion to dismiss the Action in its entirety. The motion to dismiss is
currently pending. Discreet intends to contest this case vigorously; however,
the ultimate outcome of the case cannot be predicted at this point.
On August 28, 1998, a complaint was filed in the Marin County, California,
Superior Court, entitled Jerry Krim, on Behalf of Himself and All Others
Similarly Situated, vs. Discreet Logic Inc., et al., case No. 174792. The
lawsuit relates to the proposed Transactions and names as defendants certain
of Discreet's directors and certain unidentified "John Does." The complaint
alleges that the defendants breached their fiduciary duties to shareholders in
connection with the proposed Transactions. The complaint asks the court to
enjoin the consummation of the Transactions or, alternatively, seeks to
rescind the Transactions or an award of unspecified damages from the
defendants in the event the Transactions are consummated. Discreet believes
the claims asserted in the complaint are without merit and intends to
vigorously contest them.
Recent Acquisitions
On July 15, 1997, Discreet acquired all of the outstanding shares of capital
stock of D-Vision pursuant to a Stock Purchase Agreement dated as of July 10,
1997, among Discreet, D-Vision, the former stockholders of D-Vision and
certain other individuals. As a result of the D-Vision acquisition, Discreet
acquired the D-Vision OnLINE and PRO software products for non-linear video
and digital media editing solutions including related know-how and goodwill.
The purchase price was paid in a combination of 555,000 newly issued Discreet
Common Shares and approximately $10,750,000 in cash. In addition,
approximately $4,000,000 of the cash consideration is being held in escrow
until September 30, 1999, subject to (i) earlier release from escrow of up to
$1,900,000 on September 30, 1998, pending satisfactory resolution of a dispute
regarding an indemnification claim against such escrow, and (ii) the
resolution of any indemnification claims made by Discreet pursuant to the
Stock Purchase Agreement. The D-Vision acquisition was accounted for as a
purchase. The cash used by Discreet to fund the acquisition was derived
primarily from cash flow from operations. A substantial portion of the
purchase price, net liabilities of D-Vision and transaction costs was
allocated to purchased in-process research and development that had not yet
reached technical feasibility and had no alternative use for which Discreet
incurred a one-time charge against earnings in the amount of $21,000,000
($0.72 per share), in the quarter ending September 30, 1997, based on an
independent appraisal. The terms of the transaction and the consideration
received by the D-Vision stockholders were the result of arms-length
negotiations between the representatives of Discreet Logic and D-Vision. D-
Vision develops Microsoft Windows NT-based non-linear, digital editing
solutions.
On December 2, 1997, Discreet entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") with Lantern Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Discreet Logic ("Merger
Sub"), and Lightscape Technologies, Inc., a Delaware corporation
("Lightscape"). On December 30, 1997, pursuant to the Merger Agreement, and
upon the satisfaction of certain closing conditions, Merger Sub merged (the
"Lightscape Merger") with and into Lightscape with Lightscape as the surviving
corporation and a wholly-owned subsidiary of Discreet. As a result of the
Lightscape Merger, Discreet acquired, among other products, the Lightscape TM
product, a software application which integrates radiosity and raytracing with
physically based lighting, including related know-how and goodwill. The
aggregate purchase price for Lightscape includes the assumption of
approximately $5,700,000 of net liabilities (of which approximately $3,400,000
was paid at the closing), not including costs associated with the transaction,
and up to $6,800,000 in contingent consideration to be paid only if certain
revenue objectives are achieved by Lightscape in calendar 1998 and 1999. The
Lightscape Merger has been accounted for as a purchase. A substantial portion
of the purchase price and transaction costs was allocated to purchased in-
process research and development that
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had not yet reached technical feasibility and had no alternative use for which
Discreet incurred a one-time charge against earnings in the amount of
$5,800,000 ($0.20 per share), based on an independent appraisal, in the
quarter ended December 31, 1997 and approximately $1,087,000 was allocated to
intangible assets, which include goodwill and acquired technology, and is
being amortized on a straight-line basis over their estimated useful lives of
three to five years. The terms of the transaction were the result of arms'-
length negotiations between the representatives of Discreet and Lightscape.
Restructurings
During the fiscal year ended July 31, 1996, excluding a restructuring charge
of $15,000,000 and its related tax effects, Discreet incurred a net loss of
approximately $31,000,000 on revenues of approximately $83,997,000. In
response to the financial results and other developments facing the business,
Discreet developed a restructuring plan during the fourth fiscal quarter of
1996. Discreet began implementation of its restructuring plan in the fourth
fiscal quarter of 1996 and had substantially completed the implementation of
the plan at the end of fiscal 1997. During the fourth fiscal quarter of 1998,
Discreet revised its estimates of remaining costs to be incurred and reversed
approximately $2,333,000 of reserves no longer considered to be necessary.
Discreet still has approximately $775,000 in restructuring reserves primarily
for the estimated cost of terminating leases, and the legal and taxation
winding down of several subsidiaries.
Discreet also recorded an unrelated restructuring charge in the fourth
fiscal quarter of 1998 in the amount of $829,000 for the estimated costs of
closing its U.K. research and development facility. As of June 30, 1998, the
closure was substantially complete and Discreet still has approximately
$50,000 in restructuring reserves primarily for the estimated cost of
professional fees associated with the winding down of this subsidiary. See
Note 19 of Notes to Discreet's Consolidated Financial Statements.
Change in Fiscal Year
On January 9, 1997, the Discreet Board approved the change of Discreet's
fiscal year end from July 31 to June 30. This change was effective beginning
with Discreet's second fiscal quarter of 1997. The consolidated financial
statements are presented for the year ended June 30, 1998, the eleven-month
period ended June 30, 1997 and the year ended July 31, 1996. Discreet prepares
consolidated financial statements, remeasures accounts in foreign currencies
to reflect changes in exchange rates and examines and adjusts certain reserve
accounts at the end of each quarter. Therefore, it is not practicable to
recast the 1996 fiscal year's results to reflect a June 30 fiscal year end.
Consequently, the results for the twelve-month period ended June 30, 1998 are
not directly comparable with those for the eleven-month period ended June 30,
1997, or the twelve-month period ended July 31, 1996.
Year 2000
Discreet has made preliminary assessments of its products and information
systems and has determined that they are Year 2000 compliant, or that only a
limited effort will be required to achieve compliance. Discreet is currently
proceeding with detailed reviews of every application used. It is expected
that some will have to be upgraded to Year 2000 compliant applications. Some
Discreet products run on platforms, or work with peripherals that are
currently not Year 2000 compliant. Accordingly, it is expected that some
customers may experience some difficulties related to non-Discreet products,
which may affect the performance of Discreet products and, therefore, lead to
an unusually high number of calls to Discreet's technical support department.
Discreet anticipates that the costs related to the detailed assessments,
application upgrades, and responding to the increased volume of support calls
will not be material to its results of operations, liquidity and capital
resources. Although management does not expect Year 2000 issues to have a
material impact on its business or future results of operations, there can be
no assurance that the potential problems described above, related to the
platforms and peripherals on and with which Discreet's products operate, will
be resolved in a timely manner, and that Discreet will not experience
significant costs or delays in developing versions of its products that are
compatible with Year 2000 compliant versions of these platforms and
peripherals.
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RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues represented
by certain line items in the statement of operations:
<TABLE>
<CAPTION>
YEAR ELEVEN MONTHS YEAR
ENDED JULY 31, ENDED ENDED JUNE 30,
1996 JUNE 30, 1997 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Total revenues................. 100 % 100 % 100 %
Cost of revenues............... 59 47 41
--- --- ---
Gross profit............. 41 53 59
--- --- ---
Operating expenses:
Research and development... 20 10 10
Sales and marketing........ 31 23 23
General and
administrative............ 13 6 5
Gain on sale of
investment................ -- -- (2)
Costs related to terminated
transaction............... -- -- 1
Write-off of purchased
research and development.. 10 10 18
Restructuring expense...... 18 -- (1)
Litigation and related
settlement expense........ 3 6 0
--- --- ---
Total operating
expenses................ 95 55 54
--- --- ---
Operating income (loss).. (54) (2) 5
Other income (expense)......... 3 1 2
--- --- ---
Income (loss) before income
taxes......................... (51) (1) 7
Provision for income taxes..... 2 6 7
--- --- ---
Net loss................. (53)% (7)% (0)%
=== === ===
</TABLE>
TWELVE MONTHS ENDED JUNE 30, 1998 AND ELEVEN MONTHS ENDED JUNE 30, 1997
As discussed above, it is not practicable to recast prior quarterly results
to reflect new fiscal periodic reporting resulting from Discreet's previously
announced change in fiscal year end. Therefore, the results for the twelve-
month period ended June 30, 1998 are not directly comparable to the results of
the eleven-month period ended June 30, 1997.
Total Revenues. Discreet's revenues consist of product revenues (including
licensing of its software, sales of Discreet's proprietary hardware, and
resale of third party hardware) and, to a lesser extent, revenues from
maintenance and other services (including consulting and training). Effective
January 1, 1998, Discreet has recognized revenue in accordance with Statement
of Position (SOP) 97-2, entitled Software Revenue Recognition, issued by the
American Institute of Certified Public Accountants. The implementation of this
new standard did not have a material impact on the consolidated results of
operations. See Note 2(c) of Notes to Discreet's Consolidated Financial
Statements.
Total revenues were $151,558,000 and $101,924,000 for the twelve-month
period ended June 30, 1998, and the eleven-month period ended June 30, 1997,
respectively. The increase in total revenues is primarily due to:
(1) increased penetration of inferno*; (2) increased penetration of flame* due
in part to the introduction of flame* on the SGI Octane platform resulting in
a significantly reduced system cost to customers; (3) the introduction of
smoke*; (4) the introduction of the New Media Software products acquired
through the Denim, D-Vision, and Lightscape acquisitions; and (5) the
additional month in the fiscal 1998 period. These increases were partially
offset by a decrease in revenues from Discreet's Broadcast Production
products.
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<PAGE>
Revenues from customers outside of North America were $80,691,000 (53% of
total revenues) and $58,171,000 (57% of total revenues) for the twelve-month
period ended June 30, 1998, and the eleven-month period ended June 30, 1997,
respectively. Revenues from customers outside North America increased due to
the increased penetration of Discreet's products in Discreet's European and
Asian markets as well as the additional month in the fiscal 1998 period.
Discreet expects that revenues from customers outside of North America will
continue to account for a substantial portion of its revenues and should, as a
percentage of total revenues, increase slightly from current levels.
Cost of Revenues. Cost of revenues consists primarily of the cost of
hardware sold (mainly workstations manufactured by SGI), cost of hardware
service contracts, cost of integration and hardware assembly, cost of service
personnel and the facilities, computing, benefits and other administrative
costs allocated to such personnel and the provision for inventory reserves.
Cost of revenues was $62,033,000 (41% of total revenues) and $47,571,000 (47%
of total revenues) for the twelve-month period ended June 30, 1998, and the
eleven-month period ended June 30, 1997, respectively. The decrease in cost of
revenues, as a percentage of total revenues, was primarily due to: (1) an
increase in sales to Discreet's indirect channel partners, whose purchases
from Discreet are predominantly software only and software and storage media
bundles since these indirect channel partners are themselves hardware
resellers; (2) porting certain of Discreet's software products to recently
available, lower priced workstations, resulting in a lower cost to Discreet
for the hardware component of system sales; and (3) the increased penetration
of Discreet's products in the Asian market where customers typically purchase
from Discreet only software or software and storage media bundles. The
decrease in cost of revenues, as a percentage of total revenues, is also
attributable to lower margins realized on systems sold in the three-month
period ended October 31, 1996 under an aggressive sales program, including
product discounts, designed to reduce the inventory on hand at the end of the
fourth fiscal quarter of 1996. Discreet expects that cost of revenues, as a
percentage of total revenues, should decrease slightly from its current
levels. However, cost of revenues remains difficult to predict and is subject
to fluctuations due to a number of factors including product and product
configuration mix and the proportion of direct and indirect sales.
Research and Development. Research and development expenses consist
primarily of the cost of research and development personnel and the
facilities, depreciation on research and development equipment, computing,
benefits and other administrative costs allocated to such personnel, and
consulting fees. Expenditures for research and development, after deducting
Canadian federal and provincial tax credits, were $14,847,000 (10% of total
revenues) and $9,708,000 (10% of total revenues) for the twelve-month period
ended June 30, 1998, and the eleven-month period ended June 30, 1997,
respectively. The increase in research and development expenses was primarily
due to: (1) an increase in the number of software engineers (including the
engineers joining Discreet as a result of the Denim, D-Vision and Lightscape
Acquisitions) to develop and enhance Discreet's existing and newly acquired
products and to develop new products, (2) an increase in depreciation charges
on the additional research and development equipment required for the
additional personnel,and (3) the additional month in the fiscal 1998 period.
Research and development costs are expensed as incurred. Software development
costs are considered for capitalization once technical feasibility has been
established. Discreet has not capitalized any software development costs to
date. Certain research and development expenditures are incurred substantially
in advance of related revenue and in some cases do not generate revenues.
Discreet expects that research and development expenses will increase from
current levels. Should revenues increase, Discreet expects that research and
development expenses, as a percentage of total revenues, should remain
approximately the same as current levels.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related benefits, facilities and administrative
costs allocated to Discreet's sales and marketing personnel, tradeshow
expenses, and dealer commissions. Sales and marketing expenses were
$34,321,000 (23% of total revenues) and $23,206,000 (23% of total revenues)
for the twelve-month period ended June 30, 1998, and the eleven-month period
ended June 30, 1997, respectively. The increase in sales and marketing
expenses, was primarily due to: (1) the continued expansion of Discreet's
direct and indirect sales organization, including the operating costs
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<PAGE>
of domestic sales offices and foreign subsidiaries, (2) an increase in
tradeshow activities, (3) the launch of a corporate branding initiative in the
fourth fiscal quarter of 1998, and (4) the additional month in the fiscal 1998
period. Discreet expects that sales and marketing expenses will increase from
their current levels. Should revenues increase, Discreet expects that sales
and marketing expenses, as a percentage of total revenues, should remain
approximately the same as current levels.
General and Administrative. General and administrative expenses include the
costs of finance and accounting, human resources, facilities, corporate
information systems, legal and other administrative functions of Discreet and
reserves for doubtful accounts receivable. General and administrative expenses
were $8,077,000 (5% of total revenues) and $6,396,000 (6% of total revenues)
for the twelve-month period ended June 30, 1998, and the eleven-month period
ended June 30, 1997, respectively. The increase in general and administrative
expenses is explained by an increase in personnel, as well as the additional
month in the fiscal 1998 period. Discreet expects that general and
administrative expenses will increase from their current levels. Should
revenues increase, Discreet expects that general and administrative expenses,
as a percentage of total revenues, should remain approximately the same as
current levels.
Gain on Sale of Investment. In the fourth fiscal quarter of 1998, Essential
Communications Corporation, a company in which Discreet held a minority
interest investment of preferred shares, was sold. As a result of this sale,
Discreet received proceeds of $2,500,000 in exchange for the preferred shares
held by it. Previously, in fiscal 1996, Discreet had taken a charge to
operations due to the uncertainty regarding the realizability of this
investment. Upon receipt of the proceeds, Discreet realized a gain of
$2,500,000.
Costs related to Terminated Transaction. In the fourth fiscal quarter of
1998, Discreet incurred $1,713,000 of costs related to the terminated
agreement to acquire MGI Software Corp.
Restructuring expense. In the fourth fiscal quarter of 1998, Discreet
reversed $2,333,000 of restructuring reserves. These reserves were considered
to no longer be necessary when the costs estimated to complete the
restructuring plan were reviewed. This reversal was offset by an additional
accrual of $829,000 to accrue the cost of closing Discreet's U.K. research and
development facility. The closure of this facility substantially was completed
by June 30, 1998. See Note 19 of Notes to Discreet's Consolidated Financial
Statements.
Charge for Purchased Research and Development. In connection with the
Lightscape acquisition, Discreet expensed $5,800,000, based on an independent
appraisal, of in-process research and development that had not yet reached
technological feasibility and had no alternative use, in the three-month
period ended December 31, 1997. In connection with the D-Vision acquisition,
Discreet expensed $21,000,000, based on an independent appraisal, of in-
process research and development, that had not yet reached technological
feasibility and had no alternative use, in the three-month period ended
September 30, 1997. See Note 15 of Notes to Discreet's Consolidated Financial
Statements.
Litigation and Related Settlement Expenses. In the third fiscal quarter of
1998, Discreet reversed $405,000 of litigation and related settlement expenses
in order to adjust previously estimated legal costs to the actual amount of
costs incurred to settle the class action litigations. See Note 5 of Notes to
Discreet's Consolidated Financial Statements.
Other Income (Expense). Other Income (Expense) primarily consists of foreign
currency gains and losses and interest income and expense. Foreign currency
translation resulted in gains of $1,083,000 and losses of $188,000 for the
twelve-month period ended June 30, 1998, and the eleven-month period ended
June 30, 1997, respectively. These gains and losses are primarily the result
of Discreet and each subsidiary translating intercompany balances denominated
in a currency other than its own functional currency. These balances are
remeasured into the functional currency of each company every reporting
period. This remeasurement results in either unrealized gains or losses
depending on the exchange rate fluctuation between the functional currency of
each company and the currency in which the monetary asset or liability is
denominated.
Provision for Income Taxes. Discreet's provision for income taxes was
$10,854,000 and $6,489,000 for the twelve-month period ended June 30, 1998,
and the eleven-month period ended June 30, 1997, respectively.
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The provision for all periods is based upon the Canadian federal statutory
rate of 38% and reflects the impact of various tax credits and foreign taxes.
The effective tax rate for the twelve-month period ended June 30, 1998
differed from the statutory rate primarily as a result of Discreet recording
charges for purchased in-process research and development for which no benefit
was recorded due to the uncertainty of realizing any future tax benefit
associated with these charges, offset by the realization of the benefit for
some prior year tax losses for which no benefit was previously recorded. The
effective tax rate for the eleven-month period ended June 30, 1997 differed
from the statutory rate primarily as a result of Discreet not recording
benefits related to losses, and charges for purchased in-process research and
development and the settlement of the class action litigation, where the
realization of the benefits were uncertain. Discreet has foreign net operating
loss carry forwards of approximately $13,841,000 which may be available to
reduce future income tax liabilities.
ELEVEN MONTHS ENDED JUNE 30, 1997 AND TWELVE MONTHS ENDED JULY 31, 1996
As discussed above, it is not practicable to recast prior quarterly results
to reflect new fiscal periodic reporting resulting from Discreet's previously
announced change in fiscal year end. Therefore, the results for the eleven-
month period ended June 30, 1997, are not directly comparable to the results
of the twelve-month period ended July 31, 1996.
Total Revenues. Total revenues were $101,924,000 and $83,997,000 for the
eleven-month period ended June 30, 1997 and the twelve-month period ended July
31, 1996, respectively. Despite the fact that fiscal 1997 was an eleven-month
period, total revenues increased in fiscal 1997 over total revenues for fiscal
1996 due to new product offerings during the year, namely FIRE and FLINT RT,
as well as wider acceptance of Discreet's premier resolution-independent
effects system, INFERNO, and a growing installed base. Revenues from FLAME
systems, including software and hardware, were $26,159,000 (26% of total
revenues) and $44,745,000 (53% of total revenues) for the eleven-month period
ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decline in FLAME revenues, both in amount and as a
percentage of total revenues, was primarily a result of an aggressive program
in the three months ended October 31, 1996 which included significant
discounting designed to reduce inventory on hand at the end of fiscal 1996,
and the wider acceptance of Discreet's premier resolution-independent effects
system, INFERNO, which began to ship commercially in October 1995. Revenues
from INFERNO systems, including software and hardware, were $16,161,000 (16%
of total revenues) and $8,887,000 (11% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decline in FLAME revenues was also offset by an increase in
FLINT revenues due to the initial commercial shipment of FLINT RT. Revenues
from FLINT (including FLINT RT) systems, including software and hardware, were
$17,263,000 (17% of total revenues) and $14,068,000 (17% of total revenues)
for the eleven-month period ended June 30, 1997 and the twelve-month period
ended July 31, 1996, respectively. Revenues from FIRE systems, including
software and hardware, were $26,482,000 (26% of total revenues) during the
eleven-month period ended June 30, 1997, the first period it was commercially
available. Revenues from VAPOUR and FROST systems, including software and
hardware, were $2,253,000 (2% of total revenues) and $4,784,000 (6% of total
revenues) for the eleven-month period ended June 30, 1997 and the twelve-month
period ended July 31, 1996, respectively. Due to the high average sales price,
the timing of purchase orders and the lengthy sales cycle of VAPOUR and FROST
systems, a limited number of sales of these systems could account for a
significant amount of revenues. The decline in VAPOUR and FROST revenues is
attributable to the fact that the 1996 revenues include the sale of several
large systems.
Software-only revenues were $7,495,000 (7% of total revenues) and $4,564,000
(5% of total revenues) for the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 31, 1996, respectively. Hardware-only revenues,
consisting primarily of the sale of disk arrays and other peripherals, were
$6,639,000 (7% of total revenues) and $4,938,000 (6% of total revenues) for
the eleven-month period ended June 30, 1997 and the twelve-month period ended
July 31, 1996, respectively. System revenues, which include software and
hardware, were $74,183,000 (73% of total revenues) and $63,183,000 (75% of
total revenues) for the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 31, 1996, respectively. The fluctuations in
software-only, hardware-only and system revenues are primarily due to the high
average sales price of Discreet's products, such that a limited number of
sales can account for a substantial portion of total
151
<PAGE>
revenues. The increase in software-only revenues as a percentage of total
revenues resulted from more revenues in fiscal 1997 being derived from
Discreet's indirect sales channel which primarily purchases only software from
Discreet.
Maintenance revenues were $9,728,000 (10% of total revenues) and $6,483,000
(8% of total revenues) for the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 31, 1996, respectively. Maintenance revenues
increased due to the increased installed base of Discreet's FLAME, INFERNO and
FLINT systems as well as the development of an installed base for Discreet's
FIRE systems. Other revenues were $3,878,000 (4% of total revenues) and
$4,829,000 (6% of total revenues) for the eleven-month period ended June 30,
1997 and the twelve-month period ended July 31, 1996, respectively. Other
revenues for all periods consisted primarily of rentals, systems integration,
and training services provided to customers. Other revenues decreased in the
eleven-month period ended June 30, 1997 as compared to the twelve-month period
ended July 31, 1996, due to the decrease in rentals of Discreet's FLAME
systems.
Revenues from customers outside of North America were $58,171,000 (57% of
total revenues) and $47,711,000 (57% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. Discreet is continuing to develop its direct and indirect
distribution channels in North America, Asia and Europe. Discreet expects that
revenues from customers outside of North America will continue to account for
a substantial portion of its revenues and, as a percentage of total revenues,
remain approximately the same.
Cost of Revenues. Cost of revenues was $47,571,000 (47% of total revenues)
and $49,333,000 (59% of total revenues) for the eleven-month period ended June
30, 1997 and the twelve-month period ended July 31, 1996, respectively. The
decrease in cost of revenues as a percentage of total revenues was a result of
the following factors: (1) Discreet's growing penetration into the Asian
market where customers typically purchase only software or software and
storage media bundles, (2) the SGI workstation component of cost of revenues
declined as Discreet's installed base purchased additional software and
storage media to add on to existing workstations, and (3) provisions to write
inventories down to their net realizable values were lower for the eleven-
month period ended June 30, 1997 as compared to the twelve-month period ended
July 31, 1996.
Research and Development. Expenditures for research and development, after
deducting Canadian federal and provincial tax credits, were $9,708,000 (10% of
total revenues) and $16,902,000 (20% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decrease in research and development expenses, after
deducting tax credits, was a result of the following factors: (1) the
provision, in the amount of $2,500,000, recorded during the quarter ended
April 30, 1996, to reflect the uncertainty regarding the realizability of
Discreet's investment in the preferred shares of Essential Communications
Corporation and (2) the implementation of Discreet's restructuring plan which
included the reduction of personnel, closure of certain research and
development offices, and consolidation of software research and development in
its Montreal headquarters during the fourth fiscal quarter of 1996 and the
eleven-month period ended June 30, 1997. See Note 19 to Notes to Discreet's
Consolidated Financial Statements. These decreases were partially offset by
general salary increases. Research and development costs are expensed as
incurred. Software development costs are considered for capitalization once
technical feasibility has been established. Discreet has not capitalized any
software development costs to date. See Note 2(e) of Notes to Discreet's
consolidated financial statements. Certain research and development
expenditures are incurred substantially in advance of related revenue and in
some cases do not generate revenues.
Sales and Marketing. Sales and marketing expenses were $23,206,000 (23% of
total revenues) and $26,088,000 (31% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decrease in sales and marketing expenses resulted primarily
from the implementation of Discreet's restructuring plan, which included a
reduction of personnel and the closure of the Florida sales office and the
relocation of the New York demonstration center during the fourth fiscal
quarter of 1996. These decreases were partially offset by the continued
expansion of Discreet's direct and indirect sales organization, including the
operating costs of domestic sales offices and foreign subsidiaries.
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<PAGE>
General and Administrative. General and administrative expenses were
$6,396,000 (6% of total revenues) and $10,582,000 (13% of total revenues) for
the eleven-month period ended June 30, 1997 and the twelve-month period ended
July 31, 1996, respectively. The decrease in general and administrative
expenses resulted primarily from the implementation of Discreet's
restructuring plan which included a reduction of administrative personnel as
well as the closure of administrative offices in Cambridge, Massachusetts.
Additionally, in fiscal 1996, Discreet provided approximately $3,300,000 in
reserves for potentially uncollectible accounts receivable and provided
$830,000 to reflect certain recourse provisions associated with third party
financing arrangements, and reduced the carrying value of a building purchased
in Montreal by CDN$500,000 (approximately $365,000) to reflect the value
expected to be realized upon sale.
Charge for Purchased Research and Development. In connection with the
acquisition of substantially all of the assets of Denim Software L.L.C.,
Discreet expensed $9,800,000 (10% of total revenues) of in-process research
and development, that had not yet reached technical feasibility and had no
alternative use, during the eleven-month period ended June 30, 1997. During
fiscal 1996, in connection with the COSS/IMP acquisition, Discreet expensed
$8,500,000 (10% of total revenues) of in-process research and development. See
Note 15 of Notes to Discreet's Consolidated Financial Statements.
Restructuring Expense. In the fourth quarter of fiscal 1996, Discreet
recorded a restructuring expense of $15,000,000 (18% of total fiscal 1996
revenues). The focus of Discreet's restructuring plan was to solidify its
senior management team, reduce operating expenses through workforce reductions
and office closings, consolidate software research and development activities
in Montreal, discontinue certain product lines, and restructure its sales
force to emphasize indirect sales channels. While Discreet began
implementation of its restructuring plan in the fourth fiscal quarter of 1996
and had substantially completed the implementation of the plan at the end of
fiscal 1997, as of June 30, 1997, Discreet had $4,272,000 in restructuring
reserves primarily for the estimated cost of terminating leases, resolving
outstanding severance issues, and the legal and taxation winding down of
several subsidiaries. See Note 19 of Notes to Discreet's Consolidated
Financial Statements.
Litigation and Settlement. In August 1997, Discreet announced an agreement-
in-principle to settle all three of the class action shareholder lawsuits
outstanding against it for $10,800,000. In the fiscal year ended July 31,
1996, Discreet had provided a $2,506,000 (3% of total revenues) litigation
reserve for legal costs associated with defending the class action lawsuits.
During the eleven-month period ended June 30, 1997, Discreet recorded a
provision of $6,500,000 (6% of total revenues) to accrue the additional
estimated settlement costs to be borne by Discreet. See Note 5 of Notes to
Discreet's Consolidated Financial Statements.
Other Income (Expense). Foreign currency translation losses were $188,000
during the eleven-month period ended June 30, 1997 compared to gains of
$179,000 during the year ended July 31, 1996.
Provision for Income Taxes. Discreet's provision for income taxes was
approximately $6,489,000 and $1,435,000 for the eleven-month period ended June
30, 1997 and the twelve-month period ended July 31, 1996, respectively. The
provision for all periods was based on the Canadian federal statutory rate of
38% and reflects the impact of various tax credits and foreign taxes. The tax
provision for these periods resulted from taxable earnings in jurisdictions
where Discreet did not have available tax loss carryforwards partially offset
by the realization of the benefit for some prior year tax losses for which no
benefit was previously recorded. In both fiscal years, Discreet recorded
charges for acquired in-process research and development for which no benefit
was recorded due to the uncertainty of realizing any future tax benefit
associated with these charges. In addition, in fiscal 1997, Discreet recorded
a provision for estimated litigation settlement costs for which no tax benefit
was recorded because of the uncertainty of realizing any tax benefit
associated with this charge.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain quarterly financial data for each of
the eight most recent quarters in the period ended June 30, 1998, together
with such data as a percentage of total revenues. The quarterly information
presented is unaudited. In the opinion of management, the unaudited quarterly
information has been prepared on the same basis as the annual audited
consolidated financial statements and includes all adjustments
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(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the periods presented. Operating results
for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
TWO
QUARTER MONTHS QUARTERS ENDED
ENDED ENDED ----------------------------------------------------------
OCT. DEC. DEC. MARCH JUNE
31, 31, MAR. 31, JUNE 30, SEPT. 31, 31, 30,
1996 1996 1997 1997 30, 1997 1997 1998 1998
------- ------- -------- -------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $23,263 $16,833 $27,044 $ 34,784 $ 38,405 $37,268 $35,712 $40,173
Cost of revenues........ 12,287 8,003 11,255 16,026 17,280 13,548 14,191 17,015
------- ------- ------- -------- -------- ------- ------- -------
Gross profit........ 10,976 8,830 15,789 18,758 21,125 23,720 21,521 23,158
------- ------- ------- -------- -------- ------- ------- -------
Operating expenses:
Research and
development.......... 2,678 1,575 2,746 2,709 3,512 3,901 4,032 3,402
Sales and marketing... 6,017 4,610 6,534 6,045 7,433 8,407 8,610 9,870
General and
administrative....... 1,516 1,189 1,842 1,849 1,884 2,012 2,137 2,044
Gain on sale of
investment........... -- -- -- -- -- -- -- (2,500)
Costs related to
terminated
transaction.......... -- -- -- -- -- -- -- 1,713
Write-off of purchased
research and
development.......... -- -- -- 9,800 21,000 5,800 -- --
Restructuring expense. -- -- -- -- -- -- -- (1,504)
Litigation and related
settlement expenses.. -- -- -- 6,500 -- -- (405) --
------- ------- ------- -------- -------- ------- ------- -------
Total operating
expenses........... 10,211 7,374 11,122 26,903 33,829 20,120 14,374 13,025
------- ------- ------- -------- -------- ------- ------- -------
Operating income
(loss)............. 765 1,456 4,667 (8,145) (12,704) 3,600 7,147 10,133
Total other income
(expense).............. (925) 1,819 46 51 377 287 (205) 1,608
------- ------- ------- -------- -------- ------- ------- -------
Income (loss) before
income taxes........... (160) 3,275 4,713 (8,094) (12,327) 3,887 6,942 11,741
Provision for income
taxes.................. 652 1,310 1,674 2,853 2,775 3,097 1,739 3,243
------- ------- ------- -------- -------- ------- ------- -------
Net income (loss)... $ (812) $ 1,965 $ 3,039 $(10,947) $(15,102) $ 790 $ 5,203 $ 8,498
======= ======= ======= ======== ======== ======= ======= =======
Total revenues.......... 100 % 100% 100% 100 % 100 % 100% 100 % 100 %
Cost of revenues........ 53 48 42 46 45 36 40 42
------- ------- ------- -------- -------- ------- ------- -------
Gross profit......... 47 52 58 54 55 64 60 58
------- ------- ------- -------- -------- ------- ------- -------
Operating expenses:
Research and
development.......... 12 9 10 8 9 10 11 9
Sales and marketing... 26 27 24 17 19 23 24 25
General and
administrative....... 6 7 7 5 5 5 6 5
Gain on sale of
investment........... -- -- -- -- -- -- -- (6)
Costs related to
terminated
transaction.......... -- -- -- -- -- -- -- 4
Write-off of purchased
research and
development.......... -- -- -- 28 55 16 -- --
Restructuring expense. -- -- -- -- -- -- -- (4)
Litigation and related
settlement expenses.. -- -- -- 19 -- -- (1) --
------- ------- ------- -------- -------- ------- ------- -------
Total operating
expenses............ 44 43 41 77 88 54 40 33
------- ------- ------- -------- -------- ------- ------- -------
Operating income
(loss).............. 3 9 17 (23) (33) 10 20 25
Total other income
(expense).............. (4) 11 -- -- 1 -- (1) 4
------- ------- ------- -------- -------- ------- ------- -------
Income (loss) before
income taxes........... (1) 20 17 (23) (32) 10 19 29
Provision for income
taxes.................. 3 8 6 8 7 8 5 8
------- ------- ------- -------- -------- ------- ------- -------
Net income (loss).... (4)% 12% 11% (31)% (39)% 2% 14 % 21 %
======= ======= ======= ======== ======== ======= ======= =======
</TABLE>
154
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Discreet has funded its operations to date primarily through cash flow from
operations (including deferred revenue and customer deposits), borrowings
under its demand line of credit, capital leases, the private and public sales
of equity securities, and the receipt of research and development tax credits
from the Canadian federal government and the Quebec government. As of June 30,
1998, Discreet had cash of approximately $43,746,000. During fiscal 1998,
Discreet amended its revolving demand line of credit with its bank. The new
agreement provides for a revolving demand line of credit under which it may
borrow up to Cdn$7,000,000 (approximately $4,773,000 at June 30, 1998).
Advances under the line accrue interest monthly at the Canadian prime rate
(6.50% at June 30, 1998) plus 0.25%. Additionally, the agreement provides for
a Cdn$600,000 (approximately $409,000 at June 30, 1998) demand leasing
facility, and a Cdn$600,000 (approximately $409,000 at June 30, 1998) demand
research and development tax credit facility. Advances under these facilities
accrue interest monthly at the Canadian prime rate (6.50% at June 30, 1998)
plus 1%. The line and facilities are secured by essentially all of Discreet's
North American assets. As additional security, Discreet assigned to the bank
its insurance on these assets. Discreet is required to maintain certain
financial ratios, including minimum levels of working capital, debt service
coverage and equity to assets ratios. As of June 30, 1998, there were no
amounts outstanding under the demand leasing and demand research and
development tax credit facilities, however, the amount available to Discreet
under the line of credit was reduced by the letter of guarantee discussed
below.
During the year, Discreet's Japanese subsidiary entered into a line of
credit agreement with its bank. Under this agreement, the subsidiary can
borrow up to $3,000,000. Advances under this line accrue interest at the
prevailing overnight rate (approximately 2.1% at June 30, 1998) and are
secured by a letter of guarantee, in the amount of $3,000,000, issued by
Discreet in favour of the subsidiary's bank. As of June 30, 1998, the
subsidiary had borrowed (Yen)376,824,000 (approximately $2,725,000 at June 30,
1998).
Discreet's operating activities, including research and development tax
credits, provided cash of $17,107,000, $26,012,000 and used cash of
$24,425,000, in the fiscal year ended June 30, 1998, and in the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31, 1996,
respectively. The principal sources of cash in the twelve-month period ended
June 30, 1998 were cash generated from operations, the decreases in inventory
and in income taxes receivable, and the increase in income taxes payable,
offset by an increase in accounts receivable, decreases in accounts payable
and accrued expenses, deferred revenue, and customer deposits, and the
disbursement of funds used to settle the class action litigation. Accounts
receivable increased during fiscal 1998 as a result of Discreet experiencing a
level of revenues greater than in the fourth fiscal quarter of 1997 and the
timing of those revenues being close to the end of the year. Inventory
decreased during fiscal 1998, as a result of close monitoring of inventory
throughout the year and the migration of some of Discreet's products to
hardware platforms that cost less than previous generations. Accrued expenses
decreased due to the settlement of the class action litigation and the
reduction of the accrued restructuring reserve. (See Note 19 of Notes to
Discreet's Consolidated Financial Statements). The primary sources of cash in
fiscal 1997 were cash generated from operations, reductions in inventory and
income taxes receivable, and increases in accounts payable, accrued expenses,
deferred revenue, income taxes payable, offset by uses of cash including the
increase in accounts receivable and the reduction of customer deposits. The
primary sources of cash in fiscal 1996 were the increases in accrued expenses,
deferred revenue and customer deposits, offset by decreases in cash including
the increases in accounts receivable, inventory, income taxes receivable and
other current assets and the reductions of accounts payable and income taxes
payable.
Discreet's investing activities used cash of $16,526,000, $17,867,000 and
$24,223,000 in the twelve-month period ended June 30, 1998, the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31, 1996,
respectively. The principal uses of cash in fiscal 1998 were the acquisition
of D-Vision and the purchase of computer equipment and software, general
office equipment, leasehold improvements and furniture and fixtures used in
the operation of Discreet's business, offset by the receipt of the proceeds of
sale of the Montreal building and the investment in Essential Communications
Corporation. The principal uses of cash in fiscal 1997 were the acquisition of
Denim, and the purchase of computer equipment and software, general office
equipment, leasehold improvements and furniture and fixtures used in the
operation of Discreet's business. In fiscal 1996,
155
<PAGE>
the principal uses of cash were the acquisition of COSS/IMP, the purchase of
the preferred shares of Essential Communications Corporation, the purchase of
land and an office building in London, England, the purchase of land and an
office building in Montreal, Quebec, and the purchase of computer equipment
and software, general office equipment, leasehold improvements, and furniture
and fixtures used in the operation of Discreet's business.
Financing activities provided cash of $15,188,000, $1,479,000 and
$30,310,000 during the fiscal year ended June 30, 1998, the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31, 1996,
respectively. In all three periods, cash was provided from common stock option
exercises and the issuance of shares under the Employee Stock Purchase Plan.
In fiscal 1998, Discreet issued 645,000 Discreet Common Shares under a private
placement sale to Intel Corporation for proceeds of approximately $13,527,000,
net of issuance costs. In fiscal 1996, cash was provided primarily from
proceeds from the issuance of approximately 971,000 common shares in a
secondary public offering which was completed in December 1995, proceeds from
the repayment of subscriptions receivable, and proceeds from common stock
option exercises less payment of capital lease obligations.
Discreet incurred $9,502,000, $6,265,000 and $15,871,000 of capital
expenditures during the fiscal year ended June 30, 1998, the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31, 1996,
respectively, consisting primarily of computer equipment, software and general
office equipment and leasehold improvements. In the fiscal year ended July 31,
1996, Discreet purchased an office building and related land in London,
England. Discreet incurred (Pounds)1,034,000 (or approximately $1,663,000),
and (Pounds)715,000 (or approximately $1,114,000) in capital expenditures
during the fiscal years ended June 30, 1997 and July 31, 1996, respectively,
for the refitting of the London property. In fiscal 1996, Discreet also
purchased an office building in Montreal, Quebec. The carrying values of the
Montreal building and the London building were written down to their estimated
fair market values and the buildings were classified as assets held for sale
in fiscal 1996. In September 1997, Discreet sold the Montreal office building
for proceeds of $818,000.
As of June 30, 1998, Discreet did not have any material commitments for
capital expenditures.
During the year, Discreet concluded a financing arrangement in relation to
the Lightscape Acquisition with the Societe de Developpement Industriel du
Quebec, an agency of the Quebec provincial government. This agreement provides
for an interest free (until July 2004) loan in the amount of Cdn$2,800,000
(approximately $1,909,000 at June 30, 1998). The funds were received in July
1998 and are repayable in four annual installments of Cdn$600,000
(approximately $409,000 at June 30, 1998) commencing in July 2004, and a final
installment of Cdn$400,000 (approximately $273,000 at June 30, 1998) in July
2008. The loan is subject to standard covenants for these arrangements,
including covenants that may require early repayment of the loan.
Discreet has never declared or paid cash dividends on its Common Shares and
does not anticipate paying any cash dividends on Discreet Common Shares in the
forseeable future. In the event cash dividends are declared or paid, Discreet
anticipates that they would be declared and paid in US dollars. Part 1A of the
Quebec Act prohibits Discreet from paying dividends that would prevent it from
discharging its liabilities when due or that would bring the book value of its
assets to an amount less than the sum of its liabilities and its issued and
paid-up share capital account. At June 30, 1998, Discreet could not distribute
any dividends.
Subject to the factors discussed in "--Certain Factors That May Affect
Future Results," Discreet believes that, with its current levels of working
capital together with funds generated from operations, it has adequate sources
of cash to meet its operations and capital expenditure requirements through
fiscal 1999.
156
<PAGE>
DISCREET MANAGEMENT, EXECUTIVE
COMPENSATION AND PRINCIPAL SHAREHOLDERS
DISCREET MANAGEMENT
The following table sets forth the directors and the executive officers of
Discreet, their ages, and the positions currently held by each such person
with Discreet. Discreet Common Shares beneficially owned by each director,
directly or indirectly, as of August 31, 1998, appears under the heading "--
Security Ownership of Certain Beneficial Owners and Management of Discreet."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Richard J. Szalwinski(1)......... 47 President, Chief Executive Officer,
Chairman of the Board of Directors
and Director
Francois Plamondon............... 40 Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
Winston Rodrigues................ 56 Senior Vice President, Advanced
Systems and Operations
Gary G. Tregaskis................ 39 Director
Thomas Cantwell(1)(2)............ 71 Director
Brian P. Drummond(1)(2).......... 67 Director
Perry M. Simon(1)................ 43 Director
Pierre Desjardins(2)............. 56 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
RICHARD J. SZALWINSKI, a founder of Discreet, has served as a Director since
May 1992 and as Chairman of the Board of Directors since March 1994. Mr.
Szalwinski served as acting President and Chief Executive Officer from
February 1996 and assumed that position officially in July 1996. From May 1992
to November 1994 Mr. Szalwinski served as Chief Executive Officer of Discreet
and served as President of Discreet from May 1992 to March 1994. Prior to
founding Discreet, he held several positions at Softimage Inc. from June 1988
to December 1991, most recently as a Director and Vice President of Sales. Mr.
Szalwinski also serves as the Chairman of the Board of Directors of Behaviour
Communications Inc., a public company.
FRANCOIS PLAMONDON joined Discreet in July 1996 and, since August 1996,
served as Executive Vice President, Senior Vice President, Chief Financial
Officer, Treasurer and Secretary of Discreet. Prior to joining Discreet, Mr.
Plamondon was a partner at Ernst & Young, Chartered Accountants, from December
1990 to July 1996.
WINSTON RODRIGUES joined Discreet in October 1997 and currently serves as
Senior Vice President, Advanced Systems and Operations. Prior to joining
Discreet, Mr. Rodrigues was Vice President, Operations at Memotec
Communications Inc., a communications and networking company, from 1995 to
1997. From 1994 to 1995, Mr. Rodrigues was a Vice-President at Circo Craft Co.
Inc., a manufacturer of printed circuit boards; prior to that, he occupied
various positions at IBM Canada Ltd., most recently as a product manager.
GARY G. TREGASKIS has served as a Director of Discreet since July 1992. Mr.
Tregaskis has been an independent consultant to Discreet since December 1995.
Prior to that, Mr. Tregaskis served as Director of Advanced Products of
Discreet from February 1994 to December 1995. He has also served as Director
of Advanced Systems Division of Discreet from July 1992 to February 1994. Mr.
Tregaskis was the principal designer and architect of flame*. Prior to joining
Discreet, Mr. Tregaskis served as the Director of Research
157
<PAGE>
and Development at D.A. Technology, an Australian software development
corporation, from 1985 to June 1992. Mr. Tregaskis also serves as a Director
of Behaviour Communications Inc., a public company.
THOMAS CANTWELL has served as a Director of Discreet since September 1992.
Dr. Cantwell has been an investor and venture capitalist since 1987. He has
served as President of Technical Computer Graphics, a computer distributor and
software development corporation, since November 1987. Dr. Cantwell also
serves as a Director of Supreme Industries, Inc., a public company and as
Chairman of the Board of Directors of Paradigm Entertainment Inc., a privately
held developer of computer and video games.
BRIAN P. DRUMMOND has served as a Director of Discreet since January 1996.
Mr. Drummond has served as President of Brican Investments Ltd., a private
holding company, since March 1979. Mr. Drummond was Vice Chairman and Director
of Richardson Greenshields of Canada Limited, an investment dealer, from 1982
to June 1997. Mr. Drummond also serves as a Director of Atco Ltd. and Canadian
Utilities Limited, both public companies.
PERRY M. SIMON has served as a Director of Discreet since January 1996. Mr.
Simon has been President, of Viacom Television for Viacom Entertainment,
Viacom, Inc., a television and film developer and producer, since September
1993. Prior to that, Mr. Simon held several positions with NBC Entertainment,
from 1985 to 1993, most recently as Executive Vice President-Prime-time
Programs.
PIERRE DESJARDINS has served as a Director of Discreet since January 1997.
Mr. Desjardins has been Chairman, President and Chief Executive Officer of
Total Containment, a manufacturer and distributor of underground systems and
products for the conveyance and containment of fuels, since September 1996.
Prior to that, Mr. Desjardins was President and Chief Executive Officer of
Domtar Inc., a producer of paper, pulp and forest products, from September
1990 to October 1994. Mr. Desjardins also served as President of Labatt
Breweries of Canada from 1988 to September 1990. Mr. Desjardins also serves as
a Director of Canam Manac Group Inc., a public company and Uniselect, Inc., a
public company.
Discreet's executive officers are elected by the Discreet Board on an annual
basis and serve until their successors have been duly elected and qualified or
until their earlier resignation or removal.
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<PAGE>
COMPENSATION AND OTHER INFORMATION CONCERNING DISCREET OFFICERS
Executive Compensation Summary
The following table sets forth summary information concerning the
compensation paid or earned for services rendered to Discreet in all
capacities during the fiscal years ended July 31, 1996, June 30, 1997 and June
30, 1998 to (i) Discreet's current Chief Executive Officer; and (ii) each of
the four most highly compensated executive officers of Discreet (other than
the Chief Executive Officer) who earned more than $100,000 in salary and bonus
in fiscal year 1998 (collectively, the "Discreet Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION(1)
------------------------- OPTION
NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS AWARDS (#)
- ------------------------------ ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Richard J. Szalwinski................... 1998 $264,562 $ 81,355 75,000
President, Chief Executive Officer, 1997 $192,724 $172,500 450,000
Chairman of the Board of Directors and
Director 1996 $154,557 -- --
Francois Plamondon...................... 1998 $176,875 $ 60,138 50,000
Executive Vice President, 1997 $133,833 $ 50,920 --
Chief Financial Officer, Secretary and
Treasurer 1996 -- -- 300,000
Winston Rodrigues(2).................... 1998 $ 84,923 $ 30,643 65,000
Senior Vice President, Advanced Systems
and Operations 1997 -- -- --
1996 -- -- --
Terrence Higgins(3)..................... 1998 $123,813 -- 40,000
Former Senior Vice President, Products 1997 $ 93,683 $ 25,550 --
1996 $121,549 -- 40,000
Graham Sharp............................ 1998 $176,881(4) -- --
Former Senior Vice President, 1997 $183,337(5) $ 25,000 300,000
Sales and Marketing 1996 $ 98,572(6) -- 10,000
</TABLE>
- --------
(1) 1997 amounts represent salary and bonus actually paid or earned during the
eleven month period ended June 30, 1997.
(2) Mr. Rodrigues joined Discreet in October 1997. This amount includes his
salary for the nine months of fiscal 1998 during which he was employed by
Discreet.
(3) Mr. Higgins' employment with Discreet was terminated on July 2, 1998.
(4) This amount includes $60,000 of sales commissions earned by Mr. Sharp
during fiscal 1998. Mr. Sharp's employment with Discreet was terminated on
July 2, 1998.
(5) This amount includes $68,750 of sales commissions earned by Mr. Sharp
during fiscal 1997.
(6) Mr. Sharp joined Discreet in January 1996. This amount includes his salary
as well as $57,948 of sales commissions paid to Mr. Sharp for the seven
months of fiscal 1996 during which he was employed by Discreet.
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 1998 to each of the Discreet Named Executive
Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------
POTENTIAL
REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION -------------------
NAME GRANTED (#) YEAR (1) ($/SHARE) DATE 5% ($) 10% ($)
- ---- ----------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard J. Szalwinski... 75,000 8.32% $15.75 11/20/07 $742,881 $1,882,608
Terrence Higgins(2)..... 40,000 4.44% $24.25 08/11/07 $610,027 $1,545,930
Francois Plamondon(3)... 50,000 5.54% $24.25 08/11/07 $762,534 $1,932,413
Graham Sharp............ -- -- -- -- -- --
Winston Rodrigues(4).... 45,000 4.99% $21.00 10/30/07 $594,305 $1,506,086
20,000 2.22% $22.63 03/02/08 $284,575 $ 721,168
</TABLE>
- --------
(1) Percentages are based upon a total of 901,771 options granted to employees
in the fiscal year ended June 30, 1998.
(2) On July 2, 1998, Mr. Higgins' employment with Discreet was terminated and,
as a result, on that same day, the option to purchase 40,000 Discreet
Common Shares which was granted on August 11, 1997 was cancelled.
(3) On August 4, 1998, Mr. Plamondon was granted an option to purchase 60,000
Discreet Common Shares, at an exercise price per share of $11.00.
(4) On August 4, 1998, Mr. Rodrigues was granted an option to purchase 60,000
Discreet Common Shares, at an exercise price per share of $11.00.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth, for each of the Discreet Named Executive
Officers, information with respect to the exercise of stock options during the
year ended June 30, 1998 and the year-end value of unexercised options:
<TABLE>
<CAPTION>
SHARES VALUE OF UNEXERCISED IN-
ACQUIRED ON NUMBER OF UNEXERCISED THE-MONEY OPTIONS AT YEAR-
EXERCISE VALUE OPTIONS AT YEAR-END END(2)
NAME (#) REALIZED ($)(1) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- ---- ----------- --------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Richard J. Szalwinski... -- -- 0/525,000 --/$2,517,165
Terrence Higgins(3)..... -- -- 40,508/ 40,000 $389,285/--
Francois Plamondon...... -- -- 0/350,000 --/$1,837,500
Graham Sharp(4)......... -- -- 5,625/304,375 --/$2,137,500
Winston Rodrigues....... -- -- 0/ 65,000 --/--
</TABLE>
- --------
(1) Amounts disclosed in this column are calculated based on the difference
between the fair market value of Discreet Common Shares on the date of
exercise and the exercise price of the options in accordance with
regulations promulgated under the Securities Exchange Act, and do not
reflect amounts actually received by the Discreet Named Executive
Officers.
(2) Value is based on the difference between the option exercise price and the
fair market value at June 30, 1998, the fiscal year-end ($11.625 per
share), multiplied by the number of shares underlying the option.
(3) Represents shares and amounts as of June 30, 1998. Mr. Higgins' employment
with Discreet was terminated on July 2, 1998 and, as a result, on that
same day, Mr. Higgins' option to purchase 40,000 Discreet Common
160
<PAGE>
Shares was cancelled. On August 14, 1998, Mr. Higgins exercised options to
purchase 8,008 Discreet Common Shares at an exercise price of $0.0463
pursuant to an option granted on June 14, 1994 and 32,500 Discreet Common
Shares at an exercise price of $2.50 pursuant to an option granted on
January 10, 1995. As of the Discreet Record Date, the number of unexercised
options held by Mr. Higgins and the value of such options were 0 and $0.00
respectively.
(4) Represents shares and amounts as of June 30, 1998. Mr. Sharp's employment
with Discreet was terminated on July 2, 1998 and as a result, on that day
options to purchase an additional 150,000 Discreet Common Shares became
vested. On September 15, 1998, Mr. Sharp exercised options to purchase
30,000 Discreet Common Shares at an exercise price of $4.50 per share
pursuant to an option granted on August 12, 1996. On September 16, 1998,
Mr. Sharp exercised options to purchase 20,000 Discreet Common Shares at
an exercise price of $4.50 per share pursuant to an option granted on
August 12, 1996. On September 23, 1998, Mr. Sharp exercised options to
purchase 70,000 Discreet Common Shares at an exercise price of $4.50 per
share pursuant to an option granted on August 12, 1996. As of September
24, 1998, the number of unexercised options held by Mr. Sharp and the
value of such options were 36,250 and $255,000 respectively. Mr. Sharp's
remaining vested options to purchase 36,250 Discreet Common Shares will
expire if not exercised by September 30, 1998.
EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS
Richard J. Szalwinski and Francois Plamondon have each entered into
agreements with Autodesk pursuant to which such individuals reconfirmed their
current employment arrangements with Discreet and agreed, subject to
consummation of the Transactions, to a minimum one year term of employment
with the Combined Company following the Effective Time and, in the event their
employment relationship with the Combined Company is terminated, to refrain
from competing with the Combined Company and from soliciting customers and
employees of the Combined Company for a specified period after such
termination.
In August 1997, Discreet entered into an agreement with Richard J.
Szalwinski, whereby Mr. Szalwinski agreed to serve as President and Chief
Executive Officer of Discreet. Mr. Szalwinski previously had no employment
agreement with Discreet. Pursuant to such agreement, Mr. Szalwinski's annual
base salary was increased from $200,000 to $230,000, effective March 1, 1997.
In addition, pursuant to such agreement, Mr. Szalwinski is eligible to receive
an annual bonus of up to 75% of his base annual salary, based on Discreet
meeting the consolidated budgets and forecasts approved by the Discreet Board.
In the event that Discreet does not meet such consolidated budgets and
forecasts, the Discreet Board may, at its sole discretion, approve the payment
of a bonus of up to 75% of his base annual salary to Mr. Szalwinski if the
Discreet Board determines that Mr. Szalwinski's performance of his duties was
outstanding and that Discreet's failure to meet such consolidated budgets and
forecasts was not attributable to factors within Mr. Szalwinski's control. In
August 1997, the Discreet Board increased Mr. Szalwinski's annual base salary
to $255,500, effective July 1, 1997. The agreement provides that Mr.
Szalwinski's employment with Discreet may be terminated by Mr. Szalwinski upon
three months written notice to Discreet, in which case Discreet must pay to
Mr. Szalwinski his salary and benefits for the remaining time period specified
in his notice of termination. The agreement further provides that Discreet may
terminate the agreement at any time with or without cause, upon written
notice. In the event Mr. Szalwinski's employment is terminated by Discreet,
without cause, Discreet must pay Mr. Szalwinski a lump sum amount equal to
twenty-four months base annual salary at the time of such termination. In
addition, Mr. Szalwinski was granted an incentive stock option to purchase
450,000 Discreet Common Shares under the Discreet's Amended and Restated 1994
Restricted Share and Option Plan (the "1994 Plan") at an exercise price of
$6.03 per share. In the event that Mr. Szalwinski's employment is terminated
without cause, then all options to purchase shares of Discreet which would
have next vested, shall immediately vest upon such termination. The agreement
further provides that in the event of a Reorganization, as defined in the 1994
Plan, then (i) the option to purchase the 450,000 Discreet Common Shares
granted to Mr. Szalwinski will become immediately vested or (ii) if the
Discreet Board elects, in accordance with the 1994 Plan, not to accelerate the
vesting of the options granted pursuant to the 1994 Plan, Mr. Szalwinski will
receive in substitution for all of his outstanding options to purchase
Discreet Common Shares, whether vested or not, such securities (excluding
options) of Discreet or of any merged, consolidated or otherwise reorganized
corporation or, only in the event of a merger of
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<PAGE>
Discreet with one of its subsidiaries, options of the merged company, all of
which securities or options shall be of equivalent value and liquidity.
In June 1996, Discreet entered into an agreement with Francois Plamondon,
whereby Mr. Plamondon became Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of Discreet, effective August 1, 1996. Pursuant to
such agreement, Mr. Plamondon received an annual base salary of Cdn$200,000,
and is eligible to receive an annual bonus of up to Cdn$70,000, based on
Discreet meeting the consolidated budgets and forecasts approved by the
Discreet Board. In the event that Discreet does not meet such consolidated
budgets and forecasts, the Discreet Board may, at its sole discretion, approve
the payment of a bonus of up to Cdn$70,000 to Mr. Plamondon if the Discreet
Board determines that Mr. Plamondon's performance of his duties was
outstanding and that Discreet's failure to meet such consolidated budgets and
forecasts was not attributable to factors within Mr. Plamondon's control. In
August 1997, the Discreet Board increased Mr. Plamondon's annual base salary
from Cdn$200,000 to Cdn$250,000, effective July 1, 1997 and increased his
eligible annual bonus from Cdn$70,000 to 50% of his annual base salary. The
agreement provides that Mr. Plamondon's employment with Discreet may be
terminated by Mr. Plamondon upon three months written notice to Discreet, in
which case Discreet must pay to Mr. Plamondon his salary and benefits for the
remaining time period specified in his notice of termination. The agreement
further provides that Discreet may terminate the agreement at any time with or
without cause, upon written notice. In the event Mr. Plamondon's employment is
terminated by Discreet, without cause, Discreet must pay Mr. Plamondon a lump
sum amount equal to twelve months base annual salary at the time of such
termination. In addition, Mr. Plamondon was granted an incentive stock option
to purchase 300,000 Discreet Common Shares under the 1994 Plan at an exercise
price of $5.50 per share (the "Initial Grant"). In the event that
Mr. Plamondon's employment is terminated without cause after August 1, 1997,
then all options to purchase Discreet Common Shares granted which would have
next vested following the effective date of such termination, will become
immediately vested upon such termination. The agreement further provides that
in the event of a Reorganization, as defined in the 1994 Plan, then (i) all
options to purchase Discreet Common Shares granted under the Initial Grant
will become immediately vested or (ii) if the Discreet Board elects, in
accordance with the 1994 Plan, not to accelerate the vesting of the options
granted pursuant to the 1994 Plan, Mr. Plamondon will receive in substitution
for all of his outstanding options to purchase Discreet Common Shares, whether
vested or not, such securities (excluding options) of Discreet or of any
merged, consolidated or otherwise reorganized corporation or, only in the
event of a merger of Discreet with one of its subsidiaries, options of the
merged company, all of which securities or options shall be of equivalent
value and liquidity.
In November 1996, Discreet entered into an agreement with Graham Sharp
related to Mr. Sharp's employment as Discreet's Senior Vice President-Sales &
Marketing, effective July 23, 1996. Pursuant to such agreement, Mr. Sharp
received an annual base salary of $125,000, and was eligible to receive sales
commissions of up to $75,000, based on Discreet meeting the sales and margin
contribution targets approved by the Discreet Board, and, in the event
Discreet exceeds such targets, an annual bonus of $25,000. The Discreet Board
could also, at its sole discretion, approve the payment of an additional bonus
to Mr. Sharp if Discreet exceeded the sales and margin contribution targets.
In addition, in the event Discreet did not meet such sales targets, the
Discreet Board could, at its sole discretion, approve the payment of a bonus
to Mr. Sharp if the Discreet Board determined that Mr. Sharp's performance of
his duties was outstanding and Discreet's failure to meet such targets was not
attributable to factors within Mr. Sharp's control. In August 1997, the
Discreet Board increased Mr. Sharp's annual base salary from $125,000 to
$150,000, effective July 1, 1997 and increased his eligible annual bonus from
$25,000 to up to 50% of his annual base salary. Under this agreement, Mr.
Sharp's eligibility to receive sales commissions remained unchanged. The
agreement provided that Mr. Sharp's employment with Discreet could be
terminated by Mr. Sharp upon three months written notice to Discreet, in which
case Discreet must pay to Mr. Sharp his salary and benefits for the remaining
time period specified in his notice of termination. The agreement further
provided that Discreet could terminate the agreement at any time, with or
without cause, upon written notice. In the event Mr. Sharp's employment was
terminated by Discreet, without cause, Discreet must pay Mr. Sharp a lump sum
amount equal to twelve months of his base annual salary at the time of such
termination. In addition, Mr. Sharp was granted an incentive stock option to
purchase 300,000 Discreet Common Shares under the Plan at an exercise price of
$4.50 per share. In the event that Mr. Sharp's employment was
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terminated without cause after July 23, 1997, then all options to purchase
shares of Discreet which would have next vested, immediately vested upon such
termination. The agreement provided that in the event of a Reorganization, as
defined in the 1994 Plan, then (i) the option to purchase the 300,000 Discreet
Common Shares granted to Mr. Sharp would become immediately vested or (ii) if
the Discreet Board elected, in accordance with the 1994 Plan, not to
accelerate the vesting of the options granted pursuant to the 1994 Plan, Mr.
Sharp would receive in substitution for all of his outstanding options to
purchase Discreet Common Shares, whether vested or not, such securities
(excluding options) of Discreet or, only in the event of a merger of Discreet
with one of its subsidiaries, options of the merged company, all of which
securities or options would be of equivalent value and liquidity. Also,
Discreet agreed to reimburse Mr. Sharp's documented out-of-pocket expenses
incurred in connection with his relocation from Montreal. On July 2, 1998,
Mr. Sharp's employment with Discreet was terminated. Pursuant to the terms of
Mr. Sharp's employment agreement, Discreet paid a lump sum amount equal to
twelve months of his base annual salary ($150,000) and agreed to reimburse Mr.
Sharp for his documented out-of-pocket expenses up to $20,000, incurred in
connection with his relocation from Montreal. Such payment was made on July
24, 1998. Additionally, all options to purchase Discreet Common Shares, which
would have next vested, became immediately vested. Of those vested options to
purchase Discreet Common Shares which totalled 156,250, Mr. Sharp exercised
options to purchase 50,000 Discreet Common Shares in September of 1998. The
remaining options to purchase 106,250 Discreet Common Shares must be exercised
by September 30, 1998 or they will expire.
On July 17, 1998, Discreet entered into a severance agreement with Terrence
Higgins in connection with his termination as an executive officer of
Discreet. Pursuant to such agreement, Discreet agreed to pay Mr. Higgins
severance in the amount of $68,100 (Cdn $100,000 converted as of June 30,
1998) plus an additional $341 (Cdn $500 converted as of June 30, 1998) as a
reimbursement of related legal expenses. Discreet also agreed to provide Mr.
Higgins with outplacement counselling for six months. In addition, pursuant to
the terms of the 1994 Plan, Mr. Higgins had 90 days from July 2, 1998 to
exercise his vested options to purchase Discreet Common Shares. On August 14,
1998, Mr. Higgins exercised such options to purchase 40,508 Discreet Common
Shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Discreet Board has established a Compensation Committee consisting of
Messrs. Szalwinski, Cantwell, Drummond and Simon. During this period, Mr.
Szalwinski, Discreet's Chairman and Chief Executive Officer, participated in
deliberations of Discreet's Compensation Committee concerning the compensation
of executive officers other than his own. No executive officer of Discreet
served as a member of the compensation committee of another entity (or other
committee of the Discreet Board performing equivalent functions or, in the
absence of any such committee, the entire Discreet Board), one of whose
executive officers served as a director of Discreet.
COMPENSATION OF DISCREET DIRECTORS
Employee directors of Discreet do not receive cash compensation for their
service as members of the Board of Directors. Non-Employee Directors (as
defined below) receive an annual fee of $10,000 for services on the Discreet
Board and an additional $2,500 for services on each committee of the Board of
Directors. Non-Employee Directors also receive reimbursement of their expenses
for each Discreet Board or committee meeting attended. Discreet may from time
to time, and at the discretion of the Discreet Board (or the Compensation
Committee), grant stock options to directors in addition to the options
specified in the 1995 Non-Employee Director Stock Option Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1996, Richard Szalwinski, Discreet's Chairman, President and
Chief Executive Officer extended three loans to Smoke and Mirrors Productions
Limited ("Smoke and Mirrors") in an aggregate amount of (Pounds)1,077,975 (or
approximately $1,678,650 at July 31, 1996). As of June 1997, the loans had
been repaid by Smoke and Mirrors. Each loan was negotiated at arm's length and
bore interest at the Canadian prime borrowing rate as quoted by a Canadian
chartered bank. Discreet recorded revenue of $2,304,000 during fiscal 1996
from Smoke and Mirrors. Discreet had a trade account receivable of $836,000
from Smoke and Mirrors at July 31, 1996, which amount was subsequently
collected in full by Discreet in fiscal 1997.
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During fiscal 1996, fiscal 1997 and fiscal 1998, Discreet paid Gary
Tregaskis, a director of Discreet, (Pounds)27,916 (approximately $45,000),
(Pounds)0, and (Pounds)75,000 (approximately $122,000), respectively for
services rendered to Discreet.
Thomas Cantwell, a director of Discreet, is a majority shareholder of
Radium, Inc. ("Radium"). The Corporation recorded revenue of $1,138,000 during
fiscal year 1996 from Radium. At July 31, 1996, the full amount of the sale
had been collected.
BHVR Communications Inc. ("BHVR"), an entity of which Richard Szalwinski
owns 84% of the voting securities, owns 100% of Behaviour Entertainment Inc.
("Behaviour"). During fiscal 1996, Discreet recorded revenue of $121,000 from
Behaviour and had trade receivables of $113,000 from Behaviour at July 31,
1996, which amount was subsequently collected in full during fiscal 1997.
During fiscal 1997, Discreet did not record revenue from sales, purchase
services or have trade receivables from Behaviour at June 30, 1997. During
fiscal 1998, Discreet purchased marketing services from Behaviour in the
amount of $223,090, recorded revenue from sales of an effect* (option 3)
system, and other hardware to Behaviour in the amount of $320,573 and had net
trade receivables of $97,483 from Behaviour at June 30, 1998.
BHVR owns 100% of TGR Zone Corporation ("TGR Zone"). In July 1997, Discreet
agreed to rent space for its headquarters in Montreal from TGR Zone and a
lease was subsequently executed whereby Discreet agreed to rent approximately
55,000 square feet of space at approximately Cdn $13.00 (or approximately
$8.86 converted as of June 30, 1998) per square foot per annum subject to
normal escalation clauses. The lease is set to expire in July 2007. As part of
this agreement, TGR Zone assumed Discreet's lease commitment at its previous
Montreal location. During fiscal 1998, Discreet made rental payment to TGR
Zone in the amount of $941,151.
Discreet purchased professional consulting services from BHVR in the amount
of $106,244 during fiscal 1998 and had a payable of $106,244 at June 30, 1998.
BHVR indirectly owns approximately 37.5% of Behaviour Design, Inc.
("Behaviour Design"), Discreet purchased marketing services from Behaviour
Design in the amount of $1,383,639 during fiscal 1998 and had a payable of
$1,383,639 to Behaviour Design at June 30, 1998.
BHVR indirectly owns approximately 37.5% of Behaviour Studios, Inc.
("Behaviour Studios"). Discreet recorded revenue from sales of fire* and
inferno* systems of Behaviour Studios in the amount of $1,837,077 during
fiscal 1998 and had trade receivables of $1,837,077 from Behaviour Studios at
June 30, 1998.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF DISCREET
The following table sets forth as of August 31, 1998, with respect to
beneficial ownership of Discreet Common Shares by: (i) the name of each person
who, to the knowledge of Discreet beneficially owned more than 5% of the
Discreet Common Shares outstanding as of such date; (ii) the name of each
director of Discreet; (iii) each Discreet Named Executive Officer and (iv) all
directors and executive officers of Discreet as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNER OF OWNERSHIP(1) OF CLASS
------------------------ ----------------- --------
<S> <C> <C>
Richard J. Szalwinski............................ 5,631,896(2) 18.68%
Terrence Higgins................................. 140,427(3) *
Thomas Cantwell.................................. 3,057,467(4) 10.29%
Gary G. Tregaskis................................ 3,123,700(5) 10.52%
Brian P. Drummond................................ 26,666(6) *
Perry M. Simon................................... 26,666(7) *
Francois Plamondon............................... 312,500(8) 1.04%
Graham Sharp..................................... 156,250(9) *
Pierre Desjardins................................ 24,332(10) *
Winston Rodrigues................................ -- *
Putnam Investments Management, Inc............... 1,548,877(11) 5.22%
Pilgrim Baxter & Associates...................... 2,159,500(12) 7.27%
All current executive officers and directors as a
group (8 persons)............................... 12,203,227(13) 39.97%
</TABLE>
- --------
* Less than 1%
(1) Applicable percentage of ownership as of August 31, 1998, is based upon
29,697,358 Discreet Common Shares outstanding. Beneficial ownership is
determined in accordance with the rules of the SEC, and includes voting
and investment power with respect to shares. Discreet Common Shares
subject to options currently exercisable or exercisable within 60 days of
August 31, 1998, are deemed outstanding for computing the percentage
ownership of the person holding such options, but are not deemed
outstanding for computing the percentage of any other person.
(2) Includes 450,000 Discreet Common Shares issuable upon the exercise of
options, which options are exercisable upon the change of control of
Discreet effected by the Transactions and 5,181,896 shares held of record
by BHVR Communications Inc., a holding corporation controlled by
Mr. Szalwinski.
(3) Mr. Higgins' employment with Discreet was terminated on July 2, 1998. See
"--Compensation and Other Information Concerning Discreet Directors and
Officers--Employment Agreements and Severance Arrangements."
(4) Consists of Discreet Common Shares owned by Cantwell Holdings, Ltd., a
Texas Limited Partnership of which Mr. Cantwell is the General Partner.
(5) Includes 723,700 Discreet Common Shares held of record by Nearco Trustee
Company (Jersey) Limited re: Gary Tregaskis Settlement, a trust
established for the benefit of Mr. Tregaskis.
(6) Consists of Discreet Common Shares issuable upon the exercise of options,
which options are exercisable within 60 days of August 31, 1998.
(7) Consists of Discreet Common Shares issuable upon the exercise of options,
which options are exercisable within 60 days of August 31, 1998.
(8) Consists of a total of (i) 162,500 Discreet Common Shares issuable upon
the exercise of options, which options are exercisable within 60 days of
August 31, 1998, and (ii) 150,000 Discreet Common Shares issuable upon
the exercise of options, which options are exercisable upon the change of
control of Discreet effected by the Transactions.
(9) Consists of Discreet Common Shares issuable upon the exercise of options,
which options are exercisable within 60 days of August 31, 1998. Mr.
Sharp's employment with Discreet was terminated on July 2, 1998. If such
options are not exercised by September 30, 1998, they will expire. See
"--Compensation and Other Information Concerning Discreet Directors and
Officers--Employment Agreements and Severance Arrangements."
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(10) Includes 13,332 Discreet Common Shares issuable upon the exercise of
options, which options are exercisable within 60 days of August 31, 1998
and 11,000 Discreet Common Shares beneficially owned by Mr. Desjardins.
(11) Such information is based on a Form 13G dated January 16, 1998 and filed
with the SEC. Putnam Investment Management, Inc.'s address is: One Post
Office Square, Boston, Massachusetts 02110.
(12) Such information is based on a Form 13G/A dated February 12, 1998 and
filed with the SEC. Pilgrim Baxter & Associates' address is: 825
Duportail Road, Wayne, Pennsylvania, 19087.
(13) Includes 829,164 Discreet Common Shares issuable upon the exercise of
options, which options are exercisable within 60 days of August 31, 1998
or upon the change in control of Discreet effected by the Transactions.
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DESCRIPTION OF CAPITAL STOCK
AUTODESK CAPITAL STOCK
The authorized capital stock of Autodesk consists of 250,000,000 shares of
Common Stock, $0.01 par value per share and 2,000,000 shares of Preferred
Stock, $0.01 par value per share
Autodesk Common Stock
As of , 1998, there were approximately shares of Autodesk Common
Stock outstanding, held of record by approximately stockholders. Autodesk
Common Stock is listed on the Nasdaq National Market under the symbol "ADSK."
Autodesk Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to Autodesk Common Stock. Autodesk Stockholders are entitled to
receive ratably such dividends, if any, as may be declared from time to time
by the Autodesk Board out of funds legally available therefor. In the event of
a liquidation, dissolution or winding up of Autodesk, each share of Autodesk
Common Stock is entitled to participate pro rata in the distribution of all
assets remaining after payment of liabilities. All outstanding shares of
Autodesk Common Stock are fully paid and non-assessable, and the shares of
Autodesk Common Stock to be outstanding upon completion of the Transactions
will be fully paid and non-assessable.
Autodesk Stockholders are entitled to one vote per share on all matters to
be voted upon by Autodesk Stockholders. Autodesk Stockholders do not have
cumulative voting rights in connection with the election of Directors. The By-
laws of Autodesk (the "Autodesk By-Laws") provide that any action required or
permitted to be taken at any annual or special meeting of Autodesk
Stockholders may be taken without a meeting, without prior notice, and without
a vote, if written consents are obtained from the holders of outstanding
Autodesk Common Stock having not less than the minimum number of votes that
would be necessary to take such action at a meeting at which all shares
entitled to vote were present and voted.
Preferred Stock
Autodesk has 2,000,000 shares of Preferred Stock authorized, of which, as of
, 1998, no shares were outstanding. Under Autodesk's Restated Certificate
of Incorporation (the "Autodesk Certificate"), the Autodesk Board has the
authority to issue these shares of Preferred Stock in one or more series and,
subject to limitations prescribed by law, to fix the designations, rights,
powers, and preferences and the qualifications, limitations or restrictions
thereof, of each such series of Preferred Stock, including without limitation
authority to fix the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions),
and liquidation preferences of any wholly unissued series of Preferred Stock
and the number of shares constituting any such series and the designation
thereof, or any of the foregoing, without any further vote or action by the
stockholders. Although it presently has no intention to do so, the Autodesk
Board, without Autodesk Stockholder approval, can issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power or
other rights of the holders of Autodesk Common Stock and the issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of Autodesk.
In connection with the adoption of a stockholder rights plan in December
1995, the Autodesk Board of Directors designated a series of Preferred Stock
as "Series A Participating Stock," with a par value of $0.01 per share and
consisting of 100,000 shares. See "--Comparison of Shareholders' Rights--
Autodesk Rights Plan."
In connection with the Transactions, the Autodesk Board will also designate
one share of Preferred Stock as "Series B Preferred Stock," which share will
be issued to the Trustee pursuant to the Voting and Exchange Trust Agreement.
See "Terms of the Transactions--Description of New Discreet Exchangeable
Shares--Voting Rights."
Autodesk Transfer Agent and Registrar
The Transfer Agent and Registrar for the Autodesk Common Stock is Harris
Trust & Savings Bank, Chicago, Il.
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DISCREET SHARE CAPITAL
The authorized share capital of Discreet consists of an unlimited number of
Discreet Common Shares and an unlimited number of preferred shares. Discreet
Common Shares entitle their holder to one vote per share on all matters voted
on by the Discreet Shareholders (except for matters which require class or
series votes) and are entitled to receive such dividends as are declared by
the directors out of funds legally available therefor and to receive the
remaining properties of Discreet on dissolution. Discreet Common Shares do not
confer any pre-emptive, redemption or conversion rights.
As at , 1998, Discreet Common Shares were outstanding. No preferred
shares were outstanding.
Discreet Transfer Agent and Registrar
The Transfer Agent and Registrar for the Discreet Common Shares is Boston
EquiServe, Canton, MA.
COMPARISON OF SHAREHOLDERS' RIGHTS
In the event the Transactions are consummated, shareholders of Discreet, a
Quebec company, will, immediately after the Effective Time, have the right to
receive either Autodesk Common Stock or New Discreet Exchangeable Shares,
exchangeable for Autodesk Common Stock. Holders of New Discreet Exchangeable
Shares have the right to exchange such shares for an equivalent number of
shares of Autodesk Common Stock. Moreover, pursuant to the Voting and Exchange
Trust Agreement, the Trustee may, at the direction of the holders of the New
Discreet Exchangeable Shares, exercise votes equivalent to those possessed by
holders of Autodesk Common Stock. Autodesk is a corporation organized under
the Delaware General Corporation Law. While the rights and privileges of
stockholders of a Delaware Corporation are, in many instances, comparable to
those of shareholders of a Quebec company, there are certain differences. The
following is a summary of the material differences between the rights of
holders of Discreet Common Shares at the date hereof and of New Discreet
Exchangeable Shares and Autodesk Common Stock after giving effect to the
Transactions. These differences arise from differences between United States
and Canadian securities laws, between the DGCL and the Quebec Act, and between
the Discreet Articles and Discreet By-laws, the New Discreet articles and the
New Discreet by-laws as proposed to be amended in connection with the
Transactions (the "New Discreet Articles" and the "New Discreet By-Laws,"
respectively), and the Autodesk Restated Certificate and Autodesk's by-laws
(the "Autodesk By-Laws"). For a description of the respective rights of the
holders of Autodesk Common Stock and Discreet Common Shares, see,
respectively, "--Autodesk Capital Stock" and "--Discreet Share Capital."
Vote Required for Extraordinary Transactions
Under the Quebec Act, certain extraordinary corporate actions, such as
certain amalgamations and continuances, are required to be approved by special
resolution. A special resolution is a resolution passed by not less than two-
thirds (2/3) of the votes cast by the shareholders at the special meeting
called for that purpose. An arrangement (if ordered by a court) must be
approved by a resolution passed by not less than three-fourths (3/4) of the
votes cast by the shareholders of each class represented at the special
meeting of shareholders called for that purpose. The dissolution or winding-up
of a Quebec company must be approved by a resolution passed by the vote of at
least two-thirds (2/3) in value of the shares represented at the meeting of
shareholders called for that purpose pursuant to the Winding-Up Act (Quebec).
Under the Quebec Act, a class or series of shares of a company is entitled to
vote as a class or series if any provision of a proposed amalgamation or
amendment would affect the rights, privileges, conditions or restrictions of
shares of a class or series as the case may be, or changes them in relation to
another class or series, as the case may be.
The DGCL requires the affirmative vote of a majority of the outstanding
stock entitled to vote thereon to authorize any merger, consolidation,
dissolution or sale of substantially all of the assets of a corporation,
except that, unless required by its certificate of incorporation, no
authorizing stockholder vote is required of a
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corporation surviving a merger if (a) such corporation's certificate of
incorporation is not amended in any respect by the merger, (b) each share of
stock of such corporation outstanding immediately prior to the effective time
of the merger will be an identical outstanding or treasury share of the
surviving corporation after the effective time of the merger, and (c) the
number of shares to be issued in the merger does not exceed 20% of such
corporation's outstanding common stock immediately prior to the effective time
of the merger. The Autodesk Restated Certificate does not require a greater
percentage vote for such actions. Stockholder approval is also not required
under the DGCL for mergers or consolidations in which a parent corporation
merges or consolidates with a subsidiary of which it owns at least 90% of the
outstanding shares of each class of stock.
Such matters as take-over bids, issuer bids or self tenders, going-private
transactions and transactions with directors, officers, significant
shareholders and other related parties to which New Discreet is a party will
be subject to regulation by Canadian provincial securities legislation and
administrative policies of Canadian securities administrators. Similar matters
to which Autodesk is a party will be subject to regulation under US securities
laws, regulations and policies.
Dissenters' Rights
Section 262 of the DGCL provides appraisal rights (sometimes referred to as
"dissenters' rights") to stockholders of Delaware corporations in certain
situations involving the acquisition of such corporations. The Quebec Act does
not provide appraisal or similar rights to shareholders of a Quebec company in
connection with an amalgamation or similar takeover transaction.
Cumulative Voting and Classification of Board of Directors
The Autodesk Restated Certificate and the Autodesk By-Laws do not provide
for cumulative voting in director elections or for a classified board of
directors. The Discreet Articles and the Discreet By-Laws do not provide for
cumulative voting in director elections and for a classified board of
directors.
Amendment to Governing Documents
Under the Quebec Act, any amendment to a company's articles generally
requires the approval by special resolution, which is a resolution passed by a
majority of not less than two-thirds of the votes cast by shareholders present
in person or by proxy at the meeting at which the resolution is considered.
Under the Quebec Act, unless the articles or by-laws of the company otherwise
provide, the directors may, by resolution, make, amend, repeal or re-enact any
by-laws that regulates the business or affairs of the company. Where the
directors make, amend, repeal or re-enact a by-law, they are required under
the Quebec Act to submit the by-law, amendment, repeal or re-enactment to the
shareholders at a special meeting of the shareholders of the company called
for that purpose or, at the next annual meeting of shareholders, and such
by-law, in default of confirmation thereat, shall at and from that time only
cease to be in force. The shareholders may confirm, reject or amend the by-
law, amendment, repeal or re-enactment by an ordinary resolution, which is a
resolution passed by a majority of the votes cast by shareholders present in
person or by proxy at the meeting at which the by-law is considered.
The DGCL requires a vote of the corporation's board of directors followed by
the affirmative vote of a majority of the outstanding stock of each class
entitled to vote for any amendment to the certificate of incorporation, unless
a greater level of approval is required by the certificate of incorporation.
The Autodesk Restated Certificate does not require a greater level of approval
for an amendment thereto. If an amendment alters the powers, preferences or
special rights of a particular class or series of stock so as to affect them
adversely, that class or series shall be given the power to vote as a class
notwithstanding the absence of any specifically enumerated power in the
certificate of incorporation. The Autodesk Series B Preferred Stock which will
be issued in connection with the Transactions has special voting powers. See
"Terms of the Transactions--Description of New Discreet Exchangeable Shares--
Voting Rights." The DGCL also states that the power to adopt, amend or repeal
the by-laws of a corporation shall be in the stockholders entitled to vote,
provided that the corporation in its certificate of incorporation may confer
such power on the board of directors in addition to the stockholders.
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The Autodesk Restated Certificate expressly authorizes each of the board of
directors and the stockholders to adopt, amend or repeal the Autodesk By-Laws.
Derivative Action
Derivative actions may be brought in Delaware by a stockholder on behalf of,
and for the benefit of, the corporation. The DGCL provides that a stockholder
must aver in the complaint that he or she was a stockholder of the corporation
at the time of the transaction of which he or she complaints. A stockholder
may not sue derivatively unless he or she first makes demand on the
corporation that it bring suit and such demand has been refused, unless it is
shown that such demand would have been futile.
Under the Civil Code of Quebec, in the case of fraud against a company, a
court may, on the application of a shareholder, hold the founders, directors,
other senior officers or shareholders of the company who have participated in
the alleged act or derived personal profit therefrom liable for any damage
suffered by the company.
Shareholder Consent in Lieu of Meeting
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required to be taken or which may be taken at an
annual or special meeting of stockholders may be taken without a meeting if a
consent in writing is signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize
such action at a meeting at which all shares entitled to vote were present and
voted. The Autodesk Restated Certificate does not contain any special
provision relating to action by written consent. Under the Quebec Act,
shareholder action without a meeting may only be taken by written resolution
signed by all shareholders who would be entitled to vote thereon at a meeting.
Director Qualifications
In the absence of qualifications in the articles of incorporation or by-
laws, directors of a Quebec company need not be residents of Quebec or Canada,
nor be shareholders of the company, in order to act as directors of the
company. Discreet's articles of incorporation and by-laws contain no such
limiting provisions. However, the Quebec Act requires that the board of
directors of a company that has made a distribution to the public of its
securities shall be composed of not fewer than three directors.
Fiduciary Duties of Directors
Directors of corporations incorporated or organized under the Quebec Act and
the DGCL have fiduciary obligations to the corporation and its shareholders.
Pursuant to these fiduciary obligations, the directors must act in accordance
with the so-called duties of "due care" and "loyalty." Under the DGCL, the
duty of care requires that the directors act in an informed and deliberative
manner and to inform themselves, prior to making a business decision, of all
material information reasonably available to them. The duty of loyalty may be
summarized as the duty to act in good faith, not out of self-interest, and in
a manner which the directors reasonably believe to be in the best interests of
the stockholders.
Pursuant to the Civil Code of Quebec, directors have a duty of care,
requiring that the directors of a company incorporated under the laws of
Quebec act with prudence and diligence, and a duty of loyalty, requiring the
directors to act with honesty and loyalty and in the best interests of the
company.
Indemnification of Officers and Directors
Under the Quebec Act and the Civil Code of Quebec, Discreet must assume the
defense of a director or officer if he or she is prosecuted by a third person
for an act done in the exercise of his or her duties and must pay for the
damages, if any, resulting from such act, as well as reasonable expenses
incurred in respect of any
170
<PAGE>
such prosecution, unless the director or officer has committed a grievous
offense or a personal offense separable from the exercise of his or her
duties. In a penal or criminal proceeding, however, Discreet must assume the
payment of the expenses of an officer or director only if he or she had
reasonable grounds to believe that his or her conduct was in conformity with
the law, or was freed or acquitted. In addition, Discreet must assume the
expenses of an officer or director if, having prosecuted him for an act done
in the exercise of his duties, Discreet loses its case and the court so
decides. If Discreet wins its case only in part, the court may determine the
amount of the expenses it shall assume.
The DGCL provides that a corporation may indemnify its present and former
directors, officers, employees and agents (each an "indemnitee") against all
reasonable expenses (including attorneys' fees) and, except in actions
initiated by or in the right of the corporation, against all judgments, fines
and amounts paid in settlement in actions brought against them, if such
indemnitee acted in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and
with respect to a criminal action or proceeding, had no reasonable cause to be
believe that his or her conduct was unlawful. The corporation shall indemnify
an indemnitee to the extent that he or she is successful on the merits or
otherwise in the defense of any claim, issue or matter associated with an
action. In the case of actions brought against a present or former director,
officer, employee or agent by or in the right of the corporation, no
indemnification shall be made in respect of any claim, issue or matter as to
which such a person shall have been adjudged to be liable to the corporation
unless and only to the extent that an appropriate court of law shall determine
upon application that, despite the adjudication of liability, but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
The Autodesk Restated Certificate provides for indemnification of directors
and officers to the fullest extent permitted by the DGCL.
The DGCL allows for the advance payment of an indemnitee's expenses prior to
the final disposition of an action, provided that the indemnitee undertakes to
repay any such amount advanced if it is later determined that the indemnitee
is not entitled to indemnification with regard to the action for which such
expenses were advanced. The Quebec Act does not expressly provide for such
advance payment.
Director Liability
The DGCL provides that the charter of the corporation may include a
provision which limits or eliminates the liability of directors to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided such liability does not arise from certain
proscribed conduct, including acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, breach of the
duty of loyalty, the payment of unlawful dividends or expenditure of funds for
unlawful stock purchases or redemptions or transactions from which such
director derived an improper personal benefit. The Autodesk Restated
Certificate contains a provision limiting the liability of its directors to
the fullest extent permitted by the DGCL. The Quebec Act does not permit any
such limitation of a director's liability.
Anti-takeover Provisions and Interested Stockholder Transactions
The DGCL prohibits, in certain circumstances, a "business combination"
between corporation and an "interest stockholder" within three years of the
stockholder becoming an "interest stockholder". An "interested stockholder" is
a holder who, directly or indirectly, controls 15% or more of the outstanding
voting stock or is an affiliate of the corporation and was the owner of 15% or
more of the outstanding voting stock at any time within the prior three-year
period. A "business combination" includes a merger or consolidation, a sale or
other disposition of assets having an aggregate market value of 10% or more of
the consolidated assets of the corporation or the aggregate market value of
the outstanding stock of the corporation and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation. This provision does not apply where: (i) either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder is approved by the corporation's board of directors
prior to the date to the interested stockholder acquired such 15% interest;
(ii) upon the consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the
171
<PAGE>
outstanding voting stock of the corporation excluding, for the purpose of
determining the number of shares outstanding, shares held by persons who are
directors and also officers and by employee stock plans in which participants
do not have the right to determine confidentially whether shares held subject
to the plan will be tendered; (iii) the business combination is approved by a
majority of the board of directors and the affirmative vote of the two-thirds
of the outstanding votes entitled to be cast by disinterested stockholders at
an annual or special meeting; (iv) the corporation does not have a class of
voting stock that is listed on a national securities exchange, authorized for
quotation on an inter-dealer quotation system of a registered national
securities association, or held of record by more than 2,000 stockholders
unless any of the foregoing results from action taken, directly or indirectly,
by an interested stockholder or from a transaction in which a person becomes
an interested stockholder; or (v) the corporation has opted out of this
provision. Autodesk has not opted out of this provision.
The Quebec Act does not contain a comparable provision with respect to
"business combinations". However, policies of certain Canadian securities
regulatory authorities, including Policy Q-27 of the QSC ("Policy Q-27"),
contain requirements in connection with related party transactions. A related
party transaction means, generally, any transaction by which an issuer,
directly or indirectly, acquires or transfers an asset or acquires or issues
treasury securities or assumes or transfers a liability from or to, as the
case may be, a related party by any means in any one transaction or any
combination of transactions. "Related party" is defined in Policy Q-27 and
includes directors, senior officers and holders of at least 10% of the voting
securities of the issuer.
Policy Q-27 requires more detailed disclosures in the proxy material sent to
security holders in connection with a related party transaction and, subject
to certain exemptions, the preparation of a formal valuation of the subject
matter of the related party transaction and any non-cash consideration offered
therefor and the inclusion of a summary of the valuation in the proxy
material. Policy Q-27 also requires, subject to certain exemptions, that the
minority shareholders of the issuer approve the transaction, by either a
simple majority or two-thirds of the votes cast, depending upon the
circumstances.
Currently, Policy Q-27 does not apply to a going private transaction or to a
related party transaction involving Discreet since certain exemptions from the
requirements of Policy Q-27 are available.
Autodesk Rights Plan
In December 1995, pursuant to a Preferred Shares Rights Agreement (the
"Rights Agreement") between Autodesk and Harris Trust & Savings Bank, as
Rights Agent (the "Rights Agent"), the Autodesk Board declared a dividend of
one right (a "Right") to purchase one one-thousandth share of the Autodesk's
Series A Participating Preferred Stock ("Series A Preferred") for each
outstanding share of Autodesk Common Stock. The dividend is payable on
December 29, 1995 (the "Record Date") to Autodesk Stockholders of record as of
the close of business on that date. Each Right entitles the registered holder
to purchase from Autodesk one one-thousandth of a share of Series A Preferred
at an exercise price of $200.00 (the "Purchase Price"), subject to adjustment.
The Rights will not be exercisable until the Distribution Date (defined
below). Prior to the Distribution Date, certificates for the Rights ("Rights
Certificates") will not be sent to Autodesk Stockholders and the Rights will
attach to and trade only together with the Autodesk Common Stock. Accordingly,
Autodesk Common Stock certificates outstanding on the Record Date will
evidence the Rights related thereto, and Autodesk Common Stock certificates
issued after the Record Date but prior to the Distribution Date will contain a
notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender or transfer of any certificates for Autodesk Common Stock, even
without notation or a copy of the Summary of Rights being attached thereto
(but as to certificates representing Autodesk Common Stock issued after the
Record Date, only if they bear the legend required by the Rights Agreement),
will also constitute the transfer of the Rights associated with the Autodesk
Common Stock represented by such certificate.
172
<PAGE>
The Rights will separate from the Autodesk Common Stock, Rights Certificates
will be issued and the Rights will become exercisable upon the earlier of: (i)
10 days (or such later date as may be determined by a majority of the Autodesk
Board, excluding directors affiliated with the Acquiring Person, as defined
below (the "Continuing Directors") following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person")
has acquired, or obtained the right to acquire, beneficial ownership of 15% or
more of the outstanding Autodesk Common Stock, or (ii) 10 days (or such later
date as may be determined by a majority of the Continuing Directors) following
the commencement of, or announcement of an intention to make, a tender offer
or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Autodesk
Common Stock. The earlier of such dates is referred to as the "Distribution
Date."
As soon as practicable following the Distribution Date, separate Rights
Certificates will be mailed to holders of record of the Autodesk Common Stock
as of the close of business on the Distribution Date and such separate Rights
Certificates alone will evidence the Rights from and after the Distribution
Date. All shares of Autodesk Common Stock issued prior to the Distribution
Date will be issued with Rights. Autodesk Common Stock issued after the
Distribution Date may be issued with Rights if such shares are issued (i) upon
the conversion of outstanding convertible debentures or any other convertible
securities issued after adoption of the Rights Agreement or (ii) pursuant to
the exercise of stock options or under employee benefit plans or arrangements
unless such issuance would result in (or create a risk that) such options,
plans or arrangements would not qualify for otherwise available special tax
treatment. Except as otherwise determined by the Autodesk Board, no other
shares of Autodesk Common Stock issued after the Distribution Date will be
issued with Rights. The Rights will expire on the earliest of (i) December 14,
2005 (the "Final Expiration Date"), (ii) redemption or exchange of the Rights
as described below, or (iii) consummation of an acquisition of Autodesk
satisfying certain conditions by a person who acquired shares pursuant to a
Permitted Offer as described below.
Following the Distribution Date, and until one of the further events
described below, holders of the Rights will be entitled to receive, upon
exercise and the payment of $200.00 per Right, one one-thousandth share of the
Series A Preferred.
Unless the Rights are earlier redeemed, in the event that an Acquiring
Person becomes the beneficial owner of 15% or more of Autodesk Common Stock
then outstanding (other than pursuant to a Permitted Offer), then proper
provision will be made so that each holder of a Right which has not
theretofore been exercised (other than Rights beneficially owned by the
Acquiring Person, which will thereafter be void) will thereafter have the
right to receive, upon exercise, Autodesk Common Stock having a value equal to
two times the Purchase Price. Rights are not exercisable following the
occurrence of an event as described above until such time as the Rights are no
longer redeemable by Autodesk as set forth below.
In the event that Autodesk does not have sufficient Autodesk Common Stock
available for all Rights to be exercised, or the Autodesk Board decides that
it is necessary and not contrary to the interests of Rights holders to do so,
Autodesk may instead substitute cash, assets or other securities for the
Autodesk Common Stock for which the Rights would have been exercisable under
this provision.
Similarly, unless the Rights are earlier redeemed, in the event that, after
the Shares Acquisition Date (as defined below), (i) Autodesk is acquired in a
merger or other business combination transaction, or (ii) 50% or more of
Autodesk's consolidated assets or earning power are sold (other than in
transactions in the ordinary course of business), proper provision must be
made so that each holder of a Right which has not theretofore been exercised
(other than Rights beneficially owned by the Acquiring Person, which will
thereafter be void) will thereafter have the right to receive, upon exercise,
shares of common stock of the acquiring company having a value equal to two
times the Purchase Price (unless the transaction satisfies certain conditions
and is consummated with a person who acquired shares pursuant to a Permitted
Offer, in which case the Rights will expire).
173
<PAGE>
A Permitted Offer means a tender offer for all outstanding shares of
Autodesk Common Stock that has been determined by a majority of the Continuing
Directors to be adequate and otherwise in the best interests of Autodesk and
its stockholders. Where the Autodesk Board has determined that a tender offer
constitutes a Permitted Offer, the Rights will not become exercisable to
purchase Autodesk Common Stock or shares of the acquiring company (as the case
may be) at the discounted price described above.
At any time after the acquisition by an Acquiring Person of 15% or more of
the then outstanding shares of Autodesk Common Stock and prior to the
acquisition by such Acquiring Person of 50% or more of the then outstanding
shares of Autodesk Common Stock, the Autodesk Board may exchange the Rights
(other than Rights owned by the Acquiring Person), in whole or in part, at an
exchange ratio of one share of Autodesk Common Stock per Right.
At any time on or prior to the close of business on the earlier of (i) the
10th day following the acquisition by an Acquiring Person (the "Share
Acquisition Date") or such later date as may be determined by a majority of
the Continuing Directors and publicly announced by Autodesk, or (ii) the Final
Expiration Date of the Rights, Autodesk may redeem the Rights in whole, but
not in part, at a price of $.01 per Right.
The Purchase Price payable, the number of Rights, and the number of Series A
Preferred or shares of Autodesk Common Stock or other securities or property
issuable upon exercise of the Rights are subject to adjustment from time to
time in connection with the dilutive issuances by Autodesk as set forth in the
Rights Agreement. With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at
least 1% in such Purchase Price.
No fractional portion less than integral multiples of one share of Autodesk
Common Stock will be issued upon exercise of a Right and in lieu thereof, an
adjustment in cash will be made based on the market price of the Autodesk
Common Stock on the last trading date prior to the date of exercise.
Until a Right is exercised, the holder thereof, as such, will have no rights
as an Autodesk Stockholder (other than any rights resulting from such holder's
ownership of Autodesk Common Stock), including, without limitation, the right
to vote or to receive dividends.
The provisions of the Rights Agreement may be supplemented or amended by the
Autodesk Board in any manner prior to the close of business on the
Distribution Date without the approval of Rights holders. After the
Distribution Date, the provisions of the Rights Agreement may be amended by
the Autodesk Board in order to cure any ambiguity, defect or inconsistency, to
make changes which do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or to shorten or lengthen
any time period under the Rights Agreement; provided, however, that no
amendment to adjust the time period governing redemption shall be made at such
time as the Rights are not redeemable.
Series A Preferred purchasable upon exercise of the Rights will not be
redeemable. Each share of Series A Preferred will be entitled to an aggregate
dividend of 1,000 times the dividend declared per share of Autodesk Common
Stock. In the event of liquidation, the holders of the Series A Preferred will
be entitled to a minimum preferential liquidation payment equal to the greater
of (i) $1,000 per share or (ii) 1,000 times the per share amount to be
distributed to the holders of Autodesk Common Stock. Each share of Series A
Preferred will have 1,000 votes, voting together with the Autodesk Common
Stock. In the event of any merger, consolidation or other transaction in which
the Autodesk Common Stock are changed or exchanged, each share of Series A
Preferred will be entitled to receive 1,000 times the amount received per
share of Autodesk Common Stock. These rights are protected by customary anti-
dilution provisions.
Because of the nature of the dividend, liquidation and voting rights of the
shares of Series A Preferred, the value of the one one-thousandth interest in
a share of Series A Preferred purchasable upon exercise of each Right should
approximate the value of one share of Autodesk Common Stock.
174
<PAGE>
The Rights approved by the Autodesk Board are designed to protect and
maximize the value of the outstanding equity interests in Autodesk in the
event of an unsolicited attempt by an acquiror to take over Autodesk, in a
manner or on terms not approved by the Autodesk Board. Takeover attempts
frequently include coercive tactics to deprive the Autodesk Board and Autodesk
Stockholders of any real opportunity to determine the destiny of Autodesk.
The Rights have been declared by the Autodesk Board in order to deter such
tactics, including a gradual accumulation in the open market of a 15% or
greater position to be followed by a merger or a partial or two-tier tender
offer that does not treat all stockholders equally. These tactics unfairly
pressure stockholders, squeeze them out of their investment without giving
them any real choice and deprive them of the full value of their shares.
The Rights are not intended to prevent a takeover of Autodesk and will not
do so. The Rights may be redeemed by Autodesk at $.01 per Right within ten
days (or on such later date as may be determined by a majority of the Autodesk
Board, excluding directors affiliated with an Acquiring Person) after the
accumulation of 15% or more of Autodesk's Common Stock by a single acquiror or
group.
Accordingly, the Rights should not interfere with any merger or business
combination approved by the Autodesk Board.
Issuance of the Rights does not in any way weaken the financial strength of
Autodesk or interfere with its business plans. The issuance of the Rights
themselves has no dilutive effect, will not affect reported earnings per
share, should not be taxable to Autodesk or to Autodesk Stockholders, and will
not change the way in which Autodesk's shares are presently traded. The
Autodesk Board believes that the Rights represent a sound and reasonable means
of addressing the complex issues of corporate policy created by the current
takeover environment.
However, the Rights may have the effect of rendering more difficult or
discouraging an acquisition of Autodesk deemed undesirable by the Autodesk
Board. The Rights may cause substantial dilution to a person or group that
attempts to acquire Autodesk on terms or in a manner not approved by the
Autodesk Board, except pursuant to an offer conditioned upon the negation,
purchase or redemption of the Rights.
EXPERTS
The consolidated financial statements of Autodesk at January 31, 1998 and
1997, and for each of the three years in the period ended January 31, 1998,
included in the Proxy Circular of Autodesk, Inc. which is referred to and made
a part of this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Discreet as of June 30, 1997 and
1998, and for the year ended July 31, 1996, the eleven-month period ended
June 30, 1997, and the year ended June 30, 1998, appearing in this Proxy
Circular and in Form S-4 have been audited by Arthur Andersen & Cie,
independent chartered accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.
LEGAL MATTERS
Certain legal matters in connection with the Transactions will be passed on
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California and Aird & Berlis, Toronto, Ontario, on behalf of Autodesk. Mark A.
Bertelsen, a director of Autodesk, is also a member of Wilson Sonsini
Goodrich & Rosati, Professional Corporation. Certain legal matters in
connection with the Transactions will be passed on by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts, and Stikeman, Elliott, Montreal,
Quebec, on behalf of Discreet.
175
<PAGE>
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
DISCREET LOGIC INC. AND SUBSIDIARIES
<S> <C>
Report of Arthur Andersen & Cie......................................... F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Shareholders' Equity......................... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
AUTODESK, INC.
ANNUAL AUDITED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors....................... F-29
Consolidated Balance Sheet as of January 31, 1998 and 1997.............. F-30
Consolidated Statement of Income for the Years ended January 31, 1998,
1997, and 1996......................................................... F-31
Consolidated Statement of Cash Flows for the Years ended January 31,
1998, 1997 and 1996.................................................... F-32
Consolidated Statements of Stockholders' Equity for the Years ended
January 31, 1998, 1997, and 1996....................................... F-33
Notes to Consolidated Financial Statements.............................. F-34
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance sheet as of July 31, 1998 (Unaudited).... F-47
Condensed Consolidated Statement of Operations for the Six Months ended
July 31, 1998 and 1997 (Unaudited)..................................... F-48
Condensed Consolidated Statement of Cash Flows for the Six Months ended
July 31, 1998 and 1997................................................. F-49
Notes to Unaudited Condensed Consolidated Financial Statements.......... F-50
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Discreet Logic Inc.:
We have audited the accompanying consolidated balance sheets of Discreet
Logic Inc. (a Quebec corporation) and subsidiaries at June 30, 1997 and 1998
and the related consolidated statements of operations, shareholders' equity
and cash flows for the year ended July 31, 1996, the eleven-month period ended
June 30, 1997, and the year ended June 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada, which are in substantial agreement with those in the
United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Discreet Logic Inc. and subsidiaries as at June 30, 1997 and 1998, and the
results of their operations and their cash flows for the year ended July 31,
1996, the eleven-month period ended June 30, 1997, and the year ended June 30,
1998, in accordance with generally accepted accounting principles in the
United States of America.
Arthur Andersen & Cie
Chartered Accountants
General Partnership
Montreal, Canada
July 31, 1998
(except with respect to the matters discussed in Note 22, as to which the date
is September 11, 1998.)
F-2
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
------------ ------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................ $ 31,668,128 $ 43,745,982
Accounts receivable (less reserves for
uncollectible accounts of $3,487,000 and
$3,654,000 respectively)........................ 26,893,405 32,102,444
Inventory--
Resale......................................... 10,867,176 7,880,378
Demonstration.................................. 3,053,752 4,776,387
Income taxes receivable.......................... 448,059 --
Other current assets............................. 3,888,689 4,718,671
------------ ------------
76,819,209 93,223,862
Property and equipment--less accumulated
depreciation and amortization..................... 7,728,248 9,576,129
Deferred income taxes.............................. 3,489,537 877,514
Other assets....................................... 2,659,964 6,548,313
Assets held for resale............................. 5,247,741 4,384,160
------------ ------------
$ 95,944,699 $114,609,978
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................. $ 23,687,070 $ 23,265,953
Accrued expenses................................. 20,398,720 12,833,320
Deferred revenue................................. 8,103,294 6,544,620
Customer deposits................................ 1,359,619 288,113
Income taxes payable............................. 4,734,484 9,882,485
------------ ------------
58,283,187 52,814,491
------------ ------------
Deferred income taxes.............................. 713,236 2,228,634
------------ ------------
Commitments and Contingencies (Notes 5, 12, and 15)
Shareholders' Equity:
Preferred shares--no par value
Authorized--unlimited number of shares
Issued and outstanding--none
Common shares--no par value
Authorized--unlimited number of shares
Issued and outstanding--28,117,415 shares at
June 30, 1997 and 29,617,504 shares at June 30,
1998........................................... 80,401,669 106,841,218
Accumulated deficit.............................. (42,639,374) (43,250,587)
Cumulative translation adjustment................ (814,019) (4,023,778)
------------ ------------
Total shareholders' equity..................... 36,948,276 59,566,853
------------ ------------
$ 95,944,699 $114,609,978
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
ELEVEN
YEAR ENDED MONTHS ENDED YEAR ENDED
JULY 31, JUNE 30, JUNE 30,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Total revenues....................... $ 83,997,447 $101,923,931 $151,558,128
Cost of revenues..................... 49,333,071 47,571,342 62,033,320
------------ ------------ ------------
Gross profit..................... 34,664,376 54,352,589 89,524,808
------------ ------------ ------------
Operating expenses:
Research and development, net of
tax credits of $711,000, $696,000
and $1,108,000, respectively...... 16,902,432 9,707,890 14,847,019
Sales and marketing................ 26,088,163 23,206,070 34,320,612
General and administrative......... 10,581,670 6,396,024 8,077,175
Write-off of purchased research and
development (Note 15)............. 8,500,000 9,800,000 26,800,000
Gain on sale of investment (Note
16)............................... -- -- (2,500,000)
Costs of terminated agreement (Note
17)............................... -- -- 1,712,860
Restructuring expense (Note 19).... 15,000,000 -- (1,504,472)
Litigation and related settlement
expenses (Note 5)................. 2,506,203 6,500,000 (405,000)
------------ ------------ ------------
Total operating expenses......... 79,578,468 55,609,984 81,348,194
------------ ------------ ------------
Operating income (loss).......... (44,914,092) (1,257,395) 8,176,614
------------ ------------ ------------
Other income (expense):
Interest income.................... 2,258,705 1,233,924 1,118,343
Interest expense................... (229,579) (55,318) (135,625)
Foreign currency exchange gain
(loss)............................ 178,620 (187,843) 1,083,450
------------ ------------ ------------
Total other income (expense)..... 2,207,746 990,763 2,066,168
------------ ------------ ------------
Income (loss) before income taxes.. (42,706,346) (266,632) 10,242,782
Provision for income taxes........... 1,434,835 6,489,343 10,853,995
------------ ------------ ------------
Net loss........................... $(44,141,181) $ (6,755,975) $ (611,213)
============ ============ ============
Net loss per common share............ $ (1.64) $ (0.24) $ (0.02)
============ ============ ============
Weighted average common shares
outstanding......................... 26,836,834 27,947,807 29,029,147
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
RETAINED SHARE CUMULATIVE TOTAL
COMMON EARNINGS SUBSCRIPTIONS TRANSLATION SHAREHOLDERS'
SHARES AMOUNT (DEFICIT) RECEIVABLE ADJUSTMENT EQUITY
---------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1995.. 25,166,860 $ 43,232,545 $ 8,257,782 $(1,645,000) $ 279,126 $ 50,124,453
Issuance of common
shares net of issuance
costs of $1,988,202
and related tax effect
of $775,399........... 970,920 28,157,527 -- -- -- 28,157,527
Exercise of common
stock options......... 1,244,918 1,230,734 -- -- -- 1,230,734
Issuance of shares
through Employee Stock
Purchase Plan......... 16,728 302,108 -- -- -- 302,108
Issuance of shares to
COSS ................. 300,000 6,000,000 -- -- -- 6,000,000
Collection of share
subscriptions
receivable............ -- -- -- 1,645,000 -- 1,645,000
Net loss............... -- -- (44,141,181) -- -- (44,141,181)
Change in cumulative
translation
adjustment............ -- -- -- -- (975,625) (975,625)
---------- ------------ ------------ ----------- ----------- ------------
Balance, July 31, 1996.. 27,699,426 78,922,914 (35,883,399) -- (696,499) 42,343,016
Exercise of common
stock options......... 321,577 1,128,256 -- -- -- 1,128,256
Issuance of shares
through Employee Stock
Purchase Plan......... 96,412 350,499 -- -- -- 350,499
Net loss............... -- -- (6,755,975) -- -- (6,755,975)
Change in cumulative
translation
adjustment............ -- -- -- -- (117,520) (117,520)
---------- ------------ ------------ ----------- ----------- ------------
Balance, June 30, 1997.. 28,117,415 80,401,669 (42,639,374) -- (814,019) 36,948,276
Exercise of common
stock options......... 253,163 1,136,747 -- -- -- 1,136,747
Issuance of shares
through Employee Stock
Purchase Plan......... 46,926 524,165 -- -- -- 524,165
Issuance of shares to
D-Vision (Note 15(b)). 555,000 10,649,063 -- -- -- 10,649,063
Issuance of shares to
Intel, net of issuance
costs of $17,625 (Note
8(d))................. 645,000 13,527,375 -- -- -- 13,527,375
Compensation expense
related to stock
options............... -- 602,199 -- -- -- 602,199
Net loss............... -- -- (611,213) -- -- (611,213)
Change in cumulative
translation
adjustment............ -- -- -- -- (3,209,759) (3,209,759)
---------- ------------ ------------ ----------- ----------- ------------
Balance, June 30, 1998.. 29,617,504 $106,841,218 $(43,250,587) $ -- $(4,023,778) $ 59,566,853
========== ============ ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
ELEVEN MONTHS YEAR ENDED
YEAR ENDED ENDED JUNE 30,
JULY 31, 1996 JUNE 30, 1997 1998
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss......................... $(44,141,181) $ (6,755,975) $ (611,213)
Adjustments to reconcile net loss
to cash provided by operating
activities--
Depreciation and amortization.. 6,276,139 5,882,575 8,154,462
Deferred income taxes.......... (2,072,789) 503,699 3,769,945
Loss on sale of fixed assets... 31,819 -- --
Write-off of purchased research
& development................. 8,500,000 9,800,000 26,800,000
Write-off of assets for
restructuring................. 5,510,237 -- 610,472
Reversal of restructuring
reserve, net.................. -- -- (1,504,472)
Write-off of investment in
Essential Communications
Corporation................... 2,500,000 -- --
Gain on sale of investment in
Essential Communications
Corporation................... -- -- (2,500,000)
Compensation expense related to
stock options................. -- -- 602,199
Changes in assets and
liabilities (net of effect of
acquisitions)--
Settlement of class action
litigation.................. -- -- (10,800,000)
Insurance proceeds related to
class action litigation..... -- -- 3,459,000
Accounts receivable.......... (1,100,199) (10,819,617) (4,326,039)
Inventory.................... (6,088,107) 2,986,146 3,378,732
Income taxes receivable...... (2,718,204) 2,743,232 448,059
Other current assets......... (1,917,776) (248,546) (682,982)
Accounts payable............. (6,183,710) 14,336,101 (3,880,117)
Accrued expenses............. 16,865,069 799,643 (8,328,774)
Deferred revenue............. 961,399 3,333,788 (1,558,674)
Income taxes payable......... (2,578,994) 4,734,484 5,148,001
Customer deposits............ 1,807,254 (1,258,442) (1,071,506)
Due to related parties....... (75,778) (25,535) --
------------ ------------ ------------
Net cash provided by (used
in) operating activities... (24,424,821) 26,011,553 17,107,093
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment....................... (15,870,636) (6,265,405) (9,501,868)
Proceeds from disposal of
property and equipment.......... 212,719 4,885 818,000
Increase in other assets......... (519,841) (2,480,908) --
Cash paid for Denim acquisition
and related costs............... -- (9,125,611) --
Cash paid for D-Vision
acquisition and related costs... -- -- (10,342,000)
Cash paid for COSS/IMP
acquisition and related costs... (5,544,848) -- --
Cash paid for investment in
Essential Communications
Corporation..................... (2,500,000) -- --
Proceeds from sale of investment
in Essential Communications
Corporation..................... -- -- 2,500,000
------------ ------------ ------------
Net cash used in investing
activities................. (24,222,606) (17,867,039) (16,525,868)
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common
shares, net of issuance costs... 27,382,128 -- 13,527,375
Proceeds from the exercise of
stock options................... 1,230,734 1,128,256 1,136,747
Proceeds from the employee stock
purchase plan................... 302,108 350,499 524,165
Payment of capital lease
obligations..................... (249,699) -- --
Proceeds from share subscriptions
receivable...................... 1,645,000 -- --
------------ ------------ ------------
Net cash provided by
financing activities....... 30,310,271 1,478,755 15,188,287
------------ ------------ ------------
Foreign exchange effect on cash... (991,874) 386,808 (3,691,658)
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents................. (19,329,030) 10,010,077 12,077,854
Cash and cash equivalents,
beginning of year................ 40,987,081 21,658,051 31,668,128
------------ ------------ ------------
Cash and cash equivalents, end of
year............................. $ 21,658,051 $ 31,668,128 $ 43,745,982
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ELEVEN MONTHS YEAR
ENDED ENDED ENDED
JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Interest paid during the year...... $ 229,610 $ 16,579 $ 150,243
Income taxes paid during the year.. 8,823,579 1,141,487 2,527,720
Supplemental disclosure of non-cash
financing and investing activities:
Issuance of common shares to COSS.. 6,000,000 -- --
Deferred tax asset recorded in
connection with share issuance
costs............................. 775,399 -- --
In connection with the acquisition
of Lightscape in December 1997, the
following non-cash transaction
occurred:
Fair value of assets acquired...... $ -- $ -- $ 7,614,322
Liabilities assumed................ -- -- (7,614,322)
---------- ---------- ------------
Cash paid for acquisition, net of
cash acquired...................... $ -- $ -- $ --
========== ========== ============
In connection with the acquisition
of D-Vision in July 1997, the
following non-cash transaction
occurred:
Fair value of assets acquired...... $ -- $ -- $ 27,210,063
Liabilities assumed................ -- -- (5,811,000)
Cash acquired...................... -- -- (408,000)
Issuance of 555,000 shares of
common stock...................... -- -- (10,649,063)
---------- ---------- ------------
Cash paid for acquisition, net of
cash acquired...................... $ -- $ -- $ 10,342,000
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN U.S. DOLLARS)
(1) OPERATIONS
Discreet Logic Inc. ("the Company") was incorporated under Part 1A of the
Quebec Companies Act on September 10, 1991. The Company and its subsidiaries
develop, assemble, market and support non-linear, digital systems and software
for creating, editing and compositing imagery and special effects for film,
video, HDTV, broadcast and the Web. The Company's systems and software are
utilized by creative professionals, for a variety of applications, including
feature films, television programs, commercials, music and corporate videos,
interactive game production, live broadcasting as well as Web design.
The Company sells its advanced systems and other products through its direct
sales force, as well as through distributors and resellers. The Company
markets and sells its systems directly in North America and in certain
European and Pacific Rim countries. Sales activities in North America are
conducted from the Company's Montreal headquarters, sales offices in Los
Angeles, New York and Chicago and field representatives based in Boston, San
Francisco and Atlanta. In fiscal 1996, the Company opened sales offices in
India, Hong Kong and Japan. The Company also markets its systems through sales
offices located in the United Kingdom, France, Germany, Singapore, Spain and
Brazil and through a network of distributors and resellers in over 80
countries.
The success of the Company is subject to a number of risks and
uncertainties, including, without limitation, the Company's ability to
successfully develop, introduce and gain customer acceptance of existing and
new or enhanced products; the need for the continued development of the market
for the Company's systems; the ability of the Company to expand its current
market to include additional applications and develop new products for related
markets; the risk that as the Company enters new markets, the distribution
channels, technical requirements and levels and basis of competition may be
different from those in the Company's current markets; the presence of
competitors with greater financial, technical, manufacturing, marketing and
distribution resources; the risk that the products and technologies acquired
by the Company through acquisitions will not be successful, achieve market
acceptance or be successfully integrated with the Company's existing products
and business; the risk of quarterly fluctuations in the Company's operating
results; the risk of the Company's reliance on Silicon Graphics, Inc. ("SGI")
for the workstations included in the Company's systems including the impact of
the timing of the development and release of SGI products as well as
unforeseen difficulties associated with adapting the Company's products to
future SGI products; the risk that the Company derives a significant portion
of its revenues from foreign sales; the Company's reliance principally on
unregistered copyrights and trade secrets to protect its intellectual
property; the risk that the Company's direct sales efforts may compete with
those of its indirect channels; the risk of the Company's reliance on SGI as
the sole source for video input/output cards used in the Company's systems;
the Company's dependence on key management and technical employees; market
price fluctuations due to quarter-to-quarter variations in the Company's
operating results, announcements of technological innovations or new products
by the Company or its competitors and the historical fluctuations in market
prices of technology companies generally; and other risks detailed from time
to time in the Company's filings with the Securities and Exchange Commission.
The Company believes that with its current level of working capital together
with funds generated from operations, it has adequate sources of cash to meet
its operational and capital expenditure requirements through fiscal 1999.
F-8
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of the following significant accounting policies, as described below and
elsewhere in the notes to consolidated financial statements. These
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America, and are
presented in United States dollars ("U.S. Dollars").
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results may differ from these
estimates.
(a) Change of Fiscal Year
On January 9, 1997, the Board of Directors of the Company approved the
change of the Company's fiscal year end from July 31 to June 30. This change
was effective beginning with the Company's second fiscal quarter of 1997. The
consolidated financial statements are presented for the twelve-month period
ended June 30, 1998, the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 31, 1996.
The Company prepares consolidated financial statements, remeasures accounts
in foreign currencies to reflect changes in exchange rates, and examines and
adjusts certain reserve accounts at the end of each quarter. Therefore, it is
not practicable to recast the previous fiscal years' results to reflect the
current fiscal period. Consequently, the results for the twelve-month period
ended June 30, 1998 are not directly comparable with those for the eleven-
month period ended June 30, 1997, or with the twelve-month period ended July
31, 1996.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All subsidiaries are wholly owned as of June 30, 1998.
All significant intercompany accounts and transactions have been eliminated
upon consolidation.
(c) Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, Software Revenue Recognition.
The statement provides specific industry guidance and stipulates that revenue
recognized from software arrangements is to be allocated to each element of
the arrangement based on the relative fair values of the elements, such as
software products, upgrades, enhancements, postcontract customer support,
installation or training. Under SOP 97-2, the determination of fair value is
based on objective evidence that is specific to the vendor. If such evidence
of fair value for each element of the arrangement does not exist, all revenue
from the arrangement is deferred until such time that the evidence of fair
value does exist or until all elements of the arrangement are delivered.
Revenue allocated to software products, specified upgrades and enhancements is
generally recognized upon delivery of the related products, upgrades and
enhancements. Revenue allocated to postcontract customer support is generally
recognized ratably over the term of the support, and revenue allocated to
service elements is generally recognized as the services are performed. SOP
97-2 was adopted by the Company effective January 1, 1998 and has not had a
material effect on revenue recognition.
The Company recognizes revenue from software licenses, and the related
hardware and peripherals, upon shipment of the products. The Company
recognizes revenue from post contract customer support and other related
services ratably, as the obligations are fulfilled, or when the related
services are performed. Post contract
F-9
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
customer support, training, installation, systems integration and rental
services, are performed primarily under separately priced arrangements under
which the Company has recorded revenues of $11,713,000, $13,606,000 and
$14,050,000 for the year ended July 31, 1996, the eleven-month period ended
June 30, 1997, and for the year ended June 30, 1998, respectively.
(d) Net Income (Loss) per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share. The new standard simplifies the computation of earnings per share (EPS)
and increases comparability to international standards. Under SFAS No. 128,
primary EPS is replaced by "Basic" EPS, which excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. "Diluted" EPS,
which is computed similarly to fully diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. The Company is required
to disclose both basic and diluted EPS. All prior period EPS data have been
restated to conform to SFAS No. 128.
The following table presents, in thousands (except for EPS amounts) a
reconciliation of Basic EPS to Diluted EPS as required by SFAS No. 128:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS ENDED YEAR ENDED
JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
----------------------- ---------------------- ---------------------
INCOME SHARES EPS INCOME SHARES EPS INCOME SHARES EPS
-------- ------ ------ ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common shareholders.. $(44,141) 26,837 $(1.64) $(6,756) 27,948 $(0.24) $(612) 29,029 $(0.02)
====== ====== ======
Effect of Dilutive
Securities
Impact of exercise of
stock options under
treasury stock
method............... -- -- -- -- -- --
-------- ------ ------- ------ ----- ------
Diluted EPS
Income available to
common shareholders
and assumed
exercises............ $(44,141) 26,837 $(1.64) $(6,756) 27,948 $(0.24) $(612) 29,029 $(0.02)
======== ====== ====== ======= ====== ====== ===== ====== ======
</TABLE>
In accordance with SFAS No. 128, in periods that the Company incurs a net
loss, all outstanding options are excluded from the calculation of diluted
EPS. Had the Company not been in a loss position, dilutive outstanding options
of 2,044,265, 945,845 and 1,763,785 for fiscal 1996, 1997, and 1998,
respectively, would have been added to compute diluted EPS.
F-10
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(e) Research and Development Expenses
The Company charges to operations research and development costs as incurred
and presents such expenses net of income tax credits from the Canadian federal
and Quebec provincial governments (see Note 7). Software development costs are
considered for capitalization when technological feasibility is established in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. The Company sells software in a market that is subject to rapid
technological change, new product introductions and changing customer needs.
Accordingly, the Company has not capitalized software development costs due to
its inability to estimate the useful life of software under development.
(f) Translation of Foreign Currencies
The accounts of the Company are translated in accordance with SFAS No. 52,
Foreign Currency Translation. The Company's management has elected to present
these consolidated financial statements in U.S. dollars. The financial
statements of the Company and its subsidiaries are translated from their
functional currency into the reporting currency, the U.S. dollar, utilizing
the current rate method. Accordingly, assets and liabilities are translated at
exchange rates in effect at the end of the year, and revenues and expenses are
translated at the weighted average exchange rate during the year. All
cumulative translation gains or losses from the translation into the Company's
reporting currency are included as a separate component of shareholders'
equity in the consolidated balance sheets.
Foreign currency transaction gains (losses) included in other income
(expense) in the accompanying consolidated statements of operations were
$178,620, $(187,843) and $1,083,450 for the year ended July 31, 1996, the
eleven-month period ended June 30, 1997, and the year ended June 30, 1998,
respectively.
(g) Concentration of Credit Risk
During fiscal 1998, the Company amended and restated its Maximum Liability
Agreement with a leasing company. The agreement provides that the Company is
contingently liable up to a maximum percentage of the remaining principal
payments outstanding related to the purchase of the Company's products by
customers financed by said leasing company. The maximum liability is
contingent on certain factors as defined in the agreement. As at June 30, 1997
and 1998, the Company had accrued $619,000 and $648,000, respectively, the
maximum amount of the contingent liability as a charge to general and
administrative expenses.
The Company has no other significant off-balance sheet concentration of
credit risk such as foreign exchange contracts, option contracts or other
foreign currency hedging arrangements. The Company maintains the majority of
cash balances with three financial institutions and its accounts receivable
credit risk is not concentrated within any geographic area. There were no
accounts receivable from a single customer which exceeded 10 percent of total
accounts receivable as of June 30, 1997 and 1998.
(h) Postemployment and Postretirement Benefits
The Company does not provide postemployment and postretirement benefits.
(i) Cash Equivalents
Cash equivalents are carried at cost, which approximates market value. Cash
equivalents are short-term, highly liquid investments with original maturities
of less than three months. Cash equivalents consist of commercial paper and
money market mutual funds at June 30, 1997 and 1998.
F-11
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(j) Inventory
Inventory consists of hardware purchased for resale and is valued at the
lower of cost (determined on a first-in, first-out basis) or net realizable
value. Demonstration inventory consists of hardware inventory used by the
Company and potential customers for product demonstrations which will be
subsequently sold.
(k) Property and Equipment
The Company provides for depreciation and amortization using the straight-
line and declining-balance methods over the estimated useful lives of the
assets as follows:
<TABLE>
<CAPTION>
ESTIMATED JUNE 30, JUNE 30,
ASSET CLASSIFICATION USEFUL LIFE 1997 1998
-------------------- -------------------- ----------- ------------
<S> <C> <C> <C>
Computer equipment,
video equipment and
software............... 2-5 Years $14,375,443 $ 19,775,508
Leasehold improvements.. Shorter of term of 1,222,478 1,735,401
lease or useful life
Furniture and fixtures.. 5 Years 1,797,891 2,503,772
----------- ------------
17,395,812 24,014,681
Less--Accumulated
depreciation and
amortization........... (9,667,564) (14,438,552)
----------- ------------
$ 7,728,248 $ 9,576,129
=========== ============
</TABLE>
(l) Other Assets
Other assets include acquired technology, goodwill, and other deferred
charges, and are amortized on a straight-line basis over the estimated useful
lives of the assets, which range from three to five years. The Company
evaluates the realizability and the related periods of amortization of these
assets on a regular basis.
Other assets included the following amounts at June 30:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION 1997 1998
-------------------- ----------- -----------
<S> <C> <C>
Acquired technology................................ $ 2,875,665 $ 6,938,137
Goodwill........................................... 2,437,789 3,451,542
Other deferred charges............................. -- 639,840
----------- -----------
5,313,454 11,029,519
Less--Accumulated amortization..................... (2,653,490) (4,481,206)
----------- -----------
$ 2,659,964 $ 6,548,313
=========== ===========
</TABLE>
(m) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose financial
statements and is required to be adopted by the Company beginning in its
fiscal year 1999. Additionally, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131), which
establishes standards for the way public business enterprises report
information in annual statements and interim financial reports regarding
operating segments,
F-12
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
products and services, geographic areas, and major customers. SFAS 131 will
first be reflected in the Company's fiscal year 1999 Annual Report and will
apply to both annual and interim financial reporting subsequent to this date.
The Company is currently evaluating the impact of SFAS 130 and SFAS 131 on its
financial disclosures.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 will be effective for the
Company's fiscal year ending June 30, 2000. Management believes that this
statement will not have a significant impact on the Company.
In March 1998, the AICPA issued Statement of Position (SOP) 98-4, which
amends certain provisions of SOP 97-2. The Company believes it is in
compliance with the provisions of SOP 97-2 as amended by SOP 98-4. However,
detailed implementation guidelines for this standard have not been issued.
Once issued, such guidance could lead to unanticipated changes in the
Company's current revenue recognition practices, and such changes could be
material to the Company's results of operations.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This standard requires companies to
capitalize qualifying computer software costs which are incurred during the
application development stage and amortize them over the software's estimated
useful life. The Company is required to adopt this standard in fiscal year
2000 and is currently evaluating the impact that its adoption will have on the
consolidated financial position and results of operations of the Company.
(3) OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
---------- ----------
<S> <C> <C>
Prepaid expenses..................................... $2,919,782 $2,754,321
Sales tax receivable................................. 787,515 1,147,833
Other receivables.................................... 181,392 816,517
---------- ----------
$3,888,689 $4,718,671
========== ==========
</TABLE>
(4) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
----------- -----------
<S> <C> <C>
Payroll and payroll related....................... $ 2,838,873 $ 4,180,410
Professional fees................................. 733,680 764,869
Commissions....................................... 2,187,178 2,676,242
Sales tax and VAT payable......................... 679,052 1,542,036
Accrued restructuring expenses.................... 4,272,438 825,000
Maximum liability accrual......................... 619,000 647,667
Accrued litigation and settlement expenses........ 8,186,969 --
Acquisition costs................................. -- 1,021,305
Other............................................. 881,530 1,175,791
----------- -----------
$20,398,720 $12,833,320
=========== ===========
</TABLE>
F-13
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LITIGATION AND RELATED SETTLEMENT EXPENSES
(a) Class action securities litigation
On May 29, 1996, June 13, 1996 and April 29, 1997, certain of the Company's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against the Company and certain of its
officers and directors among others. The three lawsuits were filed in the
Superior Court of the State of California, the United States District Court,
District of Massachusetts and the United States District Court, Northern
District of California, respectively. On or about November 25, 1997, a
settlement of all three shareholder class actions received final court
approval. Under the $10,800,000 settlement, the Company contributed
approximately $7,400,000 from its own funds, with the remainder provided by
insurance.
In the year ended July 31, 1996, the Company had provided a $2,506,000
litigation reserve for legal costs associated with defending the class action
lawsuits. During the eleven-month period ended June 30, 1997, the Company
recorded a provision of $6,500,000 to accrue the additional estimated
settlement costs to be borne by the Company.
In the twelve-month period ended June 30, 1998, the Company reversed
$405,000 of litigation and related settlement expenses in order to adjust
previously estimated legal costs to the actual amount of costs incurred.
(b) Griffith & Tekushan, Inc.
On June 2, 1998, the Company was named as a defendant in a breach of
warranty action filed in the Supreme Court of the State of New York for the
County of New York entitled Griffith & Tekushan, Inc. v. Discreet Logic, Inc.
(Index No. 602684/98) (the "Action"). The complaint alleges, among other
things, that the Company breached certain warranties arising out of a software
licensing agreement and seeks damages of $1 million. On July 10, 1998, the
Action was removed from state court to the United States District Court for
the Southern District of New York (Case No. 98 Civ. 4909 (BSJ)). On July 17,
1998, the Company filed a motion to dismiss the Action in its entirety. The
motion to dismiss is currently pending. The Company intends to contest this
case vigorously; however, the ultimate outcome of the case cannot be predicted
at this point.
(6) DEMAND LINE OF CREDIT, LEASING AND TAX CREDIT FACILITIES
During the year, the Company amended its revolving demand line of credit and
leasing facility with its bank. The new agreement provides for a revolving
demand line of credit under which it can borrow up to Cdn$7,000,000
(approximately $4,773,000 at June 30, 1998). Advances under the line accrue
interest monthly at the Canadian prime rate (6.50% at June 30, 1998) plus
0.25%. Additionally, the agreement provides for a Cdn$600,000 (approximately
$409,000 at June 30, 1998) demand leasing facility, and a Cdn$600,000
(approximately $409,000 at June 30, 1998) demand research and development tax
credit facility. Advances under these facilities accrue interest monthly at
the Canadian prime rate (6.50% at June 30, 1998) plus 1%. The line and
facilities are secured by essentially all of the Company's North American
assets. As additional security, the Company assigned to the bank its insurance
on these assets. The Company is required to maintain certain financial ratios,
including minimum levels of working capital, debt service coverage and equity
to asset ratios. As of June 30, 1998, there were no amounts outstanding under
the demand leasing and demand research and development tax credit facilities,
however, the amount available to the Company under the line of credit was
reduced by the letter of guarantee discussed below.
During the year, the Company's Japanese subsidiary entered into a line of
credit agreement with its bank. Under this agreement, the subsidiary can
borrow up to $3,000,000. Advances under this line accrue interest at the
prevailing overnight rate for the period (approximately 2.1% at June 30, 1998)
and are secured by a letter of
F-14
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
guarantee, in the amount of $3,000,000, issued by the Company in favor of the
subsidiary's bank. As of June 30, 1998, the subsidiary had borrowed
(Yen)376,824,000 (approximately $2,725,000 at June 30, 1998).
(7) CANADIAN FEDERAL AND PROVINCIAL INCOME TAX CREDITS
The Company is entitled to research and development incentives in the form
of income tax credits from the Canadian federal government ("Federal") and
from the Province of Quebec ("Provincial"). Federal income tax credits are
received on qualified Canadian research and development expenditures and
equipment purchases. Provincial income tax credits are received on qualified
research and development salaries in the Province of Quebec. The Federal and
Provincial income tax credits are earned at 20% of qualified research and
development expenditures. Additionally, the Federal credit may be limited to a
credit against income taxes payable.
The Company recorded $711,000, $696,000 and $1,108,000 of income tax credits
as a reduction of research and development expenses for the year ended July
31, 1996, the eleven-month period ended June 30, 1997, and the year ended June
30, 1998, respectively. These income tax credits represent credits earned
based on qualifying research and development expenditures. In addition, the
Company recorded, $513,000, $196,000 and $374,000 of income tax credits as a
reduction in the carrying value of property and equipment for the year ended
July 31, 1996, the eleven-month period ended June 30, 1997, and the year ended
June 30, 1998, respectively. These income tax credits represent credits earned
based on qualifying property and equipment purchases.
(8) SHAREHOLDERS' EQUITY
(a) Secondary Offering
In December 1995, the Company completed a secondary offering of 970,920
common shares at $30.25 per share, resulting in proceeds of approximately
$28,158,000 net of issuance costs and their related tax effects.
(b) Preferred Shares
The Board of Directors is authorized to issue preferred shares, in one or
more series, and to fix the rights, dividend rates, conversion rights, voting
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, and the number of shares constituting any series or the
designations of such series, without further vote or action by the
shareholders.
(c) Share Subscriptions Receivable
In fiscal 1995, a share subscriptions receivable, in the amount of $148,148,
from the then and current Chairman of the Board of Directors and the former
president of the Company was reduced through the shares being repurchased or
repaid. On November 11, 1994, the former President and Chief Executive Officer
of the Company issued to the Company a $1,645,000 note in connection with the
exercise of nonqualified stock options which is included in share
subscriptions receivable at July 31, 1995. During the 1996 fiscal year, the
note was repaid in full together with interest in the amount of $134,000.
(d) Private Placement of Shares to Intel Corporation
On March 4, 1998, Discreet completed a private placement of 645,000 common
shares, no par value per share, for proceeds to the Company of approximately
$13,527,000, net of issuance costs.
(e) Dividends
The Company has never declared or paid cash dividends and does not
anticipate paying any cash dividends
F-15
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on its capital stock in the foreseeable future. In the event cash dividends
are declared or paid, the Company anticipates that they would be declared and
paid in U.S. dollars. Part 1A of the Quebec Companies Act prohibits the
Company from paying dividends that would prevent it from discharging its
liabilities when due or that would bring the book value of its assets to an
amount less than the sum of its liabilities and its issued and paid-up share
capital account. At June 30, 1998, the Company could not distribute any
dividends.
(f) Capital Structure
In February 1997, the FASB also issued SFAS No. 129, Disclosure of
Information About Capital Structure. This statement is effective for financial
statements for periods ended after December 15, 1997. SFAS No. 129 establishes
standards for disclosing information about an entity's capital structure. The
implementation of this statement has not had a material impact on the
consolidated financial statements.
(9) STOCK OPTION AND STOCK PURCHASE PLANS
The Company applies the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock issued to Employees, in accounting for its stock-based
compensation plans. During the year ended June 30, 1997, the Company adopted
only the disclosure requirements of Statement of Financial Accounting
Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation. SFAS
No. 123 establishes financial accounting and reporting standards based on a
fair value concept for stock-based employee compensation plans. This statement
requires an employer that continues to apply the accounting provisions of APB
25 to disclose pro forma amounts reflecting the difference between
compensation costs, including tax effects, that would have been recognized in
the income statement, if the fair value based method had been used.
The table below presents pro forma net loss and EPS, had compensation cost
for the Company's stock-based employee compensation plans been determined
using the provisions of SFAS No. 123.
<TABLE>
<CAPTION>
1996 1997 1998
------------ ----------- -------------
<S> <C> <C> <C>
Net loss:
As Reported..................... $(44,141,181) $(6,755,975) $ (611,213)
Pro forma....................... $(46,118,158) $(8,414,957) $ (5,671,932)
Net loss per share:
As Reported..................... $ (1.64) $ (0.24) $ (0.02)
Pro forma....................... $ (1.72) $ (0.30) $ (0.20)
</TABLE>
The fair value of each graded vesting option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1996, 1997 and 1998: risk free
interest rates between 5.2% and 6.3%; expected dividend yields of 0%; expected
term after vest date of approximately .5 years; and expected volatility of
100%.
Because the fair value based method of accounting has not been applied to
options granted prior to August 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
(a) Restricted Stock and Stock Option Plan
On June 14, 1994, the Company's Board of Directors approved the
establishment of the 1994 Restricted Stock and Stock Option Plan (the "1994
Plan") for the Company's officers, employees, consultants and directors. Under
the 1994 Plan, the Compensation Committee of the Board of Directors (the
"Compensation Committee") may grant stock options for a maximum of 5,000,000
common shares. Under the terms of the 1994
F-16
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Plan, the purchase price, which approximates fair market value, and vesting
schedule applicable to each option grant is determined by the Compensation
Committee.
On August 12, 1996, the Company's Board of Directors authorized the
repricing of 106,600 stock options previously granted under the 1994 Plan. The
repricing provided for the exercise price of the 106,600 options to be reduced
to $6.375 per share, representing the fair value per common share on the date
of repricing. Prior to the repricing, such options had exercise prices ranging
from $19.25 to $28.50 per share. In exchange for the repriced options, the
159,900 stock options remaining from these grants were forfeited.
On November 20, 1997, the shareholders approved an amendment to the
Company's 1994 Amended and Restated Restricted Stock and Stock Option Plan to
reserve an additional 2,000,000 shares of common stock for issuance under this
plan.
(b) 1995 Non-Employee Director Stock Option Plan
On March 27, 1995, the Company's Board of Directors adopted, and in April
1995, the shareholders approved, the 1995 Non-Employee Director Stock Option
Plan (the "Director Plan"). Under the Director Plan, the Compensation
Committee may grant options to purchase up to 200,000 common shares to
nonemployee directors of the Company. The Director Plan authorizes the grant
(a) to each person who becomes a member of the Board of Directors and who is
not an employee, officer or direct and indirect owner of 5% or more of the
common shares of the Company (a "Non-Employee Director"), on the date such
person is first elected to the Board of Directors without further action by
the Compensation Committee, of an option to purchase 20,000 common shares and
(b) to each person receiving an option pursuant to clause (a) who is a Non-
Employee Director on the fifth anniversary of the date such person was first
elected to the Board of Directors, during the term of the Director Plan, of an
option to purchase 15,000 common shares, provided that such person has
continuously served as a Non-Employee Director during such 5-year period. The
exercise price will be the fair market value at the date of grant and the
options will expire 10 years from the date of grant. All options vest in three
equal annual installments, with the first vesting on the date of grant. As of
June 30, 1998, 60,000 options were granted and outstanding at fair market
value under the Director Plan.
(c) 1995 Employee Stock Purchase Plan
On March 27, 1995, the Company's Board of Directors adopted, and in April
1995, the shareholders approved, the 1995 Employee Stock Purchase Plan,
whereby the Company has reserved and may issue to employees up to an aggregate
of 300,000 common shares in semiannual offerings over a ten year period.
Common shares are sold at 85% of fair market value. As of June 30, 1998,
160,066 shares had been issued under the plan.
(d) Non-Qualified Stock Option Outside the Plan
On November 4, 1994, the Company granted, outside the 1994 Plan, a
nonqualified stock option for the purchase of 1,012,308 common shares, at a
price of $1.63 per share, which approximated fair market value at date of
grant, to the former President and Chief Executive Officer of the Company.
This option was exercised on November 4, 1994 through the issuance of a
$1,645,000 note. (See Note 8(c)).
(e) 1997 Special Limited Non-Employee Director Stock Option Plan
On February 10, 1997, the Company's Board of Directors adopted the 1997
Special Limited Non-Employee Director Stock Option Plan (the "1997 Plan").
Under the 1997 Plan, options to purchase 10,000 of the
F-17
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's common shares were granted to each of two of the Company's non-
employee directors at the Fair Market Value (as defined in the 1997 Plan) of
the shares on the date of the grant, February 10, 1997. The total number of
common shares originally available for grant under the 1997 Plan was 20,000.
The options granted pursuant to the 1997 Plan expire 10 years from the date of
grant and vest in three equal annual installments. As of June 30, 1998, 20,000
options were granted and outstanding under the 1997 Plan.
(f) Stock Option Activity
The following is a summary of all stock option activity:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning Outstanding... 3,403,740 $ 2.97 2,744,646 $7.77 2,505,913 $ 5.64
Options Granted......... 973,000 16.53 1,689,638 5.41 901,771 19.03
Options Exercised....... (1,244,918) 1.27 (321,577) 3.51 (253,163) 4.49
Options Canceled........ (387,176) 10.67 (1,606,794) 9.63 (133,951) 10.31
---------- ---------- ---------
Ending Outstanding...... 2,744,646 7.77 2,505,913 5.64 3,020,570 9.53
========== ========== =========
Exercisable............. 513,714 $ 6.01 389,832 $4.71 469,122 $ 5.10
========== ========== =========
Weighted Average Fair
Value of Options
Granted During the
Year................... $10.43 $3.19 $13.87
The following table provides further detail on the options granted during
fiscal 1996, 1997, and 1998 in relation to their respective fair values as
calculated above:
<CAPTION>
1996 1997 1998
-------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Exercise price equal to
fair value............. 531,562 $13.17 1,487,238 $5.23 84,000 $19.88
Exercise price greater
than fair value........ 45,000 23.72 147,400 6.48 386,000 24.25
Exercise price less than
fair value............. 396,438 20.22 55,000 7.38 431,771 14.21
---------- ------ ---------- ----- --------- ------
973,000 $16.53 1,689,638 $5.41 901,771 $19.03
========== ====== ========== ===== ========= ======
</TABLE>
The following table summarizes the options outstanding and exercisable as at
June 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.05-$2.88......... 252,238 6.29 $ 1.39 229,246 $ 1.28
$4.50-$4.63......... 655,636 8.12 $ 4.50 56,002 $ 4.50
$5.50-$6.03......... 893,600 8.53 $ 5.85 27,750 $ 6.03
$6.38-$8.94......... 413,596 8.02 $ 7.35 103,687 $ 6.69
$15.75-$24.25....... 805,500 9.14 $21.36 52,437 $18.82
--------- ---- ------ ------- ------
$0.05-$24.25........ 3,020,570 8.34 $ 9.53 469,122 $ 5.10
</TABLE>
F-18
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) RELATED PARTY TRANSACTIONS
(a) Sales to Related Parties
During fiscal 1998, the Company recorded revenue from system sales made to
Behaviour Entertainment Inc. and Behaviour Studios, Inc., companies controlled
by the Company's Chairman and Chief Executive Officer, in the amounts of
$320,573 and $1,837,077, respectively. At June 30, 1998, approximately
$445,000 remained outstanding and is included in other current assets. During
fiscal 1996, Discreet recorded revenue from system sales of $121,000 to
Behavior Entertainment Inc.
During fiscal 1996, the Company recorded revenue of $2,304,000, from a
company with which the Company's Chairman and Chief Executive Officer is
affiliated. At July 31, 1996, the Company had a trade accounts receivable of
$836,000 from such company. The balance was collected in six monthly
installments of $139,000. The Company also recorded revenue of $1,138,000
during fiscal 1996, from a company with which a member of the Company's board
of directors is affiliated. The sale was collected in full during fiscal 1996.
In accordance with the Company's policy, these sales were on terms no less
favorable to the Company than provided by the Company to unrelated third
parties.
(b) Purchases from Related Parties
During fiscal 1998, the Company purchased consulting services, in the amount
of $106,244, from BHVR Communications Inc., purchased marketing services in
the amount of $1,383,639 from Behaviour Design Inc., and purchased marketing
services in the amount of $223,090 from Behaviour Entertainment Inc. These
related parties are companies controlled by the Company's Chairman and Chief
Executive Officer.
During fiscal 1998, the Company made rental payments in the amount of
$941,151 to TGR Zone Corporation ("TGR Zone"), a company indirectly owned by
Discreet Logic's Chairman and Chief Executive Officer, for space in its new
headquarters in Montreal. The commitments related to the lease on this
building are disclosed in Note 12.
In accordance with the Company's policy, the purchase of these services was
on terms no less favorable to the Company than could be obtained by the
Company from unrelated third parties.
F-19
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) INCOME TAXES
The Company applies the provisions of SFAS No. 109, Accounting for Income
Taxes. Under the provisions of SFAS No. 109, the Company recognizes a current
tax liability or asset for current taxes payable or refundable and a deferred
tax liability or asset for the estimated future tax effects of temporary
differences between the carrying value of assets and liabilities for financial
reporting and their tax basis and carryforwards to the extent they are
realizable.
The components of the deferred tax assets and the deferred tax liabilities
are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
----------- ----------
<S> <C> <C>
Deferred tax assets--
Foreign tax loss carryforwards..................... $ 5,150,000 $5,499,216
Litigation and related settlement expenses......... 1,650,000 --
Restructuring expenses............................. 1,400,000 278,009
Initial and secondary public offering issuance
costs............................................. 1,254,730 686,776
Other temporary differences........................ 834,807 2,005,176
----------- ----------
10,289,537 8,469,177
Less: Valuation allowance.......................... 6,800,000 7,591,663
----------- ----------
$ 3,489,537 $ 877,514
=========== ==========
Deferred tax liabilities--
Difference between book and tax basis of property
and equipment..................................... $ 544,745 $1,250,871
Federal research and development tax credits....... 168,491 330,568
Other temporary differences........................ -- 647,195
----------- ----------
$ 713,236 $2,228,634
=========== ==========
</TABLE>
The Company provides deferred taxes for research and development tax credits
earned in the current year, which are included in taxable income in the
subsequent year. In accordance with Canadian tax laws, stock issuance costs
are deductible over a five year period.
The following table presents income (loss) before income taxes for the
entities incorporated in the following jurisdictions:
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Canada......................... $ (2,470,805) $ 6,110,923 $ 19,215,124
United States.................. (12,587,746) 1,486,294 5,369,073
United Kingdom................. (5,191,695) (320,982) 3,261,899
European and Other............. (22,456,100) (7,542,867) (17,603,314)
------------- ----------- ------------
$(42,706,346) $ (266,632) $ 10,242,782
============= =========== ============
</TABLE>
F-20
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The income tax provision is composed of the following:
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Current--
Federal........................ $ 2,060,380 $3,641,996 $ 1,131,398
Provincial..................... 375,087 930,323 248,972
Foreign........................ 1,072,157 1,979,000 5,703,680
----------- ---------- -----------
3,507,624 6,551,319 7,084,050
----------- ---------- -----------
Deferred--
Federal........................ (1,373,684) 229,580 2,683,103
Provincial..................... (228,379) 190,996 394,825
Foreign........................ (470,726) (482,552) 692,017
----------- ---------- -----------
(2,072,789) (61,976) 3,769,945
----------- ---------- -----------
Total provision.............. $ 1,434,835 $6,489,343 $10,853,995
=========== ========== ===========
</TABLE>
The reconciliation between the Canadian federal statutory income tax rate
and the effective tax rate is as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Provision (benefit) at the
Canadian federal statutory
rate........................... (38.0)% (38.0)% 38.0 %
Foreign taxes................... 17.2 122.1 5.5
Effect of not benefitting
foreign subsidiaries' tax
losses......................... 16.0 320.2 15.5
Effect of basis differences not
benefitted..................... 3.0 2,323.1 94.0
Provincial taxes, net of federal
tax abatements................. 0.2 72.3 3.0
Canadian federal incentives for
manufacturers and small
business....................... 0.2 0.0 0.0
Utilization of net operating
losses not previously
benefitted..................... -- (361.2) (47.3)
Other items..................... 4.8 (4.7) (2.7)
----- ------- -----
Tax provision................. 3.4 % 2,433.8 % 106.0 %
===== ======= =====
</TABLE>
The Company has $13,841,000 of cumulative foreign net operating loss
carryforwards which may be available to reduce future income tax liabilities
in those jurisdictions. The loss carryforwards will expire beginning June 30,
2001.
The Company has recorded a valuation allowance against certain deferred tax
assets including the tax benefit of certain foreign net operating loss
carryforwards as the tax benefits do not meet the recognition criteria set
forth in SFAS 109 due to the uncertainty of realizability.
These net operating loss carryforwards are subject to review and adjustment
by the respective tax authorities and may be limited in certain cases upon a
significant ownership change of the corporation, as defined.
F-21
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES
(a) Lease commitments
The Company has operating lease commitments for certain facilities and
equipment which expire, at various dates, through June 2007. The following
schedule outlines the future minimum rental payments under these leases at
June 30, 1998:
<TABLE>
<S> <C>
Year ended June 30,
1999........................................................ $ 2,243,871
2000........................................................ 1,837,957
2001........................................................ 1,279,230
2002........................................................ 1,130,401
2003 and thereafter......................................... 5,016,812
-----------
Total minimum lease payments................................ $11,508,271
===========
</TABLE>
The above commitments include leases for locations which the Company plans
to close under the restructuring plan (see Note 19).
Rental expenses related to the operating leases were approximately
$1,348,000, $1,600,000 and $1,985,000 for the year ended July 31, 1996, the
eleven-month period ended June 30, 1997, and the year ended June 30, 1998,
respectively. Included in the minimum lease payment commitment is
approximately CDN $12,471,452 (approximately $8,503,036 at June 30, 1998)
representing future payment due to a related party from which the Company
leases office space in Montreal.
(b) Letters of Guarantee
The Company has provided letters of guarantee in the amount of $328,753 and
$3,000,000 as of June 30, 1997 and 1998, respectively.
(13) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
The Company operates in one industry segment primarily digital image
processing solution systems for creating, editing and compositing special
visual effects for film and video, including training and other services
incidental to these products.
Revenues by geographic destination and as a percentage of total revenues are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS YEAR ENDED
GEOGRAPHIC AREA JULY 31, ENDED JUNE 30,
BY DESTINATION 1996 JUNE 30, 1997 1998
--------------- ----------- ------------- ------------
<S> <C> <C> <C>
North America....................... $36,286,073 $ 43,752,904 $ 70,866,936
Europe.............................. 35,774,418 36,839,458 45,385,523
Pacific Rim......................... 8,717,015 15,396,131 26,745,421
Other............................... 3,219,941 5,935,438 8,560,248
----------- ------------ ------------
$83,997,447 $101,923,931 $151,558,128
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
ELEVEN MONTHS
GEOGRAPHIC AREA YEAR ENDED ENDED YEAR ENDED
BY DESTINATION JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
--------------- ------------- ------------- -------------
<S> <C> <C> <C>
North America.................... 43.2% 42.9% 46.8%
Europe........................... 42.6 36.1 29.9
Pacific Rim...................... 10.4 15.2 17.6
Other............................ 3.8 5.8 5.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
F-22
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenues, net income and identifiable assets for the Company's Canadian,
U.S., U.K., German, French and other operations are as follows:
Intercompany transfers between geographic areas are at prices that
approximate arm's length transactions. Expenses incurred in one geographic
area that benefit other areas have been allocated based upon services
utilized.
<TABLE>
<CAPTION>
CANADA U.S. U.K. FRANCE GERMANY OTHER ELIMINATIONS CONSOLIDATED
------------ ------------ ----------- ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996--
Revenues......... $ 8,339,345 $ 33,090,335 $17,309,369 $ 7,696,297 $12,307,428 $ 5,254,673 $ -- $ 83,997,447
Transfers between
geographic
locations....... 20,211,614 29,090,504 -- -- -- 9,007,939 (58,310,057) --
------------ ------------ ----------- ----------- ----------- ------------ ------------- ------------
Total revenues.. $ 28,550,959 $ 62,180,839 $17,309,369 $ 7,696,297 $12,307,428 $ 14,262,612 $ (58,310,057) $ 83,997,447
============ ============ =========== =========== =========== ============ ============= ============
Net loss........ $ (1,398,871) $(11,532,447) $(5,210,577) $(2,409,595) $ (797,282) $(19,528,169) $ (3,264,240) $(44,141,181)
============ ============ =========== =========== =========== ============ ============= ============
Identifiable
assets......... $103,117,776 $ 48,995,740 $20,411,397 $ 6,583,316 $ 5,937,355 $ 21,037,113 $(125,934,955) $ 80,147,742
============ ============ =========== =========== =========== ============ ============= ============
1997--
Revenues......... $ 5,872,359 $ 42,135,249 $16,596,218 $10,298,958 $12,388,084 $ 14,633,063 $ -- $101,923,931
Transfers between
geographic
locations....... 28,279,123 16,531,229 3,293,329 1,539,298 -- 5,483,484 (55,126,463) --
------------ ------------ ----------- ----------- ----------- ------------ ------------- ------------
Total revenues.. $ 34,151,482 $ 58,666,478 $19,889,547 $11,838,256 $12,388,084 $ 20,116,547 $ (55,126,463) $101,923,931
============ ============ =========== =========== =========== ============ ============= ============
Net income
(loss)......... $ 1,199,545 $ 707,540 $ (504,001) $ 841,043 $ 274,412 $ (9,046,246) $ (228,268) $ (6,755,975)
============ ============ =========== =========== =========== ============ ============= ============
Identifiable
assets......... $148,151,830 $ 48,967,084 $21,762,860 $ 8,196,759 $ 6,107,907 $ 25,332,305 $(162,574,046) $ 95,944,699
============ ============ =========== =========== =========== ============ ============= ============
1998--
Revenues......... $ 10,174,057 $ 65,461,287 $20,434,970 $14,640,546 $14,132,721 $ 26,714,547 $ -- $151,558,128
Transfers between
geographic
locations....... 61,579,951 17,481,159 1,604,708 1,390,882 419,736 5,532,861 (88,009,297) --
------------ ------------ ----------- ----------- ----------- ------------ ------------- ------------
Total revenues.. $ 71,754,008 $ 82,942,446 $22,039,678 $16,031,428 $14,552,457 $ 32,247,408 $ (88,009,297) $151,558,128
============ ============ =========== =========== =========== ============ ============= ============
Net income
(loss)......... $ 14,756,827 $ 2,561,673 $ 3,079,881 $ 1,037,665 $ 895,885 $ 228,907 $ (23,172,051) $ (611,213)
============ ============ =========== =========== =========== ============ ============= ============
Identifiable
assets......... $137,435,570 $ 29,185,579 $11,211,994 $ 6,984,229 $ 6,911,638 $ 45,739,574 $(122,858,606) $114,609,978
============ ============ =========== =========== =========== ============ ============= ============
</TABLE>
"Other" includes the revenues, net income(loss) and identifiable assets of
the Company's Asian and less significant European subsidiaries.
Export sales from Canada were $5,788,925, $3,708,757 and $4,334,962 for the
fiscal year ended July 31, 1996, the eleven-month period ended June 30, 1997,
and the fiscal year ended June 30, 1998, respectively.
(14) DEPENDENCE ON KEY SUPPLIERS
The Company is dependent on Silicon Graphics, Inc. to manufacture and supply
a large proportion of the workstations and certain peripherals used in the
Company's systems. The Company purchases electronic tablets manufactured by
Wacom Technology Corporation ("Wacom") and believes that while alternative
suppliers are available, there can be no assurance that alternative electronic
tablets would be functionally equivalent or be available on a timely manner or
on similar terms.
F-23
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) ACQUISITIONS
(a) Denim Software
On June 12, 1997, the Company, through its wholly-owned subsidiary 3380491
Canada Inc. ("Acquisition Sub"), acquired substantially all of the assets and
assumed certain liabilities of Denim Software L.L.C., a Delaware limited
liability company ("Denim"), pursuant to the terms of an Asset Purchase
Agreement dated as of June 12, 1997 among Acquisition Sub, Denim, Sam Khulusi,
Frank Khulusi, Westco Denim Investments Group, Ltd., a California limited
partnership, and Frank Khulusi Family Limited Partnership, a California
limited partnership. The purchased assets consist primarily of Denim software
products, including ILLUMINAIRE Paint, ILLUMINAIRE Composition and ILLUMINAIRE
Studio and related know-how and goodwill.
The aggregate purchase price for the assets was comprised of (i)
approximately $9,126,000 in cash, (ii) the assumption of certain enumerated
liabilities in an amount equal to no more than approximately $2,209,000 in the
aggregate, and (iii) the assumption of certain on-going obligations under
certain existing contracts of Denim. At closing, cash consideration, of
approximately $9,126,000 and certain liabilities, of approximately $655,000,
were paid. The cash used by the Company to fund the acquisition was derived
primarily from operations. The transaction has been accounted for using the
purchase method. The Company incurred a one-time charge of $9,800,000 based on
an independent appraisal, or $0.35 per share, for in-process research and
development that had not yet reached technical feasibility and had no
alternative use, purchased and expensed in the eleven-month period ended June
30, 1997. Goodwill, in the amount of $315,000, has been recorded and is
included in other assets in the consolidated balance sheet. The terms of the
transaction were the result of arms-length negotiations between the
representatives of Discreet and Denim.
(b) D-Vision Systems
On July 15, 1997, the Company acquired all of the outstanding shares of
capital stock of D-Vision Systems, Inc. ("D-Vision"), an Illinois corporation,
pursuant to a Stock Purchase Agreement dated as of July 10, 1997, among the
Company, D-Vision, the former stockholders of D-Vision (the "Selling
Stockholders") and certain other individuals (the "D-Vision Acquisition"). As
a result of the D-Vision Acquisition, the Company acquired the D-Vision OnLINE
and PRO software products for non-linear video and digital media editing
solutions including related know-how and goodwill. The purchase price was paid
in a combination of 555,000 newly issued Discreet Logic common shares and
approximately $10,750,000 in cash. In addition, approximately $4,000,000 of
the cash consideration is being held in escrow until September 30, 1999,
subject to (i) earlier release from escrow of up to $1,900,000 on September
30, 1998 and (ii) the resolution of any indemnification claims made by the
Company pursuant to the Stock Purchase Agreement. The cash used by the Company
to fund the acquisition was derived primarily from cash flow from operations.
The D-Vision Acquisition was accounted for as a purchase. A substantial
portion of the purchase price, net liabilities of D-Vision and transaction
costs was allocated to purchased in-process research and development that had
not yet reached technical feasibility and had not alternative use for which
the Company incurred a one-time charge against earnings in the amount of
$21,000,000 ($0.72 per share), based on an independent appraisal, in the
quarter ended September 30, 1997. The terms of the transaction and the
consideration received by the D-Vision stockholders were the result of arms-
length negotiations between the representatives of the Company and D-Vision.
D-Vision develops Microsoft Windows NT-based non-linear, digital editing
solutions.
(c) Lightscape Technologies, Inc.
On December 2, 1997, Discreet entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") with Lantern Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Discreet Logic ("Merger
Sub"), and Lightscape Technologies, Inc., a Delaware corporation
F-24
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
("Lightscape"). On December 30, 1997, pursuant to the Merger Agreement, and
upon the satisfaction of certain closing conditions, Merger Sub merged (the
"Lightscape Merger") with and into Lightscape with Lightscape as the surviving
corporation and a wholly-owned subsidiary of Discreet. As a result of the
Lightscape Merger, Discreet Logic acquired, among other products, the
Lightscape product, a software application which integrates radiosity and
raytracing with physically based lighting, including related know-how and
goodwill. The aggregate purchase price for Lightscape includes the assumption
of approximately $5,700,000 of net liabilities (of which approximately
$3,400,000 was paid at the closing), not including costs associated with the
transaction, and up to $6,800,000 in contingent consideration to be paid only
if certain revenue objectives are achieved by Lightscape in calendar 1998 and
1999. The acquisition has been accounted for as a purchase. A substantial
portion of the purchase price and transaction costs was allocated to purchased
in-process research and development that had not yet reached technical
feasibility and had no alternative use for which Discreet Logic incurred a
one-time charge against earnings in the amount of $5,800,000 ($0.20 per
share), based on an independent appraisal, in the quarter ended December 31,
1997 and approximately $1,087,000 was allocated to intangible assets, which
include goodwill and acquired technology, and is being amortized on a
straight-line basis over their estimated useful lives of three to five years.
The terms of the transaction were the result of arm's-length negotiations
between the representatives of Discreet and Lightscape.
(D) PROFORMA INFORMATION
The following presents, on an unaudited basis, certain items of the
Company's result of operations, for the fiscal years ended June 30, 1997 and
1998, as though the acquisitions discussed above had occurred on August 1,
1996:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Revenues........................................ $108,151,000 $152,277,000
Operating income (loss)......................... $(13,911,000) $ 6,048,000
Net loss........................................ $(18,944,000) $ (2,747,000)
</TABLE>
(16) GAIN ON SALE OF INVESTMENT
In May 1998, Essential Communications Corporation, a company in which
Discreet held a minority interest investment of preferred shares, was sold. As
a result of this sale, the Company received proceeds of $2,500,000 in exchange
for its preferred shares. Previously, in fiscal 1996, the Company had taken a
charge to operations due to the uncertainty regarding the realizability of
this investment. Upon receipt of the proceeds, the Company realized a gain of
approximately $2,500,000.
(17) COST OF TERMINATED AGREEMENT WITH MGI
In its fourth quarter of fiscal 1998, the Company announced a mutual
termination of its Arrangement Agreement entered into on March 9, 1998 with
MGI Software Corp. ("MGI"). Both the Company and MGI determined that, in light
of current conditions which could result in significant delays in the
realization of previously discussed anticipated benefits and synergies of the
merger, it was in the best interests of both companies to terminate the
agreement and remain independent companies. The Company incurred approximately
$1,713,000 of costs, expensed in fiscal 1998, related to this terminated
agreement.
(18) PURCHASE OF LAND AND FACILITIES
In August 1995, the Company purchased land and an office building in London,
England for approximately (Pounds)1,148,000 (or approximately $1,916,000 at
June 30, 1998). Additionally, in December 1995, the Company purchased land and
a building in Montreal for Cdn$1,730,000 (or approximately $1,250,000 at June
30, 1997). During fiscal 1996, the carrying value of the London and Montreal
buildings were written down to their estimated fair market values and these
buildings were classified as assets held for resale. In September 1997, the
Company sold its Montreal land and office building for a price not materially
different from its carrying value.
F-25
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(19) RESTRUCTURING
During the fiscal year ended July 31, 1996, the Company recorded a pre-tax
restructuring charge of $15 million to cover the direct costs of restructuring
the Company's operations and to bring operating expenses in line with the
Company's current revenue level. The focus of the Company's restructuring plan
was to solidify its senior management team, reduce operating expenses through
workforce reductions and office closings, consolidate research and development
activities in Montreal, discontinue certain product lines, and restructure its
sales force to emphasize indirect sales channels. The Company began
implementation of its restructuring plan in the fourth fiscal quarter of 1996
and had substantially completed the implementation of the plan at the end of
fiscal 1997. The major aspects of the restructuring plan and remaining amounts
in accrued liabilities are discussed below.
The restructuring entailed the closing and moving of several offices in
North America and Europe. It also included the termination of approximately
110 positions across all departments and around the world.
The components of the restructuring charge are as follows:
<TABLE>
<S> <C>
Asset write down.............................................. $ 6,190,000
Lease terminations and leasehold improvements reserve......... 4,600,000
Severance..................................................... 2,800,000
Professional services and other............................... 1,410,000
-----------
$15,000,000
===========
</TABLE>
The primary component of the asset write down is an amount of $2.2 million
for goodwill and acquired technology. The other components of the write down
are primarily fixed assets which have no future use.
In the fourth quarter of fiscal 1998, the Company reversed approximately
$2,333,000 of excess reserves, related primarily to the estimated cost of
terminating leases, no longer considered necessary to complete the
restructuring plan.
The charges against the restructuring reserve include the following amounts:
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31, ELEVEN MONTHS ENDED
1996 JUNE 30, 1997 YEAR ENDED JUNE 30, 1998
---------- ------------------- --------------------------------
CHARGES CHARGES CHARGES REVERSED TOTAL
<S> <C> <C> <C> <C> <C>
Asset write down........ $4,421,000 $1,269,000 $ 359,000 $ 141,000 $ 500,000
Lease terminations and
leasehold improvements
reserve................ 1,072,000 865,000 366,000 1,947,000 2,313,000
Severance............... 582,000 1,768,000 205,000 245,000 450,000
Professional services
and other.............. 291,000 460,000 234,000 -- 234,000
---------- ---------- ---------- ---------- ----------
$6,366,000 $4,362,000 $1,164,000 $2,333,000 $3,497,000
========== ========== ========== ========== ==========
</TABLE>
F-26
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following reflects the remaining accrued restructuring expense as of
June 30, 1997 and 1998, by major component:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
---------- --------
<S> <C> <C>
Asset write down...................................... $ 500,000 --
Lease terminations and leasehold improvements reserve. 2,663,000 350,000
Severance............................................. 450,000 --
Professional services and other....................... 659,000 425,000
---------- --------
$4,272,000 $775,000
========== ========
</TABLE>
During the fourth fiscal quarter of 1998, the Company accrued an additional
$829,000 charge, which is included as a component of the restructuring expense
in 1998, for the closure of its U.K. research and development facility, and
the related termination of 17 employees.
The components of the charge are as follows:
<TABLE>
<S> <C>
Asset write down................................................. $444,000
Severance........................................................ 198,000
Professional services and other.................................. 187,000
--------
$829,000
========
</TABLE>
As at June 30, 1998, the closure was substantially complete and the Company
still had $50,000 of restructuring reserves primarily for the estimated legal
and tax costs dissolution of the subsidiary. All other amounts were paid as of
June 30, 1998.
(20) CHANGE IN YEAR END COMPARATIVE RESULTS
Selected unaudited estimated results for the eleven-month period ended June
30, 1996 were approximately as follows:
<TABLE>
<S> <C>
Revenues..................................................... $ 73,000,000
Gross profit................................................. 31,176,000
Provision for income taxes................................... 1,435,000
Net loss..................................................... (43,310,000)
</TABLE>
(21) GOVERNMENT ASSISTANCE
(a) SDI loan
The Company entered into a loan agreement with the Societe de Developpement
Industriel du Quebec dated as of May 7, 1998 whereby an interest free loan was
granted to the Company by the Quebec government in the amount of Cdn$2,800,000
(approximately $1,909,000 at June 30, 1998) in relation with the Lightscape
acquisition. The loan is conditional to the Company meeting certain criteria:
1. During the five year period following the disbursement of the loan by
the Quebec government, the Company is required to create 200 jobs and
maintain each of these jobs for a five year period after their creation;
2. The loan should not exceed Cdn$2,800,000 or 20% of the costs incurred
by the Company for the Lightscape acquisition.
F-27
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The loan is payable in four annual installments of Cdn$600,000
(approximately $409,000 at June 30, 1998) commencing in July 2004 and a final
installment of Cdn$400,000 (approximately $273,000 at June 30, 1998) in July
2008. The loan is interest free until July 2004, after which it will bear
interest at the Canadian prime rate (approximately 6.50% at June 30, 1998)
plus 1.5%. In the situation where the criteria mentioned above are not
respected, a portion of the loan may have to be repaid at an earlier date. The
loan was disbursed to the Company in July 1998.
(b) PACST Subsidy Program
The Company entered into a financial assistance contract with the Quebec
Government dated as of March 27, 1998 under a subsidy program designed to
improve competencies in science and technology. The contract provides that the
Company is eligible to receive up to Cdn$3,012,000 (approximately $2,054,000
at June 30, 1998) in the form of reimbursement of expenses incurred by the
Company for new employee training (mainly reimbursement of salary). The
Company's job creation estimate provided to the Quebec Government at the time
of signature of the contract was 251 science and technology related jobs to be
created over a three-year period. As of August 1998, an advance of Cdn$350,000
(approximately $244,000 at June 30, 1998) was received which covers 40% of the
first year estimated subsidy. The program requires the Company to meet certain
criteria in order to earn the subsidies. Since the criteria have not yet been
met by the Company, the advance has been classified as a liability in accrued
expenses at June 30, 1998.
(22) SUBSEQUENT EVENTS
On August 20, 1998, the Company announced that it has entered into a
definitive agreement providing for the acquisition of the Company by Autodesk,
Inc. ("Autodesk"). The combination is intended to create the premier total
solutions provider of digital content design, creation, and manipulation tools
for the creation of moving images. Under the terms of the agreement, Autodesk
will issue 0.525 shares of common stock for each outstanding share of Discreet
Logic stock and the Transactions intended to be accounted for as a pooling of
interests. Subject to several conditions, including regulatory approvals and
approval of the shareholders of both companies, the transaction is expected to
close by December 31, 1998. Until this transaction is finalized, both
companies shall operate as separate entities.
On August 28, 1998, a complaint was filed in the Marin County, California,
Superior Court, entitled Jerry Krim, on Behalf of Himself and all Others
Similarly Situated, vs. Discreet Logic Inc., et al., case No. 174792. The
lawsuit relates to the proposed Transactions and names as defendants certain
of Discreet's directors and certain unidentified "John Does." The complaint
alleges that the defendants breached their fiduciary duties to shareholders in
connection with the proposed Transactions. The complaint asks the court to
enjoin the closing of the Transactions or, alternatively, seeks to rescind the
transaction or an award of unspecified damages from the defendants in the
event the Amalgamation is consummated. Discreet believes the claims asserted
in the complaint are without merit and intends to vigorously contest them.
F-28
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Autodesk, Inc.
We have audited the accompanying consolidated balance sheets of Autodesk,
Inc., as of January 31, 1998 and 1997, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended January 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Autodesk, Inc., at January 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended January 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Jose, California
February 24, 1998
F-29
<PAGE>
AUTODESK, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................ $ 96,089 $ 64,814
Marketable securities.................................... 100,399 117,971
Accounts receivable, net of allowance for doubtful
accounts of $7,136 ($6,635 in 1997)..................... 60,856 68,577
Inventories.............................................. 7,351 7,340
Deferred income taxes.................................... 27,577 22,759
Prepaid expenses and other current assets................ 15,430 16,210
-------- --------
Total current assets................................... 307,702 297,671
Marketable securities, including a restricted balance of
$18,000 ($28,000 in 1997)................................. 104,831 103,523
Computer equipment, furniture, and leasehold improvements:
Computer equipment and furniture......................... 117,434 103,903
Leasehold improvements................................... 20,505 17,818
Accumulated depreciation................................. (98,800) (77,671)
-------- --------
Net computer equipment, furniture, and leasehold
improvements.......................................... 39,139 44,050
Purchased technologies and capitalized software, net of
accumulated amortization of $31,400 ($18,700 in 1997)..... 31,553 15,916
Goodwill................................................... 16,995 6,470
Deferred income taxes...................................... 13,782 12,857
Other assets............................................... 19,681 11,746
-------- --------
$533,683 $492,233
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable......................................... $ 26,417 $ 24,557
Accrued compensation..................................... 34,962 18,099
Accrued income taxes..................................... 76,465 75,061
Deferred revenues........................................ 18,934 3,141
Other accrued liabilities................................ 42,709 29,313
-------- --------
Total current liabilities.............................. 199,487 150,171
Deferred income taxes...................................... 481 2,974
Litigation accrual......................................... 29,328 29,328
Other liabilities.......................................... 1,255 1,646
Commitments and contingencies
Put warrants............................................... -- 64,500
Stockholders' equity:
Common stock, $0.01 par value; 100,000 shares authorized,
45,465 issued and outstanding (45,108 in 1997).......... 299,315 147,091
Retained earnings........................................ 20,472 106,587
Foreign currency translation adjustment.................. (16,655) (10,064)
-------- --------
Total stockholders' equity............................. 303,132 243,614
-------- --------
$533,683 $492,233
======== ========
</TABLE>
See accompanying notes.
F-30
<PAGE>
AUTODESK, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues............................................ $632,358 $509,630 $546,884
Direct commissions.................................. 15,232 12,937 12,717
-------- -------- --------
Net revenues........................................ 617,126 496,693 534,167
Costs and expenses:
Cost of revenues.................................. 70,858 64,217 66,812
Marketing and sales............................... 237,107 199,939 183,550
Research and development.......................... 122,432 93,702 78,678
General and administrative........................ 83,287 74,280 76,100
Nonrecurring charges.............................. 58,087 4,738 --
-------- -------- --------
Total costs and expenses........................ 571,771 436,876 405,140
-------- -------- --------
Income from operations.............................. 45,355 59,817 129,027
Interest and other income, net...................... 9,644 6,695 9,253
-------- -------- --------
Income before income taxes.......................... 54,999 66,512 138,280
Provision for income taxes.......................... 39,635 24,941 50,492
-------- -------- --------
Net income.......................................... $ 15,364 $ 41,571 $ 87,788
======== ======== ========
Basic net income per share.......................... $ 0.33 $ 0.91 $ 1.86
======== ======== ========
Diluted net income per share........................ $ 0.31 $ 0.88 $ 1.76
======== ======== ========
Shares used in computing basic net income per share. 46,760 45,540 47,090
======== ======== ========
Shares used in computing diluted net income per
share.............................................. 49,860 47,190 49,800
======== ======== ========
</TABLE>
See accompanying notes.
F-31
<PAGE>
AUTODESK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
------------------------------
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income.................................... $ 15,364 $ 41,571 $ 87,788
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 43,854 34,833 25,247
Charge for acquired in-process research and
development................................ 58,087 4,738 --
Changes in operating assets and liabilities,
net of business combinations:
Accounts receivable....................... 8,829 25,365 (7,579)
Inventories............................... 534 2,345 (3,850)
Deferred income taxes..................... (10,947) (785) (4,567)
Prepaid expenses and other current assets. 1,501 890 (6,443)
Accounts payable and accrued liabilities.. 40,125 (4,318) 3,721
Accrued income taxes...................... 1,265 9,544 12,315
---------- -------- --------
Net cash provided by operating activities..... 158,612 114,183 106,632
---------- -------- --------
Investing activities
Purchases of available-for-sale marketable
securities................................... (1,102,015) (683,550) (224,655)
Maturities of available-for-sale marketable
securities................................... 1,126,174 604,727 141,893
Purchase of computer equipment, furniture, and
leasehold improvements....................... (15,000) (17,409) (16,306)
Business combinations, net of cash acquired... (5,766) (9,908) (7,194)
Purchases of software technologies and
capitalization of software costs............. (19,833) (995) (1,409)
Other......................................... (4,759) (16,698) 8,042
---------- -------- --------
Net cash used by investing activities......... (21,199) (123,833) (99,629)
---------- -------- --------
Financing activities
Proceeds from issuance of common stock........ 80,059 23,307 46,424
Repurchase of common stock.................... (174,907) (67,269) (107,976)
Dividends paid................................ (11,290) (10,879) (11,184)
---------- -------- --------
Net cash used in financing activities......... (106,138) (54,841) (72,736)
---------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................. 31,275 (64,491) (65,733)
Cash and cash equivalents at beginning of
year......................................... 64,814 129,305 195,038
---------- -------- --------
Cash and cash equivalents at end of year...... $ 96,089 $ 64,814 $129,305
========== ======== ========
Supplemental disclosure of noncash investing
and financing activities:
Common stock issued in connection with the ac-
quisition of Softdesk........................ $ 92,021 $ -- $ --
========== ======== ========
</TABLE>
See accompanying notes.
F-32
<PAGE>
AUTODESK, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-YEAR PERIOD ENDED JANUARY 31, 1998
-----------------------------------------------------
FOREIGN
COMMON STOCK CURRENCY TOTAL
---------------- RETAINED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT EARNINGS ADJUSTMENT EQUITY
------ -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 31,
1995.................... 47,241 $100,870 $215,064 $ 7,550 $323,484
Common shares issued
under stock option and
stock purchase plans.... 1,781 35,712 35,712
Tax effect of stock op-
tions................... 10,712 10,712
Net income............... 87,788 87,788
Dividends paid........... (11,184) (11,184)
Repurchase of common
shares.................. (2,671) (6,529) (101,447) (107,976)
Foreign currency transla-
tion adjustment......... 2,904 2,904
Unrealized gains on
available-for-sale secu-
rities, net of tax...... 888 888
------ -------- -------- -------- --------
Balances, January 31,
1996.................... 46,351 140,765 191,109 10,454 342,328
Common shares issued un-
der stock option and
stock purchase plans.... 974 20,729 20,729
Tax effect of stock op-
tions................... 2,578 2,578
Reclassification of put
warrants................ (9,870) (54,630) (64,500)
Net income............... 41,571 41,571
Dividends paid........... (10,879) (10,879)
Repurchase of common
shares.................. (2,217) (7,111) (60,158) (67,269)
Foreign currency transla-
tion adjustment......... (20,518) (20,518)
Unrealized losses on
available-for-sale secu-
rities, net of tax...... (426) (426)
------ -------- -------- -------- --------
Balances, January 31,
1997.................... 45,108 147,091 106,587 (10,064) 243,614
Common shares issued un-
der stock option and
stock purchase plans.... 2,790 63,829 63,829
Tax effect of stock op-
tions................... 16,230 16,230
Reclassification of put
warrants................ 9,870 54,630 64,500
Shares issued in connec-
tion with business com-
bination................ 2,900 92,021 92,021
Net income............... 15,364 15,364
Dividends paid........... (11,290) (11,290)
Repurchase of common
shares.................. (5,333) (29,726) (145,181) (174,907)
Foreign currency transla-
tion adjustment......... (6,591) (6,591)
Unrealized gains on
available-for-sale secu-
rities, net of tax...... 362 362
------ -------- -------- -------- --------
Balances, January 31,
1998.................... 45,465 $299,315 $ 20,472 $(16,655) $303,132
====== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-33
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
Autodesk, Inc. ("Autodesk" or the "Company"), is a leader in the development
and marketing of design and drafting software and multimedia tools, primarily
for the business and professional environment. Autodesk's flagship product,
AutoCAD, is one of the world's leading computer-aided design ("CAD") tools,
with an installed base of 1.9 million seats worldwide.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated. Certain reclassifications have been made to the 1996 and
1997 consolidated financial statements to conform to the 1998 presentation.
The asset and liability accounts of foreign subsidiaries are translated from
their respective functional currencies at the rates in effect at the balance
sheet date, and revenue and expense accounts are translated at weighted
average rates during the period. Foreign currency translation adjustments are
reflected as a separate component of stockholders' equity. Gains (losses)
resulting from foreign currency transactions, which are included in interest
and other income, were ($68,000), ($197,000), and $554,000 in fiscal years
1998, 1997, and 1996, respectively.
Business combinations
On March 31, 1997, the Company issued approximately 2.9 million shares of
its common stock for all outstanding shares of Softdesk, Inc. ("Softdesk"), a
leading supplier of AutoCAD-based application software for the architecture,
engineering, and construction market, and exchanged Autodesk options for
outstanding Softdesk options. Based upon the value of Autodesk stock and
options exchanged, the transaction, including transaction costs, was valued at
approximately $94 million. This transaction has been accounted for using the
purchase method. To assist in the allocation of the purchase price, an
independent valuation of Softdesk was completed. Approximately $55.1 million
of the Softdesk purchase price represented the value of in-process research
and development that had not yet reached technological feasibility and had no
alternative future use, and as such, was charged to operations in the first
quarter of fiscal year 1998. The remaining purchase price was allocated
primarily to assets acquired, developed technology, and other intangibles.
Specifically, costs of $14,300,000 and $6,700,000 were allocated to goodwill
and other intangibles and are being amortized over five and four years,
respectively. The operating results of Softdesk, which have not been material
in relation to those of the Company, have been included in the accompanying
consolidated financial statements since the date of acquisition. In the first
quarter of fiscal year 1998, the Company also acquired certain assets of and
licensed technology from 3D/Eye for $5.8 million. Of the total cost, $3.0
million represented the value of in-process research and development that had
not yet reached technological feasibility and had no alternative future use
and was charged to operations.
During fiscal year 1997 the Company acquired certain businesses for an
aggregate of $9.9 million. Included in these acquisitions were the purchases
of assets from Creative Imaging Technologies, Inc. ("CIT"), CadZooks, Inc.,
Argus Technologies, Inc. ("Argus"), as well as the outstanding stock of Teleos
Research ("Teleos"). Approximately $3.2 million of the Teleos purchase price
and $1.5 million of the Argus purchase price represented the value of in-
process research and development that had not yet reached technological
feasibility and had no alternative future use. These amounts were charged to
operations during fiscal year 1997 and classified as nonrecurring charges in
the accompanying statement of income. In fiscal year 1996, the Company
acquired certain assets of Automated Methods (Pty) Ltd. and made final
payments to the former stockholders of
F-34
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Ithaca Software, which was acquired by the Company in August 1993, based on
revenues as specified in the acquisition agreement. Cash payments in fiscal
year 1996 associated with these transactions totaled approximately $7.2
million. All of these acquisitions were accounted for using the purchase
method of accounting with the purchase price being principally allocated to
purchased technologies and capitalized software, intangible assets, and for
the Teleos and Argus acquisitions, in-process research and development. The
Company is amortizing these intangible assets on a straight-line basis over
the remaining useful lives of the assets. The operating results of the
acquired businesses, which have not been material in relation to those of the
Company, have been included in the accompanying consolidated financial
statements from their respective dates of acquisition. Additional
consideration may also be payable to the former stockholders of CIT, Argus,
Automated Methods, and Teleos based on product milestones and operating
results, which are expected to be allocated to intangible assets and amortized
on a straight-line basis over the remaining useful lives of the assets.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign currency translation
The Company hedges a portion of its exposure on certain receivables and
payables denominated in foreign currencies using forward foreign exchange
contracts in European and Asian foreign currencies. Gains and losses
associated with exchange rate fluctuations on forward foreign exchange
contracts are recorded currently in interest and other income and offset
corresponding gains and losses on the foreign currency assets being hedged.
The costs of forward foreign exchange contracts are amortized on a straight-
line basis over the life of the contract as interest and other income.
Cash and cash equivalents
The Company considers all highly liquid investments with insignificant
interest rate risk and original maturities of three months or less to be cash
equivalents. Cash equivalents are recorded at cost, which approximates fair
value.
Marketable securities
Marketable securities, consisting principally of high-quality municipal
bonds, tax-advantaged money market instruments, and US treasury notes, are
stated at fair value. Marketable securities maturing within one year that are
not restricted are classified as current assets.
The Company determines the appropriate classification of its marketable
securities at the time of purchase and reevaluates such classification as of
each balance sheet date. The Company has classified all of its marketable
securities as available-for-sale and carries such securities at fair value,
with unrealized gains and losses, net of tax, reported in stockholders' equity
until disposition.
Concentration of credit risk
The Company places its cash, cash equivalents, and marketable securities
with financial institutions with high credit standing and, by policy, limits
the amounts invested with any one institution, type of security, and issuer.
Autodesk's accounts receivable are derived from software sales to a large
number of resellers and
F-35
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
distributors in the Americas, Europe, and Asia Pacific. The Company performs
ongoing evaluations of its customers' financial condition and limits the
amount of credit extended when deemed necessary, but generally requires no
collateral.
Inventories
Inventories, consisting principally of disks, compact disks (CD-ROMs), and
technical manuals, are stated at the lower of cost (determined on the first-
in, first-out method) or market.
Computer equipment, furniture, and leasehold improvements
Computer equipment, furniture, and leasehold improvements are stated at
cost. Computer equipment and furniture are depreciated using the straight-line
method over the estimated useful lives of the assets, which range from two to
five years.
Leasehold improvements are amortized on a straight-line basis over the
shorter of the estimated useful life or the lease term. Depreciation expense
was $22,876,000, $21,252,000, and $13,482,000 in fiscal years 1998, 1997, and
1996, respectively.
Purchased technologies and capitalized software
Costs incurred in the initial design phase of software development are
expensed as incurred. Once the point of technological feasibility is reached,
production costs (programming and testing) are capitalized. Certain acquired
software-technology rights are also capitalized. Capitalized software costs
are amortized ratably as revenues are recognized, but not less than on a
straight-line basis over two- to seven-year periods. Amortization expense was
$12,668,000, $9,563,000, and $11,765,000 in fiscal years 1998, 1997, and 1996,
respectively. The actual lives of the Company's purchased technologies or
capitalized software may differ from the Company's estimates, and such
differences could cause carrying amounts of these assets to be reduced
materially.
Other assets and goodwill
Amortization of purchased intangibles and goodwill is provided on a
straight-line basis over the respective useful lives of the assets, which
range from three to ten years. Accumulated amortization was $22,556,000 and
$14,293,000 in fiscal years 1998 and 1997, respectively. The Company evaluates
the realizability and the related periods of amortization of these assets on a
regular basis. Amortization expense was $8,310,000 and $4,018,000 in fiscal
years 1998 and 1997, respectively. (The Company did not incur amortization
expense in fiscal year 1996.)
Employee stock compensation
The Company accounts for its employee stock plans under the intrinsic-value-
based method under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees."
Revenue recognition
Autodesk's revenue recognition policy is in compliance with the provisions
of the American Institute of Certified Public Accountants' Statement of
Position 91-1, "Software Revenue Recognition" ("SOP 91-1"). Revenue is
recognized at the time of shipment, provided that no significant vendor
obligations exist and collection of the resulting receivable is deemed
probable. A portion of revenues related to certain customer consulting and
training obligations is deferred, while costs associated with certain postsale
customer obligations are accrued.
F-36
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Autodesk establishes allowances for product returns, including allowances
for stock balancing and product rotation, based on estimated future returns of
product and after taking into consideration channel inventory levels at its
resellers, the timing of new product introductions, and other factors. These
allowances are recorded as direct reductions of accounts receivable. While the
Company maintains strict measures to monitor channel inventories and to
provide appropriate allowances, actual product returns may differ from the
Company's estimates, and such differences could be material to the
consolidated financial statements.
Advertising
Advertising costs are expensed the first time the advertising takes place.
Total advertising expenses incurred during fiscal years 1998, 1997, and 1996
were $12,194,000, $10,830,000, and $8,489,000, respectively.
Royalties
The Company licenses software used to develop components of AutoCAD,
Mechanical Desktop, 3D Studio MAX, and certain other software products.
Royalties are payable to developers of the software at various rates and
amounts generally based on unit sales or revenues. Royalty expense was
$7,640,000, $8,000,000, and $6,102,000 in fiscal years 1998, 1997, and 1996,
respectively. Such costs are included as a component of cost of revenues.
Net income per share
The Company adopted Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share" ("SFAS 128") in the fourth quarter of fiscal year 1998.
SFAS 128 requires companies to present both basic net income per share and
diluted net income per share. Basic net income per share excludes dilutive
common stock equivalents and is calculated as net income divided by the
weighted average number of common shares outstanding. Diluted net income per
share is computed using the weighted average number of common shares
outstanding and dilutive common stock equivalents outstanding during the
period. A reconciliation of the numerators and denominators used in the basic
and diluted net income per share amounts follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
JANUARY 31,
-----------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income per
share--net income................................ $15,364 $41,571 $87,788
======= ======= =======
Denominator:
Denominator for basic net income per share--
weighted average shares.......................... 46,760 45,540 47,090
Effect of dilutive common stock options........... 3,100 1,650 2,710
------- ------- -------
Denominator for diluted net income per share........ 49,860 47,190 49,800
======= ======= =======
</TABLE>
The Company has restated all prior year amounts to comply with this
standard. See Note 8 to see related quarterly financial data amounts, as
restated.
Recently issued accounting standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in a full set of general-purpose financial statements and
is required to be adopted by the Company beginning in its fiscal year 1999.
Additionally, the Financial Accounting
F-37
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Standards Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which establishes standards for the way public business enterprises
report information in annual statements and interim financial reports
regarding operating segments, products and services, geographic areas, and
major customers. SFAS 131 will first be reflected in the Company's fiscal year
1999 Annual Report and will apply to both annual and interim financial
reporting subsequent to this date. The Company is currently evaluating the
impact of SFAS 130 and SFAS 131 on its financial disclosures.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), which supersedes SOP 91-1. SOP 97-2 will be effective beginning
in fiscal year 1999. In March 1998, the AICPA issued Statement of Position 98-
4 ("SOP 98-4"), which amends certain provisions of SOP 97-2. The Company
believes it is in compliance with the provisions of SOP 97-2 as amended by SOP
98-4. However, detailed implementation guidelines for this standard have not
been issued. Once issued, such guidance could lead to unanticipated changes in
the Company's current revenue recognition practices, and such changes could be
material to the Company's results of operations.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This standard requires companies to capitalize
qualifying computer software costs which are incurred during the application
development stage and amortize them over the software's estimated useful life.
The Company is required to adopt this standard in fiscal year 2000 and is
currently evaluating the impact that its adoption will have on the
consolidated financial position and results of operations of the Company.
NOTE 2. FINANCIAL INSTRUMENTS
Fair values of financial instruments
Estimated fair values of financial instruments are based on quoted market
prices. The carrying amounts and fair value of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
JANUARY 31, 1998 JANUARY 31, 1997
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................ $96,089 $96,089 $64,814 $64,814
Marketable securities.................... 205,230 205,230 221,494 221,494
Forward foreign currency contracts....... (124) (124) (458) (458)
</TABLE>
Foreign currency contracts
The Company utilizes derivative financial instruments in the form of forward
foreign exchange contracts only for the purpose of hedging foreign currency
market exposures of underlying assets, liabilities, and other obligations
which exist as a part of its ongoing business operations. The Company, as a
matter of policy, does not engage in trading or speculative transactions. In
general, instruments used as hedges must be effective at reducing the foreign
currency risk associated with the underlying transaction being hedged and must
be designated as a hedge at the inception of the contract. Substantially all
forward foreign currency contracts entered into by the Company have maturities
of 60 days or less. The Company uses the forward contracts only as hedges of
existing transactions. Amounts receivable and payable on forward foreign
exchange contracts are recorded as other current assets and other accrued
liabilities, respectively. For these contracts, mark-to-market gains and
losses are recognized as other income or expense in the current period,
generally consistent with the period in which the gain or loss of the
underlying transaction is recognized. Cash flows associated with derivative
transactions are classified in the statement of cash flows in a manner
consistent with those of the transactions
F-38
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
being hedged. The notional amounts of foreign currency contracts were $38.8
million and $35.7 million at January 31, 1998 and 1997, respectively, and were
predominantly to buy Swiss francs. While the contract or notional amount is
often used to express the volume of foreign exchange contracts, the amounts
potentially subject to credit risk are generally limited to the amounts, if
any, by which the counterparties' obligations under the agreements exceed the
obligations of the Company to the counterparties.
Marketable securities
Marketable securities include the following available-for-sale securities at
January 31, 1998 and 1997:
<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term:
Municipal bonds...................... $ 24,383 $ -- $ (22) $ 24,361
Treasury bills....................... 9,994 2 -- 9,996
Preferred stock...................... 2,000 -- -- 2,000
Money market deposits................ 64,042 -- -- 64,042
-------- ---- ----- --------
100,419 2 (22) 100,399
Long-term:
Municipal bonds...................... 85,911 935 -- 86,846
US Treasury bills.................... 17,987 -- (2) 17,985
-------- ---- ----- --------
103,898 935 (2) 104,831
-------- ---- ----- --------
$204,317 $937 $ (24) $205,230
======== ==== ===== ========
<CAPTION>
JANUARY 31, 1997
----------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term:
Municipal bonds...................... $ 70,325 $ 43 $ -- $ 70,368
Preferred Stock...................... 2,000 -- -- 2,000
Time deposits........................ 45,603 -- -- 45,603
-------- ---- ----- --------
117,928 43 -- 117,971
Long-term:
Municipal bonds...................... 72,565 -- (74) 72,491
US Treasury notes.................... 28,592 -- (592) 28,000
Preferred stock and other............ 3,022 10 -- 3,032
-------- ---- ----- --------
104,179 10 (666) 103,523
-------- ---- ----- --------
$222,107 $ 53 $(666) $221,494
======== ==== ===== ========
</TABLE>
Long-term US Treasury bills included a restricted balance of $18.0 million
at January 31, 1998, and $28.0 million at January 31, 1997 (see Note 4). The
contractual maturities of Autodesk's short-term marketable securities at
January 31, 1998, were one year or less while the Company's long-term
marketable securities had contractual maturities as follows: $59.6 million
between one and two years; $13.7 million maturing in three
F-39
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
years; $9.6 million maturing in four to five years; and $21.9 million beyond
five years. Expected maturities may differ from contractual maturities because
the issuers of the securities may have the right to prepay or call
obligations without prepayment penalties. Realized gains and losses on sales
of available-for-sale securities were immaterial in fiscal years 1998, 1997,
and 1996. The cost of securities sold is based on the specific identification
method.
NOTE 3. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
-------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current......................................... $31,749 $ 5,546 $26,711
Deferred........................................ (7,978) 1,133 (3,392)
State:
Current......................................... 5,594 4,796 8,779
Deferred........................................ (1,398) (1,148) (856)
Foreign:
Current......................................... 14,083 15,503 19,569
Deferred........................................ (2,415) (889) (319)
------- ------- -------
$39,635 $24,941 $50,492
======= ======= =======
</TABLE>
The principal reasons that the aggregate income tax provisions differ from
the US statutory rate of 35 percent are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
-------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision at statutory rate........... $19,250 $23,279 $48,398
Foreign income taxed at rates different from the
US statutory rate............................... (1,005) (1,644) (7,863)
State income taxes, net of federal benefit....... 2,727 2,371 8,616
Tax-exempt interest.............................. (2,031) (1,348) (1,668)
Acquired in-process research and development..... 19,285 1,130 --
Other............................................ 1,409 1,153 3,009
------- ------- -------
$39,635 $24,941 $50,492
======= ======= =======
</TABLE>
Significant sources of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
JANUARY 31,
----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued state income taxes................................. $ 5,667 $ 5,562
Accrued legal judgment, including accrued interest......... 13,863 13,822
Reserves for product returns and bad debts................. 9,728 7,864
Accrued compensation and benefits.......................... 3,809 2,950
Purchased technology and capitalized software.............. 11,079 6,270
Unremitted earnings of certain subsidiaries................ (6,018) (6,018)
Other, net................................................. 2,750 2,192
------- -------
Net deferred tax assets.................................. $40,878 $32,642
======= =======
</TABLE>
F-40
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable for fiscal years 1998, 1997, and 1996 by
$16,230,000, approximately $44.0 million. Foreign pretax income was $55.1
million, $45.0 million, and $64.4 million in fiscal years 1998, 1997, and
1996, respectively.
The Company's United States income tax returns for fiscal years ended
January 31, 1992 through 1996, are under examination by the Internal Revenue
Service. On August 27, 1997, the Internal Revenue Service issued a Notice of
Deficiency proposing increases to the amount of the Company's United States
income taxes for fiscal years 1992 and 1993. On November 25, 1997, the Company
filed a petition with the United States Tax Court to contest these alleged tax
deficiencies. Management believes that adequate amounts have been provided for
any adjustments that may ultimately result from these examinations.
Cash payments for income taxes were approximately $33,272,000, $13,605,000,
and $32,032,000 for fiscal years 1998, 1997, and 1996, respectively.
NOTE 4. LITIGATION ACCRUAL
In December 1994, the Company recorded a $25.5 million litigation charge as
the result of a judgment against the Company on a claim of trade secret
misappropriation brought by Vermont Microsystems, Inc. ("VMI"). The Company
appealed that judgment and, upon remand to the Federal District Court, a
reduced judgment was entered against the Company in the amount of $14.2
million plus interest. On February 23, 1998, the U.S. Court of Appeals for the
Second Circuit reduced the judgment to $7.8 million. Because the case is still
subject to postjudgment motions and appeals, the Company has not reflected the
reduction of damages in the accompanying consolidated financial statements.
The Company was required by statute to post collateral approximating the
amount of the initial judgment plus accrued interest. In May 1997, the escrow
account was reduced to $17.3 million, with interest to accrue. At January 31,
1998, the Company's long-term marketable securities included a balance of
$18.0 million which is restricted as to its use until final adjudication of
this matter.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable lease
agreements. The leases generally provide that the Company pay taxes,
insurance, and maintenance expenses related to the leased assets. Future
minimum lease payments for fiscal years ended January 31 are as follows: $19.2
million in 1999; $17.5 million in 2000; $13.3 million in 2001; $9.6 million in
2002; $13.2 million in 2003; and $17.8 million thereafter.
Rent expense was $17,729,000, $17,358,000, and $16,992,000 in fiscal years
1998, 1997, and 1996, respectively.
The Company has a line of credit permitting short-term, unsecured borrowings
of up to $40 million, which may be used from time to time to facilitate short-
term cash flow. There were no borrowings outstanding under this agreement at
January 31, 1998, which expires in January 1999.
The Company is a party to various legal proceedings arising from the normal
course of business activities. In management's opinion, resolution of these
matters is not expected to have a material adverse impact on the Company's
consolidated results of operations or its financial position. However,
depending on the amount and timing, an unfavorable resolution of a matter
could materially affect the Company's future results of operations or cash
flows in a particular period.
F-41
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. EMPLOYEE BENEFIT PLANS
Stock option plans
Under the Company's stock option plans, incentive and nonqualified stock
options may be granted to officers, employees, directors, and consultants to
purchase shares of the Company's common stock. Options vest over periods of one
to five years and generally have terms of up to ten years. The exercise price
of the stock options is determined by the Company's Board of Directors on the
date of grant and is at least equal to the fair market value of the stock on
the grant date.
Stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE
NUMBER PER
OF SHARES PRICE PER SHARE SHARE
--------- --------------- --------
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
Options outstanding at January 31, 1995.. 7,997 $12.56 - $38.25 $21.97
Granted................................. 2,546 35.25 - 49.25 44.83
Exercised............................... (1,484) 12.56 - 30.50 19.19
Canceled................................ (368) 13.38 - 49.25 30.78
------ --------------- ------
Options outstanding at January 31, 1996.. 8,691 13.38 - 49.25 28.75
Granted................................. 5,271 0.01 - 42.00 29.99
Exercised............................... (651) 0.01 - 38.25 19.66
Canceled................................ (598) 16.25 - 49.25 36.98
------ --------------- ------
Options outstanding at January 31, 1997.. 12,713 13.38 - 49.25 28.11
Granted................................. 3,411 0.01 - 48.38 34.62
Assumed via acquisitions................ 306 0.34 - 36.40 23.72
Exercised............................... (2,304) 0.01 - 49.25 23.15
Canceled................................ (908) 13.38 - 49.25 33.22
------ --------------- ------
Options outstanding at January 31, 1998.. 13,218 $1.86 - $ 49.25 $30.20
====== =============== ======
Options exercisable at January 31, 1998.. 5,174 $1.86 - $ 49.25 $28.83
====== =============== ======
Options available for grant at January
31, 1998................................ 918
====== =============== ======
</TABLE>
The following table summarizes information about options outstanding at
January 31, 1998.
<TABLE>
<CAPTION>
OUTSTANDING
OPTIONS WEIGHTED
NUMBER OF WEIGHTED AVERAGE AVERAGE
SHARES CONTRACTUAL LIFE EXERCISE
(IN THOUSANDS) (IN YEARS) PRICE
-------------- ---------------- --------
<S> <C> <C> <C>
Range of per share
exercise prices
$ 1.86 - $23.00......... 1,647 3.91 $16.78
$23.13 - $30.25......... 5,430 5.54 $25.51
$30.38 - $49.25......... 6,141 8.68 $37.94
------ ---- ------
13,218 6.80 $30.20
====== ==== ======
</TABLE>
F-42
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about options outstanding and
exercisable at January 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE
(IN THOUSANDS) EXERCISE PRICE
-------------- --------------
<S> <C> <C>
Range of per share exercise prices
$ 1.86 - $23.00............................... 1,577 $16.58
$23.13 - $30.25............................... 2,034 $27.29
$30.38 - $49.25............................... 1,563 $43.18
----- ------
5,174 $28.23
===== ======
</TABLE>
These options will expire if not exercised at specific dates ranging from
February 1998 to January 2008. Prices for options exercised during the three-
year period ended January 31, 1998, range from $0.01 to $49.25.
A total of 14.1 million shares of the Company's common stock have been
reserved for future issuance under existing stock option programs.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan ("plan") for all employees
meeting certain eligibility criteria. Under the plan, eligible employees may
purchase shares of the Company's common stock, at their discretion up to 15
percent of their compensation subject to certain limitations, at not less than
85 percent of fair market value as defined in the plan. A total of 2,600,000
shares have been reserved for issuance under the plan. In fiscal years 1998,
1997, and 1996, shares totaling 490,000, 323,000, and 301,000, respectively,
were issued under the plan at average prices of $21.99, $24.56, and $24.01 per
share. At January 31, 1998, a total of 301,000 shares were available for
future issuance under the plan.
PRO FORMA INFORMATION
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for its employees' stock options because,
as discussed below, the alternative fair value accounting provided for under
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized in the Company's
financial statements.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123. This information is required to be determined as if
the Company had accounted for its employee stock options (including shares
issued under the Employee Stock Purchase Plan, collectively called "options")
granted subsequent to January 31, 1995, under the fair value method of that
statement. The fair value of options granted in 1998, 1997, and 1996 reported
below has been estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
EMPLOYEE EMPLOYEE STOCK
STOCK OPTIONS PURCHASE PLAN
---------------- ----------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years)................. 2.6 2.7 2.5 0.5 0.5 0.5
Risk-free interest rate.................. 6.1% 6.1% 5.8% 5.4% 5.5% 5.8%
Volatility............................... .52 .42 .40 .50 .45 .45
Dividend yield........................... 0.6% 0.8% 0.8% 0.6% 0.8% 0.8%
</TABLE>
F-43
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected volatility of the stock
price. Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its options. The weighted average
estimated fair value of employee stock options granted during fiscal years
1998, 1997, and 1996 was $13.50, $8.34, and $12.76 per share, respectively.
The weighted average estimated fair value of shares granted under the Employee
Stock Purchase Plan during fiscal years 1998, 1997, and 1996 was $7.17, $8.01,
and $7.85, respectively.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma net income (loss) for fiscal years 1998, 1997, and 1996
was $(21,939,000), $15,343,000, and $77,952,000, respectively. Pro forma basic
net income (loss) per share was $(0.47), $0.34, and $1.66 in fiscal years
1998, 1997, and 1996, respectively. In fiscal years 1998, 1997, and 1996, pro
forma diluted net income (loss) per share was $(0.47), $0.30, and $1.52,
respectively.
The effects on pro forma disclosures of applying SFAS No. 123 are not likely
to be representative of the effects on pro forma disclosures of future years.
Because SFAS No. 123 is applicable only to options granted subsequent to
January 31, 1995, the pro forma effect will not be fully reflected until 1999.
Pretax savings plan
The Company has a pretax savings plan covering nearly all US employees that
qualify under Section 401(k) of the Internal Revenue Code. Eligible employees
may contribute up to 15 percent of their pretax salary, subject to certain
limitations. The Company makes voluntary contributions and matches a portion
of employee contributions. Company contributions, which may be terminated at
the Company's discretion, were $4,103,000, $3,068,000, and $2,442,000 in
fiscal years 1998, 1997, and 1996, respectively.
The Company provides defined-contribution plans in certain foreign countries
where required by statute. The Company's funding policy for foreign defined-
contribution plans is consistent with the local requirements in each country.
Company contributions to these plans during fiscal year 1998 were $1,376,000.
Company contributions to these plans in fiscal years 1997 and 1996 were not
significant.
NOTE 7. STOCKHOLDERS' EQUITY
Preferred stock
The Company's Certificate of Incorporation authorizes 2 million shares of
preferred stock, none of which is issued or outstanding. The Board of
Directors has the authority to issue the preferred stock in one or more series
and to fix rights, preferences, privileges and restrictions, including
dividends, and the number of shares constituting any series or the designation
of such series, without any further vote or action by the stockholders.
Common stock repurchase program
During fiscal years 1998, 1997, and 1996, the Company repurchased and
retired a total of 2,332,500, 1,659,500, and 2,671,000 shares of its common
stock at average repurchase prices of $38.39, $32.44, and $40.43,
respectively, pursuant to an ongoing and systematic repurchase plan
("Systematic Plan") approved by the Company's Board of Directors to reduce the
dilutive effect of common shares to be issued under the Company's employee
stock plans. In December 1997, the Board of Directors authorized the purchase
of an additional 4 million shares under the Systematic Plan.
F-44
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In August 1996, the Company announced another stock repurchase program under
which the Company may purchase up to 5 million shares of common stock in open
market transactions as market and business conditions warrant--the
"Supplemental Plan." In December 1997, the Board of Directors authorized the
purchase of an additional 5 million shares under the Supplemental Plan. The
Company may also utilize equity options as part of the Supplemental Plan.
During fiscal years 1998 and 1997, the Company repurchased 1,000,000 and
557,500 shares in the open market at average per share repurchase prices of
$34.37 and $24.09, respectively, and entered into the equity options described
below.
In September 1996, the Company sold put warrants to an investment bank that
entitle the holder of the warrants to sell 3 million shares of common stock to
the Company at $21.50 per share. Additionally, the Company purchased call
options from the same independent third party that entitle the Company to buy
2 million shares of its common stock at $25.50 per share. The premiums
received with respect to the equity options totaled $8.1 million and equaled
the premiums paid. Consequently, there was no exchange of cash. The Company
exercised the call options, repurchasing 2,000,000 shares of its common stock
during the third quarter for $51 million. The put warrants expired unexercised
in September 1997 and were reclassified from put warrants to stockholders'
equity during the third quarter of fiscal year 1998.
In December 1997, the Company sold put warrants to an independent third
party that entitle the holder of the warrants to sell 1.5 million shares of
common stock to the Company at $38.12 per share. Additionally, the Company
purchased call options from the same independent third party that entitle the
Company to buy 1 million shares at $39.88 per share. The premiums received
with respect to the equity options totaled $4.5 million and equaled the
premiums paid. Consequently, there was no exchange of cash. The outstanding
put warrants at January 31, 1998, permitted a net share settlement at the
Company's option. As a result, the transaction did not result in a put warrant
liability on the consolidated balance sheet.
NOTE 8. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal years 1998, 1997, and
1996 is as follows:
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER FISCAL YEAR
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Fiscal year 1998
Net revenues........... $118,984 $154,096 $162,195 $181,851 $617,126
Gross margin........... 102,943 135,371 144,683 163,271 546,268
Income (loss) from op-
erations.............. (53,796) 25,469 30,126 43,556 45,355
Net income (loss)...... (52,745) 17,835 20,956 29,318 15,364
Basic net income (loss)
per share............. (1.15) 0.37 0.44 0.64 0.33
Diluted net income
(loss) per share...... (1.15) 0.34 0.41 0.60 0.31
Fiscal year 1997
Net revenues........... $136,281 $128,745 $116,647 $115,020 $496,693
Gross margin........... 118,989 112,123 101,427 99,937 432,476
Income from operations. 28,125 17,123 7,502 7,067 59,817
Net income............. 19,060 10,645 5,873 5,993 41,571
Basic net income per
share................. 0.41 0.23 0.13 0.13 0.91
Diluted net income per
share................. 0.39 0.22 0.13 0.13 0.88
Fiscal year 1996
Net revenues........... $138,658 $140,686 $128,537 $126,286 $534,167
Gross margin........... 121,373 123,324 112,419 110,239 467,355
Income from operations. 38,408 38,897 28,046 23,676 129,027
Net income............. 25,977 26,299 19,207 16,305 87,788
Basic net income per
share................. 0.55 0.56 0.41 0.35 1.86
Diluted net income per
share................. 0.51 0.52 0.38 0.34 1.76
</TABLE>
F-45
<PAGE>
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Results for the first quarter of fiscal year 1998 included nonrecurring
charges of approximately $55.1 million and $3.0 million, respectively,
representing the value of in-process research and development that had not yet
reached technological feasibility and had no alternative future use acquired
in the Softdesk and 3D/Eye transactions. These charges resulted in a reduction
in diluted net income per share of $1.25 in the first quarter of fiscal year
1998. Results for the second and third fiscal quarters of fiscal year 1997
included nonrecurring charges of $3.2 million and $1.5 million, respectively,
related to in-process research and development acquired in the Teleos and
Argus acquisitions that had not yet reached technological feasibility and had
no alternative future use. These charges resulted in an $0.08 and $0.02
reduction in diluted net income per share in the second and third quarters of
fiscal year 1997, respectively.
NOTE 9. INFORMATION BY GEOGRAPHIC AREA
Information regarding the Company's operations by geographic area at January
31, 1998, 1997, and 1996, and for the fiscal years then ended is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
-----------------------------
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
The Americas
Customers in the United States............... $ 266,921 $176,286 $195,272
Customers in Asia Pacific.................... 46,542 40,284 42,262
Customers in Canada.......................... 18,695 10,671 14,619
Other exports................................ 18,014 13,420 11,103
Intercompany revenues........................ 47,445 65,758 67,728
--------- -------- --------
397,617 306,419 330,984
Europe........................................ 208,340 189,082 211,480
Asia Pacific.................................. 73,846 79,887 72,148
Consolidating eliminations.................... (47,445) (65,758) (67,728)
--------- -------- --------
$ 632,358 $509,630 $546,884
========= ======== ========
Income (loss) from operations:
The Americas................................. $ (11,816) $ 22,734 $ 63,843
Europe....................................... 51,220 32,909 53,696
Asia Pacific................................. 5,951 4,174 11,488
--------- -------- --------
$ 45,355 $ 59,817 $129,027
========= ======== ========
Identifiable assets:
The Americas................................. $ 333,558 $329,171 $306,795
Europe....................................... 287,470 302,183 250,268
Asia Pacific................................. 72,472 72,543 73,426
Consolidating eliminations................... (159,817) (211,664) (112,560)
--------- -------- --------
$ 533,683 $492,233 $517,929
========= ======== ========
</TABLE>
Intercompany revenues consist of royalty revenue payable by the Company's
subsidiaries under software license agreements with the US parent company. At
January 31, 1998, 1997, and 1996, total foreign net equity was $247.2 million,
$161.2 million, and $133.2 million, respectively.
F-46
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, 1998
-------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents..................................... $ 43,402
Marketable securities......................................... 249,998
Accounts receivable, net...................................... 84,079
Inventories................................................... 6,358
Deferred income taxes......................................... 28,486
Prepaid expenses and other current assets..................... 17,051
--------
Total current assets........................................ 429,374
--------
Computer equipment, furniture, and leasehold improvements, at
cost:
Computer equipment and furniture.............................. 126,133
Leasehold improvements........................................ 21,560
Less accumulated depreciation................................. (108,391)
--------
Net computer equipment, furniture, and leasehold
improvements............................................... 39,302
Purchased technologies and capitalized software, net............ 36,241
Goodwill, net................................................... 36,751
Deferred income taxes........................................... 7,086
Other assets.................................................... 16,912
--------
$565,666
========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable.............................................. $ 27,500
Accrued compensation.......................................... 30,054
Accrued income taxes.......................................... 84,575
Deferred revenues............................................. 17,747
Other accrued liabilities..................................... 54,098
--------
Total current liabilities................................... 213,974
--------
Deferred income taxes........................................... 492
Other liabilities............................................... 2,007
Stockholders' equity:
Common stock.................................................. 337,284
Retained earnings............................................. 30,612
Foreign currency translation adjustment....................... (18,703)
--------
Total stockholders' equity.................................. 349,193
--------
$565,666
========
</TABLE>
See accompanying notes.
F-47
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Net revenues............................................... $373,844 $273,080
Costs and expenses:
Cost of revenues......................................... 37,983 34,766
Marketing and sales...................................... 130,698 111,356
Research and development................................. 70,510 58,035
General and administrative............................... 55,466 39,163
Nonrecurring charges..................................... 37,692 58,087
Litigation accrual reversal.............................. (18,200) --
-------- --------
314,149 301,407
-------- --------
Income (loss) from operations.............................. 59,695 (28,327)
Interest and other income, net............................. 8,646 4,774
-------- --------
Income (loss) before income taxes.......................... 68,341 (23,553)
Provision for income taxes................................. 31,588 11,357
-------- --------
Net income (loss).......................................... $ 36,753 $(34,910)
======== ========
Basic net income (loss) per share.......................... $ 0.79 $ (0.78)
======== ========
Diluted net income (loss) per share........................ $ 0.74 $ (0.78)
======== ========
Shares used in computing basic net income (loss) per share. 46,500 45,045
======== ========
Shares used in computing diluted net income (loss) per
share..................................................... 49,670 45,045
======== ========
</TABLE>
See accompanying notes.
F-48
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities
Net income (loss)........................................ $ 36,753 $(34,910)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Charge for acquired in-process research and
development........................................... 28,806 58,087
Depreciation and amortization.......................... 24,243 20,105
Litigation accrual reversal............................ (20,900) --
Net gain on disposition of business unit............... (1,307) --
Write-off of purchased technology...................... 2,233 --
Changes in operating assets and liabilities............ (12,100) 11,649
-------- --------
Net cash provided by operating activities.................. 57,728 54,931
-------- --------
Investing activities
Purchases of marketable securities....................... (44,768) (61,005)
Business combinations, net of cash acquired.............. (69,279) (5,766)
Purchases of computer equipment, furniture, and leasehold
improvements............................................ (9,859) (7,924)
Proceeds from disposition of business unit............... 5,137 --
Purchases of software technologies, capitalization of
software costs, and other............................... (3,416) 6,857
-------- --------
Net cash used in investing activities...................... (122,185) (67,838)
-------- --------
Financing activities
Proceeds from issuance of common stock................... 66,226 29,250
Repurchase of common stock............................... (48,866) (38,243)
Dividends paid........................................... (5,590) (5,748)
-------- --------
Net cash provided by (used in) financing activities........ 11,770 (14,741)
-------- --------
Net decrease in cash and cash equivalents.................. (52,687) (27,648)
Cash and cash equivalents at beginning of year............. 96,089 64,814
-------- --------
Cash and cash equivalents at end of quarter................ $ 43,402 $ 37,166
======== ========
Supplemental cash flow information:
Cash paid during the period for income taxes........... $ 1,496 $ 4,280
======== ========
Supplemental noncash information:
Common stock received in relation to the equity collar
(see Note 5)............................................ $ 4,265 $ --
======== ========
Common stock issued in connection with the acquisition of
Softdesk, Inc........................................... $ -- $ 92,021
======== ========
</TABLE>
See accompanying notes.
F-49
<PAGE>
AUTODESK, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at July 31, 1998 and for the
three- and six- month periods then ended are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements at July 31, 1998 should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Annual Report to
Stockholders incorporated by reference in the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1998. The results of operations for
the three and six months ended July 31, 1998 are not necessarily indicative of
the results for the entire fiscal year ending January 31, 1999.
2. NONRECURRING CHARGES
On May 4, 1998, the Company entered into an agreement with Genius CAD
Software GmbH ("Genius"), a German limited liability company to purchase
various mechanical computer-aided-design ("CAD") software applications and
technologies (the "acquisition"). In consideration for this acquisition, the
Company paid Genius approximately $69 million in cash. The acquisition has
been accounted for using the purchase method of accounting with the purchase
price being principally allocated to in-process research and development,
developed technology, assembled workforce and goodwill. Amortization of these
purchased intangibles is provided on the straight-line basis over the
respective useful lives of the assets, ranging from three to seven years. The
operating results of Genius, which have not been material in relation to those
of the Company, have been included in Autodesk's consolidated financial
statements from the acquisition date.
In-Process Research and Development
Management estimates that $29 million of the purchase price represents
purchased in-process technology that has not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
expensed in the second quarter of the current fiscal year following
consummation of the acquisition. The value assigned to purchased in-process
technology, based on a valuation prepared by an independent third-party
appraisal, was determined by identifying research projects in areas for which
technological feasibility had not been achieved. The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from
such projects, and discounting the net cash flows back to their present value.
The discount rate included a factor that took into account the uncertainty
surrounding the successful development of the purchased in-process technology
projects.
Developed technology
To determine the value of the developed technology ($13.4 million), the
expected future cash flows of the existing developed technologies were
discounted taking into account the characteristics and applications of the
product, the size of existing markets, growth rates of existing and future
markets as well as an evaluation of past and anticipated product-life cycles.
Assembled work force
To determine the value of the assembled work force ($1.0 million), the
Company evaluated the work force in place at the acquisition date and utilized
the cost approach to estimate the value of replacing the work force. Costs
considered in replacing the work force included costs to recruit and interview
candidates, as well as the cost to train new employees.
F-50
<PAGE>
AUTODESK, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the three months ended July 31, 1998, the Company recorded charges of
approximately $8.9 million relating to restructuring charges associated with
the consolidation of certain development centers; the write-off of purchased
technologies associated with these operations; staff reductions in Asia
Pacific in response to current economic conditions in the region; and costs in
relation to potential legal settlements.
On March 31, 1997, the Company exchanged 2.9 million shares of its common
stock for all of the outstanding stock of Softdesk, Inc. Based on the value of
Autodesk stock and options exchanged, the transaction, including transaction
costs, was valued at approximately $94 million. This transaction was accounted
for using the purchase method of accounting with the purchase price being
principally allocated to capitalized software, purchased technologies, and
intangible assets. Approximately $55.1 million of the total purchase price
represented the value of in-process research and development that had not yet
reached technological feasibility and had no alternative future use.
Approximately $3.0 million of technology acquired from 3D/Eye during the first
quarter of fiscal year 1998 also represented the value of in-process research
and development that had not yet reached technological feasibility and had no
alternative future use. The $55.1 million and the $3.0 million were charged to
operations in the first quarter of fiscal year 1998.
3. LITIGATION ACCRUAL REVERSAL
In December 1994, a $25.5 million judgment was entered into against the
Company on a claim of trade-secret misappropriation brought by Vermont
Microsystems, Inc ("VMI"). The initial judgment and related expenses were
accrued in fiscal year 1995, as well as interest expense in subsequent periods
in accordance with this judgment. The Company appealed this decision, and in
May 1998, final judgment was entered in the VMI litigation in the amount of
$7.8 million plus accrued interest. Following entry of judgment, the Company
made a final payment of approximately $8.4 million, including interest, to
VMI. During the quarter ended July 31, 1998, the Company recognized $18.2
million and $2.7 million as operating income and interest income,
respectively, to reflect the remaining unutilized litigation and related
interest accruals.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In the first quarter of fiscal year 1999, the Company adopted the provisions
of the American Institute of Certified Public Accountants' Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This standard requires companies to capitalize
qualifying computer software costs which are incurred during the application
development stage and amortize them over the software's estimated useful life.
The adoption of this standard did not have a material effect on the Company's
consolidated operating results or financial position.
5. COMMON STOCK REPURCHASE PROGRAMS
The Company sold put warrants to an independent third party in December 1997
that entitled the holder of the warrants to sell 1.5 million shares of common
stock to the Company at $38.12 per share. Additionally, the Company purchased
call options from the same independent third party that entitled the Company
to buy 1 million shares at $39.88 per share. The premiums received with
respect to the equity options totaled $4.5 million and equaled the premiums
paid. Consequently, there was no exchange of cash. The put warrants permitted
a net share settlement at the Company's option. In March 1998, the Company
exercised the call option, electing the net share settlement option and
retired approximately 97,000 shares of its common stock. The put warrants
expired unexercised.
F-51
<PAGE>
AUTODESK, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NET INCOME PER SHARE
Basic net income per share is calculated using the weighted average number
of common shares outstanding. Diluted net income per share is computed using
the weighted average number of common shares outstanding and dilutive common
stock equivalents outstanding during the period. A reconciliation of the
numerators and denominators used in the basic and diluted net income (loss)
per share amounts follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
--------------- ----------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted per
share amounts--net income (loss)....... $ 9,112 $17,835 $36,753 $(34,910)
======= ======= ======= ========
Denominator:
Denominator for basic net income (loss)
per share-- weighted average shares.... 46,610 48,000 46,500 45,045
Effect of dilutive common stock options. 2,790 3,880 3,170 --
------- ------- ------- --------
Denominator for dilutive net income (loss)
per share................................ 49,400 51,880 49,670 45,045
======= ======= ======= ========
</TABLE>
7. COMPREHENSIVE INCOME
Effective February 1, 1998, Autodesk adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the Company's net income or stockholders' equity. This Statement
requires unrealized gains or losses on the Company's available-for-sale
securities and foreign currency translation adjustments, which prior to
adoption were reported separately in stockholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
Autodesk's total comprehensive income was as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
---------------- -----------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net income (loss)........................ $ 9,112 $17,835 $36,753 $(34,910)
Other comprehensive income (loss)........ (1,977) 6,544 (2,490) 2,615
------- ------- ------- --------
Total comprehensive income (loss)...... $ 7,135 $24,379 $34,263 $(32,295)
======= ======= ======= ========
</TABLE>
8. RESTRUCTURING CHARGES
During the quarter ended July 31, 1998, the Company's management approved
restructuring plans, which include initiatives to address current economic
conditions in the Asia Pacific region, consolidate duplicative facilities and
reduce overhead. These plans resulted in a charge of $5.4 million, which
includes $2.3 million for the cost of involuntary employee separation benefits
relating to approximately 87 employees. Employee separation benefits include
severance, medical and other benefits. Employee separation will affect certain
engineers and sales and marketing employees. The remaining charge of $3.1
million relates to other exit costs, namely the write-off of purchased
technologies, lease termination buyout costs, the disposal of fixed assets in
these regions, and professional fees. As of July 31, 1998, the number of
employee separations due to restructuring actions was 32 and actual payments
of approximately $331,000 have been made.
F-52
<PAGE>
AUTODESK, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSEQUENT EVENTS
On August 20, 1998, the Company announced a definitive agreement to acquire
Discreet Logic Inc. ("Discreet"), a company that develops, assembles, markets
and supports non-linear, digital systems and software for creating, editing
and compositing imagery and special effects for film, video, and HDTV. Under
the terms of the agreement, the Company will exchange 0.525 shares of its
common stock for each outstanding share of Discreet. The transaction is
expected to result in the issuance of between 15.8 million and 16.0 million
shares of Autodesk common stock. The transaction, which will be accounted for
using the pooling of interests method, is expected to be completed during the
Company's fourth fiscal quarter, subject to certain regulatory approvals and
the approval of Discreet and Autodesk shareholders.
On September 14, 1998, Discreet notified the Company that it had been named
as a defendant in a purported class action lawsuit filed in California
Superior Court for the County of Marin on behalf of owners of Discreet's
common stock. The complaint alleges that the defendants breached their
fiduciary duties in connection with the previously announced acquisition
transaction with the Company. Discreet believes the claims asserted in the
complaint are without merit and intends to vigorously contest them. The
Company does not expect the lawsuit to affect consummation of the transaction
with Discreet.
F-53
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF ACQUISITION AND AMALGAMATION
BY AND AMONG
AUTODESK, INC.,
AUTODESK DEVELOPMENT B.V.,
9066-9771 QUEBEC INC.,
AUTODESK CANADA INC.,
9066-9854 QUEBEC INC.
AND
DISCREET LOGIC INC.
DATED AS OF SEPTEMBER 23, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I The Transactions................................................. A-2
1.1 The Transactions.................................................... A-2
1.2 Effective Time...................................................... A-2
1.3 Share Conversions, Etc.............................................. A-2
1.4 Accounting Consequences............................................. A-2
1.5 Material Adverse Effect............................................. A-2
1.6 Adjustments to Exchange Ratio....................................... A-3
1.7 Cancellation........................................................ A-3
1.8 Share Certificates of Amalgamation Sub and Giants Quebec............ A-3
1.9 Execution of Amalgamation Agreement................................. A-3
1.10 Tax Treatment....................................................... A-3
1.11 Existing Agreement Terminated....................................... A-3
ARTICLE II Representations And Warranties Of The Company................... A-3
2.1 Organization and Qualification; Subsidiaries........................ A-4
2.2 Articles of Incorporation and By-Laws............................... A-4
2.3 Capitalization...................................................... A-4
2.4 Authority........................................................... A-5
2.5 No Conflict; Required Filings and Consents.......................... A-5
2.6 Compliance; Permits................................................. A-6
2.7 SEC Filings; Financial Statements................................... A-6
2.8 Absence of Certain Changes or Events................................ A-7
2.9 Absence of Litigation............................................... A-7
2.10 Employee Benefit Plans; Employment Agreements....................... A-7
2.11 Labor Matters....................................................... A-9
2.12 Registration Statement; Joint Proxy Statement....................... A-9
2.13 Restrictions on Business Activities................................. A-10
2.14 Title to Property................................................... A-10
2.15 Taxes............................................................... A-10
2.16 Environmental Matters............................................... A-12
2.17 Brokers............................................................. A-12
2.18 Intellectual Property............................................... A-12
2.19 Interested Party Transactions....................................... A-13
2.20 Insurance........................................................... A-13
2.21 Vote Required....................................................... A-14
2.22 Pooling Matters..................................................... A-14
2.23 Opinion of Financial Advisor........................................ A-14
ARTICLE III Representations And Warranties Of The Parent Group............. A-14
3.1 Organization and Qualification...................................... A-14
3.2 Authority .......................................................... A-14
3.3 No Conflict; Required Filings and Consents.......................... A-15
3.4 Certificate of Incorporation and By-Laws............................ A-15
3.5 Capitalization...................................................... A-15
3.6 Compliance; Permits................................................. A-16
3.7 SEC Filings; Financial Statements................................... A-16
3.8 Absence of Certain Changes or Events................................ A-16
3.9 Board Approval...................................................... A-17
3.10 Registration Statement; Joint Proxy Statement/Prospectus............ A-17
3.11 Brokers............................................................. A-17
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
3.12 Opinion of Financial Advisor........................................ A-17
3.13 Pooling Matters..................................................... A-18
3.14 Absence of Litigation............................................... A-18
3.15 Restrictions on Business Activities................................. A-18
3.16 Taxes............................................................... A-18
3.17 Intellectual Property............................................... A-19
3.18 Insurance........................................................... A-19
3.19 Vote Required....................................................... A-19
ARTICLE IV Conduct Of Business Pending The Amalgamation.................... A-20
4.1 Conduct of Business by the Company Pending the Amalgamation......... A-20
4.2 No Solicitation..................................................... A-21
4.3 Covenants of Parent................................................. A-23
ARTICLE V Additional Agreements............................................ A-23
5.1 Joint Proxy Statement/Prospectus; Registration Statement............ A-23
5.2 Shareholders' Meetings.............................................. A-23
5.3 Access to Information; Confidentiality.............................. A-24
5.4 Consents; Approvals................................................. A-24
5.5 Stock Options; Employee Benefits; Retention of Employees............ A-24
5.6 Company Employee Stock Purchase Plan................................ A-25
5.7 Agreements of Affiliates............................................ A-26
5.8 Voting Agreements................................................... A-26
5.9 Indemnification and Insurance....................................... A-26
5.10 Notification of Certain Matters..................................... A-27
5.11 Further Action...................................................... A-27
5.12 Public Announcements................................................ A-27
5.13 Listing of Parent Common Shares..................................... A-27
5.14 Conveyance Taxes.................................................... A-28
5.15 Pooling Letters..................................................... A-28
5.16 Pooling Accounting Treatment........................................ A-28
5.17 Ancillary Documents/Reservation of Shares........................... A-28
5.18 Listing of Class B Shares, Class E Shares and Class F Shares........ A-29
5.19 Tax Elections....................................................... A-29
5.20 Board Candidate..................................................... A-29
5.21 Issuance of Class D Shares.......................................... A-29
ARTICLE VI Conditions To The Transactions.................................. A-29
6.1 Conditions to Obligation of Each Party to Effect the Transactions... A-29
6.2 Additional Conditions to Obligations of Parent Group Members........ A-31
6.3 Additional Conditions to Obligation of the Company.................. A-31
ARTICLE VII Termination.................................................... A-31
7.1 Termination......................................................... A-32
7.2 Effect of Termination............................................... A-33
7.3 Fees and Expenses................................................... A-33
ARTICLE VIII General Provisions............................................ A-34
8.1 Effectiveness of Representations, Warranties and Agreements......... A-34
8.2 Notices............................................................. A-34
8.3 Certain Definitions................................................. A-35
8.4 Amendment........................................................... A-36
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
8.5 Waiver.............................................................. A-36
8.6 Headings............................................................ A-36
8.7 Severability........................................................ A-36
8.8 Entire Agreement.................................................... A-36
8.9 Assignment; Amalgamation Sub/Dutchco................................ A-36
8.10 Parties in Interest................................................. A-37
8.11 Failure or Indulgence Not Waiver; Remedies Cumulative............... A-37
8.12 Governing Law....................................................... A-37
8.13 Choice of Language.................................................. A-37
8.14 Counterparts........................................................ A-37
8.15 Guarantee........................................................... A-37
</TABLE>
EXHIBITS:
Exhibit A:Form of Amalgamation Agreement
Exhibit B-1:Form of Parent Affiliate Agreement
Exhibit B-2:Form of Company Affiliate Agreement
Exhibit C-1:Form of Parent Voting Agreement
Exhibit C-2:Form of Company Voting Agreement
Exhibit D:Form of Support Agreement
Exhibit E:Form of Voting and Exchange Trust Agreement
Exhibit F:Form of Certificate of Designation
iii
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF ACQUISITION AND AMALGAMATION
This Amended and Restated Agreement and Plan of Acquisition and
Amalgamation, dated as of September 23, 1998 (the "AGREEMENT"), is entered
into by and among Autodesk, Inc., a Delaware corporation ("PARENT"), Autodesk
Development B.V., a Netherlands corporation and indirect wholly owned
subsidiary of Parent ("DUTCHCO"), 9066-9771 Quebec Inc., a Quebec company and
a wholly owned subsidiary of Dutchco ("AMALGAMATION SUB"), Autodesk Canada
Inc., an Ontario company and wholly owned subsidiary of Parent ("ACI"), 9066-
9854 Quebec Inc., a Quebec company and indirect wholly owned subsidiary of
Parent ("GIANTS QUEBEC"), and Discreet Logic Inc., a Quebec company (the
"Company").
Witnesseth:
Whereas, the Boards of Directors of Parent, Dutchco and the Company have
each determined that it is advisable and in the best interests of their
respective stockholders for Dutchco to acquire shares in the share capital of
the Company upon the terms and subject to the conditions set forth herein;
Whereas, in furtherance of such acquisition, Parent, Dutchco, Amalgamation
Sub, Giants Quebec, ACI and the Company entered into an Agreement and Plan of
Acquisition and Arrangement dated as of August 20, 1998 (the "EXISTING
AGREEMENT");
Whereas, the Boards of Directors of Parent, Dutchco, Amalgamation Sub,
Giants Quebec, ACI and the Company now desire to amend and restate the
Existing Agreement and have each approved the execution and delivery of this
Agreement in order to provide for a business combination involving the
amalgamation (the "AMALGAMATION") of Amalgamation Sub, Giants Quebec (to which
ACI will assign, prior to the Amalgamation, substantially all its assets) and
the Company whereupon each outstanding common share in the Company's share
capital (the "COMPANY COMMON SHARES") shall be converted into one Class B
Share of the continuing corporation resulting from the Amalgamation (the
"CONTINUING CORPORATION");
Whereas, Articles of Amalgamation (the "ARTICLES") will be filed pursuant to
Section 123.118 of the Companies Act (Quebec) (the "QUEBEC ACT"), pursuant to
the terms hereof and the Amalgamation Agreement (the "AMALGAMATION AGREEMENT")
in the form annexed hereto as Exhibit A;
Whereas, immediately following the Amalgamation, the Class B Shares of the
Continuing Corporation automatically will be, based on the prior election of
the holder, either (i) redeemed by the Continuing Corporation for 0.525 (the
"EXCHANGE RATIO") exchangeable shares in the share capital of the Continuing
Corporation (the "EXCHANGEABLE SHARES"), subject to proration in certain
instances, or (ii) converted into units comprised of one Class E Share and one
Class F Share of the Continuing Corporation ("UNITS"), which units will be
acquired by Dutchco in exchange for 0.525 shares of common stock, par value
$0.01 per share, of Parent ("PARENT COMMON SHARES"), in either case without
further action on the part of the holder;
Whereas, the Exchangeable Shares are exchangeable by the holders for Parent
Common Shares on a one-for-one basis at any time on or before a date eleven
(11) years after the Effective Time (as defined herein), and
Whereas, for accounting purposes, it is intended that the Transactions (as
defined in Section 1.1 hereof) shall be accounted for as a taxable pooling of
interests under United States generally accepted accounting principles ("US
GAAP");
Now, Therefore, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Dutchco, ACI, Giants Quebec, Amalgamation Sub (collectively, the
"PARENT GROUP") and the Company hereby agree as follows:
A-1
<PAGE>
ARTICLE I
The Transactions
1.1 The Transactions.
(a) Effective Time. Subject to and upon the terms and conditions of the
Ancillary Documents (as defined in Section 5.17), this Agreement, the Articles
and the Quebec Act, (i) at the Effective Time (as defined in Section 1.2
hereof), Amalgamation Sub and Giants Quebec shall be amalgamated with the
Company (provided, however, that the Company shall not be required to
amalgamate with Amalgamation Sub unless Giants Quebec simultaneously
amalgamates with Amalgamation Sub, and Giants Quebec shall not be required to
amalgamate with Amalgamation Sub unless the Company simultaneously amalgamates
with Amalgamation Sub) and (ii) immediately following the Effective Time, the
Class B Shares of the Continuing Corporation automatically shall, based on the
prior election of the holder, either (x) be redeemed by the Continuing
Corporation for Exchangeable Shares of the Continuing Corporation or (y) be
converted into Units which Units shall be acquired by Dutchco in exchange for
shares of Parent Common Stock, in either case without further action on the
part of the holder (such redemptions, conversions and share acquisitions set
forth in clause (ii), together with the Amalgamation, are collectively
referred to herein as the "TRANSACTIONS"). Prior to the Effective Time, ACI
will assign and transfer all of its assets and liabilities to Giants Quebec.
(b) Closing. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
7.1 hereof, and subject to the satisfaction or waiver of the conditions set
forth in Article VI hereof, the consummation of the Transactions will take
place as promptly as practicable after satisfaction or waiver of the
conditions set forth in Article VI hereof, at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California, unless another
date, time or place is agreed to in writing by the parties hereto. At the
closing, the parties hereto shall deliver the documents contemplated hereby
together with such other customary documents as may be reasonably requested by
the parties.
1.2 Effective Time. As promptly as practicable after the satisfaction or
waiver of the conditions set forth in Article VI, the parties hereto shall
cause the Amalgamation to be consummated by filing the Articles together with
the documents contemplated by Section 123.14 of the Quebec Act, with the
Inspector General of Financial Institutions of the Province of Quebec, in such
form as required by, and executed in accordance with the relevant provisions
of, the Quebec Act (the time specified in such filing being the "EFFECTIVE
TIME").
1.3 Share Conversions, Etc. Immediately following the Class B Conversion
Time (as defined in Appendix A to the Amalgamation Agreement), Dutchco and
Parent shall cause the Continuing Corporation to provide notice of its
intention to exercise its right to redeem the Class E Shares and Class F
Shares of the Continuing Corporation (as specified in Appendix A to the
Amalgamation Agreement). At or prior to the Class E Redemption Time and the
Class F Redemption Time, Dutchco shall, and Parent shall cause Dutchco to,
exercise the Class E Redemption Call Right and the Class F Redemption Call
Right (as each is defined in Appendix A to the Amalgamation Agreement).
1.4 Accounting Consequences. It is intended by the parties hereto that the
Transactions shall qualify for accounting treatment as a pooling of interests
under US GAAP.
1.5 Material Adverse Effect. When used in connection with the Company, or
Parent, as the case may be, the term "MATERIAL ADVERSE EFFECT" means any
change or effect that, individually or when taken together with all other such
changes or effects that have occurred prior to the date of determination of
the occurrence of the Material Adverse Effect, is or is reasonably likely to
be materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of the Company and its
subsidiaries or Parent and its subsidiaries, as the case may be, in each case
taken as a whole; provided, however, that none of the following shall be
deemed to constitute a Material Adverse Effect with respect to either party:
(a) any change in the market price or trading volume of the Company Common
Shares or Parent Common Shares, as appropriate; (b) any adverse effect on the
bookings, revenues or earnings of such party, or any delay in or reduction or
cancellation of such party's product orders, following the execution of the
Existing Agreement or this Agreement which is
A-2
<PAGE>
reasonably attributable to the announcement of the execution of the Existing
Agreement or this Agreement and the transactions contemplated hereby; (c) any
change arising out of conditions affecting the economy or industry of such
party in general; (d) the failure, in and of itself, to meet analysts'
expectations (it being understood that the underlying causes of such failure
shall not be excluded from the definition of Material Adverse Effect except as
otherwise provided in this definition); or (e) employee attrition which is (i)
reasonably attributable to the announcement of the execution of the Existing
Agreement or this Agreement and the transactions contemplated hereby, or (ii)
directly attributable to any action directly required of the Company by Parent
under Section 4.1, or any omission of the Company directly resulting from
Parent's failure to consent to actions requested to be taken by the Company
under Section 4.1.
1.6 Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect fully the effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities convertible into Parent
Common Shares or Company Common Shares), reorganization, recapitalization or
other like change with respect to Parent Common Shares or Company Common
Shares occurring after the date hereof and prior to the Effective Time.
1.7 Cancellation. Immediately prior to the Effective Time, each Company
Common Share owned by Parent, Dutchco, Amalgamation Sub or any direct or
indirect wholly owned subsidiary of the Company or Parent shall be purchased
for cancellation by the Company for nominal consideration.
1.8 Share Certificates of Amalgamation Sub and Giants Quebec. Each share
certificate of Amalgamation Sub evidencing ownership of any common shares of
Amalgamation Sub shall continue to evidence ownership of Class A Shares in the
share capital of the Continuing Corporation, and each share certificate of
Giants Quebec evidencing ownership of any common shares of Giants Quebec shall
continue to evidence ownership of Class C Shares in the share capital of the
Continuing Corporation. Any reference herein to classes of shares in the share
capital of the Continuing Corporation shall mean the classes of shares set out
in Appendix A to the Amalgamation Agreement.
1.9 Execution of Amalgamation Agreement. Concurrently herewith, Amalgamation
Sub, Autodesk Quebec and the Company shall execute and deliver the
Amalgamation Agreement.
1.10 Tax Treatment. It is intended that the Transactions shall generally
constitute (i) a taxable exchange for United States federal income tax
purposes (not qualifying under Sections 368 or 351 of the United States
Internal Revenue Code of 1986, as amended (the "Code")) to holders of Company
Common Shares who are otherwise subject to taxation in the United States on
the sale or exchange of Company Common Shares, and (ii) a non-taxable exchange
for Canadian federal income tax purposes for owners of Company Common Shares
who are residents of Canada for Canadian federal income tax purposes who elect
to receive Exchangeable Shares (but only to the extent they actually receive
Exchangeable Shares and only to the extent that they file appropriate
elections with the relevant tax authorities), which election the parties
hereto intend shall be permitted only to the extent that the aggregate
percentage of Company Common Shares exchanged for Exchangeable Shares pursuant
to all such elections shall not exceed 19.99 percent of the Company Common
Shares outstanding immediately prior to the Effective Time.
1.11 Existing Agreement Terminated. This Agreement amends and restates in
its entirety the Existing Agreement. Accordingly, upon the execution and
delivery hereof by the parties, the Existing Agreement shall be terminated in
all respects and be of no further force or effect (except in respect of rights
which have arisen prior to the date hereof).
ARTICLE II
Representations And Warranties Of The Company
The term "KNOWLEDGE" as used in connection with the Company shall mean the
Company's actual knowledge after reasonable inquiry of officers, directors and
other employees of the Company charged with
A-3
<PAGE>
senior administrative or operational responsibility of such matters. The
Company hereby represents and warrants to each member of the Parent Group as
of the date of the Existing Agreement (except for representations and
warranties which reflect technical changes to the Existing Agreement resulting
from the change in structure of the business combination to an Amalgamation,
which are made as of the date hereof), subject to the written disclosure
schedule supplied by the Company to Parent dated as of the date of the
Existing Agreement and certified by a duly authorized officer of the Company
(the "COMPANY DISCLOSURE SCHEDULE"), that:
2.1 Organization and Qualification; Subsidiaries. The Company and, except as
set forth on Schedule 2.1 of the Company Disclosure Schedule, each of its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization and has the requisite corporate power and authority and is in
possession of all material franchises, grants, authorizations, licenses,
permits, easements, consents, certificates, approvals and orders
(collectively, "APPROVALS") necessary to own, lease and operate the properties
it purports to own, operate or lease and to carry on its business as it is now
being conducted, except where the failure to be so organized, existing and in
good standing or to have such power, authority and Approvals would not have a
Material Adverse Effect. The Company and each of its subsidiaries is duly
qualified or licensed as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing that would not have a Material
Adverse Effect. A true and complete list of all of the Company's subsidiaries,
together with the jurisdiction of incorporation or organization of each
subsidiary and the percentage of each subsidiary's outstanding capital stock
owned by the Company or another subsidiary, is set forth in Schedule 2.1 of
the Company Disclosure Schedule. Except as set forth in Schedule 2.1 of the
Company Disclosure Schedule, the Company does not directly or indirectly own
any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for, any equity or similar interest in, any
corporation, partnership, joint venture or other business association or
entity.
2.2 Articles of Incorporation and By-Laws. The Company has heretofore
furnished to Parent a complete and correct copy of its Articles of
Incorporation and By-Laws, as amended to date, and has made available to
Parent the equivalent organizational documents of each of its subsidiaries.
Such Articles of Incorporation, By-Laws and equivalent organizational
documents of each of its subsidiaries are in full force and effect. Except as
set forth on Schedule 2.2 of the Company Disclosure Schedule, neither the
Company nor any of its subsidiaries is in violation of any of the provisions
of its Articles of Incorporation or By-Laws or equivalent organizational
documents.
2.3 Capitalization. The authorized share capital of the Company consists of
an unlimited number of Company Common Shares and an unlimited number of
preferred shares, no par value (the "COMPANY PREFERRED SHARES"). As of August
10, 1998, (i) 29,653,313 Company Common Shares were issued and outstanding,
all of which are validly issued, fully paid and nonassessable, (ii) no Company
Common Shares were held by subsidiaries of the Company, (iii) 5,012,924
Company Common Shares were reserved for future issuance pursuant to option
grants under the Company's Amended and Restated 1994 Restricted Stock and
Stock Option Plan, of which options to purchase 3,505,716 Company Common
Shares are outstanding, (iv) 111,779 Company Common Shares were reserved for
future issuance under the Company's 1995 Employee Stock Purchase Plan, (v)
200,000 Company Common Shares were reserved for future issuance pursuant to
option grants under the Company's 1995 Non-Employee Director Stock Option
Plan, of which options to purchase 140,000 Company Common Shares are
outstanding, (vi) 20,000 Company Common Shares were reserved for future
issuance pursuant to option grants under the Company's 1997 Special Limited
Non-Employee Director Stock Plan, of which options to purchase 20,000 Company
Common Shares are outstanding, and (vii) no Company Preferred Shares were
issued or outstanding. Except as set forth in Schedule 2.3 of the Company
Disclosure Schedule, no material change in such capitalization has occurred
between August 10, 1998 and the date hereof, except for the issuance of shares
under the exercise of options, warrants or other rights outstanding prior to
August 10, 1998. Except as set forth in this Section 2.3 or Section 2.10
hereof or in Schedule 2.3 or Schedule 2.10 of the Company Disclosure Schedule,
there are no options, warrants or other rights, agreements, arrangements or
commitments of any character relating to the issued or unissued capital stock
of the Company or any of its subsidiaries
A-4
<PAGE>
obligating the Company or any of its subsidiaries to issue or sell any shares
of share capital of, or other equity interests in, the Company or any of its
subsidiaries. All Company Common Shares subject to issuance as aforesaid, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, shall be duly authorized, validly issued, fully paid
and nonassessable. Except as set forth in Schedule 2.3 of the Company
Disclosure Schedule, there are no obligations, contingent or otherwise, of the
Company or any of its subsidiaries (A) to repurchase, redeem or otherwise
acquire any shares of the share capital of the Company or the capital stock of
any subsidiary or (B) except for the provision of operational expenses to
subsidiaries in the ordinary course of business consistent with past practice,
to provide funds or to make any investment (in the form of a loan, capital
contribution or otherwise) in any such subsidiary or any other entity other
than guarantees of bank and capital or other lease obligations of subsidiaries
entered into in the ordinary course of business. All of the outstanding shares
of capital stock of each of the Company's subsidiaries are duly authorized,
validly issued, fully paid and nonassessable, and all such shares are owned by
the Company or another subsidiary free and clear of all security interests,
liens, claims, pledges, agreements, limitations in the Company's voting
rights, charges or other encumbrances of any nature whatsoever which would
have a Material Adverse Effect.
2.4 Authority. The Company has all necessary corporate power and authority
to execute and deliver this Agreement and the Amalgamation Agreement and to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Amalgamation Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby and
thereby have been duly and validly authorized by all necessary corporate
action and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or the Amalgamation Agreement or to
consummate the Transactions, other than the approval and adoption of this
Agreement and confirmation of by-law No. 1998-1 approving the Amalgamation by
the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding Company Common Shares who are permitted to, and who, vote at the
Company Shareholders' Meeting (as defined in Section 2.12 hereof) in
accordance with the Quebec Act. The Board of Directors of the Company has
determined that it is advisable and in the best interests of the Company's
shareholders for the Company to enter into a business combination with Parent
upon the terms and subject to the conditions of this Agreement and to
recommend that the shareholders of the Company approve same. This Agreement
and the Amalgamation Agreement have each been duly and validly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery of each such agreement by each member of the Parent Group, as
applicable, each such agreement constitutes a legal, valid and binding
obligation of the Company.
2.5 No Conflict; Required Filings and Consents.
(a) Schedule 2.5(a) of the Company Disclosure Schedule sets forth all
agreements necessary to the current operation of the business of the Company,
excluding (i) employment agreements, standard end user license agreements and
standard distribution agreements; (ii) purchase orders, procurement contracts
and other similar agreements entered into in the ordinary course of business;
(iii) agreements which call for the payment or receipt of less than $200,000
over a three-year period; (iv) agreements disclosed in Schedule 2.18 of the
Company Disclosure Schedule; or (v) agreements filed with the United States
Securities and Exchange Commission ("SEC") pursuant to the requirements under
Item 601(b) of Regulation S-K.
(b) The execution and delivery of this Agreement and the Amalgamation
Agreement by the Company do not, and the performance of this Agreement and the
Amalgamation Agreement by the Company will not, (i) conflict with or violate
the Articles of Incorporation or By-Laws or equivalent organizational
documents of the Company or any of its subsidiaries, (ii) conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to the
Company or any of its subsidiaries or by which its or any of their respective
properties is bound or affected, or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default), or impair the Company's or any of its subsidiaries'
rights or, to the Company's knowledge, alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of any agreement (each, a "COVERED AGREEMENT")
disclosed in Schedule 2.5(a) and Schedule 2.18 of the Company Disclosure
Schedule or filed as a "material contract" with the SEC pursuant to the
requirements of the Securities Exchange Act of 1934, as amended, and
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the SEC's rules thereunder (collectively, the "EXCHANGE ACT"), or result in
the creation of a lien or encumbrance on any of the properties or assets of
the Company or any of its subsidiaries pursuant to any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or its or any of
their respective properties is bound or affected, except in the case of (ii)
and (iii) for any such conflicts, violations, breaches, defaults,
terminations, cancellations or accelerations which would not have a Material
Adverse Effect.
(c) The execution and delivery of this Agreement and the Amalgamation
Agreement by the Company do not, and the performance of the transactions
contemplated hereby and thereby will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, domestic or foreign, to be made or
obtained by the Company, except (i) for applicable requirements, if any, of
the Securities Act of 1933, as amended, and the SEC's rules thereunder (the
"SECURITIES ACT"), the Exchange Act, state securities laws ("BLUE SKY LAWS"),
the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR ACT"), the Securities Act
(Quebec) (the "QSA") and other relevant Canadian securities statutes, filing
with Industry Canada under the Investment Canada Act (Canada), filing under
the Competition Act (Canada) and the filing and recordation of appropriate
documents as required by the Quebec Act in connection with the Transactions
and (ii) where the failure to obtain such consents, approvals, authorizations
or permits, or to make such filings or notifications, would not prevent or
materially delay consummation of the Transactions, or otherwise prevent or
materially delay the Company from performing its obligations under this
Agreement and the Amalgamation Agreement, or would not otherwise have a
Material Adverse Effect.
2.6 Compliance; Permits.
(a) Neither the Company nor any of its subsidiaries is in conflict with, or in
default or violation of, (i) any law, rule, regulation, order, judgment or
decree applicable to the Company or any of its subsidiaries or by which its or
any of their respective properties is bound or affected or (ii) any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
its or any of their respective properties is bound or affected, except for any
such conflicts, defaults or violations which would not have a Material Adverse
Effect.
(b) Except as disclosed in Schedule 2.6(b) of the Company Disclosure Schedule,
the Company and its subsidiaries, but only to the extent material to the
operation of the business of the Company and the subsidiaries, as a whole,
hold all permits, licenses, easements, variances, exemptions, consents,
certificates, orders and approvals from governmental authorities that are
material to the operation of the business of the Company as operated on the
date hereof (collectively, the "COMPANY PERMITS"). The Company and its
subsidiaries, but only to the extent material to the operation of the business
of the Company and the subsidiaries, as a whole, are in compliance with the
terms of the Company Permits, except where the failure to so comply would not
have a Material Adverse Effect.
2.7 SEC Filings; Financial Statements.
(a) The Company has filed all forms, reports and documents required to be
filed by the Company with the SEC since July 6, 1995 and has made available to
Parent (i) its Transition Report on Form 10-K for the eleven-month period
ended June 30, 1997, (ii) its Quarterly Reports on Form 10-Q for the three-
month periods ended September 30, 1997, December 31, 1997 and March 31, 1998,
respectively, (iii) all proxy statements relating to the Company's meetings of
stockholders (whether annual or special) held since July 6, 1995, (iv) all
other reports or Registration Statements (other than Reports on Form 10-Q not
referred to in clause (ii) above and Reports on Form 3, 4 or 5 or registration
statements on Form S-8) filed by the Company with the SEC since July 6, 1995,
and (v) all amendments and supplements to all such reports and registration
statements filed by the Company with the SEC (collectively, the "COMPANY SEC
REPORTS"). The Company SEC Reports (i) were prepared in accordance with the
requirements of the Securities Act or the Exchange Act, as the case may be, in
all material respects, and (ii) did not at the time they were filed (or if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such amending or superseding filing) contain any untrue statement
of a material fact or omit
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to state a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. As of the date hereof, none of the Company's
subsidiaries is required to file any forms, reports or other documents with
the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Company SEC Reports was prepared
in accordance with US GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated therein or in the notes thereto
or, in the case of unaudited financial statements, as permitted by Form 10-Q
of the SEC) and each fairly presented in all material respects the
consolidated financial position of the Company and its subsidiaries as at the
respective dates thereof and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount. The
unaudited financial statements of the Company for its fiscal year ended June
30, 1998 included in Schedule 2.7(b) of the Company Disclosure Schedule (the
"COMPANY FINANCIAL STATEMENTS") reflect in all material respects the financial
position of the Company as of June 30, 1998 and were prepared in accordance
with US GAAP, except for the absence of a statement of shareholders' equity, a
statement of cash flow, and in each case, the absence of notes thereto and of
any subsequent events or similar such notations that may require a change in
the financial statements.
(c) The Company has hereto furnished to Parent a complete and correct copy of
any amendments or modifications which have not yet been filed with the SEC but
which are required to be filed, to agreements, documents or other instruments
which previously had been filed by the Company with the SEC pursuant to the
Securities Act or the Exchange Act.
(d) The Company is not a "reporting issuer" or its equivalent for the purposes
of the QSA or any other Canadian provincial securities legislation.
2.8 Absence of Certain Changes or Events. Except as set forth in Schedule
2.8 of the Company Disclosure Schedule and in the Company SEC Reports, since
June 30, 1998, the Company has conducted its business in the ordinary course
and since such date and through the date hereof, there has not occurred any
Material Adverse Effect. In addition, since such date there has not been (i)
any amendment or change in the Articles of Incorporation or By-Laws of the
Company, (ii) any damage to, destruction or loss of any assets of the Company
(whether or not covered by insurance) that could have a Material Adverse
Effect, (iii) any revaluation by the Company of any of its assets resulting in
or reasonably likely to have a Material Adverse Effect, including, without
limitation, writing down the value of capitalized software or inventory or
writing off notes or accounts receivable other than in the ordinary course of
business, (iii) except as disclosed in Schedule 2.8 of the Company Disclosure
Schedule, any other action or event that would have required the consent of
Parent pursuant to Section 4.1 hereof had such action or event occurred after
the date of this Agreement and that would be reasonably likely to have a
Material Adverse Effect.
2.9 Absence of Litigation. Except as set forth in Schedule 2.9 of the
Company Disclosure Schedule or the Company SEC Reports, there are no claims,
actions, suits, proceedings or investigations pending or, to the knowledge of
the Company, threatened against the Company or any of its subsidiaries, or any
properties of the Company or any of its subsidiaries or the Company
Intellectual Property Rights (as defined in Section 2.18), before any court,
tribunal, arbitrator or administrative, governmental or regulatory authority
or body, domestic or foreign, that is reasonably likely to have a Material
Adverse Effect.
2.10 Employee Benefit Plans; Employment Agreements.
(a) The Company has made available to Parent all employee benefit plans (as
defined in Section 3(3) of the United States Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), regardless of whether ERISA is
applicable thereto, all other bonus, stock option, stock purchase, incentive,
deferred compensation, supplemental retirement, severance or termination pay,
or medical, life or other insurance, supplemental unemployment benefits,
profit-sharing, pension or retirement plans, agreements or arrangements and
other similar material fringe or employee benefit plans, programs or
arrangements (including those sponsored by the federal or any provincial
government of Canada, collectively "GOVERNMENT SPONSORED or MANDATED
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PLANS") and any current or former employment or executive compensation or
severance agreements, written or otherwise, for the benefit of, or relating
to, any employee of the Company, any trade or business (whether or not
incorporated) which is a member of a controlled group including the Company or
which is under common control with the Company (an "ERISA AFFILIATE") within
the meaning of Section 414 of the Code, or any subsidiary of the Company, as
well as each plan with respect to which the Company or an ERISA Affiliate
could incur liability if such plan has been or were terminated (together, the
"EMPLOYEE PLANS"), and a copy of each such written Employee Plan has been made
available to Parent.
(b) (i) Except as set forth in Schedule 2.10(b) of the Company Disclosure
Schedule, none of the Employee Plans promises or provides retiree medical or
other retiree welfare benefits to any person and none of the Employee Plans is
a "MULTIEMPLOYER PLAN" as such term is defined in Section 3(37) of ERISA; (ii)
there has been no transaction or failure to act with respect to any Employee
Plan, which could result in any material liability of the Company or any of
its subsidiaries; (iii) all Employee Plans are in compliance in all material
respects with the requirements prescribed by any and all statutes, orders, or
governmental rules and regulations currently in effect with respect thereto,
and the Company and each of its subsidiaries have performed all material
obligations required to be performed by them under, are not in any material
respect in default under or in violation of, and have no knowledge of any
material default or violation by any other party to, any of the Employee
Plans; (iv) each Employee Plan intended to qualify under Section 401(a) of the
Code and each trust intended to qualify under Section 501(a) of the Code is
the subject of a favorable determination letter from the United States
Internal Revenue Service (the "IRS"), and so far as the Company is aware
nothing has occurred which may reasonably be expected to impair such
determination; (v) all contributions required to be made to any Employee Plan,
under the terms of the Employee Plan or any collective bargaining agreement,
have been made on or before their due dates and a reasonable amount has been
accrued for contributions to each Employee Plan for the current plan years;
(vi) with respect to each Employee Plan subject to Title IV of ERISA, no
"REPORTABLE EVENT" within the meaning of Section 4043 of ERISA (excluding any
such event for which the thirty (30) day notice requirement has been waived
under the regulations to Section 4043 of ERISA) nor any event described in
Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) neither the
Company nor any ERISA Affiliate has incurred, nor reasonably expects to incur,
any liability under Title IV of ERISA (other than liability for premium
payments to the United States Pension Benefit Guaranty Corporation arising in
the ordinary course).
(c) Each Employee Plan that is required or intended to be qualified under
applicable law or registered or approved by a governmental agency or authority
has been so qualified, registered or approved by the appropriate governmental
agency or authority if required to obtain such qualification, registration or
approval, and, to the Company's knowledge, nothing has occurred since the date
of the last qualification, registration or approval to adversely affect, or
cause, the appropriate governmental agency or authority to revoke such
qualification, registration or approval.
(d) All contributions (including premiums) required by law or contract to have
been made or approved by the Company under or with respect to the Employee
Plans have been paid or accrued by the Company, except as would not have a
Material Adverse Effect. Without limiting the foregoing, there are no material
unfunded liabilities under any Employee Plan.
(e) There are no pending or, to the Company's knowledge, threatened
investigations, litigation or other enforcement actions against the Company
with respect to any of the Employee Plans.
(f) There are no actions, suits or claims pending or, to the knowledge of the
Company, threatened by former or present employees of the Company (or their
beneficiaries) with respect to the Employee Plans or the assets or fiduciaries
thereof (other than routine claims for benefits).
(g) Except as set forth in Schedule 2.10(g) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries maintains any 401(k)
or other type of pension plan subject to Section 401(a) of the Code in the
United States.
(h) No condition or event has occurred with respect to the Employee Plans
which has or could reasonably be expected to result in a material liability to
the Company.
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(i) Schedule 2.10(i) of the Company Disclosure Schedule sets forth, as of
August 10, 1998, a true and complete list of each current or former employee,
officer or director of the Company or any of its subsidiaries who holds any
option to purchase Company Common Shares as of the date hereof, together with
the number of Company Common Shares subject to such option, the date of grant
of such option, the extent to which such option is vested, the option price of
such option (to the extent determined as of the date hereof), whether such
option is intended to qualify as an incentive stock option within the meaning
of Section 422(b) of the Code (an "ISO"), and the expiration date of such
option. Schedule 2.10(i) of the Company Disclosure Schedule also sets forth
the total number of such ISOs and such nonqualified options.
(j) The Company has made available to Parent and Dutchco (i) copies of all
employment agreements with executive officers of the Company; (ii) copies of
all agreements with consultants who are individuals obligating the Company to
make annual cash payments in an amount exceeding US $100,000; (iii) a schedule
listing all officers of the Company who have executed a non-competition
agreement with the Company; (iv) copies of all severance agreements, programs
and policies of the Company, if any, with or relating to its employees; (v)
copies of all plans, programs, agreements and other arrangements of the
Company with or relating to its employees which contain change in control
provisions; and (vi) the form of standard employment agreement of the Company
for its non-executive employees.
2.11 Labor Matters. (i) There are no actions or proceedings pending or, to
the knowledge of the Company, threatened between the Company or any of its
subsidiaries and any of their respective employees, which have or may have a
Material Adverse Effect; (ii) neither the Company nor any of its subsidiaries
is a party to any collective bargaining agreement or other labor union
contract applicable to persons employed by the Company or any of its
subsidiaries nor does the Company or any of its subsidiaries know of any
activities or proceedings of any labor union to organize any such employees;
and (iii) neither the Company nor any of its subsidiaries has any knowledge of
any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or
with respect to any employees of the Company or any of its subsidiaries.
2.12 Registration Statement; Joint Proxy Statement. None of the information
to be supplied by the Company in writing for inclusion or incorporation by
reference in (i) the registration statement on Form S-4 (the "FORM S-4") to be
filed with the SEC by Parent in connection with the (A) sale of Parent Common
Shares by Dutchco to holders of Units in exchange for such Units, and (B)
issuance of Exchangeable Shares by the Continuing Corporation, (ii) the proxy
statement relating to the general special meeting of the Company's
shareholders (the "COMPANY SHAREHOLDERS' MEETING") and the proxy statement
relating to the special meeting of Parent's stockholders (the "PARENT
STOCKHOLDERS' MEETING") to be held in connection with the Transactions
(collectively, the "JOINT PROXY STATEMENT" and, together with the Form S-4,
the "JOINT PROXY STATEMENT/PROSPECTUS"), and (iii) any other document to be
filed with the SEC or any regulatory agency by any member of the Parent Group
or the Company in connection with the transactions contemplated by this
Agreement (the "OTHER FILINGS") will, (A) at the respective times such
documents are filed with the SEC or other regulatory agency, (B) in the case
of the Joint Proxy Statement/Prospectus, at the date it or any amendments or
supplements thereto are mailed to stockholders, at the time of the Company
Shareholders' Meeting and at the Effective Time and (C) in the case of the
Form S-4, when it becomes effective under the Securities Act, at the Effective
Time and on the date of any post-effective amendment thereto, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Joint Proxy Statement (as it relates to the Company
Shareholders' Meeting) will comply as to form in all material respects with
the applicable provisions of the Quebec Act and the Exchange Act. If at any
time prior to the Effective Time any event relating to the Company or any of
its respective affiliates, officers or directors should be discovered by the
Company which should be set forth in an amendment to the Form S-4 or a
supplement to the Joint Proxy Statement, the Company shall promptly inform
Parent. Notwithstanding the foregoing, the Company makes no representation or
warranty with respect to any information supplied by any member of the Parent
Group which is contained in any of the foregoing documents. No requirements of
any Canadian provincial securities legislation govern the contents or mailing
of the Joint Proxy Statement nor the holding of the Company Shareholders'
Meeting.
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2.13 Restrictions on Business Activities. Except for this Agreement, there
is no material agreement, judgment, injunction, order or decree binding upon
the Company or any of its subsidiaries which has or could reasonably be
expected to have the effect of prohibiting or impairing any material business
practice of the Company or any of its subsidiaries, the acquisition of
property by the Company or any of its subsidiaries or the conduct of business
by the Company or any of its subsidiaries as currently conducted.
2.14 Title to Property. Schedule 2.14 of the Company Disclosure Schedule
sets forth a true and complete list of all real property (i) owned by the
Company or any of its subsidiaries or (ii) leased by the Company or any of its
subsidiaries requiring annual lease payments of more than US $100,000
("MATERIAL LEASES"), and the aggregate monthly rental or other fee payable
under such Material Lease. The Company and each of its subsidiaries have good
and valid title to all of their properties and assets free and clear of all
liens, charges and encumbrances except (i) liens for Taxes not yet due and
payable, (ii) such liens or other imperfections of title, if any, as do not
materially detract from the value of or interfere with the present use of the
property affected thereby, (iii) liens securing debt which is reflected on the
balance sheet of the Company at June 30, 1998 included in the Company
Financial Statements, or (iv) liens which would not have a Material Adverse
Effect; and all Material Leases are in good standing, valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing material default or event of default as to the Company or
its subsidiaries (or event which with notice or lapse of time, or both, would
constitute a material default and in respect of which the Company or such
subsidiary has not taken adequate steps to prevent such a default from
occurring) except where the lack of such good standing, validity and
effectiveness or the existence of such default or event of default would not
have a Material Adverse Effect. All the facilities of the Company and its
subsidiaries used in the operation of their businesses, except such as may be
under construction, are in good operating condition and repair, except where
the failure of such plants, structures and equipment to be in such good
operating condition and repair would not, individually or in the aggregate,
have a Material Adverse Effect.
2.15 Taxes.
(a) For purposes of this Agreement, "TAX" or "TAXES" shall mean taxes, fees,
levies, duties, tariffs, imposts, premiums and governmental impositions or
charges of any kind in the nature of (or similar to) taxes, payable to any
federal, state, provincial, local or foreign taxing authority, including
(without limitation) (i) income, capital, business, franchise, profits, gross
receipts, ad valorem, goods and services, customs, net worth, value added,
sales, use, service, real or personal property, special assessments, capital
stock, license, payroll, withholding, employment, social security, workers'
compensation, unemployment insurance or compensation, utility, severance,
production, excise, stamp, occupation, premiums, environmental, recapture,
windfall profits, transfer and gains taxes, fees, levies, duties, tariffs,
imposts, premiums and governmental impositions and (ii) interest, penalties,
additional taxes and additions to tax imposed with respect thereto; and "TAX
RETURNS" shall mean returns, reports, declarations, and information statements
with respect to Taxes required to be filed with Revenue Canada, Ministere du
Revenu du Quebec ("REVENUE QUEBEC"), the Internal Revenue Service ("IRS") or
any other taxing authority, domestic or foreign, including, without
limitation, consolidated, combined and unitary tax returns.
(b) Except as disclosed in Schedule 2.15(b) of the Company Disclosure
Schedule, the Company and its subsidiaries have filed or caused to be filed
all Tax Returns required to be filed by them, except to the extent the failure
to file such Tax Returns would not have a Material Adverse Effect, and the
Company and its subsidiaries have paid and discharged or caused to be paid and
discharged all Taxes due in connection with or with respect to the filing of
all Tax Returns and have paid all other Taxes as are due, and there are no
other Taxes that would be due if asserted by a taxing authority, except such
Taxes as are being contested in good faith by appropriate proceedings (to the
extent that any such proceedings are required) and with respect to which the
Company is maintaining reserves to the extent currently required in all
material respects adequate for their payment except to the extent the failure
to maintain such reserves or pay such Taxes would not have a Material Adverse
Effect. Except as disclosed in Schedule 2.15(b) of the Company Disclosure
Schedule, none of Revenue Canada, Revenue Quebec, the IRS or any other taxing
authority or agency is now asserting or, to the Company's knowledge,
threatening to assert against the Company or any of its subsidiaries any
deficiency or claim for additional Taxes other than additional Taxes with
respect to which the Company is maintaining reserves in all
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material respects adequate for their payment, and, to the Company's knowledge,
there are no requests for information currently outstanding that could affect
the Taxes of the Company or any of its subsidiaries. Except as disclosed in
Schedule 2.15(b) of the Company Disclosure Schedule, neither the Company nor
any of its subsidiaries is currently being audited or examined by any taxing
authority, nor has the Company received any written notice that any Tax Return
will undergo any audit or examination or that such an audit or examination is
threatened. Except as disclosed in Schedule 2.15(b) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries has, except as would
not have a Material Adverse Effect, granted any waiver of any statute of
limitations with respect to, or any extension of a period for the assessment
of, any Tax. The accruals and reserves for Taxes reflected in the Company
Financial Statements are in all material respects adequate to cover all Taxes
accruable through the date thereof (including interest and penalties, if any,
thereon and Taxes being contested) in accordance with generally accepted
accounting principles. No liability for Taxes has been incurred (or prior to
the Effective Time will be incurred) since such date other than in the
ordinary course of business except (i) as would not have a Material Adverse
Effect or (ii) attributable to the transactions contemplated hereby. Except as
disclosed in Schedule 2.15(b) of the Company Disclosure Schedule, neither the
Company nor any of its subsidiaries is required to include in income (i) items
in respect of any change in accounting principles or (ii) any installment sale
gain, where the inclusion in income would result in a tax liability materially
in excess of the reserves therefor.
(c) The Company on behalf of itself and all its subsidiaries hereby represents
that, other than as disclosed on Schedule 2.15(c) of the Company Disclosure
Schedule, and other than with respect to items the inaccuracy of which would
not have a Material Adverse Effect: (i) neither the Company nor any of its
subsidiaries is a party to any agreement, contract or arrangement that may
result, separately or in the aggregate, in the payment of any "EXCESS
PARACHUTE PAYMENT" within the meaning of Section 280G of the Code, determined
without regard to Section 280G(b)(4) of the Code and (ii) neither the Company
nor any of its subsidiaries has participated in or cooperated with a boycott
under Section 999 of the Code.
(d) Except as disclosed in Schedule 2.15(d) of the Company Disclosure
Schedule, no power of attorney has been granted by the Company or any of its
subsidiaries with respect to any matter relating to Taxes which is currently
in force.
(e) Except as disclosed in Schedule 2.15(e) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries is a party to any
agreement or arrangement (written or oral) providing for the allocation or
sharing of Taxes.
(f) Except as disclosed in Schedule 2.15(f) of the Company Disclosure
Schedule, the Company and each of its subsidiaries have reported and withheld
from each payment made to any of their respective past or present employees,
officers, directors or non-residents of Canada the amount of all Taxes and
other material deductions required to be withheld therefrom and have paid the
same to the proper tax or other receiving officers within the time required
under any applicable legislation except where failure to do so would not have
a Material Adverse Effect.
(g) Except as disclosed in Schedule 2.15(g) of the Company Disclosure
Schedule, the Company has remitted to the appropriate tax authority when
required by law to do so all amounts collected by it on account of all Taxes
under Part IX of the Excise Tax Act and retail sales tax except where failure
to do so would not have a Material Adverse Effect.
(h) Except as would not have a Material Adverse Effect on the Company, the
Company has not deducted any material amounts in computing its income in a
taxation year which may be included in a subsequent taxation year under
Section 78 of the Income Tax Act (Canada).
(i) Except as disclosed in Schedule 2.15(i) of the Company Disclosure
Schedule, the Company has not requested or received a ruling from any taxing
authority or signed a closing or other agreement with any taxable authority
which could have a Material Adverse Effect.
(j) Except as would not have a Material Adverse Effect on the Company, to the
Company's knowledge, no circumstances exist which would make the Company or
any subsidiary subject to the application of any of sections 79 to 80.04 of
the Income Tax Act (Canada). Neither the Company nor any of its subsidiaries
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have acquired property or services from, or disposed of property or provided
services to, a person with whom it does not deal at arm's length (within the
meaning of the Income Tax Act (Canada)) for an amount that is other than the
fair market value of such property or services, or has been deemed to have
done so for purposes of the Income Tax Act (Canada).
2.16 Environmental Matters. Except in all cases as have not had and could
not reasonably be expected to have a Material Adverse Effect, to the knowledge
of the Company, the Company and each of its subsidiaries: (i) have obtained
all applicable permits, licenses and other authorization which are required
under federal, state, provincial or local laws relating to pollution or
protection of the environment, including laws relating to emissions,
discharges, releases or threatened releases of pollutants, contaminants or
hazardous or toxic materials or wastes into ambient air, surface water, ground
water or land or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants or hazardous or toxic materials or wastes by the
Company or its subsidiaries (or their respective agents); (ii) are in
compliance with all terms and conditions of such required permits, licenses
and authorization, and also are in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in such laws or contained in any
regulation, code, plan, order, decree, judgment, notice or demand letter
issued, entered, promulgated or approved thereunder; and (iii) are not aware
of nor have received notice of any event, condition, circumstance, activity,
practice, incident, action or plan which is reasonably likely to interfere
with or prevent continued compliance with or which would give rise to any
common law or statutory liability, or otherwise form the basis of any claim,
action, suit or proceeding, based on or resulting from the Company's or any of
its subsidiary's (or any of their respective agent's) manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge or release into the environment, of any pollutant,
contaminant or hazardous or toxic material or waste.
2.17 Brokers. No broker, finder or investment banker (other than Volpe Brown
Whelan & Company, LLC) is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company. The Company has
heretofore furnished to Parent a complete and correct copy of all agreements
between the Company and Volpe Brown Whelan & Company, LLC pursuant to which
such firm would be entitled to any payment relating to the transactions
contemplated hereunder.
2.18 Intellectual Property.
(a) Except as set forth in Schedule 2.18 of the Company Disclosure Schedule,
the Company owns, or is licensed or otherwise possesses legally enforceable
rights to use sell (except as to Third Party Intellectual Property Rights, as
defined below) and license all trademarks, trade names, service marks,
copyrights and any applications therefor, technology, trade secrets, know-how,
computer software programs or applications (in both source code and object
code form), tangible or intangible proprietary information or material, and,
to the knowledge of the Company, all patents, that are necessary to, required
for or used in the business of the Company as currently conducted (the
"COMPANY INTELLECTUAL PROPERTY RIGHTS") the absence of which would be
reasonably likely to have a Material Adverse Effect. Schedule 2.18 of the
Company Disclosure Schedule lists all current patents, registered and material
unregistered trademarks and service marks, registered copyrights, material
trade names and any applications therefor owned by the Company, and specifies
the jurisdictions in which each such Company Intellectual Property Right has
been issued or registered or in which an application for such issuance and
registration has been filed, including the respective registration or
application numbers and the names of all registered owners, together with a
list of all of the Company's currently marketed software products and an
indication as to which, if any, of such software products have been registered
for copyright protection with the United States or Canadian Copyright Office
and any other foreign offices and by whom such items have been registered.
Schedule 2.18 of the Company Disclosure Schedule also includes and
specifically identifies all third-party patents, trademarks or copyrights
(including software) (the "THIRD PARTY INTELLECTUAL PROPERTY RIGHTS"), that
are incorporated in, are, or form a part of, any Company product and which are
material to the Company's business. The listing of Third Party Intellectual
Property Rights shall include the following information: the type of the
agreement by which such Third Party Intellectual Property Rights have been
procured by the Company, the names of the parties and the material terms of
such agreement(s). Schedule 2.18
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of the Company Disclosure Schedule lists (i) any requests the Company has
received to make any registration of a copyright, patent or trademark,
including the identity of the requester and the item requested to be so
registered, and the jurisdiction for which such request has been made; and
(ii) except for object code license agreements for the Company's products
executed in the ordinary course of business that are not material to the
Company's business, all material licenses, sublicenses and other agreements as
to which the Company is a party and pursuant to which any person is authorized
to use, or which otherwise relate to, any Company Intellectual Property Right.
(b) The Company is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations hereunder, in
violation in any material respect of any license, sublicense or agreement
described in Schedule 2.18 of the Company Disclosure Schedule. Neither the
execution and delivery of this Agreement by the Company, nor the performance
by the Company of its obligations hereunder will cause the forfeiture or
termination or give rise to a right of forfeiture or termination of any
Company Intellectual Property Right or Third Party Intellectual Property Right
set forth in Schedule 2.18 of the Company Disclosure Schedule, nor impair the
ability of the Company, its subsidiaries, the Continuing Corporation or Parent
to use, sell or license any Company Intellectual Property Right or Third Party
Intellectual Property Right set forth in Schedule 2.18 of the Company
Disclosure Schedule. Except as set forth in Schedule 2.18 of the Company
Disclosure Schedule, no claims with respect to the Company Intellectual
Property Rights (or Third Party Intellectual Property Rights to the extent
arising out of any use, reproduction or distribution of such Third Party
Intellectual Property Rights by or through the Company) are currently pending,
or, to the knowledge of the Company, are threatened by any person, nor, to the
knowledge of the Company, are there any valid grounds for any such claims (i)
to the effect that the manufacture, sale, licensing or use of any product as
now used, sold or licensed or proposed for use, sale or license by the Company
infringes on any copyright, patent, trademark, service mark or trade secret;
(ii) against the use by the Company of any trademarks, trade names, trade
secrets, copyrights used in the Company's business as currently conducted by
the Company; (iii) challenging the ownership, validity or effectiveness of any
of the Company Intellectual Property Rights or (iv) challenging the Company's
license or legally enforceable right to use of the Third Party Intellectual
Property Rights. All registered trademarks, maskworks, and copyrights held by
the Company, are valid and subsisting. Except as set forth in Schedule 2.18 of
the Company Disclosure Schedule, to the knowledge of the Company, all patents
held by the Company are valid and subsisting. Except as set forth in Schedule
2.18 of the Company Disclosure Schedule, to the Company's knowledge, there is
no material unauthorized use, infringement or misappropriation of any of the
Company Intellectual Property by any third party, including any employee or
former employee of the Company or any of its subsidiaries. Except as set forth
in Schedule 2.18 of the Company Disclosure Schedule, neither the Company nor
any of its subsidiaries (i) has been sued or charged in writing as a defendant
in any claim, suit, action or proceeding which involves a claim or
infringement of trade secrets, any patents, trademarks, service marks,
maskworks or copyrights and which has not been finally terminated prior to the
date hereof, or been informed or notified by any third party that the Company
may be engaged in such infringement, or (ii) has knowledge of any infringement
liability with respect to, or infringement by, the Company or any of its
subsidiaries of any trade secret, patent, trademark, service mark, maskwork or
copyright of another.
(c) The Company has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all Company Intellectual Property Rights (other than those which,
by operation of law, have been disclosed or made public). Except as set forth
in Schedule 2.18 of the Company Disclosure Schedule, each employee and
consultant of the Company has executed a confidentiality and invention
agreement substantially in the respective forms previously delivered to
Parent.
2.19 Interested Party Transactions. Except as set forth in the Company SEC
Reports or as set forth in Schedule 2.19 of the Company Disclosure Schedule,
since the date of the Company's proxy statement dated October 24, 1997, no
event has occurred that would be required to be reported as a Certain
Relationship or Related Transaction pursuant to Item 404 of Regulation S-K
promulgated by the SEC or that is a related party transaction for the purposes
of Quebec Securities Commission Policy Statement Q-27. The Transactions will
not constitute a "going private transaction" for the purposes of such Policy.
2.20 Insurance. To the Company's knowledge, except as set forth in Schedule
2.20 of the Company Disclosure Schedule, there is no material claim by the
Company or any of its subsidiaries pending under any of
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such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums payable
on or prior to the date hereof under all such policies and bonds have been
paid and the Company and its subsidiaries are otherwise in compliance in all
material respects with the terms of such policies and bonds (or other policies
and bonds providing substantially similar insurance coverage). The Company has
no knowledge of any threatened termination of, or material premium increase
with respect to, any of such policies.
2.21 Vote Required. The affirmative vote of the holders of at least sixty-
six and two-thirds percent (66 2/3%) of the Company Common Shares voting on
such matter is the only vote of the holders of any class or series of the
Company's share capital necessary to approve the Amalgamation and confirm By-
law No. 1998-1 in accordance with the Quebec Act.
2.22 Pooling Matters. Neither the Company nor, to the Company's knowledge,
any of its affiliates has, based upon consultation with its independent
auditors, taken or agreed to take any action that (without giving effect to
any action taken or agreed to be taken by Parent or any of its affiliates)
would affect the ability of Parent to account for the business combination to
be effected by the Transactions as a pooling-of-interests.
2.23 Opinion of Financial Advisor. The Company has received an oral opinion
from its financial advisor, Volpe Brown Whelan & Company, LLC (subsequently
confirmed in writing), to the effect that, as of the date of the Existing
Agreement, the consideration to be received by the shareholders of the Company
pursuant to the Transactions is fair to such shareholders from a financial
point of view.
ARTICLE III
Representations And Warranties Of The Parent Group
The term "KNOWLEDGE" as used in connection with Parent, shall mean Parent's
actual knowledge after reasonable inquiry of officers, directors and other
employees of Parent charged with senior administrative or operational
responsibility of such matters. Each member of the Parent Group hereby
represents and warrants to the Company as of the date of the Existing
Agreement (except for representations and warranties which reflect technical
changes to the Existing Agreement resulting from the change in structure of
the business combination to an Amalgamation which are made as of the date
hereof), subject to the written disclosure schedule supplied by the Parent
Group to the Company dated as of the date hereof and certified by a duly
authorized officer of Parent (the "PARENT DISCLOSURE SCHEDULE"), that:
3.1 Organization and Qualification. Parent and each of its subsidiaries is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization and has the
requisite corporate power and authority and is in possession of all Approvals
necessary to own, lease and operate the properties it purports to own, operate
or lease and to carry on its business as it is now being conducted, except
where the failure to be so organized, existing and in good standing or to have
such power, authority and Approvals would not have a Material Adverse Effect.
Parent and each of its subsidiaries is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each jurisdiction
where the character of its properties owned, leased or operated by it or the
nature of its activities makes such qualification or licensing necessary,
except for such failures to be so duly qualified or licensed and in good
standing that would not have a Material Adverse Effect.
3.2 Authority. Each member of the Parent Group has all necessary corporate
power and authority to execute and deliver this Agreement and the Ancillary
Documents (as defined in Section 5.17) (to the extent they are parties
thereto) and to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the Ancillary Documents by each member of the Parent Group
(to the extent they are parties thereto) and the consummation by each member
of the Parent Group of the transactions contemplated hereby and thereby have
been duly and validly authorized by all necessary corporate action on the part
of each member of the Parent Group, and no other corporate proceedings on the
part of any such member are necessary to authorize this Agreement or the
Ancillary Documents or to consummate the transactions so contemplated (other
than the approval of the Parent Stock Issuance (as defined in Section 3.9
hereof) by the requisite vote of the stockholders of Parent, to the extent
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necessary). The Boards of Directors of Parent and Dutchco have determined that
it is advisable and in the best interest of Parent's stockholders and
Dutchco's stockholder for Parent and Dutchco to enter into a business
combination with the Company upon the terms and subject to the conditions of
this Agreement and the Amalgamation Agreement and to recommend that the
stockholders of Parent approve the Parent Stock Issuance. This Agreement and
the Amalgamation Agreement have each been duly and validly executed and
delivered by each member of the Parent Group (to the extent they are parties
thereto) and, assuming the due authorization, execution and delivery by the
Company, each such agreement constitutes a legal, valid and binding obligation
of each member of the Parent Group. Each of the Ancillary Documents not yet
executed and delivered as of the date hereof shall constitute a legal, valid
and binding obligation of each member of the Parent Group (to the extent they
are parties thereto) upon execution and delivery of each such document.
3.3 No Conflict; Required Filings and Consents.
(a) Except as set forth in Schedule 3.3(a) of the Parent Disclosure Schedule,
the execution and delivery of this Agreement and the Ancillary Documents by
each member of the Parent Group (to the extent they are parties thereto) do
not (or in the case of Ancillary Documents not yet executed and delivered,
will not), and the performance of this Agreement and the Ancillary Documents
by each member of the Parent Group will not, (i) conflict with or violate the
Certificate of Incorporation or By-Laws (or similar charter documents, as the
case may be) of any member of the Parent Group, (ii) conflict with or violate
any law, rule, regulation, order, judgment or decree applicable to Parent or
any of its subsidiaries or by which its or their respective properties are
bound or affected, or (iii) result in any breach of or constitute a default
(or an event which with notice or lapse of time or both would become a
default) under, or impair Parent's or any of its subsidiaries' rights or alter
the rights or obligations of any third party under, or to the knowledge of
Parent, give to others any rights of termination, amendment, acceleration or
cancellation of, any material contract or result in the creation of a lien or
encumbrance on any of the properties or assets of Parent or any of its
subsidiaries pursuant to any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Parent or any of its subsidiaries is a party or by which
Parent or any of its subsidiaries or its or any of their respective properties
are bound or affected, except in the case of (ii) and (iii) any such case for
any such breaches, defaults or other occurrences that would not have a
Material Adverse Effect.
(b) The execution and delivery of this Agreement and the Ancillary Documents
by each member of the Parent Group (to the extent they are parties thereto)
does not (or in the case of Ancillary Documents not yet executed and
delivered, will not), and the performance of the transactions contemplated
hereby and thereby will not, require any material consent, approval,
authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, domestic or foreign, except (i) for
applicable requirements, if any, of the Securities Act, the Exchange Act, the
Blue Sky Laws, the pre-merger notification requirements of the HSR Act,
relevant Canadian securities statutes, filing with Industry Canada under the
Investment Canada Act (Canada), filing under the Competition Act (Canada) and
the filing and recordation of appropriate merger or other documents as
required by the Quebec Act and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or materially delay consummation of the
Transactions, or otherwise prevent or materially delay any member of the
Parent Group from performing its respective obligations under this Agreement
and the Ancillary Documents, and would not otherwise have a Material Adverse
Effect.
3.4 Certificate of Incorporation and By-Laws. Parent has heretofore
furnished to the Company a complete and correct copy of its Certificate of
Incorporation and the By-Laws, as amended to date. Such Certificate of
Incorporation and By-Laws are in full force and effect. Neither Parent,
Dutchco nor Amalgamation Sub is in violation of any of the provisions of its
respective Certificate of Incorporation or By-Laws (or similar charter
documents, as the case may be).
3.5 Capitalization. As of July 31, 1998, the authorized capital stock of
Parent consisted of (i) 250,000,000 shares of Parent Common Stock of which:
46,347,747 shares were issued and outstanding, no shares were held in
treasury, 12,832,135 shares were reserved for issuance pursuant to outstanding
options under Parent's stock option plans, 2,000,000 shares were reserved for
future issuance under Parent's employee purchase plan; and 2,000,000 shares of
Preferred Stock, US $0.01 par value ("PARENT PREFERRED STOCK"), none of which
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were issued and outstanding. No material change in such capitalization has
occurred between July 31, 1998 and the date hereof. The authorized capital
stock of Amalgamation Sub consists of an unlimited number of common shares, no
par value, one share of which, as of the date hereof, is issued and
outstanding. All of the outstanding shares of Parent's, Dutchco's, Giants
Quebec's and Amalgamation Sub's respective capital stock have been duly
authorized and validly issued and are fully paid and nonassessable. All of the
Parent Common Shares, Exchangeable Shares, Class B Shares (as each is defined
in the Amalgamation Agreement) and Units to be issued in connection with the
transactions contemplated hereby have been authorized by all necessary
corporate action and, when issued in accordance with the terms of this
Agreement and the provisions of such shares (as set out in Appendix A to the
Amalgamation Agreement), will be validly issued, fully paid and nonassessable.
3.6 Compliance; Permits.
(a) Neither Parent nor any of its subsidiaries is in conflict with, or in
default or violation of, (i) any law, rule, regulation, order, judgment or
decree applicable to Parent or any of its subsidiaries or by which its or any
of their respective properties is bound or affected or (ii) any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Parent or any of its subsidiaries is a
party or by which Parent or any of its subsidiaries or is or any of their
respective properties is bound or affected, except for any such conflicts,
defaults or violations which would not have a Material Adverse Effect.
(b) Parent and its subsidiaries hold all permits, licenses, easements,
variances, exemptions, consents, certificates, orders and approvals from
governmental or other regulatory authorities which are material to the
operation of the business of the Company and its subsidiaries taken as a whole
as it is now being conducted (collectively, the "PARENT PERMITS"). Parent and
its subsidiaries are in compliance with the terms of the Parent Permits,
except where the failure to so comply would not have a Material Adverse
Effect.
3.7 SEC Filings; Financial Statements.
(a) Parent has filed all forms, reports and documents required to be filed
with the SEC since February 1, 1995, and has heretofore delivered to the
Company, in the form filed with the SEC, (i) its Annual Reports on Form 10-K
for the fiscal years ended January 31, 1998, 1997 and 1996, and its quarterly
report on Form 10-Q for the fiscal quarter ended April 30, 1998, (ii) all
proxy statements relating to Parent's meetings of stockholders (whether annual
or special) held since January 31, 1996, (iii) all other reports or
registration statements (other than Reports on Form 10-Q not referred to in
clause (ii) above, Reports on Form 3, 4 or 5 filed on behalf of affiliates of
the Parent and Registration Statements on Form S-8) filed by Parent with the
SEC since January 31, 1996 and (iv) all amendments and supplements to all such
reports and registration statements filed by Parent with the SEC
(collectively, the "PARENT SEC REPORTS"). The Parent SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and (ii) did not at the time they were filed
(or if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. None of Parent's
subsidiaries is required to file any forms, reports or other documents with
the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports has been
prepared in accordance with US GAAP applied on a consistent basis throughout
the periods involved (except as may be indicated in the notes thereto) and
each fairly presents the consolidated financial position of Parent and its
subsidiaries as at the respective dates thereof and the consolidated results
of its operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be
material in amount.
(c) Parent has heretofore furnished to the Company a complete and correct copy
of any amendments or modifications, which have not yet been filed with the SEC
but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Parent with the SEC pursuant to
the Securities Act or the Exchange Act.
3.8 Absence of Certain Changes or Events. Except as set forth in Schedule
3.8 of the Parent Disclosure Schedule and in the Parent SEC Reports, since
January 31, 1998, Parent has conducted its business in the
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ordinary course and since such date and through the date hereof, there has not
occurred any Material Adverse Effect with respect to Parent. In addition,
since such date there has not been (i) any damage to, destruction or loss of
any assets of Parent (whether or not covered by insurance) that could have a
Material Adverse Effect with respect to Parent, (ii) any revaluation by Parent
of any of its assets reasonably likely to have a Material Adverse Effect with
respect to Parent, including, without limitation, writing down the value of
capitalized software or inventory or writing off notes or accounts receivable
other than in the ordinary course of business or (iii) other events outside of
the ordinary course of business and inconsistent with past practices that
would be reasonably likely to have a Material Adverse Effect with respect to
Parent.
3.9 Board Approval. The Board of Directors of Parent has, as of the date of
this Agreement, determined to recommend that the stockholders of Parent
approve the issuance of Parent Common Stock in connection with the
Transactions (including any subsequent issuance of Parent Common Stock in
connection with the exchange of Exchangeable Shares) (the "PARENT STOCK
ISSUANCE").
3.10 Registration Statement; Joint Proxy Statement/Prospectus.
(a) Subject to the accuracy of the representations of the Company in Section
2.12 hereof, (i) the Form S-4 pursuant to which the Parent Common Shares,
Exchangeable Shares, Units and Class B Shares to be issued in connection with
the Transactions will be registered with the SEC, (ii) the Joint Proxy
Statement, and (iii) the Other Filings will (A) at the respective times such
documents are filed with the SEC or other regulatory agency, (B) in the case
of the Joint Proxy Statement, at the date it or any amendments or supplements
thereto are mailed to stockholders, at the time of the Parent Stockholders'
Meeting and at the Effective Time and (C) in the case of the Form S-4, if any,
when it becomes effective under the Securities Act, at the Effective Time and
on the date of any post-effective amendment thereto, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Joint Proxy Statement will comply as
to form in all material respects with the applicable provisions of the
Delaware General Corporation Law and the Exchange Act as it relates to the
Parent Stockholders' Meeting, and the Form S-4, as it relates the issuance of
the Parent Common Shares, Exchangeable Shares, Units and Class B Shares to be
issued in connection with the Transactions, will comply as to form in all
material respects with the requirements of the Securities Act. If at any time
prior to the Effective Date any event relating to Parent, Dutchco,
Amalgamation Sub or any of their respective affiliates, officers or directors
should be discovered by Parent, Dutchco or Amalgamation Sub which should be
set forth in an amendment to the Form S-4 or a supplement to the Joint Proxy
Statement, Parent, Dutchco or Amalgamation Sub will promptly inform the
Company. Notwithstanding the foregoing, Parent makes no representation or
warranty with respect to any information supplied by the Company which is
contained in, or furnished in connection with the preparation of, any of the
foregoing.
(b) As of the date hereof and at the Effective Time, except for obligations or
liabilities incurred in connection with its incorporation or organization and
the transactions contemplated by this Agreement and the Amalgamation Agreement
and except for this Agreement and the Amalgamation Agreement and any other
agreements or arrangements contemplated by this Agreement, Amalgamation Sub
has not and will not have incurred, directly or indirectly, through any
subsidiary or affiliate, any obligations or liabilities or engaged in any
business activities of any type or kind whatsoever or entered into any
agreements or arrangements with any person.
3.11 Brokers. No broker, finder or investment banker (other than Piper
Jaffray, Inc. and Goldman, Sachs & Co.) is entitled to any brokerage, finder's
or other fee or commission in connection with the transactions contemplated by
this Agreement and the Amalgamation Agreement based upon arrangements made by
or on behalf of Parent, Dutchco or Amalgamation Sub. Parent has heretofore
furnished to Company a complete and correct copy of all agreements between any
member of the Parent Group and Piper Jaffray, Inc. and Goldman, Sachs & Co.
pursuant to which such firms would be entitled to any payment relating to the
transactions contemplated hereunder.
3.12 Opinion of Financial Advisor. Parent has received an oral opinion from
its financial advisor, Piper Jaffray, Inc. (subsequently confirmed in
writing), to the effect that, as of the date of the Existing Agreement, the
Exchange Ratio is fair from a financial point of view to Parent.
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3.13 Pooling Matters. Neither Parent nor any of its affiliates has, to its
knowledge and based upon consultation with its independent auditors, taken or
agreed to take any action that (without giving effect to any action taken or
agreed to be taken by the Company or any of its affiliates) would affect the
ability of Parent to account for the business combination to be effected by
the Transactions as a pooling-of-interests.
3.14 Absence of Litigation. Except as set forth in Schedule 3.14 of the
Parent Disclosure Schedule or the Parent SEC Reports, there are no claims,
actions, suits, proceedings or investigations pending or, to the knowledge of
the Parent, threatened against the Parent or any of its subsidiaries, or any
properties or rights of the Parent or any of its subsidiaries, before any
court, arbitrator or administrative, governmental or regulatory authority or
body, domestic or foreign, that could have a Material Adverse Effect.
3.15 Restrictions on Business Activities. Except for this Agreement and the
Ancillary Documents or as otherwise set forth in the Parent Disclosure
Schedule or the Parent SEC Reports, there is no material agreement, judgment,
injunction, order or decree binding upon the Company or any of its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or impairing any material business practice of Parent or any of
its subsidiaries, the acquisition of property by Parent or any of its
subsidiaries or the conduct of business by Parent or any of its subsidiaries
as currently conducted by Parent.
3.16 Taxes.
(a) Except as disclosed in Schedule 3.16 of the Parent Disclosure Schedule,
Parent and its subsidiaries have filed or caused to be filed all Tax Returns
required to be filed by them, except to the extent that the failure to file
such Tax Returns would not have a Material Adverse Effect, and Parent and its
subsidiaries have paid and discharged or caused or to be paid and discharged
all Taxes due in connection with or with respect to the filing of all Tax
Returns and have paid all other Taxes as are due, and there are no other Taxes
that would be due if asserted by a taxing authority, except such as are being
contested in good faith by appropriate proceedings (to the extent that any
such proceedings are required) and with respect to which Parent is maintaining
reserves to the extent currently required in all material respects adequate
for their payment except to the extent the failure to do so would not have a
Material Adverse Effect. Except as disclosed in Schedule 3.16 of the Parent
Disclosure Schedule, none of Revenue Canada, Revenue Quebec, the IRS or any
other taxation authority or agency is now asserting or, to the best of
Parent's knowledge, threatening to assert against Parent or any of its
subsidiaries any deficiency or claim for additional Taxes other than
additional Taxes with respect to which Parent is maintaining reserves in all
material respects adequate for their payment, and there are no requests for
information currently outstanding that could affect the Taxes of Parent or any
of its subsidiaries. Except as disclosed in Schedule 3.16 of the Parent
Disclosure Schedule, neither Parent nor any of its subsidiaries is currently
being audited or examined by any taxation authority, nor has Parent received
any written notice that any Tax Return will undergo any audit or examination
or that such an audit or examination is threatened. Except as disclosed in
Schedule 3.16 of the Parent Disclosure Schedule, neither Parent nor any of its
subsidiaries has, except as would not have a Material Adverse Effect, granted
any waiver of any statute of limitations with respect to, or any extension of
a period for the assessment of, any Tax. The accruals and reserves for Taxes
reflected in the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports are in all
material respects adequate to cover all Taxes accruable through the date
thereof (including interest and penalties, if any, thereon and Taxes being
contested) in accordance with generally accepted accounting principles. No
liability for taxes has been incurred (or prior to the Effective Time will be
incurred) since such date other than in the ordinary course of business except
as (i) would not have a Material Adverse Effect, or (ii) is attributable to
the transactions contemplated herein.
(b) Except as disclosed in Schedule 3.16 of the Parent Disclosure Schedule,
Parent and each of its subsidiaries have reported and withheld from each
payment made to any of their respective past or present employees, officers,
directors or non-residents of the United States the amount of all Taxes and
other material deductions required to be withheld therefrom and have paid the
same to the proper tax or other receiving officers within the time required
under any applicable legislation except where failure to do so would not have
a Material Adverse Effect.
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(c) Except as disclosed in Schedule 3.16 of the Parent Disclosure Schedule,
Parent has not requested or received a ruling from any taxation authority or
signed a closing or other agreement with any taxation authority which could
have a Material Adverse Effect.
3.17 Intellectual Property.
(a) Parent and its subsidiaries own, or are licensed or otherwise possess
legally enforceable rights to use, sell and license all trademarks,
tradenames, service marks, copyrights and any applications therefor necessary
to, used in or required for their respective businesses as currently conducted
(the "PARENT INTELLECTUAL PROPERTY RIGHTS"), the absence of which would be
reasonably likely to have a Material Adverse Effect on Parent.
(b) Parent is not, nor will it be as a result of the execution and delivery of
this Agreement or the Ancillary Documents or the performance of its
obligations hereunder or thereunder, in violation in any material respect of
any license, sublicense or agreement of which Parent or any of Parent's
subsidiaries is a party. The execution and delivery of this Agreement and the
Ancillary Documents or the performance of its obligations hereunder or
thereunder will not cause the forfeiture or termination or give rise to a
right of forfeiture or termination of any material Parent Intellectual
Property Right, or impair the ability of Parent or its subsidiaries to use,
sell or license any Parent Intellectual Property Right or portion thereof.
Except as set forth in Schedule 3.17 of the Parent Disclosure Schedule, no
claims with respect to Parent Intellectual Property Rights are currently
pending, or, to the knowledge of Parent, are threatened by any person, nor, to
the knowledge of the Parent, are there any valid grounds for any such claims
(i) to the effect that the manufacture, sale, licensing or use of any product
as now used, sold or licensed or proposed for use, sale or license by Parent
infringes on any copyright, patent, trademark, service mark or trade secret;
(ii) against the use by Parent of any trademarks, trade names, trade secrets,
copyrights used in Parent's business as currently conducted by Parent; (iii)
challenging the ownership, validity or effectiveness of any of Parent
Intellectual Property Rights or (iv) to the knowledge of Parent, against the
use by Parent of any patents. All registered trademarks, maskworks and
copyrights are valid and subsisting. Except as set forth in Schedule 3.17 of
the Parent Disclosure Schedule, to the knowledge of Parent, all patents held
by Parent are valid and subsisting. Except as set forth in Schedule 3.17 of
the Parent Disclosure Schedule, to Parent's knowledge, there is no material
unauthorized use, infringement or misappropriation of any of Parent
Intellectual Property Right by any third party, including any employee or
former employee of Parent or any of its subsidiaries. Except as set forth in
Schedule 3.17 of the Parent Disclosure Schedule, neither Parent nor any of its
subsidiaries (i) has been sued or charged in writing as a defendant in any
claim, suit, action or proceeding which involves a claim or infringement of
trade secrets, any patents, trademarks, service marks, maskworks or copyrights
and which has not been finally terminated prior to the date hereof, or been
informed or notified by any third party that Parent may be engaged in such
infringement, or (ii) has knowledge of any infringement liability with respect
to, or infringement by, Parent or any of its subsidiaries of any trade secret,
patent, trademark, service mark, maskwork or copyright of another.
(c) Each employee and consultant of Parent has executed a confidentiality and
invention agreement substantially in the respective forms previously delivered
to the Company.
(d) Parent has taken reasonable and practicable steps designed to safeguard
and maintain the secrecy and confidentiality of, and its proprietary rights
in, all Parent Intellectual Property Rights (other than those which, by
operation of law, have been disclosed or made public).
3.18 Insurance. To Parent's knowledge, except as is set forth in Schedule
3.18 of the Parent Disclosure Schedule, there is no material claim by Parent
or any of its subsidiaries pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums payable on or prior to the date hereof
under all such policies and bonds have been paid and Parent and its
subsidiaries are otherwise in compliance in all material respects with the
terms of such policies and bonds (or other policies and bonds providing
substantially similar insurance coverage). Parent has no knowledge of any
threatened termination of, or material premium increase with respect to, any
of such policies.
3.19 Vote Required. The affirmative vote of the holders of a majority of the
shares present and entitled to vote at a stockholder meeting duly convened for
the purpose of considering the Parent Stock Issuance is the
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only vote of the holders of any class or series of Parent's capital stock
necessary to approve the Transactions in accordance with the Delaware General
Corporation Law, the Certificate of Incorporation of Parent and the By-Laws of
Parent.
ARTICLE IV
Conduct of Business Pending the Amalgamation
4.1 Conduct of Business by the Company Pending the Amalgamation. During the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, and except as set forth
in Schedule 4.1 of the Company Disclosure Schedule, the Company covenants and
agrees, unless Dutchco shall otherwise agree in writing, to conduct its
business and cause the businesses of its subsidiaries to be conducted only in,
and the Company and its subsidiaries shall not take any action except in, the
ordinary course of business or in accordance with the provisions of this
Agreement and in a manner consistent with past practice; and the Company shall
use commercially reasonable efforts to preserve substantially intact the
business organization of the Company and its subsidiaries, to keep available
the services of the present officers, employees and consultants of the Company
and its subsidiaries, to take all commercially reasonable action necessary to
prevent the loss, cancellation, abandonment, forfeiture or expiration of any
Company Intellectual Property and to preserve the present relationships of the
Company and its subsidiaries with customers, suppliers and other persons with
which the Company or any of its subsidiaries has significant business
relations, except in each case where the failure to do so could not reasonably
be expected to have a Material Adverse Effect; provided, however, that the
provisions of this Section 4.1 shall not prevent the Company from taking
action to cause the Exchangeable Shares, the Class B Shares, Class E Shares
and Class F Shares to be listed, posted or quoted for trading on the Nasdaq
National Market and/or a prescribed Canadian stock exchange. By way of
amplification and not limitation, except as contemplated by this Agreement,
neither the Company nor any of its subsidiaries shall, during the period from
the date of this Agreement and continuing until the earlier of the termination
of this Agreement or the Effective Time, directly or indirectly do, or agree
to do, any of the following without the prior written consent of Dutchco,
which shall not be unreasonably withheld:
(a) amend or otherwise change the Company's Articles of Incorporation or By-
Laws;
(b) except as disclosed in Schedule 4.1(b) of the Company Disclosure Schedule,
issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale,
pledge, disposition or encumbrance of, any shares of any class of the
Company's share capital, or any options, warrants, convertible securities or
other rights of any kind to acquire any shares of the Company's share capital,
or any other ownership interest (including, without limitation, any phantom
interest) of the Company, any of its subsidiaries or affiliates (except for
the issuance of Company Common Shares issuable pursuant to employee stock
options under the Company Stock Option Plans (as defined in Section 5.5),
pursuant to rights to purchase such shares under the Company Stock Purchase
Plan (as defined in Section 5.6), which options or rights, as the case may be,
are outstanding on the date hereof) or as permitted under Section 4.2;
(c) except as set forth in Schedule 4.1(c) of the Company Disclosure Schedule,
sell, pledge, dispose of or encumber any material assets of the Company or any
of its subsidiaries (except for (i) sales of assets in the ordinary course of
business and in a manner consistent with past practice and (ii) dispositions
of obsolete or worthless assets);
(d) amend or change the period (or permit any acceleration, amendment or
change) of exercisability of options or restricted stock granted under the
Employee Plans (including the Company Stock Option Plans) or authorize cash
payments in exchange for any options granted under any of such plans except
with regard to options set forth in Schedule 4.1(d) of the Company Disclosure
Schedule;
(e) (i) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
any of its capital stock, except that a wholly owned subsidiary of the Company
may declare and pay a dividend to its parent, (ii) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
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for shares of its capital stock or (iii) amend the terms of, repurchase,
redeem or otherwise acquire, or permit any subsidiary to repurchase, redeem or
otherwise acquire, any of its securities or any securities of its
subsidiaries, or propose to do any of the foregoing;
(f) except as set forth in Schedule 4.1(f) of the Company Disclosure Schedule,
sell, transfer, license, sublicense or otherwise dispose of any Company
Intellectual Property, or amend or modify any existing agreements with respect
to any Company Intellectual Property or Third Party Intellectual Property
Rights, other than nonexclusive object and source code licenses in the
ordinary course of business consistent with past practice or industry
standards for such licensing or distribution;
(g) (i) acquire (by merger, consolidation, or acquisition of stock or assets)
any corporation, partnership or other business organization or division
thereof or otherwise acquire any material amount of assets; (ii) incur any
material indebtedness for borrowed money or issue any debt securities or
assume, guarantee (other than guarantees of bank debt of the Company's
subsidiaries entered into in the ordinary course of business), endorse or
otherwise as an accommodation become responsible for, the obligations of any
person, or make any loans or advances, except in the ordinary course of
business consistent with past practice; (iii) authorize any capital
expenditures or purchase of fixed assets which are, in the aggregate, in
excess of US $6,000,000 for the Company and its subsidiaries taken as a whole;
or (iv) enter into or amend any contract, agreement, commitment or arrangement
to effect any of the matters prohibited by this Section 4.1(g);
(h) except as set forth in Schedule 4.1(h) of the Company Disclosure Schedule,
increase the compensation payable or to become payable to its officers or
employees, except for increases in salary or wages of officers or employees of
the Company or its subsidiaries in accordance with past practices, or grant
any severance or termination pay to, or enter into any employment or severance
agreement with, any director, officer or other employee of the Company or any
of its subsidiaries, or establish, adopt, enter into or amend any Employee
Plan, except as may be required by applicable law;
(i) take any action to change material Tax or accounting policies or
procedures (including, without limitation, procedures with respect to revenue
recognition, capitalization of software development costs, payments of
accounts payable and collection of accounts receivable) other than as may be
required by law or US GAAP;
(j) make any material Tax election inconsistent with past practices or settle
or compromise any material federal, state, local or foreign Tax liability or
agree to an extension of a statute of limitations except to the extent the
amount of any such settlement has been reserved for on the Company Balance
Sheet;
(k) pay, discharge or satisfy any material claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction of liabilities reflected or
reserved against in the Company Financial Statements or incurred in the
ordinary course of business and consistent with past practice;
(l) except as may be required by law and except as disclosed on Schedule
4.1(l) of the Company Disclosure Schedule, take any action to terminate or
amend any of its Employee Plans;
(m) modify, amend or terminate any Covered Agreement (as defined in Section
2.5(b)), other than in the ordinary course of business consistent with past
practice;
(n) take or allow to be taken or fail to take any act or omission which would
jeopardize the treatment of the Transactions as a pooling-of-interests for
accounting purposes under US GAAP; or
(o) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (n) above, or any action which would make
any of the representations or warranties of the Company contained in this
Agreement untrue or incorrect in any material respect or prevent the Company
from performing or cause the Company not to perform its covenants hereunder or
result in any of the conditions to the Transactions set forth herein not being
satisfied.
4.2 No Solicitation.
(a) From and after the date hereof until the earlier of the Effective Time or
the termination of this Agreement in accordance with Article VII hereof, the
Company shall not, directly or indirectly, through any
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officer, director, employee, representative or agent of the Company or any of
its subsidiaries, take any action to initiate, solicit or encourage (including
by way of furnishing any person any non-public information, except as
permitted in Section 4.2(e)) or, subject to the terms of the immediately
following sentence, participate in any discussions or negotiations with any
persons who are considering or who have made any inquiries or proposals
regarding any merger, amalgamation, take-over bid, sale of substantial assets,
sale of shares of capital stock (including without limitation by way of a
tender offer) or similar transactions involving the Company or any
subsidiaries of the Company (any of the foregoing inquiries or proposals being
referred to herein as an "ACQUISITION PROPOSAL"). Notwithstanding anything to
the contrary contained in this Section 4.2(a) or in any other provision of
this Agreement, the Company may, to the extent the Board of Directors of the
Company determines, in good faith, after consultation with outside legal
counsel, that the Board's fiduciary duties under applicable law require it to
do so, participate in discussions or negotiations with, and, subject to the
requirements of paragraph (d), below, furnish information to any person,
entity or group after such person, entity or group has delivered to the
Company, an unsolicited bona fide Acquisition Proposal which the Board of
Directors of the Company in its good faith reasonable judgment determines,
after consultation with its independent financial advisors, would result in a
transaction more favorable to the shareholders of the Company than the
transactions contemplated by this Agreement (a "SUPERIOR PROPOSAL"). In
addition, notwithstanding any other provision of this Agreement, in connection
with a possible Acquisition Proposal, the Company may refer any third party to
this Section 4.2 or make a copy of this Section 4.2 available to a third
party. In the event the Company receives a Superior Proposal, nothing
contained in this Agreement (but subject to the terms of this Section 4.2)
will prevent the Board of Directors of the Company from accepting, approving
or recommending such Superior Proposal to its shareholders, if the Board
determines, in good faith, after consultation with outside legal counsel, that
such action is required by its fiduciary duties under applicable law; in such
case, the Board of Directors of the Company may withdraw, modify or refrain
from making its recommendation set forth in Section 5.1(a), and, to the extent
it does so, the Company may refrain from soliciting proxies and taking such
other action necessary to secure the vote of its shareholders as may be
required by Section 5.2; provided, however, that the Company shall not accept,
approve or recommend to its shareholders, or enter into any agreement
concerning, a Superior Proposal for a period of not less than three business
days after Parent's receipt of a copy of the Superior Proposal (or a
reasonably detailed written description of the significant terms and
conditions thereof, if such proposal is not in writing).
(b) Notwithstanding Section 4.2(a) above, nothing contained in this Agreement
shall prohibit the Company from complying with Rules 14d-9 and 14e-2 under the
Exchange Act; provided, however, that, in complying with Rules 14d-9 and 14e-
2, the Company will not make or authorize any recommendation of any
Acquisition Proposal unless such proposal constitutes a Superior Proposal.
(c) The Company shall immediately (and no later than 24 hours) notify Parent
and Dutchco after receipt of any written Acquisition Proposal or any request
for non-public information relating to the Company or any of its subsidiaries
in connection with an Acquisition Proposal or for access to the properties,
books or records of the Company or any subsidiary by any person or entity that
informs the Board of Directors of the Company or such subsidiary that it is
considering making, or has made, an Acquisition Proposal. Such notice to
Parent and Dutchco shall be made orally and in writing and shall indicate in
reasonable detail the terms and conditions of such proposal, inquiry or
contact.
(d) If the Board of Directors of the Company receives a request for material
nonpublic information by a party who makes a bona fide Acquisition Proposal
and the Board of Directors of the Company determines that such proposal is a
Superior Proposal, then, and only in such case, the Company may, subject to
the execution of a confidentiality agreement substantially similar to that
then in effect between the Company and Parent, provide such party with access
to information regarding the Company, which access shall be no more extensive
than that provided to Parent.
(e) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any parties (other than Parent,
Dutchco and Amalgamation Sub) conducted heretofore with respect to any of the
foregoing. The Company agrees not to release any third party from any
confidentiality or standstill agreement with respect to any of the foregoing
to which the Company is a party.
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(f) The Company shall ensure that the officers, directors, employees and
agents of the Company and its subsidiaries and any investment bankers or other
agents, advisors or representatives retained by the Company are aware of the
restrictions described in this Section, and shall be responsible for any
breach of this Section 4.2 by such bankers, officers, directors, employees,
agents, advisors or representatives.
4.3 Covenants of Parent. During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement or the
Effective Time, Parent agrees as to itself and its material subsidiaries
(except to the extent that the Company shall otherwise consent in writing,
which consent shall not unreasonably be withheld), to carry on its and such
subsidiaries' business in the ordinary course, to pay its debts and Taxes when
due subject to good faith disputes over such debts or Taxes and to pay or
perform other obligations when due, except to the extent failure to do any of
the foregoing would not have a Material Adverse Effect.
ARTICLE V
Additional Agreements
5.1 Joint Proxy Statement/Prospectus; Registration Statement. As promptly as
practicable after the execution of this Agreement, Parent and Company shall
prepare and file with the SEC a preliminary proxy statement which shall
constitute the Joint Proxy Statement/Prospectus, together with any other
documents required by the Securities Act or the Exchange Act, in connection
with the Transactions. The Joint Proxy Statement/Prospectus shall constitute
(i) the proxy statement of the Company with respect to the Company
Shareholders' Meeting, (ii) the proxy statement of Parent with respect to the
Parent Stockholders' Meeting and, (iii) the prospectus to be contained in the
Form S-4 with respect to the issuance by (A) Dutchco of the Parent Common
Shares and (B) the Continuing Corporation of the Exchangeable Shares, Units
and Class B Shares in connection with the Transactions. As promptly as
practicable after comments (if any) are received from the SEC thereon and
after the furnishing by Parent and the Company of all information required to
be contained therein, Parent and Company shall cause the Joint Proxy
Statement/Prospectus to be mailed to each of the Company's Shareholders and
each of Parent's Stockholders. The Joint Proxy Statement/Prospectus shall (i)
include the unanimous recommendation of the non-interested Board of Directors
of the Company in favor of the Transactions, except that the Board of
Directors of the Company may withdraw, modify or refrain from making such
recommendation to the extent that the Board determines, in good faith, after
consultation with outside legal counsel, that compliance with the Board's
fiduciary duties under applicable law would require it to do so, and (ii) the
unanimous recommendation of the Board of Directors of Parent in favor of the
Parent Stock Issuance, except that the Board of Directors of Parent may
withdraw, modify or refrain from making such recommendation to the extent that
the Board determines, in good faith, after consultation with outside legal
counsel, that compliance with the Board's fiduciary duties under applicable
law would require it to do so. Parent shall file a registration statement on
Form S-3 (the "FORM S-3") in order to register the Parent Common Shares to be
issued from time to time after the Effective Time upon exchange of the
Exchangeable Shares and shall use its reasonable best efforts to maintain the
effectiveness of such registration for such period as such Exchangeable Shares
remain outstanding, and Parent and the Company shall use all reasonable
efforts to cause the Form S-3 to become effective prior to the Effective Time.
Notwithstanding anything herein to the contrary, Parent shall be under no
obligation to file the Form S-3 if it shall have determined on the advice of
its counsel that the shares of Parent Common Stock to be issued upon exchange
of the Exchangeable Shares after the Effective Time will be exempt from the
registration requirements of Section 5 of the Securities Act by virtue of
Section 3(a)(9) thereof.
5.2 Shareholders' Meetings. The Company shall take all commercially
reasonable action necessary in accordance with applicable law, its Articles of
Incorporation and By-Laws to hold the Company Shareholders' Meeting as soon as
practicable (but in no event more than 40 days) after the date on which the
Form S-4 becomes effective. Parent will take all commercially reasonable
action necessary in accordance with the Delaware General Corporation Law and
its Certificate of Incorporation and By-Laws to convene the Parent
Stockholders' Meeting to be held as soon as practicable (but in no event more
than 40 days) after the date on which the Form S-4
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becomes effective. Parent will consult with Company and will use its
commercially reasonable efforts to hold the Parent Shareholders' Meeting on
the same day as the Company Stockholders' Meeting. Subject to the terms of
this Agreement, each of Parent and the Company will use its commercially
reasonable efforts to solicit from its stockholders proxies in favor of the
approval of this Agreement and the transactions contemplated hereby and the
approval of the Parent Stock Issuance, as the case may be, and will take all
other action necessary or advisable to secure the vote or consent of their
respective stockholders required by the rules of the National Association of
Securities Dealers, Inc. and applicable law to obtain such approvals.
5.3 Access to Information; Confidentiality. Upon reasonable notice and
subject to restrictions contained in confidentiality agreements to which such
party is subject, the Company, Parent and Dutchco shall each (and shall cause
each of their subsidiaries to) afford to the officers, employees, accountants,
counsel and other representatives of the other, reasonable access during
normal business hours, during the period prior to the Effective Time, to all
its properties, books, contracts, commitments and records and, during such
period, the Company and Parent each shall (and shall cause each of their
subsidiaries to) furnish promptly to the other all information concerning its
business, properties and personnel as such other party may reasonably request,
and each shall make available to the other the appropriate individuals
(including attorneys, accountants and other professionals) for discussion of
the other's business, properties and personnel as either party may reasonably
request. Each party shall keep such information confidential in accordance
with the terms of the existing confidentiality agreement dated July 10, 1998
(the "CONFIDENTIALITY AGREEMENT") between Parent and the Company.
5.4 Consents; Approvals. The Company, Parent and Dutchco shall each use best
efforts to obtain all consents, waivers, approvals, authorizations or orders
(including, without limitation, all United States, Canadian federal and
provincial and foreign governmental and regulatory rulings and approvals), and
the Company and Parent shall promptly make all filings (including, without
limitation, all filings with United States, Canadian federal and provincial
and foreign governmental or regulatory agencies) required in connection with
the authorization, execution and delivery of this Agreement and the Ancillary
Documents by the Company and each member of the Parent Group (to the extent
they are parties thereto) and the consummation by them of the transactions
contemplated hereby and thereby. The Company and Parent (with respect to
themselves and their respective subsidiaries) shall furnish all information
required to be included in the Joint Proxy Statement and the Form S-4, or for
any application or other filing to be made pursuant to the rules and
regulations of any United States, Canadian federal or provincial or foreign
governmental body in connection with the Transactions.
5.5 Stock Options; Employee Benefits; Retention of Employees.
(a) At the Effective Time, the Company's obligations with respect to each
outstanding option to purchase Company Common Shares (each a "COMPANY OPTION")
under the Company's Amended and Restated 1994 Restricted Stock and Stock
Option Plan, 1995 Non-Employee Director Stock Option Plan, 1995 Employee Stock
Purchase Plan and 1997 Special Limited Non-Employee Director Stock Plan and
outside of any such formal plan (individually, a "COMPANY STOCK OPTION PLAN,"
and, collectively, the "COMPANY STOCK OPTION PLANS"), whether vested or
unvested, will be assumed by Parent and, on such assumption, the rights to
acquire Company Common Shares under the Company Stock Option Plans shall be
exchanged for rights to acquire Parent Common Shares under such plans. Each
Company Option so assumed by Parent under this Agreement shall continue to
have, and be subject to, the same terms and conditions set forth in the
applicable Company Stock Option Plan and agreement pursuant to which such
Company Option was issued as in effect immediately prior to the Effective
Time, except that (i) such Company Option will be deemed to constitute an
option to purchase that number of Parent Common Shares equal to the product of
the number of Company Common Shares that the holder of such option would have
been entitled to receive had such holder exercised such options immediately
prior to the Effective Time (not taking into account whether such option was
in fact exercisable) multiplied by the Exchange Ratio, rounded down to the
nearest whole number of Parent Common Shares, and (ii) the per share exercise
price for the Parent Common Shares issuable upon exercise of such assumed
Company Option will be equal to the quotient determined by dividing the
exercise price per Company Common Shares at which such Company Option was
exercisable immediately prior to the Effective Time by the Exchange Ratio, and
rounding the resulting exercise price up to the nearest whole cent.
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(b) It is the intention of the parties that the Company Options assumed by
Parent qualify following the Effective Time as incentive stock options as
defined in the Code ("ISOS"), to the extent the Company Options qualified as
ISOs prior to the Effective Time.
(c) The Company shall ensure that any required consents of holders of such
options or rights to such assumptions are obtained prior to the Effective
Time.
(d) As soon as practicable after the Effective Time, Parent shall deliver to
each holder of an outstanding Company Option, an appropriate notice setting
forth such holder's rights pursuant thereto and such Company Option shall
continue in effect on the same terms and conditions (including further anti-
dilution provisions, and subject to the adjustments required by this Section
5.5 after giving effect to the Transactions). Parent shall comply with the
terms of all such Company Options. Parent shall take all corporate action
necessary to reserve for issuance a sufficient number of Parent Common Shares
for delivery pursuant to the terms set forth in this Section 5.5.
(e) As of the Effective Time, the employees of the Company (the "COMPANY
EMPLOYEES") shall be entitled (to the extent permitted by applicable law and
subject to the provisions of this Agreement) to participate in each of
Parent's employee benefit and incentive compensation and perquisite plans and
arrangements (the "PARENT EMPLOYEE PLANS") in which similarly situated
employees of Parent participate, to the same extent as similarly situated
employees of Parent. For purposes of determining eligibility to participate in
the Parent Employee Plans, eligibility to participate in the Parent Employee
Plans, eligibility for benefit forms and subsidies and the vesting of benefits
under such plans (including, but not limited to, any severance, 401(k),
vacation and sick pay plan) and for purposes of accrual of benefits under any
severance, sick leave, vacation and other similar Parent Employee Benefit
Plans (except with respect to Parent's sabbatical program), Parent shall give
effect to years of service (and for purposes of qualified and nonqualified
pension plans, prior earnings) with the Company or its subsidiaries, as the
case may be, as if they were employees of the Parent. Such service shall also
be given effect for purposes of satisfying any waiting period, evidence of
insurability requirements, or the application of any preexisting condition
limitation. The Company Employees shall be given credit for amounts paid under
a corresponding Company Employee Plan during the same period for purposes of
applying deductibles, copayments and out-of-pocket maximums as though such
amounts had been paid in accordance with the terms and conditions of the
Parent Employee Plan. With regard to any employees who are redeployed as a
result of the transactions contemplated hereby, such redeployment shall be
made in accordance with the Redeployment Schedule attached at Schedule 5.6(f)
of the Parent Disclosure Schedule, subject to any general changes in the
policies of Parent.
(f) Parent shall assume and honor the obligations of the Company and its
subsidiaries under all employment, severance, consulting and other
compensation contracts, commitments or agreements disclosed in the Company
Disclosure Schedule, each as amended to the date hereof or as contemplated
hereby. Parent hereby acknowledges that the Transactions will constitute a
"Change in Control" for purposes of all of the Company Employee Plans.
(g) The Company will use its best efforts to assist Parent in identifying and
ensuring the retention by Parent and/or the Continuing Corporation of those
technical and non-technical employees who are necessary to carrying out the
operations of the Company as presently conducted and proposed to be conducted.
The parties acknowledge and agree, consistent with the provisions of this
Agreement, that the failure of Parent and/or the Continuing Corporation to
retain such employees despite the Company's best efforts shall not entitle
Parent to terminate this Agreement.
5.6 Company Employee Stock Purchase Plan.
(a) At the Effective Time, each outstanding purchase right (each an "ASSUMED
PURCHASE RIGHT" and, collectively, the "ASSUMED PURCHASE RIGHTS") under the
Company's 1995 Employee Stock Purchase Plan (the
"COMPANY STOCK PURCHASE PLAN") shall be deemed to constitute a purchase right
to acquire, on the same terms and conditions as were applicable under the
Company Stock Purchase Plan immediately prior to the Effective Time, a number
of Parent Common Shares determined as provided in the Company Stock Purchase
Plan, except that the per share purchase price of such Parent Common Shares
under each such Assumed Purchase Right will
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be the lower of (i) the quotient determined by dividing (x) 85% of the closing
price of a Discreet Common Share as reported on the Nasdaq National Market on
the first day of the offering period in effect as of the Effective Time (the
"CURRENT OFFERING PERIOD") by (y) the Exchange Ratio and (ii) 85% of the
closing price of a share of Autodesk Common Stock as reported on the Nasdaq
National Market on the last day of the Current Offering Period. As soon as
practicable after consummation of the Transactions, Autodesk shall deliver to
the participants in the Company Stock Purchase Plan appropriate notice setting
forth such participants' rights pursuant thereto and that the Assumed Purchase
Rights shall continue in effect on the terms and conditions provided in this
Section 5.6.
(b) Parent shall file and cause to become effective not later than the
Effective Time a registration statement under the Securities Act with respect
to the assumption by Parent of the Company Options referred to in Section 5.5
and the Assumed Purchase Rights referred to in this Section 5.6 and with
respect to the issuance of Parent Common Shares upon exercise of those Company
Options and Assumed Purchase Rights and to keep such registration statement
effective throughout the term of such Company Options and Assumed Purchase
Rights.
(c) Employees of the Company as of the Effective Time shall be permitted to
participate in Parent's Employee Stock Purchase Plan commencing on the first
enrollment date following the Effective Time, subject to compliance with the
eligibility provisions of such plan (with employees receiving credit, for
purposes of such eligibility provisions, for service with the Company).
5.7 Agreements of Affiliates. The Company shall promptly deliver to Parent a
letter (the "AFFILIATE LETTER") identifying all persons who are, or may be
deemed to be, at the time of the Company Stockholders' Meeting, "AFFILIATES"
of the Company for purposes of Rule 145 under the Securities Act. The Company
shall use its best efforts to cause each person who is identified as an
"AFFILIATE" in the Affiliate Letter to deliver to Parent, and Parent shall use
its best efforts to receive from its own affiliates, as promptly as
practicable, but in no event later than the date on which the Joint Proxy
Statement/Prospectus is mailed to stockholders, a written agreement (an
"AFFILIATE AGREEMENT") in substantially the form of Exhibit B-1 hereto (in the
case of affiliates of Parent) and Exhibit B-2 hereto (in the case of
affiliates of the Company).
5.8 Voting Agreements. Concurrently with the date upon which the Joint Proxy
Statement/Prospectus is mailed to the holders of Company Common Shares and
Parent Common Shares, all executive officers and certain directors of both the
Company and Parent shall each execute and deliver a Voting Agreement in
substantially the form of Exhibit C-1 hereto (in the case of officers and
directors of Parent) and Exhibit C-2 hereto (in the case of officers and
directors of the Company), and all such agreements shall be in full force and
effect.
5.9 Indemnification and Insurance.
(a) From and after the Effective Time, (i) the Continuing Corporation and
Parent will fulfill and honor in all respects the obligations of the Company
and its subsidiaries pursuant to the indemnification provisions in the
Company's Articles of Incorporation and By-Laws existing as in effect on the
date hereof with respect to the Company's directors and officers (including
without limitation advancement of legal and other expenses to the extent
provided for in such Articles of Incorporation and By-Laws), and (ii) in the
event any of the Company's directors or officers is or becomes involved in any
capacity in any action, proceeding or investigation in connection with any
matter relating to this Agreement or the Amalgamation Agreement or the
transactions contemplated hereby or thereby occurring on or prior to the
Effective Time, Parent shall, or shall cause the Continuing Corporation to,
pay as incurred such reasonable legal and other expenses (including the cost
of any investigation and preparation) incurred in connection therewith,
subject to an undertaking to repay such amounts as required by applicable law.
(b) From and after the Effective Time, the Continuing Corporation and Parent
shall, to the fullest extent permitted under applicable law or under the
Continuing Corporation's and Parent's, as the case may be, By-Laws, indemnify
and hold harmless, each present director, officer, employee, fiduciary and
agent of the Company or any of its subsidiaries (collectively, the
"INDEMNIFIED PARTIES") against any costs or expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities and amounts paid
in settlement in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or
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investigative, arising out of or pertaining to any action or omission
occurring at or prior to the Effective Time (including, without limitation,
the transactions contemplated by this Agreement and the Amalgamation
Agreement), and to pay as incurred such legal and other expenses (including
the cost of any investigation and preparation) incurred in connection
therewith, subject to an undertaking to repay such amounts as required by
applicable law. The Indemnified Parties as a group may retain only one law
firm to represent them with respect to any single action unless there is,
under applicable standards of professional conduct, a conflict of interest
between the positions of any two or more Indemnified Parties. Any counsel
retained by the Indemnified Parties shall be reasonably satisfactory to Parent
and Parent shall not be liable for any settlement effected without its written
consent (which consent shall not be unreasonably withheld).
(c) The provisions of this Section 5.9 are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party, his or her heirs and
representatives and may not be amended, altered or repealed without the prior
written consent of the affected Indemnified Party.
(d) For a period of five years after the Effective Time, Parent and Dutchco
will, or will cause the Continuing Corporation to, provide officers' and
directors' liability insurance in respect of acts or omissions occurring on or
prior to the Effective Time covering each such person currently covered by the
Company's officers' and directors' liability insurance policy on terms
substantially similar to those of such policy in effect on the date hereof.
5.10 Notification of Certain Matters. The Company shall give prompt notice
to Parent and Dutchco, and Parent and Dutchco shall give prompt notice to the
Company, of (i) the occurrence, or non-occurrence, of any event the
occurrence, or non-occurrence, of which would be likely to cause, or does
cause, any representation or warranty contained in this Agreement to be untrue
or inaccurate or (ii) any failure of the Company, or any member of the Parent
Group as the case may be, materially to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement; provided further that failure
to provide such notice shall not be treated as a breach for purposes of
Section 7.1(g) unless failure to give such notice results in material
prejudice to Parent.
5.11 Further Action. Upon the terms and subject to the conditions hereof,
each of the parties hereto shall use all reasonable efforts to take, or cause
to be taken, all actions and to do, or cause to be done, all other things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement and the
Amalgamation Agreement, to obtain in a timely manner all necessary waivers,
consents and approvals and to effect all necessary registrations and filings,
and to otherwise satisfy or cause to be satisfied all conditions precedent to
its obligations under this Agreement. Each member of the Parent Group and the
Company shall use its best efforts to cause the Transactions to fail to
qualify, will take any actions (that do not materially adversely affect such
party) to cause the Transactions to fail to qualify, and will not (both before
and after consummation of the Transactions) take any actions which cause such
Transactions to qualify, as a reorganization under the provisions of Section
368 of the Code or a transaction described in Section 351 of the Code.
5.12 Public Announcements. Parent (on behalf of each member of the Parent
Group) and the Company shall consult with each other before issuing any press
release or otherwise making any public statements with respect to the
Transactions or this Agreement and shall not issue any such press release or
make any such public statement without the prior consent of the other party,
which shall not be unreasonably withheld; provided, however, that a party may,
without the prior consent of the other party, issue such press release or make
such public statement as may upon the advice of counsel be required by law,
the National Association of Securities Dealers, Inc. or the Nasdaq National
Market or any other regulatory body to which such party is subject if it has
used all reasonable efforts to consult with the other party as to the timing
and content of such release or statement.
5.13 Listing of Parent Common Shares. Parent shall cause the shares of
Parent Common Stock to be issued in connection with the Transactions
(including shares of Parent Common Stock delivered by Dutchco as a
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result of rights attaching to the Exchangeable Shares) to be approved for
listing on the Nasdaq National Market, subject to official notice of issuance,
prior to the Effective Time.
5.14 Conveyance Taxes. Parent, Dutchco and the Company shall cooperate in
the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp Taxes, any
transfer, recording, registration and other fees, and any similar Taxes which
become payable in connection with the transactions contemplated hereby that
are required or permitted to be filed on or before the Effective Time.
5.15 Pooling Letters.
(a) The Company shall use its best efforts to cause to be delivered to Parent
a letter of Arthur Andersen & Cie, addressed to the Company, dated as of a
date within two business days prior to the Effective Time, setting forth that
the Company will qualify as a combining company in a pooling-of-interests
transaction under Opinion 16 of the Accounting Principles Board and applicable
SEC rules and regulations (the "ARTHUR ANDERSEN POOLING LETTER").
(b) Parent shall use its best efforts to cause to be delivered to the Company
a letter of Ernst & Young LLP, addressed to Parent, dated as of a date within
two business days prior to the Effective Time, setting forth the concurrence
of Ernst & Young LLP with the conclusion of Parent's management that the
Transactions will qualify as a pooling-of-interests transaction under Opinion
16 of the Accounting Principles Board and applicable SEC rules and regulations
if consummated in accordance with the terms of this Agreement and the
Ancillary Documents (the "ERNST & YOUNG POOLING LETTER").
5.16 Pooling Accounting Treatment. Each of Parent and the Company agrees not
to take any action that would adversely affect the ability of Parent to treat
the Transactions as a pooling of interests under US GAAP.
5.17 Ancillary Documents/Reservation of Shares.
(a) Provided all other conditions of this Agreement have been satisfied or
waived, the Company, Giants Quebec and Amalgamation Sub shall, as promptly as
practicable thereafter, jointly file Articles to give effect to the
Amalgamation, such Articles to contain share conditions for the Continuing
Corporation substantially in the form of those contained in Appendix A to the
Amalgamation Agreement.
(b) Immediately after the Effective Time:
(i) Parent, Dutchco and the Continuing Corporation shall execute and
deliver a Support Agreement between Parent, Dutchco and the Continuing
Corporation containing the terms and conditions set forth in Exhibit D
hereto (the "SUPPORT AGREEMENT"), together with such other terms and
conditions as may be agreed to by the parties hereto acting reasonably;
(ii) Parent, Dutchco, the Continuing Corporation and a Canadian trust
company to be selected by Parent shall execute and deliver a Voting and
Exchange Trust Agreement containing the terms and conditions set forth
in Exhibit E hereto (the "VOTING AND EXCHANGE TRUST AGREEMENT"),
together with such other terms and conditions as may be agreed to by
the parties hereto acting reasonably; and
(iii) Parent shall file with the Secretary of State of the State of
Delaware a Certificate of Designation which shall be in substantially
the form set forth in Exhibit F hereto.
On and after the Effective Time, Parent and Dutchco shall duly and timely
perform all of their respective obligations expressed in this Agreement, the
Support Agreement and the Voting and Exchange Trust Agreement and the
Amalgamation Agreement, subject to the respective terms thereof. The
Amalgamation Agreement and the other documents referred to in this Section
5.17(b) are referred to herein as the "ANCILLARY DOCUMENTS."
(c) On or prior to the Effective Time, Parent will reserve for issuance such
number of Parent Common Shares as shall be necessary to give effect to the
exchanges, conversions and assumptions of options
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contemplated hereby. On or prior to the Effective Time, Parent and Dutchco
shall enter into a stock purchase agreement pursuant to which Dutchco will
purchase from Parent the Parent Common Shares to be delivered pursuant hereto
and in connection with the Transactions to holders of Company Common Shares at
the Effective Time or immediately thereafter and from time to time thereafter
upon exercise of the Exchangeable Shares.
5.18 Listing of Class B Shares, Class E Shares and Class F Shares. Unless
otherwise agreed to by the parties, the Company, Dutchco and Parent shall
cause the Class B Shares, Class E Shares and Class F Shares to be approved for
listing on the Nasdaq National Market or any other prescribed stock exchange
for the purposes of Section 115 of the Income Tax Act (Canada), effective as
of the time such Class B Shares, Class E Shares, Class F Shares are issued
pursuant to the Transactions.
5.19 Tax Elections.
(a) The Company understands that there may be elections under Sections 338(a)
and (g) of the Code for the Company and/or the Continuing Corporation.
(b) Eligible holders of Class B Shares who receive Exchangeable Shares on the
redemption of their Class B Shares shall be entitled to make an income tax
election pursuant to section 85 of the Income Tax Act (Canada) (and the
analogous provision of provincial income tax law) with respect to the transfer
of their Class B Shares to the Continuing Corporation by providing two signed
copies of the necessary election forms to the Continuing Corporation within
ninety (90) days following the Effective Time, duly completed with the details
of the number of shares transferred and the applicable agreed amounts for the
purposes of such elections. Thereafter, subject to the election forms
complying with the provisions of the Income Tax Act (Canada) (or applicable
provincial income tax law), the Parent and/or Dutchco will cause the forms to
be signed by the Continuing Corporation and returned to such holders of Class
B Shares (within 60 days after the receipt thereof) for filing with Revenue
Canada, Customs, Excise and Taxation (or the applicable provincial taxing
authority). With the exception of execution or causing execution of the
election by the Continuing Corporation, compliance with the requirements for a
valid election shall be the sole responsibility of the holder making the
election. For purposes of this provision an eligible holder is a holder who is
a Canadian resident for purposes of the Income Tax Act (Canada) other than a
person who is exempt from tax under the Income Tax Act (Canada) or which is a
partnership that owns such shares if one or more of its members would be
entitled to make such election if such member held such shares directly.
5.20 Board Candidate. Provided that a qualified person having relevant
expertise in the area of the Company's core business groups is identified by
Parent, Parent shall recommend such person to the Nominating Committee of
Parent's Board of Directors.
5.21 Issuance of Class D Shares. Immediately following the Transactions,
Parent and Dutchco shall cause the Continuing Corporation to issue the Class D
Shares (as defined in the Amalgamation Agreement) solely in exchange for
services.
ARTICLE VI
Conditions To The Transactions
6.1 Conditions to Obligation of Each Party to Effect the Transactions. The
respective obligations of each party to effect the Transactions shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Effectiveness of the Registration Statements. The Form S-4 shall have been
declared effective by the SEC under the Securities Act and shall cover the
Parent Common Shares, Exchangeable Shares, Units and Class B Shares issued at
or immediately after the Effective Time. The Form S-3 shall have been declared
effective by the SEC under the Securities Act and shall cover the Parent
Common Shares to be issued upon the exchange of Exchangeable Shares, if no
exemption from registration under the Securities Act is available for
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such shares. No stop order suspending the effectiveness of the Form S-4 or
Form S-3, if any, shall have been issued by the SEC and no proceedings for
that purpose and no similar proceeding in respect of the Joint Proxy
Statement/Prospectus shall have been initiated or threatened by the SEC or any
provincial securities regulatory authority in Canada;
(b) Shareholder Approval. This Agreement and the Amalgamation shall have been
approved and adopted by the affirmative requisite vote of the shareholders of
the Company, and the Parent Stock Issuance shall have been approved and
adopted by the affirmative requisite vote of the stockholders of Parent;
(c) HSR Act. The waiting period applicable to the consummation of the
Transactions under the HSR Act shall have expired or been terminated;
(d) QSC, Etc. The Company, Parent and Dutchco each shall have filed all
notices and information (if any) required under (i) the Investment Canada Act
(Canada) and shall have received a notice (if required) from the responsible
Minister under the Investment Canada Act (Canada) that he is satisfied or
deemed to be satisfied that the transactions contemplated by this Agreement
and the Ancillary Documents are likely to be of net benefit to Canada, and
(ii) Part IX of the Competition Act (Canada) and the applicable waiting period
shall have expired. Parent and Company shall have obtained from the Quebec
Securities Commission and other relevant securities commissions and
authorities such orders or exemptions as may be required in order to permit
the resale at any time by holders of Parent Common Shares received from time
to time pursuant hereto on the Nasdaq National Market;
(e) No Injunctions or Restraints; Illegality. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"INJUNCTION") preventing the consummation of the Transactions shall be in
effect, nor shall any proceeding brought by any administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending; and there shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Transactions, which makes the
consummation of the Transactions illegal. If an injunction shall have been
issued, each party agrees to use its reasonable diligent efforts to have such
Injunction lifted;
(f) Nasdaq Listing. The Parent Common Shares issued or issuable in the
Transactions and any additional shares issued as a result of the exercise of
rights attaching to the Exchangeable Shares, Class B Shares and Units shall
have been approved for listing, subject to notice of issuance, on the Nasdaq
National Market;
(g) Tax Opinions. Parent and Dutchco and the Company shall each have received
substantially identical written opinions from their counsel, Aird & Berlis and
Stikeman, Elliott, respectively, in form and substance reasonably satisfactory
to them, to the effect that, provided that (i) the adjusted cost base to a
holder of Class B Shares that are redeemed by the Continuing Corporation for
Exchangeable Shares in connection with the Transactions exceeds the aggregate
of (A) the fair market value of the rights to be received by such holder under
the Voting and Exchange Trust Agreement in respect of such holder's
Exchangeable Shares and (B) any cash received by such holder in lieu of a
fraction of an Exchangeable Share, and (ii) the holder files the appropriate
elections with the relevant tax authorities within the required time such that
the holder's proceeds of disposition do not exceed the adjusted cost base to
the holder of such Class B Shares, such holder will not realize a capital gain
or a capital loss for purposes of the Income Tax Act (Canada) on the
Amalgamation or the redemption of the Class B Shares;
(h) Public Corporation. Upon the Amalgamation, the Continuing Corporation will
be a "public corporation" under the Income Tax Act (Canada);
(i) Affiliate Agreements. Parent and Dutchco shall have received from each
person who is identified in the Affiliate Letter as an "affiliate" of the
Company an Affiliate Agreement as set forth in Section 5.7, and each such
Affiliate Agreement shall be in full force and effect. The Company shall have
received from each person who Parent in good faith determines is an affiliate
of Parent, an Affiliate Agreement as set forth in Section 5.7, and each such
Affiliate Agreement shall be in full force and effect; and
(j) Pooling Letters. Each of the Company and Parent shall have received the
Arthur Andersen Pooling Letter and the Ernst & Young Pooling Letter,
respectively.
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6.2 Additional Conditions to Obligations of Parent Group Members. The
obligations of each member of the Parent Group to effect the Transactions are
also subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of the
Company contained in this Agreement shall be true and correct in all respects
on and as of the Effective Time, except (i) for changes contemplated by this
Agreement, (ii) for those representations and warranties which address matters
only as of a particular date (which shall remain true and correct as of such
date) or (iii) where the failure to be true and correct would not have and
could not reasonably be expected to have a Material Adverse Effect on the
Company, with the same force and effect as if made on and as of the Effective
Time, and Parent and Dutchco shall have received a certificate to such effect
signed on behalf of the Company by the President and Chief Financial Officer
of the Company;
(b) Agreements and Covenants. The Company shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time, and Parent and Dutchco shall have received a certificate to such effect
signed on behalf of the Company by the President and Chief Financial Officer
of the Company;
(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all material filings
required to be made, by the Company for the authorization, execution and
delivery of this Agreement and the Amalgamation Agreement and the consummation
by it of the transactions contemplated hereby and thereby shall have been
obtained and made by the Company; and
(d) Governmental Actions. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint provision, materially
limiting or restricting Parent's conduct or operation of the business of the
Company and its subsidiaries following the consummation of the Transactions
shall be in effect, nor shall any investigation or other inquiry that is
reasonably likely to result in any of the foregoing, nor shall any proceeding
brought by an administrative agency or commission or other governmental
entity, domestic or foreign, seeking the foregoing be pending or threatened.
6.3 Additional Conditions to Obligation of the Company. The obligation of
the Company to effect the Transactions is also subject to the following
conditions:
(a) Representations and Warranties. The representations and warranties of the
Parent Group contained in this Agreement shall be true and correct in all
respects on and as of the Effective Time, except (i) for changes contemplated
by this Agreement, (ii) for those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as
of such date) or (iii) where the failure to be true and correct would not have
and could not reasonably be expected to have a Material Adverse Effect on the
Company, with the same force and effect as if made on and as of the Effective
Time, and the Company shall have received a certificate to such effect signed
by the President and Chief Executive Officer of Parent and of Dutchco;
(b) Agreements and Covenants. Each member of the Parent Group shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement and the Ancillary Documents (to the
extent they are parties thereto) to be performed or complied with by it on or
prior to the Effective Time, and the Company shall have received a certificate
to such effect signed by the President and Chief Financial Officer of Parent
and of Dutchco; and
(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required to
be made, by any member of the Parent Group for the authorization, execution
and delivery of this Agreement and the Ancillary Documents and the
consummation by them of the transactions contemplated hereby and thereby shall
have been obtained and made by such Parent Group member.
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ARTICLE VII
Termination
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, notwithstanding approval thereof by the shareholders of the
Company:
(a) by mutual written consent duly authorized by the Boards of Directors of
Parent, Dutchco and the Company; or
(b) by either Parent, Dutchco or the Company if the Transactions shall not
have been consummated by December 31, 1998 or such later date as may be agreed
upon in writing by the parties hereto (the "FINAL DATE"); provided, however,
that the Final Date shall be extended on a day-for-day basis (i) for each day
that the SEC fails to indicate that it has no further comments with regard to
the Joint Proxy Statement beginning 40 days after the filing of such document
with the SEC, and (ii) for each day that any necessary waiting period under or
compliance with the HSR Act is not completed beginning 45 days after the
original filing of the required notice under the HSR Act by the last party to
make such filing; and provided, further, that, the right to terminate this
Agreement and the Amalgamation Agreement under this Section 7.1(b) shall not
be available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Transactions
to be consummated on or before such date); or
(c) by either Parent, Dutchco or the Company if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued a non-appealable final order, decree or ruling or
taken any other action, in each case having the effect of permanently
restraining, enjoining or otherwise prohibiting the Transactions (provided,
however, that no party which has not complied with its obligations under
Section 5.4 may terminate this Agreement pursuant to this Section 7.1(c)); or
(d) by either Parent, Dutchco or the Company, if, at either the Company
Shareholders' Meeting or the Parent Stockholders' Meeting (including any
adjournment or postponement thereof), the requisite affirmative vote of
stockholders shall not have been obtained (provided, however, that no party
which has not complied with its obligations under Section 5.1 or 5.2 may
terminate this Agreement pursuant to this Section 7.1(d)); or
(e) by Parent or Dutchco, if (i) the Board of Directors of the Company shall
withdraw, modify or change its recommendation of the Transactions referred to
in Section 5.1 in a manner adverse to Parent or Dutchco or shall have resolved
to do so; or (ii) the Board of Directors of the Company shall have recommended
to its stockholders, or publicly announced a "NEUTRAL" position with respect
to, an Acquisition Proposal (as defined in Section 4.2(a)), or shall have
failed to reject as inadequate, or shall have failed to reaffirm its
recommendation of this Agreement and the Transactions within ten business days
after the public announcement or commencement of such Acquisition Proposal; or
(f) by the Company, if the Board of Directors of the Parent or Dutchco shall
withdraw, modify or change its recommendation in favor of the Parent Stock
Issuance, or shall have resolved to do so; or
(g) by (i) the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of any member of the Parent Group set forth
in this Agreement or the Amalgamation Agreement or if any representation or
warranty of the Parent Group shall have become untrue, such that the
conditions set forth in Section 6.3(a) or 6.3(b) would not be satisfied, or
(ii) Parent or Dutchco, upon a breach of any representation, warranty,
covenant or agreement on the part of the Company set forth in this Agreement
or if any representation or warranty of the Company shall have become untrue,
such that the conditions set forth in Section 6.2(a) or 6.2(b) would not be
satisfied (in either case, a "TERMINATING BREACH"), provided, however, that if
such Terminating Breach is curable prior to the expiration of 30 days from its
occurrence (but in no event later than December 31, 1998) by a Parent Group
member or the Company, as the case may be, through the exercise of its
reasonable best efforts and for so long as Parent, Dutchco and/or Amalgamation
Sub or the Company, as the case may be, continues to exercise such reasonable
best efforts, neither the Company nor Parent and/or Amalgamation Sub,
respectively, may terminate this Agreement under this Section 7.1(g) until the
earlier of December 31, 1998 or the expiration of such 30-day period without
such Terminating Breach having been cured; or
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(h) by either Parent, Dutchco or the Company, if the Board of Directors of the
Company shall have recommended, resolved to accept, or accepted, a Superior
Proposal.
7.2 Effect of Termination. In the event of the termination of this Agreement
pursuant to Section 7.1, this Agreement shall forthwith become void and there
shall be no liability on the part of any party hereto or any of its
affiliates, directors, officers or stockholders except (i) as set forth in
Section 7.3 and the last sentence of Section 8.1 hereof, and (ii) nothing
herein shall relieve any party from liability for any willful breach hereof.
7.3 Fees and Expenses.
(a) Except as set forth in this Section 7.3, all fees and expenses incurred in
connection with this Agreement and the Transactions shall be paid by the party
incurring such expenses, whether or not the Transactions are consummated.
(b) Payments by Company to Dutchco.
(i) If there shall have occurred any of the following events:
(A) The Board of Directors of the Company shall have withheld,
withdrawn or modified in a manner adverse to Parent its
recommendation in favor of adoption and approval of this Agreement
and approval of the Transactions as permitted by Section 5.1, and at
or prior to the time of such action by the Company there shall not
have occurred a Material Adverse Effect on Parent, and there shall
have occurred a Superior Proposal which shall have been publicly
disclosed and not withdrawn;
(B) The Board of Directors of the Company shall have recommended a
Superior Proposal (other than Dutchco's) to the shareholders of the
Company;
(C) The Company shall have failed to convene the Company
Shareholder's Meeting by December 24, 1998 and there is an
Acquisition Proposal outstanding at such time; or
(D) The vote of the shareholders of Company approving and adopting
this Agreement and approving the consummation of the Amalgamation
shall not have been obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of shareholders duly
convened therefor or any adjournment thereof (a "COMPANY NEGATIVE
VOTE"), and prior to such Company Negative Vote there shall have
occurred an Acquisition Proposal with respect to the Company which
shall have been publicly disclosed and not withdrawn;
then the Company shall pay to Dutchco (1) an amount equal to all out-of-pocket
fees and expenses reasonably incurred by Parent and Dutchco in connection with
this Agreement up to a maximum of US $2,000,000 within one business day
following the earlier to occur of (x) termination of this Agreement pursuant
to Section 7.1(b), Section 7.1(e) or Section 7.1(h), and (y) a Company
Negative Vote, plus (2) if any Acquisition Proposal is consummated within 9
months after the time for such payment under clause (1), an amount equal to US
$15,000,000 less any amounts paid under the preceding clause (1) within one
business day following demand therefor after such consummation.
(ii) If no payment shall have been required pursuant to Section
7.3(b)(i) and the Board of Directors of the Company shall have
withheld, withdrawn or modified in a manner adverse to Parent its
recommendation in favor of adoption and approval of this Agreement and
approval of the Transactions as permitted by Section 5.1, and at or
prior to the time of such action by the Company there shall not have
occurred a Material Adverse Effect on Parent and there shall not be a
Superior Proposal at that time outstanding, then the Company shall pay
to Dutchco US $6,000,000 following the earlier to occur of (x)
termination of this Agreement pursuant to Section 7.1(e) or (y) a
Company Negative Vote.
(iii) If no payment shall have been required pursuant to clauses
7.3(b)(i) or 7.3(b)(ii) and (A) there shall be a Company Negative Vote
and at or prior to the time of such Company Negative Vote, there shall
not have occurred a Material Adverse Effect with respect to Parent, or
(B) this Agreement is terminated by Dutchco pursuant to Section 7.1(g),
then Company shall pay to Dutchco an amount
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equal to all out-of-pocket fees and expenses reasonably incurred by
Parent and Dutchco in connection with this Agreement and the
Transactions up to a maximum of US $2,000,000 within one business day
following the earlier to occur of (A) termination of this Agreement
pursuant to Section 7.1(g), or (B) a Company Negative Vote.
(c) Payments by Dutchco to the Company.
(i) If the Board of Directors of Parent shall have withheld,
withdrawn or adversely modified its recommendation in favor of the
Parent Stock Issuance as permitted by Section 5.1, and at or prior to
the time of such action by Parent there shall not have occurred a
Material Adverse Effect on the Company, then Dutchco shall pay US
$6,000,000 within one business day following the earlier of (A)
termination of this Agreement pursuant to Section 7.1(f) or (B) a
Parent Negative Vote (as defined below).
(ii) If (A) the vote of the stockholders of Parent approving the
Parent Stock Issuance shall not have been obtained by reason of the
failure to obtain the required vote upon a vote taken at a meeting of
stockholders duly convened therefor or any adjournment thereof (a
"PARENT NEGATIVE VOTE") and at or prior to the time of such Parent
Negative Vote, there shall not have occurred a Material Adverse Effect
with respect to the Company, (B) this Agreement is terminated by the
Company pursuant to Section 7.1(g), or (C) Parent shall have failed to
convene the Parent Stockholder's Meeting by December 24, 1998, then
Dutchco shall pay to the Company an amount equal to all out-of-pocket
fees and expenses reasonably incurred by Company in connection with
this Agreement and the Transactions up to a maximum of US $2,000,000
within one business day following the earlier to occur of (A)
termination of this Agreement pursuant to Section 7.1(d) or Section
7.1(g), or (B) a Parent Negative Vote.
(d) Payment of the amounts described in Section 7.3(b) and (c) above shall not
be in lieu of damages incurred by a party for breach of this Agreement.
(e) Any fees or expenses incurred by Parent shall be borne by Dutchco to the
extent agreed by Parent and Dutchco.
ARTICLE VIII
General Provisions
8.1 Effectiveness of Representations, Warranties and Agreements. Except as
otherwise provided in this Section 8.1, the representations, warranties and
agreements of each party hereto shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any other party
hereto, any person controlling any such party or any of their officers or
directors, whether prior to or after the execution of this Agreement. The
representations, warranties and agreements in this Agreement shall terminate
upon consummation of the Transactions or upon the termination of this
Agreement pursuant to Section 7.1, as the case may be, except that any
agreement contemplated by this Agreement which, by its terms, does not
terminate until a later date and the agreements set forth in Sections 5.5,
5.6, 5.9, the ultimate paragraph of Section 5.17(b) and Sections 5.17(c), 5.18
and 5.19 shall survive the consummation of the Transactions indefinitely and
those set forth in Section 7.3 and the final sentence of Section 5.3 shall
survive termination indefinitely. The Confidentiality Agreement(s) shall
survive termination of this Agreement as provided therein.
8.2 Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered, if delivered personally, three days after being sent
by registered or certified mail (postage prepaid, return receipt requested),
one day after dispatch by recognized overnight courier (provided delivery is
confirmed by the courier), and upon transmission by telecopy, confirmed
received, to the parties at the following addresses (or at such other address
for a party as shall be specified by like changes of address shall be
effective upon receipt) or sent by electronic transmission, with confirmation
received, to the telecopy number specified below:
A-34
<PAGE>
(a) If to Parent, Dutchco, Giants Quebec, ACI or Amalgamation Sub:
Autodesk, Inc.
20400 Stevens Creek Boulevard
Cupertino, CA 95401-2217
Fax No.: (408) 517-1886
Attention: Marcia K. Sterling
Vice President Business Development, General Counsel and
Secretary
With a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Fax No.: (650) 493-6811
Attention: Mark A. Bertelsen
and
Aird & Berlis
BCE Place
Suite 1800, Box 754
181 Bay Street
Toronto, Ontario M5J 2T9
Fax No.: (416) 863-1515
Attention: Jay A. Lefton
(b) If to the Company:
Discreet Logic Inc.
10 Duke Street
Montreal, Quebec Canada H3C 2L7
Fax No.: (514) 393-3996
Attention: Francois Plamondon
Executive Vice President, Chief Financial Officer, Treasurer
and Secretary
With a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Fax No.: (617) 248-7100
Attention: Mark J. Macenka
and to:
Stikeman, Elliott
1155 Rene Levesque Boulevard West
Suite 4000
Montreal, Quebec H3B 3V2
Fax No.: (514) 397-3222
Attention: Christine Desaulniers
8.3 Certain Definitions. For purposes of this Agreement, the term:
(a) "AFFILIATES" means a person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common
control with, the first-mentioned person; including, without limitation,
any partnership or joint venture in which the Company (either alone, or
through or together with any other subsidiary) has, directly or indirectly,
an interest of 10 percent or more;
A-35
<PAGE>
(b) "BUSINESS DAY" means any day other than a Saturday, Sunday or a day
when banks are not open for business in either of San Francisco, California
and Montreal, Quebec;
(c) "CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON
CONTROL WITH") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the
management or policies of a person, whether through the ownership of stock,
as trustee or executor, by contract or credit arrangement or otherwise;
(d) "PERSON" means an individual, corporation, partnership, association,
trust, unincorporated organization, other entity or group (as defined in
Section 13(d)(3) of the Exchange Act); and
(e) "SUBSIDIARY" or "SUBSIDIARIES" of the Company, the Continuing
Corporation, Parent or any other person means any corporation, partnership,
joint venture or other legal entity of which the Company, the Continuing
Corporation, Parent or such other person, as the case may be (either alone
or through or together with any other subsidiary), owns, directly or
indirectly, more than 50% of the stock or other equity interests the
holders of which are generally entitled to vote for the election of the
board of directors or other governing body of such corporation or other
legal entity.
8.4 Amendment. This Agreement may be amended by the parties hereto by action
taken by or on behalf of their respective Boards of Directors at any time
prior to the Effective Time; provided, however, that, after approval of the
Transactions by the shareholders of the Company, no amendment may be made
which by law requires further approval by such shareholders without such
further approval. This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.
8.5 Waiver. At any time prior to the Effective Time, any party hereto may
with respect to any other party hereto (a) extend the time for the performance
of any of the obligations or other acts, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if
set forth in an instrument in writing signed by the party or parties to be
bound thereby.
8.6 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
8.7 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any
manner adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner to the end that transactions contemplated hereby are fulfilled to the
extent possible.
8.8 Entire Agreement. This Agreement, together with the Amalgamation
Agreement and the Confidentiality Agreement, constitutes the entire agreement
and supersedes all prior agreements and undertakings (other than the
Amalgamation Agreement and the Confidentiality Agreement), both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof and, except as otherwise expressly provided herein, are not intended to
confer upon any other person any rights or remedies hereunder.
8.9 Assignment; Amalgamation Sub/Dutchco.
(a) This Agreement shall not be assigned by operation of law or otherwise,
except that any member of the Parent Group may assign all or any of its
respective rights hereunder to any subsidiary of Parent provided that no such
assignment shall relieve the assigning party of its obligations hereunder. The
Company agrees that prior to the Effective Time, it may amend the Amalgamation
Agreement to provide for the amalgamation of one or more of Parent's Canadian
subsidiaries with the Company; provided, however, that, such amalgamation does
not, in any respect adversely affect the ability of the parties to complete
the transaction contemplated hereby or,
A-36
<PAGE>
affect the economic terms of the transactions contemplated hereby to the
holders of the Company Common Shares, including, without limitation, the tax
treatment to holders who elect to receive Exchangeable Shares.
(b) Parent undertakes to the Company that Parent shall cause Dutchco to
perform in a due and timely manner all of its obligations hereunder and to be
performed by it under the Ancillary Documents and in connection with the
implementation of the Transactions and that Parent shall cause Dutchco to
refrain from taking or omitting to take any action which would have an adverse
economic effect on the implementation of the Transactions as contemplated
herein.
8.10 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, other than Section 5.8 (which is intended to be for the benefit of
the Indemnified Parties and may be enforced by such Indemnified Parties).
8.11 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or
delay on the part of any party hereto in the exercise of any right hereunder
shall impair such right or be construed to be a waiver of, or acquiescence in,
any breach of any representation, warranty or agreement herein, nor shall any
single or partial exercise of any such right preclude other or further
exercise thereof or of any other right. All rights and remedies existing under
this Agreement are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
8.12 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS EXECUTED AND FULLY PERFORMED WITHIN THE STATE OF CALIFORNIA, EXCEPT
TO THE EXTENT MANDATORILY GOVERNED BY QUEBEC LAW.
8.13 Choice of Language. The parties hereto confirm that it is their wish
that this Agreement, as well as all other documents related hereto, including
legal notices, have been and shall be drawn up in the English language only.
Les parties si-dessous confirment leur desir que cet accord ainsi que tous les
documents, y compris tous avis qui s'y rattachent, soient rediges en langue
Anglaise.
8.14 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
8.15 Guarantee. Parent and Dutchco hereby unconditionally and irrevocably
guarantee the full and punctual performance of the Continuing Corporation's
obligations hereunder and pursuant to the Amalgamation Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-37
<PAGE>
In Witness Whereof, Parent, Dutchco, Amalgamation Sub, Giants Quebec, ACI and
the Company have caused this Agreement to be executed as of the date first
written above by their respective officers thereunto duly authorized.
"Parent"
Autodesk, Inc.
/s/ Carol A. Bartz
By:__________________________________
Carol A. Bartz
Chief Executive Officer
"Dutchco"
Autodesk Development B.V.
/s/ Michael E. Sutton
By:__________________________________
Michael E. Sutton
Directeur
"Amalgamation Sub"
9066-9771 Quebec Inc.
/s/ Marcia K. Sterling
By:__________________________________
Marcia K. Sterling
Secretary
"ACI"
Autodesk Canada Inc.
/s/ Carol A. Bartz
By:__________________________________
Carol A. Bartz
President
A-38
<PAGE>
"Giants Quebec"
9066-9854 Quebec Inc.
/s/ Marcia K. Sterling
By:__________________________________
Marcia K. Sterling
Secretary
"Company"
Discreet Logic Inc.
/s/ Francois Plamondon
By:__________________________________
Francois Plamondon
Executive Vice President and
Chief Financial Officer
A-39
<PAGE>
APPENDIX B
THIS AMALGAMATION AGREEMENT is made as of the 23rd day of September, 1998
BETWEEN:
DISCREET LOGIC INC., a company incorporated
under the laws of Quebec
(the "Company")
--and--
9066-9854 QUEBEC INC., a company incorporated
under the laws of Quebec
("Autodesk Quebec")
--and--
9066-9771 QUEBEC INC., a company incorporated
under the laws of Quebec
("Amalgamation Sub")
--and--
AUTODESK, INC., a corporation incorporated
under the laws of Delaware
("Autodesk"), as Intervenant
RECITALS:
A. The Company was incorporated under Part 1A of the Companies Act (Quebec),
as amended (the "Quebec Act") by certificate of incorporation dated September
10, 1991;
B. Autodesk Quebec was incorporated under Part 1A of the Quebec Act by
certificate of incorporation dated August 14, 1998;
C. Amalgamation Sub was incorporated under Part 1A of the Quebec Act by
certificate of incorporation dated August 14, 1998;
D. The authorized share capital of the Company consists of an unlimited
number of common shares (the "Company Common Shares") and an unlimited number
of preferred shares;
E. As at August 31, 1998 there were 29,697,358 Company Common Shares issued
and outstanding as fully paid and non-assessable shares and there were no
preferred shares outstanding;
F. The authorized share capital of Autodesk Quebec consists of an unlimited
number of common shares (the "Autodesk Quebec Common Shares");
G. As at the date of this Agreement, one hundred Autodesk Quebec Common
Shares were issued and outstanding as fully paid and non-assessable shares and
are held and beneficially owned indirectly by Autodesk;
H. The authorized share capital of Amalgamation Sub consists of an unlimited
number of common shares (the "Amalgamation Sub Common Shares");
B-1
<PAGE>
I. As at the date of this Agreement, one hundred Amalgamation Sub Common
Shares were issued and outstanding as fully paid and non-assessable shares and
are held by Autodesk Development B.V. ("Dutchco");
J. The Company, Autodesk Quebec and Amalgamation Sub have agreed to
amalgamate pursuant to the Quebec Act upon the terms and conditions set forth
in this Agreement; and
K. It is desirable that the amalgamation contemplated by this Agreement be
effected.
NOW THEREFORE in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration (the receipt and
sufficiency of which are hereby acknowledged) the parties agree as follows:
ARTICLE 1
Interpretation
1.1 Interpretation. In this Agreement, the following terms shall have the
following meanings:
"Affiliate" of any person means any other person directly or indirectly
controlled by, or under common control of, that person. For the purposes of
this definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control of"), as applied to any person,
means the possession by another person, directly or indirectly, of the power
to direct or cause the direction of the management and policies of that first
mentioned person, whether through the ownership of voting securities, by
contract or otherwise; provided, however, that any former directors, executive
officers or principal shareholders of the Company who may be deemed to be an
affiliate of Parent, after the Effective Date, shall not be considered an
"Affiliate" for purposes of this Agreement.
"Agreement" means this amalgamation agreement as the same may be amended
from time to time and the expressions "hereof", "herein", "hereto",
"hereunder", "hereby" and similar expressions refer to this Agreement.
"Amalgamation" means the amalgamation of the Amalgamating Companies pursuant
to the Articles of Amalgamation.
"Amalgamating Companies" means the Company, Autodesk Quebec and Amalgamation
Sub.
"Amalgamation Sub" means 9066-9771 Quebec Inc., a company incorporated under
the Quebec Act.
"Articles of Amalgamation" means the articles of amalgamation to be filed
with the Inspector General of Financial Institutions pursuant to section
123.118 of the Quebec Act to give effect to this Agreement.
"Autodesk Quebec" means 9066-9854 Quebec Inc., a company incorporated under
the Quebec Act.
"Business Day" means any day other than a Saturday, Sunday or a day when
banks are not open for business in either of San Francisco, California and
Montreal, Quebec.
"Certificate of Amalgamation" means the certificate of amalgamation to be
issued to the Corporation by the Inspector General of Financial Institutions
under the Quebec Act in respect of the Amalgamation.
"Class A Shares" means the Class A voting common shares in the share capital
of the Corporation.
"Class B Shares" means the Class B non-voting common shares in the share
capital of the Corporation.
"Class C Shares" means the Class C non-voting preferred shares in the share
capital of the Corporation.
B-2
<PAGE>
"Class D Shares" means the Class D non-voting preferred shares in the share
capital of the Corporation.
"Class E Shares" means the Class E voting common shares in the share capital
of the Corporation.
"Class F Shares" means the Class F non-voting common shares in the share
capital of the Corporation.
"Combination Agreement" means the Amended and Restated Agreement and Plan of
Acquisition and Amalgamation by and among the Parent, Dutchco, Autodesk Canada
Inc., the Company, Autodesk Quebec and Amalgamation Sub dated as of September
23, 1998, providing for, among other things, the Amalgamation and related
transactions.
"Company" means Discreet Logic Inc., a company incorporated under the Quebec
Act.
"Company Common Shares" means the common shares in the share capital of the
Company.
"Company Meeting" means the special general meeting of the shareholders of
the Company to be held to consider the Amalgamation.
"Corporation" means the company resulting from the Amalgamation.
"Dutchco" means Autodesk Development B.V., a corporation subsisting under
the laws of The Netherlands, where applicable, or such other subsidiary of
Autodesk or Dutchco to which Dutchco has assigned some or all of its rights
under the Combination Agreement.
"Effective Date" means the date of the Amalgamation as set forth in the
Certificate of Amalgamation.
"Exchangeable Share Provisions" means the rights, privileges, restrictions
and conditions attaching to the Exchangeable Shares as set forth in Appendix A
hereto.
"Exchangeable Shares" means the exchangeable non-voting shares in the share
capital of the Corporation.
"Nasdaq" means the Nasdaq National Market of the Nasdaq Stock Market, Inc.
"Parent" means Autodesk, Inc., a body corporate existing under the laws of
the State of Delaware.
"Parent Common Shares" means the common shares $0.01 par value per share in
the share capital of Parent.
"Quebec Act" means the Companies Act (Quebec), including all regulations
made thereunder, all amendments to such statute or regulations from time to
time, and any statute or regulation that supplements or supersedes such
statute or regulation.
"Special By-Law 1998-1" means the special by-law providing for the
Amalgamation adopted by the directors of the Company, the directors of
Autodesk Quebec and the directors of Amalgamation Sub and to be confirmed by
the shareholders of each of the Amalgamating Companies in accordance with the
Quebec Act.
"Subsidiary" means and includes a direct or indirect subsidiary.
1.2 Sections and Headings; Interpretation. The division of this Agreement
into sections and the insertion of headings are for reference purposes only
and shall not affect the interpretation of this Agreement. Unless otherwise
indicated, any reference in this Agreement to a section or an Appendix refers
to the specified section of or Appendix to this Agreement.
1.3 Number, Gender and Persons. In this Agreement, unless the context
otherwise requires, words importing the singular number include the plural and
vice versa, words importing any gender include all genders
B-3
<PAGE>
and words importing persons include individuals, corporations, partnerships,
associations, trusts, unincorporated organizations, governmental bodies and
other legal or business entities of any kind.
1.4 Date for any Action. In the event that any date on or by which any
action is required or permitted to be taken hereunder is not a Business Day,
such action shall be required or permitted to be taken on or by the next
succeeding day which is a Business Day.
1.5 Time. All times expressed herein are local time Montreal, Quebec unless
otherwise stipulated herein or therein.
1.6 Currency. Unless otherwise expressly stated herein, all references to
currency in this Agreement are to Canadian dollars, being lawful money of
Canada, and the sign "$" without more shall mean Canadian dollars.
1.7 Statutory References. Any reference in this Agreement to a statute
includes all regulations made thereunder, all amendments to such statute or
regulations in force from time to time, and any statute or regulation that
supplements or supersedes such statute or regulations.
1.8 Concurrent Approval. It is acknowledged that the completion of the
Amalgamation is contingent upon its approval by the requisite majority of the
shareholders of the Company, Amalgamation Sub and Autodesk Quebec, which
approvals shall have been obtained prior to the Effective Date.
ARTICLE 2
Amalgamation
2.1 Amalgamation. The Amalgamating Companies hereby agree to amalgamate
pursuant to the provisions of Chapter XVII of Part 1A of the Quebec Act as at
the Effective Date to continue as one company, the Corporation, under the
Quebec Act on the terms set forth herein.
2.2 Name. The name of the Corporation shall be Discreet Logic Inc.
2.3 Head Office. The head office of the Corporation shall be located in the
Judicial District of Montreal, in the Province of Quebec. Unless changed by
the directors of the Corporation, the address of the head office of the
Corporation shall be 10 Duke Street, Montreal, Quebec, Canada, H3C 2L7.
2.4 Business and Powers. There shall be no restrictions on the business the
Corporation may carry on or on the powers it may exercise.
2.5 Authorized Share Capital. Upon the Amalgamation, the Corporation shall
be authorized to issue:
(a) an unlimited number of Class A Shares;
(b) an unlimited number of Class B Shares;
(c) an unlimited number of Class C Shares;
(d) 150,000 non-voting Class D Shares;
(e) an unlimited number of Class E Shares;
(f) an unlimited number of Class F Shares; and
(g) an unlimited number of Exchangeable Shares,
all of which shall be without par value, except for the Exchangeable Shares
which shall have a par value provided for in the Exchangeable Share
Provisions.
B-4
<PAGE>
The Class A Shares, the Class B Shares, the Class C Shares, the Class D
Shares, the Class E Shares, the Class F Shares and the Exchangeable Shares
shall have attached thereto the rights, privileges, restrictions and
conditions respectively as set out in Appendix A hereto.
2.6 Share Restrictions. There shall be no restrictions on the issue,
transfer or ownership of shares of the Corporation.
2.7 Number of Directors. The board of directors of the Corporation will,
until otherwise changed in accordance with the Quebec Act, consist of a
minimum of three and a maximum of ten directors.
2.8 Initial Directors and Officers. The three initial directors of the
Corporation shall be:
<TABLE>
<CAPTION>
NAME RESIDENTIAL ADDRESS OCCUPATION OFFICE
---- ------------------- ---------- ------
<S> <C> <C> <C>
Eric B. Herr 228 Massol Avenue Executive President
Los Gatos, CA 95030
Steve Cakebread 1075 Greenfield Executive Chief Executive
St. Helena, CA 94574 Officer
Marcia K. Sterling 4180 Oak Hill Avenue Executive Secretary
Palo Alto, CA 94306
</TABLE>
These directors will hold office from the Effective Date until the close of
business of the annual meeting of shareholders of the Corporation first
following the date of this Agreement or until their successors are elected or
appointed. The business and affairs of the Corporation will be managed by the
directors, subject to the provisions of the Quebec Act.
2.9 By-laws. The by-laws of the Corporation shall be the by-laws of
Amalgamation Sub in effect immediately prior to the Amalgamation.
2.10 Fiscal Year. The fiscal year of the Corporation shall end on January 31
of each year.
2.11 Officers. Until changed by the directors or until their successors are
appointed, from the Effective Date the officers of the Corporation will be as
follows:
<TABLE>
<CAPTION>
NAME OFFICE
---- ------
<C> <S>
Eric B. Herr President
Steve Cakebread Vice-President
Marcia K. Sterling Secretary
</TABLE>
2.12 Auditors. From the Effective Date until the close of business of the
annual meeting of shareholders of the Corporation first following the date of
this Agreement, the auditors of the Corporation will be Ernst & Young,
Chartered Accountants, unless such auditors resign or are removed.
ARTICLE 3
Issuance of Shares on Amalgamation
3.1 Upon the Amalgamation:
(a) each holder of Amalgamation Sub Common Shares outstanding immediately
prior to the Amalgamation will receive one fully paid and non-assessable
Class A Share for each Amalgamation Sub Common Share held and the name of
each holder thereof shall be added to the register of holders of Class A
Shares accordingly and each certificate representing such Amalgamation Sub
Common Shares shall continue to evidence ownership of Class A Shares;
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<PAGE>
(b) each holder of Autodesk Quebec Common Shares outstanding immediately
prior to the Amalgamation will receive one fully paid and non-assessable
Class C Share for each Autodesk Quebec Common Share held and the name of
each holder thereof shall be added to the register of holders of Class C
Shares accordingly and each certificate representing such Autodesk Quebec
Common Shares shall continue to evidence ownership of Class C Shares; and
(c) each holder of Company Common Shares outstanding immediately prior to
the Amalgamation will receive one fully paid and non-assessable Class B
Share for each Company Common Share held and the name of each holder
thereof shall be added to the register of holders of Class B Shares
accordingly and each certificate representing Company Common Shares shall
continue to evidence ownership of Class B Shares.
ARTICLE 4
Share Capital
4.1 Share Capital. For purposes of the Quebec Act and the Income Tax Act
(Canada):
(a) the issued and paid-up share capital account of the Class A Shares
issued in connection with the Amalgamation will be $100.00;
(b) the issued and paid-up share capital account of the Class B Shares
issued in connection with the Amalgamation will be the aggregate sum of the
aggregate issued and paid-up capital account of all of the outstanding
shares of all classes of Amalgamation Sub, Autodesk Quebec and the Company
for purposes of the Income Tax Act (Canada) determined immediately before
the Amalgamation, minus the amount of issued and paid-up share capital
accounts of the Class A Shares and the Class C Shares; and
(c) the issued and paid up share capital account of the Class C Shares
issued on the Amalgamation will be equal to the sum of $100.00.
ARTICLE 5
Certificates and Fractional Shares
5.1 Share Certificates. No certificates will be issued in respect of the
Class B Shares upon the Amalgamation and, until certificates are issued
representing Parent Common Shares or Exchangeable Shares upon (i) the
retraction of the Class B Shares for Exchangeable Shares or (ii) the
subsequent conversion of the Class B Shares into Class E Shares and Class F
Shares, the redemption of Class E Shares and Class F Shares by the Corporation
for Parent Common Shares or the purchase by Dutchco of the Class E Shares and
the Class F Shares in accordance with their terms, as the case may be, in
exchange for certificates which immediately prior to the Effective Date
represented Company Common Shares, all Class B Shares, Class E Shares and
Class F Shares will be evidenced by certificates representing Company Common
Shares.
5.2 Failure to Deposit Certificates Representing Company Common Shares. Any
certificate representing Company Common Shares not deposited with all other
necessary documents prior to the seventh anniversary of the Effective Date
shall cease to represent a claim or interest of any kind or nature against the
Corporation or Parent, as the case may be. On such date, the Exchangeable
Shares or the Parent Common Shares, as the case may be, to which the former
registered holder of such certificate was entitled shall be deemed to have
been surrendered to the Corporation or Parent together with all dividends,
distributions and interests held for such former registered holder.
B-6
<PAGE>
ARTICLE 6
Amendment
6.1 Amendment
(a) The Company, Autodesk Quebec and Amalgamation Sub reserve the right
to amend, modify and/or supplement this Agreement at any time and from time
to time provided that any such amendment, modification, or supplement must
be contained in a written document which is (i) agreed to by the
Amalgamating Companies and by Parent and Dutchco pursuant to the
Combination Agreement and (ii) communicated to holders of Company Common
Shares (if so required).
(b) Any amendment, modification or supplement to this Agreement may be
proposed by the Company any time prior to or at the Company Meeting
(provided that Parent and Dutchco shall have previously consented thereto
unless otherwise permitted by the Combination Agreement) with or without
any other prior notice or communication, and if so proposed and accepted by
the persons voting at the Company Meeting, shall become part of the
Amalgamation for all purposes.
ARTICLE 7
Conditions Precedent to the Amalgamation
7.1 The respective obligations of the parties to this Agreement to
consummate the transactions contemplated hereby and, in particular, the
Amalgamation, are subject to the satisfaction of the following conditions, any
of which may be waived by the mutual consent of such parties without prejudice
to the right to rely on any other of such conditions:
(a) the holders of the Company Common Shares shall have confirmed Special
By-Law 1998-1, in accordance with the Quebec Act, and the holder of the
Autodesk Quebec Common Shares and the holder of the Amalgamation Sub Common
Shares shall have confirmed a similar special by-law providing for the
Amalgamation;
(b) there shall not be in force any order or decree restraining or
enjoining the consummation of the transactions contemplated by this
Agreement and the Combination Agreement;
(c) all necessary corporate action on the part of the Amalgamating
Companies to authorize the consummation of the transactions contemplated by
this Agreement shall be complete and effective; and
(d) all conditions set forth in the Combination Agreement shall have been
satisfied or waived.
ARTICLE 8
Implementation
8.1 Implementation.
(a) Any director of each of the Amalgamating Companies be and is hereby
authorized to execute and file articles on behalf of such director's
company giving effect to the Amalgamation and to execute and deliver all
other documents and to do all such other acts and things necessary or
desirable to give effect to the Amalgamation.
(b) The Directors of the Company are hereby authorized, if they deem
appropriate in their sole discretion, to revoke the Special By-Law 1998-1
and to not proceed with the Amalgamation without further approval of the
shareholders.
8.2 Effect of Amalgamation. From the date shown on the Certificate of
Amalgamation, each of the Amalgamating Companies shall continue their
existence as one and the same company and the Corporation shall
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possess all of the property, rights and assets of the Amalgamating Companies
and shall be liable for all of the liabilities and obligations of the
Amalgamating Companies by operation of law.
8.3 Filing of Documents. Subject to the satisfaction or waiver of all
conditions precedent set out in Section 7.1 of this Agreement, the
Amalgamation will be effected by filing, on or prior to December 31, 1998 or
such later date as may be permitted by section 7.1(b) of the Combination
Agreement as the directors of each of the Amalgamating Companies may
determine, of the Articles of Amalgamation as provided under the Quebec Act
together with any and all documents required by the Quebec Act and the
regulations thereunder.
8.4 Termination. This Agreement may, at any time prior to the issuance of a
Certificate of Amalgamation, be terminated by the parties hereto if the
conditions precedent set out in Section 7.1 cannot be met. Notwithstanding
this Agreement, this Agreement shall terminate if a Certificate of
Amalgamation has not been issued on or prior to December 31, 1998 or such
later date as may be permitted under the Combination Agreement.
8.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Province of Quebec and the laws of Canada
applicable therein.
8.6 Entire Agreement. This Agreement constitutes the entire agreement among
the parties to this Agreement relating to the Amalgamation and supersedes all
prior agreements and understandings, oral and written, between such parties
with respect to the subject matter hereof.
8.7 English Language. The parties hereto confirm that it is their wish that
this Agreement as well as all other documents relating hereto be drawn upon in
English only. Les parties aux presentes confirment leur volonte que cette
convention de meme que tous les documents s'y rattachant soient rediges en
anglais seulement.
8.8 Guarantee. Autodesk, by its intervention hereto, hereby unconditionally
and irrevocably guarantees the full and punctual performance of the
Corporation's and Dutchco's obligations hereunder and under the Articles of
Amalgamation of the Corporation.
IN WITNESS WHEREOF the parties have executed this Agreement.
Discreet Logic Inc.
9066-9054 Quebec Inc.
By: /s/ Francois Plamondon By: /s/ Marcia K. Sterling
------------------------------- -------------------------------
Francois Plamondon Marcia K. Sterling
Executive Vice President, Chief Secretary
Financial Officer and Secretary
I have the authority to bind the
company
Autodesk, Inc. (As Intervenant)
I have the authority to bind the company
9066-9771 Quebec Inc.
By: /s/ Marcia K. Sterling By: /s/ Carol A. Bartz
------------------------------- -------------------------------
Marcia K. Sterling Carol A. Bartz
Secretary Chairman of the Board and Chief
Executive Officer
I have the authority to bind the company
I have the authority to bind the
corporation
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APPENDIX A
SHARE PROVISIONS
DEFINITIONS.
For the purposes of these share provisions, except as otherwise indicated:
"Amalgamation" means the amalgamation of Discreet Logic Inc., 9066-9854
Quebec Inc., and 9066-9771 Quebec Inc. under the Quebec Act.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means any day other than a Saturday, a Sunday or a day when
banks are not open for business in either or both of San Francisco, California
and Montreal, Quebec.
"Certificate of Amalgamation" means the certificate of amalgamation to be
issued to the Corporation by the Inspector General of Financial Institutions
under the Quebec Act in respect of the Amalgamation.
"Class A Shares" means the Class A voting common shares in the share capital
of the Corporation.
"Class B Conversion Time" has the meaning ascribed thereto in Section 5.1 of
the provisions attaching to the Class B Shares.
"Class B Retraction Time" has the meaning ascribed thereto in Section 4.1 of
the provisions attaching to the Class B Shares.
"Class B Shares" means the Class B non-voting common shares in the share
capital of the Corporation.
"Class C Shares" means the Class C non-voting preferred shares in the share
capital of the Corporation.
"Class D Redemption Date" has the meaning ascribed thereto in Section 4.2 of
the provisions attaching to the Class D Shares.
"Class D Redemption Price" has the meaning ascribed thereto in Section 4.1
of the provisions attaching to the Class D Shares.
"Class D Shares" means the Class D non-voting preferred shares in the share
capital of the Corporation.
"Class E Redemption Call Purchase Price" has the meaning ascribed thereto in
Section 4.3 of the provisions attaching to the Class E Shares.
"Class E Redemption Call Right" has the meaning ascribed thereto in Section
4.3 of the provisions attaching to the Class E Shares.
"Class E Redemption Price" has the meaning ascribed thereto in Section 4.1
of the provisions attaching to the Class E Shares.
"Class E Redemption Time" has the meaning ascribed thereto in Section 4.1 of
the provisions attaching to the Class E Shares.
"Class E Shares" means the Class E voting common shares in the share capital
of the Corporation.
"Class F Redemption Call Purchase Price" has the meaning ascribed thereto in
Section 4.3 of the provisions attaching to the Class F Shares.
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"Class F Redemption Call Right" has the meaning ascribed thereto in Section
4.3 of the provisions attaching to the Class F Shares.
"Class F Redemption Price" has the meaning ascribed thereto in Section 4.1
of the provisions attaching to the Class F Shares.
"Class F Redemption Time" has the meaning ascribed thereto in Section 4.1 of
the provisions attaching to the Class F Shares.
"Class F Shares" means the Class F non-voting common shares in the share
capital of the Corporation.
"Company" means Discreet Logic Inc., a predecessor to the Corporation.
"Company Common Shares" means the common shares of the Company.
"Company Meeting" means the special general meeting of the shareholders of
the Company to be held to consider the Amalgamation.
"Corporation" means the company resulting from the Amalgamation.
"Current Market Price" means, in respect of a Parent Common Share on any
date, the Canadian Dollar Equivalent of the average of the closing prices of
Parent Common Shares on Nasdaq on each of the thirty (30) consecutive trading
days ending not more than five trading days before such date, or, if the
Parent Common Shares are not then quoted on Nasdaq, on such other stock
exchange or automated quotation system on which the Parent Common Shares are
listed or quoted, as the case may be, as may be selected by the Board of
Directors of the Corporation for such purpose; provided, however, that if
there is no public distribution or trading activity of Parent Common Shares
during such period, then the Current Market Price of a Parent Common Share
shall be determined by the Board of Directors based upon the advice of such
qualified independent financial advisors as the Board of Directors may deem to
be appropriate, and provided further that any such selection, opinion or
determination by the Board of Directors shall be conclusive and binding.
"Dutchco" means Autodesk Development B.V., a corporation subsisting under
the laws of The Netherlands or, where applicable, such other subsidiary of
Autodesk or Dutchco to which Dutchco has assigned some or all of its rights
under the Combination Agreement.
"Effective Date" means the date of the Amalgamation as set forth in the
Certificate of Amalgamation.
"Effective Time" means 3:59 p.m. on the Effective Date.
"Election Deadline" has the meaning ascribed thereto in section 4.1 of the
provisions attaching to the Class B Shares.
"Exchangeable Share Provisions" means the rights, privileges, restrictions
and conditions attaching to the Exchangeable Shares as set forth herein.
"Exchangeable Shares" means the exchangeable non-voting shares in the share
capital of the Corporation.
"Maximum Number" means the number that is equal to 19.99% of the number of
Company Common Shares outstanding immediately prior to the Amalgamation
multiplied by 0.525.
"Nasdaq" means the Nasdaq National Market.
"Parent" means Autodesk, Inc., a body corporate existing under the laws of
the State of Delaware.
"Parent Common Shares" means the common shares in the share capital of
Parent.
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"Quebec Act" means the Companies Act (Quebec), as amended.
"Transfer Agent" means Harris Trust and Savings Bank or such other person as
may from time to time be the registrar and transfer agent for the Exchangeable
Shares.
PROVISIONS ATTACHING TO CLASS A SHARES
The Class A voting common shares in the share capital of the Corporation
shall have attached thereto the following rights, privileges, restrictions and
conditions:
1 Dividends
1.1 Subject to the prior rights of the holders of any shares ranking senior
to the Class A Shares with respect to priority in the payment of dividends,
the holders of Class A Shares shall be entitled to receive dividends and the
Corporation shall pay dividends thereon, as and when declared by the board of
directors of the Corporation out of monies properly applicable to the payment
of dividends, in such amount and in such form as the board of directors may
from time to time determine and all dividends which the directors may declare
on the Class A Shares shall be declared and paid in equal amounts per share on
all Class A Shares at the time outstanding; and, subject as aforesaid, the
board of directors of the Corporation may in their discretion declare
dividends on the Class A Shares without declaring dividends on any of the
Class B Shares, the Class C Shares, the Class D Shares, the Class E Shares,
the Class F Shares or the Exchangeable Shares.
2 Dissolution
2.1 In the event of the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding up
its affairs, subject to the prior rights of the holders of the Exchangeable
Shares in the capital of the Corporation, the Class D Shares, the Class C
Shares and to any other shares ranking senior to the Class A Shares with
respect to priority in the distribution of assets upon dissolution,
liquidation or winding-up of the Corporation, the holders of the Class A
Shares shall be entitled to receive the remaining property and assets of the
Corporation rateably with the holders of the Class B Shares, the Class E
Shares and the Class F Shares.
3 Voting Rights
3.1 The holders of the Class A Shares shall be entitled to receive notice of
and to attend all meetings of the shareholders of the Corporation and,
together with the holders of Class E Shares, shall have one vote for each
share held at all meetings of the shareholders of the Corporation, except for
meetings at which only holders of another specified class or series of shares
of the Corporation are entitled to vote separately as a class or series.
4 Amendment and Approval
4.1 The rights, privileges, restrictions and conditions attaching to the
Class A Shares may be added to, changed or removed but only with the approval
of the holders of the Class A Shares given as hereinafter specified, and any
other approval required by law.
4.2 Any approval given by the holders of the Class A Shares to add to,
change or remove any right, privilege, restriction or condition attaching to
the Class A Shares or any other matter requiring the approval or consent of
the holders of the Class A Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to
a minimum requirement that such approval be evidenced by written resolution
signed by all holders of Class A Shares or by resolution passed by not less
than two-thirds of the votes cast on such resolution at a meeting of holders
of Class A Shares duly called and held at which the holders of at least 50% of
the outstanding Class A Shares at that time are present or represented by
proxy; provided that if at any such meeting the holders of at least 50% of the
outstanding Class A Shares at that time
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are not present or represented by proxy within one-half hour after the time
appointed for such meeting then the meeting shall be adjourned to such date
not less than ten days thereafter and to such time and place as may be
designated by the Chairman of such meeting. At such adjourned meeting the
holders of Class A Shares present or represented by proxy thereat may transact
the business for which the meeting was originally called and a resolution
passed thereat by the affirmative vote of not less than two-thirds of the
votes cast on such resolution at such meeting shall constitute the approval or
consent of the holders of the Class A Shares.
PROVISIONS ATTACHING TO CLASS B SHARES
The Class B non-voting common shares in the share capital of the Corporation
shall have attached thereto the following rights, privileges, restrictions and
conditions:
1 Dividends
1.1 Subject to the prior rights of the holders of any shares ranking senior
to the Class B Shares with respect to priority in the payment of dividends,
the holders of Class B Shares shall be entitled to receive dividends and the
Corporation shall pay dividends thereon, as and when declared by the board of
directors of the Corporation out of monies properly applicable to the payment
of dividends, in such amount and in such form as the board of directors may
from time to time determine and all dividends which the directors may declare
on the Class B Shares shall be declared and paid in equal amounts per share on
all Class B Shares at the time outstanding; and, subject as aforesaid, the
board of directors of the Corporation may in their discretion declare
dividends on the Class B Shares without declaring dividends on any of the
Class A Shares, the Class C Shares, the Class D Shares, the Class E Shares,
the Class F Shares or the Exchangeable Shares.
2 Dissolution
2.1 In the event of the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding up
its affairs, subject to the prior rights of the holders of the Exchangeable
Shares in the share capital of the Corporation, the Class D Shares and the
Class C Shares and to any other shares ranking senior to the Class B Shares
with respect to priority in the distribution of assets upon dissolution,
liquidation or winding-up, the holders of the Class B Shares shall be entitled
to receive the remaining property and assets of the Corporation rateably with
the holders of the Class A Shares, the Class E Shares and the Class F Shares.
3 Voting Rights
3.1 Except where specifically provided by the Quebec Act, the holders of the
Class B Shares shall not be entitled to receive notice of or to attend
meetings of the shareholders of the Corporation and shall not be entitled to
vote at any meeting of shareholders of the Corporation, but shall be entitled
to notice of meetings of shareholders called for the purpose of authorizing
the dissolution of the Corporation or the sale, lease or exchange of all or
substantially all of the property of the Corporation.
4 Retraction
4.1 A holder of Class B Shares shall be entitled immediately following the
Effective Time (the "Class B Retraction Time"), subject to applicable law and
otherwise upon compliance with and subject to the provisions of this Section
4, to require the Corporation to redeem all or any number of the Class B
Shares registered in the name of such holder for an amount per share equal to
the Current Market Price of 0.525 of one Parent Common Share on the last
Business Day prior to the Class B Retraction Time, which shall be satisfied in
full by the Corporation causing to be delivered to such holder 0.525 of one
Exchangeable Share for each Class B Share presented and surrendered by the
holder (the "Class B Retraction Price"). To effect such redemption, the holder
shall no later than [IMMEDIATELY FOLLOWING THE EFFECTIVE TIME (THE "ELECTION
DEADLINE")] present and surrender at the head office of the Company acting on
behalf of the Corporation or the Corporation or at any
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office of the Transfer Agent or such other place as may be specified by the
Corporation by notice to the holders of the Company's Common Shares (on behalf
of the holders of the Class B Shares) the certificate or certificates
representing the Class B Shares which the holder desires to have the
Corporation redeem (evidenced by the certificate or certificates representing
the Company's Common Shares which, as a result of the Amalgamation, represent
such Class B Shares), together with such other documents and instruments as
may be required to effect a transfer of Class B Shares under the Quebec Act
and the by-laws of the Corporation and such additional documents and
instruments as the Transfer Agent may reasonably require, and together with a
duly executed statement (the "Class B Retraction Request") in such form as may
be acceptable to the Corporation specifying that the holder desires to have
all or any number specified therein of the Class B Shares represented by such
certificate or certificates (the "Retracted Shares") redeemed by the
Corporation.
4.2 Upon receipt by the Corporation or the Transfer Agent in the manner
specified in Section 4.1 hereof of a certificate or certificates representing
the number of Class B Shares which the holder desires to have the Corporation
redeem, together with the documents and instruments contemplated by Section
4.1 (including a Class B Retraction Request), and provided that the Class B
Retraction Request is not revoked by the holder in the manner specified in
Section 4.6 hereof, the Corporation shall redeem the Retracted Shares
effective at the Class B Retraction Time and shall cause to be delivered to
such holder the total Retraction Price with respect to such shares. If only a
part of the Class B Shares represented by any certificate are redeemed, the
balance of shares represented by such certificate shall be governed by the
provisions of Section 5.1 of these share provisions relating to the Class B
Shares.
4.3 The Corporation shall deliver or cause the Transfer Agent to deliver to
the relevant holder, at the address of the holder recorded in the securities
register of the Corporation for the Class B Shares or at the address specified
in the holder's Class B Retraction Request or by holding for pick up by the
holder at the head office of the Corporation or at any office of the Transfer
Agent as may be specified by the Corporation by notice to the holders of Class
B Shares, certificates representing the Exchangeable Shares (which shares
shall be duly issued as fully paid and non-assessable and shall be free and
clear of any lien, claim or encumbrance) registered in the name of the holder
or in such other name as the holder may request in payment of the total Class
B Retraction Price and such delivery of such certificates on behalf of the
Corporation or by the Transfer Agent shall be deemed to be payment of and
shall satisfy and discharge all liability for the total Class B Retraction
Price to the extent that the same is represented by such share certificates.
All Class B Shares which have been so retracted shall be cancelled.
4.4 As of the Class B Retraction Time, the holder of the Retracted Shares
shall cease to be a holder of such Retracted Shares and shall not be entitled
to exercise any of the rights of a holder in respect thereof, other than the
right to receive his proportionate part of the total Class B Retraction Price.
4.5 Notwithstanding any other provision of this Section 4, the Corporation
shall not be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent that such redemption of Retracted Shares (i)
would be contrary to solvency requirements or other provisions of applicable
law or (ii) would cause the aggregate number of Exchangeable Shares issuable
on retraction to exceed the Maximum Number. If the Corporation believes that
at the Class B Retraction Time it would not be permitted by the foregoing to
redeem the Retracted Shares tendered for redemption on such date, the
Corporation shall only be obligated to redeem Retracted Shares specified by a
holder in a Class B Retraction Request to the extent of the maximum number of
shares that may be so redeemed (rounded down to a whole number of shares) as
would not be contrary to such provisions or the maximum number of Exchangeable
Shares as would not exceed the Maximum Number and shall notify the holder
immediately following the Retraction Date as to the number of Retracted Shares
which will not be redeemed by the Corporation. In any case in which the
redemption by the Corporation of Retracted Shares would be contrary to
solvency requirements or other provisions of applicable law or would cause the
Exchangeable Shares to be issued to exceed the Maximum Number, the Corporation
shall redeem Retracted Shares in accordance with Section 4.2 of these share
provisions on a pro rata basis.
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4.6 A holder of Retracted Shares may, by notice in writing given by the
holder to the Corporation at the head office of the Company on behalf of the
Corporation or of the Corporation, not less than two Business Days immediately
preceding the Class B Retraction Time, withdraw its Class B Retraction Request
in which event such Class B Retraction Request shall be null and void.
4.7 No certificates or scrip representing fractional Exchangeable Shares
shall be issued upon the surrender for exchange of certificates pursuant to
section 4.3 hereof and no dividend, stock split or other change in the capital
structure of Parent shall relate to any such fractional security and such
fractional interests shall not entitle the owner thereof to vote or to
exercise any rights as a security holder of Parent. In lieu of any such
fractional securities, each person entitled to a fractional interest in an
Exchangeable Share will receive from the Corporation an amount in cash
(rounded to the nearest whole cent), without interest, equal to the product of
(i) such fraction, multiplied by (ii) the average of the closing price for the
Parent Common Shares on Nasdaq as of each of the thirty (30) consecutive
trading days immediately preceding the Effective Date as quoted in The Wall
Street Journal or other reliable financial newspaper or publication. For the
purposes of the preceding sentence, a "trading day" means a day on which
trading generally takes place on Nasdaq and on which trading in Parent Common
Shares has occurred.
4.8 In the event of a transfer of ownership of Company Common Shares in
respect of which a Class B Retraction Request has been duly made prior to the
Class B Retraction Time but which is not registered in the transfer records of
the Company prior to the Effective Date, a certificate representing the proper
number of Exchangeable Shares may be issued to a transferee if the certificate
representing such Company Common Shares is presented to the Transfer Agent,
together with a Class B Retraction Request executed by the transferee
accompanied by all documents required to evidence and effect such transfer.
4.9 In the event any certificate which immediately prior to the Effective
Date represented outstanding Company Common Shares that were converted
pursuant to the Amalgamation into Class B Shares and subsequently retracted by
the holder pursuant to the Class B Share provisions shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such certificate to be lost, stolen or destroyed, the Transfer
Agent will issue in exchange for such lost, stolen or destroyed certificate,
certificates representing Exchangeable Shares deliverable in respect thereof
as determined in accordance with this Section 4. When authorizing such
issuance in exchange for any lost, stolen or destroyed certificate, the person
to whom certificates representing Exchangeable Shares are to be issued shall,
at the discretion of the Corporation, as a condition precedent to the issuance
thereof, give a bond satisfactory to the Corporation in such sum as the
Corporation may direct or otherwise indemnify the Corporation in a manner
satisfactory to the Corporation against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen
or destroyed.
4.10 A Class B Retraction Request executed by a holder of Company Common
Shares in respect of Class B Shares to be issued upon the Amalgamation shall
be deemed for all purposes to constitute a good and valid Class B Retraction
Request executed by a holder of Class B Shares. Any notice by the Company to a
holder of Company Common Shares in respect of Class B Shares to be issued upon
the Amalgamation shall be deemed for all purposes to constitute good and valid
notice by the Corporation to the holders of Class B Shares. Any notice by a
holder of Company Common Shares to the Company in respect of Class B Shares to
be issued upon the Amalgamation shall be deemed for all purposes of these
share provisions to constitute good and valid notice by a holder of Class B
Shares to the Corporation.
5 Automatic Conversion of Class B Shares
5.1 Immediately following the Class B Retraction Time (the "Class B
Conversion Time") each Class B Share then outstanding shall, automatically and
without any further action required on the part of either the Corporation or
the holder of the Class B Share, be converted into a unit consisting of one
fully paid and non- assessable Class E Share and one fully paid and non-
assessable Class F Share whereupon each such Class B
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Share will be cancelled, and the name of each holder thereof shall be removed
from the register of holders of Class B Shares and added to the registers of
holders of Class E Shares and Class F Shares accordingly.
5.2 No certificates shall be issued by the Corporation representing the
Class E Shares and the Class F Shares. The certificates representing the Class
B Shares shall continue to represent an equal number of Class E and Class F
Shares. On and after the Class B Conversion Time, the holders of the Class B
Shares so converted shall cease to be holders of such Class B Shares and shall
not be entitled to exercise any of the rights of holders in respect thereof.
6 Amendment and Approval
6.1 The rights, privileges, restrictions and conditions attaching to the
Class B Shares may be added to, changed or removed but only with the approval
of the holders of the Class B Shares given as hereinafter specified, and any
other approval required by law.
6.2 Any approval given by the holders of the Class B Shares to add to,
change or remove any right, privilege, restriction or condition attaching to
the Class B Shares or any other matter requiring the approval or consent of
the holders of the Class B Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to
a minimum requirement that such approval be evidenced by written resolution
signed by all holders of Class B Shares or by resolution passed by not less
than two-thirds of the votes cast on such resolution at a meeting of holders
of Class B Shares duly called and held at which the holders of at least 50% of
the outstanding Class B Shares at that time are present or represented by
proxy; provided that if at any such meeting the holders of at least 50% of the
outstanding Class B Shares at that time are not present or represented by
proxy within one-half hour after the time appointed for such meeting then the
meeting shall be adjourned to such date not less than ten days thereafter and
to such time and place as may be designated by the Chairman of such meeting.
At such adjourned meeting the holders of Class B Shares present or represented
by proxy thereat may transact the business for which the meeting was
originally called and a resolution passed thereat by the affirmative vote of
not less than two-thirds of the votes cast on such resolution at such meeting
shall constitute the approval or consent of the holders of the Class B Shares.
PROVISIONS ATTACHING TO CLASS C SHARES
The Class C non-voting preferred shares in the share capital of the
Corporation (the "Class C Shares") shall have attached thereto the following
rights, privileges, restrictions and conditions:
1 Dividends
1.1 The holders of Class C Shares shall be entitled to receive and the
Corporation shall pay to them, always in preference and priority to any
payment of dividends on the Class A Shares, the Class B Shares, the Class E
Shares and the Class F Shares of the Corporation and any other shares of the
Corporation ranking junior to the Class C Shares, but subject to the prior
rights of the holders of the Exchangeable Shares and Class D Shares, as and
when declared by the board of directors of the Corporation out of monies of
the Corporation properly applicable to the payment of dividends, annual fixed,
preferential, non-cumulative cash dividends in an amount per share equal to
$60,000 divided by the number of Class C Shares outstanding payable annually.
2 Dissolution
2.1 In the event of the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding up
its affairs, subject to the prior rights of the holders of the Exchangeable
Shares and the Class D Shares and to any other shares ranking senior to the
Class C Shares with respect to priority in the distribution of assets upon
dissolution, liquidation or winding-up, the holders of the Class C Shares
shall be entitled to receive an amount per share equal to the fair market
value of all the issued and outstanding shares of 9066- 9854 Quebec
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Inc. immediately prior to the Amalgamation and no more, in priority to the
rights of the holders of the Class E Shares, the Class F Shares, the Class A
Shares and the Class B Shares.
3 Voting Rights
3.1 Except where specifically provided by the Quebec Act, the holders of the
Class C Shares shall not be entitled to receive notice of or to attend
meetings of the shareholders of the Corporation and shall not be entitled to
vote at any meeting of shareholders of the Corporation, but shall be entitled
to notice of meetings of shareholders called for the purpose of authorizing
the dissolution of the Corporation or the sale, lease or exchange of all or
substantially all of the property of the Corporation.
4 Amendment and Approval
4.1 The rights, privileges, restrictions and conditions attaching to the
Class C Shares may be added to, changed or removed but only with the approval
of the holders of the Class C Shares given as hereinafter specified, and any
other approval required by law.
4.2 Any approval given by the holders of the Class C Shares to add to,
change or remove any right, privilege, restriction or condition attaching to
the Class C Shares or any other matter requiring the approval or consent of
the holders of the Class C Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to
a minimum requirement that such approval be evidenced by written resolution
signed by all holders of Class C Shares or by resolution passed by not less
than two-thirds of the votes cast on such resolution at a meeting of holders
of Class C Shares duly called and held at which the holders of at least 50% of
the outstanding Class C Shares at that time are present or represented by
proxy; provided that if at any such meeting the holders of at least 50% of the
outstanding Class C Shares at that time are not present or represented by
proxy within one-half hour after the time appointed for such meeting then the
meeting shall be adjourned to such date not less than ten days thereafter and
to such time and place as may be designated by the Chairman of such meeting.
At such adjourned meeting the holders of Class C Shares present or represented
by proxy thereat may transact the business for which the meeting was
originally called and a resolution passed thereat by the affirmative vote of
not less than two-thirds of the votes cast on such resolution at such meeting
shall constitute the approval or consent of the holders of the Class C Shares.
PROVISIONS ATTACHING TO CLASS D SHARES
The Class D non-voting preferred shares in the share capital of the
Corporation shall have attached thereto the following rights, privileges,
restrictions and conditions:
1 Dividends
1.1 The holders of Class D Shares shall be entitled to receive and the
Corporation shall pay to them, always in preference and priority to any
payment of dividends on the Class A Shares, the Class B Shares, the Class C
Shares, the Class E Shares and the Class F Shares of the Corporation and any
other shares of the Corporation ranking junior to the Class D Shares, as and
when declared by the board of directors of the Corporation out of monies of
the Corporation properly applicable to the payment of dividends, fixed,
preferential, cumulative cash dividends at the annual rate per share of 5% of
the Class D Liquidation Amount (as defined below) payable annually, by cheque
of the Corporation. Such dividend on any particular Class D Share shall accrue
and be cumulative from the date of issue of such Class D Share.
2 Dissolution
2.1 In the event of the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding up
its affairs, subject to the prior rights of the holders of the Exchangeable
Shares and to any other
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shares ranking senior to the Class D Shares with respect to priority in the
distribution of assets upon dissolution, liquidation or winding-up, the
holders of the Class D Shares shall be entitled to receive in the aggregate an
amount per share equal to $150,000 divided by the number of issued and
outstanding Class D Shares (the "Class D Liquidation Amount") and no more, in
priority to the rights of the holders of the Class C Shares, the Class A
Shares, the Class B Shares, the Class E Shares and the Class F Shares.
3 Voting Rights
3.1 Except where specifically provided by the Quebec Act, the holders of the
Class D Shares shall not be entitled to receive notice of or to attend
meetings of the shareholders of the Corporation and shall not be entitled to
vote at any meeting of shareholders of the Corporation, but shall be entitled
to notice of meetings of shareholders called for the purpose of authorizing
the dissolution of the Corporation or the sale, lease or exchange of all or
substantially all of the property of the Corporation.
4 Redemption of Class D Shares by the Corporation
4.1 Subject to applicable law and to Section 4.1 of the Exchangeable Share
Provisions, the Corporation shall be entitled at any time from and after
October 31, 2028 to redeem any or all of the Class D Shares registered in the
name of a holder for an amount per share equal to (a) $150,000 divided by the
number of issued and outstanding Class D Shares plus (b) an additional amount
equivalent to the full amount on all dividends accrued and unpaid thereon
(herein collectively called the "Class D Redemption Price").
4.2 To effect such redemption the Corporation shall, at least ten days prior
to the date fixed for redemption (the "Class D Redemption Date") send to each
holder of Class D Shares to be redeemed a notice in writing of the redemption
by the Corporation of Class D Shares held by such holder. Such notice shall
set out the Class D Redemption Price and the Class D Redemption Date. On or
after the Class D Redemption Date, the Corporation shall cause to be delivered
to the holders of the Class D Shares to be redeemed the Class D Redemption
Price (less any tax required to be deducted and withheld therefrom by the
Corporation) for each such Class D Share upon presentation and surrender at
the head office of the Corporation of the certificates representing such Class
D Shares, together with such other documents and instruments as may be
required to effect a transfer of Class D Shares under the Quebec Act and the
by-laws of the Corporation and such additional documents and instruments as
the Corporation may reasonably require. Payment of the total Class D
Redemption Price for such Class D Shares shall be made by delivery to each
holder, at the address of the holder recorded in the securities register of
the Corporation or by holding for pick up by the holder at the head office of
the Corporation of a cheque of the Corporation payable at par at any branch of
the bankers of the Corporation in respect of the Class D Redemption Price
(less any tax required to be deducted and withheld therefrom by the
Corporation). On and after the Class D Redemption Date, the holders of the
Class D Shares called for redemption shall cease to be holders of such Class D
Shares and shall not be entitled to exercise any of the rights of holders in
respect thereof, other than the right to receive their proportionate part of
the total Class D Redemption Price, unless payment of the total Class D
Redemption Price for such Class D Shares shall not be made upon presentation
and surrender of certificates in accordance with the foregoing provisions, in
which case the rights of the holders shall remain unaffected until the total
Class D Redemption Price has been paid in the manner hereinbefore provided.
The Corporation shall have the right at any time after the sending of notice
of its intention to redeem Class D Shares as aforesaid to deposit or cause to
be deposited the total Class D Redemption Price of the Class D Shares so
called for redemption, or of such of the said Class D Shares represented by
certificates that have not at the date of such deposit been surrendered by the
holders thereof in connection with such redemption, in a custodial account
with any chartered bank or trust company in Canada named in such notice. Upon
the later of such deposit being made and the Class D Redemption Date, the
Class D Shares in respect whereof such deposit shall have been made shall be
redeemed and the rights of the holders thereof after such deposit or Class D
Redemption Date, as the case may be, shall be limited to receiving their
proportionate part of the total Class D Redemption Price (less any tax
required to be deducted and withheld therefrom by the Corporation) for such
Class D Shares so deposited, against presentation and surrender of the said
certificates held by them, respectively, in accordance with the foregoing
provisions.
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5 Purchase for Cancellation
5.1 Subject to applicable law and to Section 4.1 of the Exchangeable Share
Provisions, the Corporation may at any time and from time to time purchase for
cancellation all or any part of the outstanding Class D Shares at any price by
tender to all the holders of record of Class D Shares then outstanding or
through the facilities of any stock exchange on which Class D Shares are
listed or quoted at any price per share. If in response to an invitation for
tenders under the provisions hereof, more Class D Shares are tendered at a
price or prices acceptable to the Corporation than the Corporation is prepared
to purchase, Class D Shares to be purchased by the Corporation shall be
purchased as nearly as may be pro rata according to the number of shares
tendered by each holder who submits a tender to the Corporation, provided that
when shares are tendered at different prices, the pro rating shall be effected
(disregarding fractions) only with respect to the shares tendered at the price
at which more shares were tendered than the Corporation is prepared to
purchase after the Corporation has purchased all the shares tendered at lower
prices. If part only of the Class D Shares represented by any certificate
shall be purchased, a new certificate for the balance of such shares shall be
issued at the expense of the Corporation. Subject as aforesaid, the
Corporation may effect such purchase for cancellation without purchasing for
cancellation shares of any other class of shares of the Corporation.
6 Amendment and Approval
6.1 The rights, privileges, restrictions and conditions attaching to the
Class D Shares may be added to, changed or removed but only with the approval
of the holders of the Class D Shares given as hereinafter specified, and any
other approval required by law.
6.2 Any approval given by the holders of the Class D Shares to add to,
change or remove any right, privilege, restriction or condition attaching to
the Class D Shares or any other matter requiring the approval or consent of
the holders of the Class D Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to
a minimum requirement that such approval be evidenced by written resolution
signed by all holders of Class D Shares or by resolution passed by not less
than two-thirds of the votes cast on such resolution at a meeting of holders
of Class D Shares duly called and held at which the holders of at least 50% of
the outstanding Class D Shares at that time are present or represented by
proxy; provided that if at any such meeting the holders of at least 50% of the
outstanding Class D Shares at that time are not present or represented by
proxy within one-half hour after the time appointed for such meeting then the
meeting shall be adjourned to such date not less than ten days thereafter and
to such time and place as may be designated by the Chairman of such meeting.
At such adjourned meeting the holders of Class D Shares present or represented
by proxy thereat may transact the business for which the meeting was
originally called and a resolution passed thereat by the affirmative vote of
not less than two-thirds of the votes cast on such resolution at such meeting
shall constitute the approval or consent of the holders of the Class D Shares.
PROVISIONS ATTACHING TO CLASS E SHARES
The Class E voting common shares in the share capital of the Corporation
shall have attached thereto the following rights, privileges, restrictions and
conditions:
1 Dividends
1.1 Subject to the prior rights of the holders of any shares ranking senior
to the Class E Shares with respect to priority in the payment of dividends,
the holders of Class E Shares shall be entitled to receive dividends and the
Corporation shall pay dividends thereon, as and when declared by the board of
directors of the Corporation out of monies properly applicable to the payment
of dividends, in such amount and in such form as the board of directors may
from time to time determine and all dividends which the directors may declare
on the Class E Shares shall be declared and paid in equal amounts per share on
all Class E Shares at the time outstanding; and, subject as aforesaid, the
board of directors of the Corporation may in their discretion declare
dividends on the
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Class E Shares without declaring dividends on any of the Class A Shares, Class
B Shares, Class C Shares, Class D Shares or Class F Shares.
2 Dissolution
2.1 In the event of the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding up
its affairs, subject to the prior rights of the holders of the Exchangeable
Shares in the share capital of the Corporation, the Class D Shares, the Class
C Shares and to any other shares ranking senior to the Class E Shares with
respect to priority in the distribution of assets upon dissolution,
liquidation or winding-up, the holders of the Class E Shares shall be entitled
to receive the remaining property and assets of the Corporation rateably with
the holders of the Class A Shares, the Class B Shares and the Class F Shares.
3 Voting Rights
3.1 The holders of the Class E Shares shall be entitled to receive notice of
and to attend all meetings of the shareholders of the Corporation and,
together with the holders of Class A Shares, shall have one vote for each
share held at all meetings of the shareholders of the Corporation, except for
meetings at which only holders of another specified class or series of shares
of the Corporation are entitled to vote separately as a class or series.
4 Redemption of Class E Shares by the Corporation
4.1 Subject to applicable law, and subject to the exercise by Dutchco of the
Class E Redemption Call Right, the Corporation shall be entitled, immediately
following the Class B Conversion Time (the "Class E Redemption Time") without
notice to the holders of the Class E Shares, but with prior notice to Dutchco,
to redeem the whole of the then outstanding Class E Shares for an amount per
share equal to the Current Market Price of 0.2625 of one Parent Common Share
on the last Business Day prior to the Class E Redemption Time, which shall be
satisfied in full by the Corporation causing to be delivered to each holder of
Class E Shares 0.2625 of one Parent Common Share for each Class E Share held
by such holder (the "Class E Redemption Price").
4.2 At or after the Class E Redemption Time and subject to the exercise by
Dutchco of the Class E Redemption Call Right, the Corporation shall cause to
be delivered to the holders of the Class E Shares to be redeemed the Class E
Redemption Price (less any tax required to be deducted and withheld therefrom
by the Corporation) for each such Class E Share upon presentation and
surrender (at the head office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation) of the certificates
representing such Class E Shares, or such other certificates of securities of
any predecessor of the Corporation acceptable to the Corporation (including
those representing Company Common Shares) together with such other documents
and instruments as may be required to effect a transfer of Class E Shares
under the Quebec Act and the by-laws of the Corporation and such additional
documents and instruments as the Transfer Agent may reasonably require.
Payment of the total Class E Redemption Price for such Class E Shares shall be
made by delivery to each holder, at the address of the holder recorded in the
securities register of the Corporation or by holding for pick up by the holder
at the head office of the Corporation or at any office of the Transfer Agent
as may be specified by the Corporation, on behalf of the Corporation of
certificates representing Parent Common Shares (which shares shall be duly
issued as fully paid and non-assessable and shall be free and clear of any
lien, claim or encumbrance) (less any tax required to be deducted and withheld
therefrom by the Corporation). At and after the Class E Redemption Time, the
holders of the Class E Shares called for redemption shall cease to be holders
of such Class E Shares and shall not be entitled to exercise any of the rights
of holders in respect thereof, other than the right to receive their
proportionate part of the total Class E Redemption Price, unless payment of
the total Class E Redemption Price for such Class E Shares shall not be made
upon presentation and surrender of certificates in accordance with the
foregoing provisions, in which case the rights of the holders shall remain
unaffected until the total Class E Redemption Price has been paid in the
manner hereinbefore provided. Subject to the exercise of the Class E
Redemption Call Right, the Corporation shall have the right at any time to
deposit or cause to be deposited the total Class E Redemption Price of the
Class E Shares so called for redemption, or of such of the
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said Class E Shares represented by certificates that have not at the date of
such deposit been surrendered by the holders thereof in connection with such
redemption, in a custodial account with any chartered bank or trust company in
Canada or the United States. Upon the later of such deposit being made and the
Class E Redemption Time, the Class E Shares in respect whereof such deposit
shall have been made shall be redeemed and the rights of the holders thereof
after such deposit or Class E Redemption Time, as the case may be, shall be
limited to receiving their proportionate part of the total Class E Redemption
Price (less any tax required to be deducted and withheld therefrom by the
Corporation) for such Class E Shares so deposited, against presentation and
surrender of the said certificates held by them, respectively, in accordance
with the foregoing provisions. Upon such payment or deposit of the total Class
E Redemption Price, the holders of the Class E Shares shall thereafter be
considered and deemed for all purposes to be holders of the Parent Common
Shares delivered to them.
4.3 Dutchco shall have the overriding right (the "Class E Redemption Call
Right"), notwithstanding the proposed redemption of Class E Shares by the
Corporation, to purchase from all but not less than all of the holders of
Class E Shares to be redeemed at the Class E Redemption Time, all but not less
than all of the Class E Shares held by each such holder on payment by Dutchco
to the holder of an amount per share equal to the Current Market Price of
0.2625 of one Parent Common Share on the last Business Day prior to the Class
E Redemption Time which shall be satisfied in full by causing to be delivered
to such holder 0.2625 of one Parent Common Share (the "Class E Redemption Call
Purchase Price"). In the event of the exercise of the Class E Redemption Call
Right by Dutchco, each holder shall be obligated to sell all the Class E
Shares held by the holder and otherwise to be redeemed to Dutchco at the Class
E Redemption Time on payment by Dutchco to the holder of the Class E
Redemption Call Purchase Price for each such share.
4.4 To exercise the Class E Redemption Call Right, Dutchco must notify the
Corporation of Dutchco's intention to exercise such right prior to the Class E
Redemption Time (which notice may be given to the Company on behalf of the
Corporation). If Dutchco exercises the Class E Redemption Call Right, Dutchco
will, at the Class E Redemption Time, purchase and the holders will sell all
of the Class E Shares to be redeemed for a price per share equal to the Class
E Redemption Call Purchase Price. Any notice by Dutchco to the Company for and
on behalf of the Corporation shall be deemed to constitute good and valid
notice by Dutchco to the Corporation.
4.5 For the purposes of completing the purchase of Class E Shares pursuant
to the Class E Redemption Call Right, Dutchco shall deposit with the Transfer
Agent, at or before the Class E Redemption Time, certificates representing the
aggregate number of Parent Common Shares deliverable by Dutchco in payment of
the total Class E Redemption Call Purchase Price and a cheque or cheques in
the amount of the remaining portion, if any, of the total Class E Redemption
Call Purchase Price. Provided that the total Class E Redemption Call Purchase
Price has been so deposited with the Transfer Agent, at and after the Class E
Redemption Time the rights of each holder of Class E Shares so purchased will
be limited to receiving such holder's proportionate part of the total Class E
Redemption Call Purchase Price payable by Dutchco upon presentation and
surrender by the holder of certificates representing the Class E Shares
purchased by Dutchco from such holder and the holder shall at and after the
Class E Redemption Time be considered and deemed for all purposes to be the
holder of the Parent Common Shares delivered to such holder. Upon surrender to
the Transfer Agent of a certificate or certificates representing Class E
Shares, together with such other documents and instruments as may be required
to effect a transfer of Class E Shares under the Quebec Act and the by-laws of
the Corporation and such additional documents and instruments as the Transfer
Agent may reasonably require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange therefor, and the
Transfer Agent on behalf of Dutchco shall deliver to such holder, certificates
representing the Parent Common Shares to which the holder is entitled and a
cheque or cheques of or on behalf of Dutchco payable at par and in Canadian
dollars at any branch of the bankers of Dutchco or of the Corporation in
Canada in payment of the remaining portion, if any, of the total Class E
Redemption Call Purchase Price. If Dutchco does not exercise the Class E
Redemption Call Right in the manner described herein, at the Class E
Redemption Time the holders of the Class E Shares will be entitled to receive
in exchange therefor the redemption price otherwise payable by the Corporation
in connection with the redemption of Class E Shares.
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4.6 No certificates or scrip representing fractional Parent Common Shares
shall be issued upon the surrender for exchange of certificates pursuant to
sections 4.2 or 4.5 hereof and no dividend, stock split or other change in the
capital structure of Parent shall relate to any such fractional security and
such fractional interests shall not entitle the owner thereof to vote or to
exercise any rights as a security holder of Parent. In lieu of any such
fractional securities, each person entitled to a fractional interest in a
Parent Common Share will receive from the Corporation or Dutchco, as the case
may be, an amount in cash (rounded to the nearest whole cent), without
interest, equal to the product of (i) such fraction, multiplied by (ii) the
average of the closing price for the Parent Common Shares on Nasdaq as of each
of the thirty (30) consecutive trading days immediately preceding the
Effective Date as quoted in The Wall Street Journal or other reliable
financial newspaper or publication. For the purposes of the preceding
sentence, a "trading day" means a day on which trading generally takes place
on Nasdaq and on which trading in Parent Common Shares has occurred.
4.7 No dividends or other distributions declared or made after the Class E
Redemption Time with respect to Parent Common Shares with a record date after
the Class E Redemption Time shall be paid to the holder of any unsurrendered
certificate which immediately prior to the Class E Redemption Time represented
Class E Shares that were redeemed or purchased pursuant to these Class E Share
provisions, and no cash payment in lieu of fractional shares shall be paid to
any such holder pursuant to section 4.6 hereof, unless and until the holder of
record of such certificate shall surrender such certificate in accordance with
sections 4.2 or 4.5 hereof, as the case may be. Subject to applicable law, at
the time of such surrender of any such certificate there shall be paid to the
record holder of the certificates representing whole Parent Common Shares
without interest (i) the amount of any cash payable in lieu of a fractional
Parent Common Share to which such holder is entitled pursuant to section 4.6
hereof, (ii) the amount of dividends or other distributions with a record date
after the Class E Redemption Time theretofore paid with respect to such whole
Parent Common Share and (iii) the amount of dividends or other distributions
with a record date after the Class E Redemption Time but prior to surrender
and a payment date subsequent to surrender payable with respect to such whole
Parent Common Share.
4.8 In the event of a transfer of ownership of Company Common Shares which
is not registered in the transfer records of the Company prior to the
Effective Date, a certificate representing the proper number of Parent Common
Shares may be issued to a transferee if the certificate representing such
Company Common Shares is presented to the Transfer Agent, accompanied by all
documents required to evidence and effect such transfer.
4.9 In the event any certificate which immediately prior to the Effective
Date represented outstanding Company Common Shares that were converted to
Class B Shares on the Amalgamation and subsequently converted into Class E
Shares at the Class B Conversion Time shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such certificate to be lost, stolen or destroyed, the Transfer Agent will
issue in exchange for such lost, stolen or destroyed certificate, certificates
representing Parent Common Shares (and any dividends or distributions with
respect thereto and any cash pursuant to section 4.6 hereof) deliverable in
respect thereof as determined in accordance with sections 4.2 or 4.5 hereof.
When authorizing such issuance and/or payment in exchange for any lost, stolen
or destroyed certificate, the person to whom certificates representing Parent
Common Shares are to be issued shall, at the discretion of the Corporation or
Dutchco, as the case may be, as a condition precedent to the issuance thereof,
give a bond satisfactory to the Corporation, the Affiliate or Dutchco, as the
case may be, in such sum as the Corporation or Dutchco may direct or otherwise
indemnify the Corporation or Dutchco in a manner satisfactory to the
Corporation, the Affiliate or the Dutchco, as the case may be, against any
claim that may be made against the Corporation, the Affiliate or Dutchco with
respect to the certificate alleged to have been lost, stolen or destroyed.
4.10 The Corporation and Dutchco shall be entitled to deduct and withhold
from the Class E Redemption Price, the Class E Redemption Call Price payable
pursuant to these Class E Share Provisions to any holder of Class E Shares
such amounts as Parent, the Affiliate, Dutchco or the Transfer Agent determine
is required to deduct and withhold with respect to the making of such payment
under the United States Internal Revenue Code of 1986, as amended, the Income
Tax Act (Canada) or any provision of state, local, provincial or foreign tax
law. To the extent that amounts are so withheld, such withheld amounts shall
be treated for all purposes hereof as having been paid to the holder of the
shares in respect of which such deduction and withholding was made,
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provided that such withheld amounts are actually remitted to the appropriate
taxing authority. To the extent any amount is required to be deducted or
withheld from any payment to a holder, the Corporation or Dutchco as the case
may be, are hereby authorized to sell or otherwise dispose of at fair market
value such portion of such consideration as is necessary to provide sufficient
funds to the Corporation or Dutchco, as the case may be, in order to enable it
to comply with such deduction or withholding requirement and the Corporation
or Dutchco, as the case may be, shall give an accounting to the holder with
respect thereto and any balance of such proceeds of sale.
4.11 The Corporation shall not be entitled to redeem, nor shall Dutchco be
entitled to purchase, any Class E Shares pursuant to this Section 4 unless at
the same time the Corporation redeems or Dutchco, purchases at the same time
and in the same manner all issued and outstanding Class F Shares.
5 Purchase for Cancellation
5.1 Subject to applicable law and to Section 4.1 of the Exchangeable Share
Provisions, the Corporation may at any time and from time to time purchase for
cancellation all or any part of the outstanding Class E Shares at any price by
tender to all the holders of record of Class E Shares then outstanding or
through the facilities of any stock exchange on which Class E Shares are
listed or quoted at any price per share. If in response to an invitation for
tenders under the provisions hereof, more Class E Shares are tendered at a
price or prices acceptable to the Corporation than the Corporation is prepared
to purchase, Class E Shares to be purchased by the Corporation shall be
purchased as nearly as may be pro rata according to the number of shares
tendered by each holder who submits a tender to the Corporation, provided that
when shares are tendered at different prices, the pro rating shall be effected
(disregarding fractions) only with respect to the shares tendered at the price
at which more shares were tendered than the Corporation is prepared to
purchase after the Corporation has purchased all the shares tendered at lower
prices. If only part of the Class E Shares represented by any certificate
shall be purchased, a new certificate for the balance of such shares shall be
issued at the expense of the Corporation. Subject as aforesaid, the
Corporation may effect such purchase for cancellation without purchasing for
cancellation shares of any other class of shares of the Corporation.
6 Issued and Paid-Up Capital Account
6.1 Where Class E Shares and Class F Shares are issued on a conversion of
Class B Shares, the amount to be added to the issued and paid-up capital
account of the Class E Shares for purposes of the Quebec Act and the paid-up
capital account of the Class E Shares for purposes of the Income Tax Act
(Canada) shall be equal to the aggregate of the issued and paid-up capital of
such Class B Shares so converted, less $1.
7 Amendment and Approval
7.1 The rights, privileges, restrictions and conditions attaching to the
Class E Shares may be added to, changed or removed but only with the approval
of the holders of the Class E Shares given as hereinafter specified, and any
other approval required by law.
7.2 Any approval given by the holders of the Class E Shares to add to,
change or remove any right, privilege, restriction or condition attaching to
the Class E Shares or any other matter requiring the approval or consent of
the holders of the Class E Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to
a minimum requirement that such approval be evidenced by written resolution
signed by all holders of Class E Shares or by resolution passed by not less
than two-thirds of the votes cast on such resolution at a meeting of holders
of Class E Shares duly called and held at which the holders of at least 50% of
the outstanding Class E Shares at that time are present or represented by
proxy; provided that if at any such meeting the holders of at least 50% of the
outstanding Class E Shares at that time are not present or represented by
proxy within one-half hour after the time appointed for such meeting then the
meeting shall be adjourned to such date not less than ten days thereafter and
to such time and place as may be designated by the Chairman of such meeting.
At such adjourned meeting the holders of Class E Shares present
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or represented by proxy thereat may transact the business for which the
meeting was originally called and a resolution passed thereat by the
affirmative vote of not less than two-thirds of the votes cast on such
resolution at such meeting shall constitute the approval or consent of the
holders of the Class E Shares.
PROVISIONS ATTACHING TO CLASS F SHARES
The Class F non-voting common shares in the share capital of the Corporation
shall have attached thereto the following rights, privileges, restrictions and
conditions:
1 Dividends
1.1 Subject to the prior rights of the holders of any shares ranking senior
to the Class F Shares with respect to priority in the payment of dividends,
the holders of Class F Shares shall be entitled to receive dividends and the
Corporation shall pay dividends thereon, as and when declared by the board of
directors of the Corporation out of monies properly applicable to the payment
of dividends, in such amount and in such form as the board of directors may
from time to time determine and all dividends which the directors may declare
on the Class F Shares shall be declared and paid in equal amounts per share on
all Class F Shares at the time outstanding; and, subject as aforesaid, the
board of directors of the Corporation may in their discretion declare
dividends on the Class F Shares without declaring dividends on any of the
Class A Shares, the Class B Shares, the Class C Shares, the Class D Shares,
the Class E Shares or the Exchangeable Shares.
2 Dissolution
2.1 In the event of the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding up
its affairs, subject to the prior rights of the holders of the Exchangeable
Shares, the Class D Shares and the Class C Shares and to any other shares
ranking senior to the Class F Shares with respect to priority in the
distribution of assets upon dissolution, liquidation or winding-up, the
holders of the Class F Shares shall be entitled to receive the remaining
property and assets of the Corporation rateably with the holders of the Class
A Shares, the Class B Shares and the Class E Shares.
3 Voting Rights
3.1 The holders of Class F Shares shall be entitled to vote separately as a
class on any change of the head office of the Corporation. Each Class F Share
shall carry one vote at any meeting called for such purpose. Except as
aforesaid and except where specifically provided by the Quebec Act the holders
of the Class F Shares shall not otherwise be entitled to receive notice of or
to attend meetings of the shareholders of the Corporation and shall not be
entitled to vote at any meeting of shareholders of the Corporation, but shall
be entitled to notice of meetings of shareholders called for the purpose of
authorizing the dissolution of the Corporation.
4 Redemption of Class F Shares by the Corporation
4.1 Subject to applicable law, and subject to the exercise by Dutchco of the
Class F Redemption Call Right, the Corporation shall be entitled, immediately
following the Class B Conversion Time (the "Class F Redemption Time") without
notice to the holders of Class F Shares, but with prior notice to Dutchco, to
redeem the whole of the then outstanding Class F Shares for an amount per
share equal to the Current Market Price of 0.2625 of one Parent Common Share
on the last Business Day prior to the Redemption Time, which shall be
satisfied in full by the Corporation causing to be delivered to each holder of
Class F Shares 0.2625 of one Parent Common Share for each Class F Share held
by such holder (the "Class F Redemption Price").
4.2 At or after the Class F Redemption Time and subject to the exercise by
Dutchco of the Class F Redemption Call Right, the Corporation shall cause to
be delivered to the holders of the Class F Shares to be redeemed the Class F
Redemption Price (less any tax required to be deducted and withheld therefrom
by the
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Corporation) for each such Class F Share upon presentation and surrender (at
the head office of the Corporation or at any office of the Transfer Agent as
may be specified by the Corporation in such notice) of the certificates
representing such Class F Shares, or such other certificates of securities or
any predecessor of the Corporation acceptable to the Corporation (including
those representing Company Common Shares) together with such other documents
and instruments as may be required to effect a transfer of Class F Shares
under the Quebec Act and the by-laws of the Corporation and such additional
documents and instruments as the Transfer Agent may reasonably require.
Payment of the total Class F Redemption Price for such Class F Shares shall be
made by delivery to each holder, at the address of the holder recorded in the
securities register of the Corporation or by holding for pick up by the holder
at the head office of the Corporation or at any office of the Transfer Agent
as may be specified by the Corporation, on behalf of the Corporation of
certificates representing Parent Common Shares (which shares shall be duly
issued as fully paid and non-assessable and shall be free and clear of any
lien, claim or encumbrance) (less any tax required to be deducted and withheld
therefrom by the Corporation). At and after the Class F Redemption Time, the
holders of the Class F Shares called for redemption shall cease to be holders
of such Class F Shares and shall not be entitled to exercise any of the rights
of holders in respect thereof, other than the right to receive their
proportionate part of the total Class F Redemption Price, unless payment of
the total Class F Redemption Price for such Class F Shares shall not be made
upon presentation and surrender of certificates in accordance with the
foregoing provisions, in which case the rights of the holders shall remain
unaffected until the total Class F Redemption Price has been paid in the
manner hereinbefore provided. Subject to the exercise of the Class F
Redemption Call Right by Dutchco, the Corporation shall have the right at any
time to deposit or cause to be deposited the total Class F Redemption Price of
the Class F Shares so called for redemption, or of such of the said Class F
Shares represented by certificates that have not at the date of such deposit
been surrendered by the holders thereof in connection with such redemption, in
a custodial account with any chartered bank or trust company in Canada or the
United States. Upon the later of such deposit being made and the Class F
Redemption Time, the Class F Shares in respect whereof such deposit shall have
been made shall be redeemed and the rights of the holders thereof after such
deposit or Class F Redemption Time, as the case may be, shall be limited to
receiving their proportionate part of the total Class F Redemption Price (less
any tax required to be deducted and withheld therefrom by the Corporation) for
such Class F Shares so deposited, against presentation and surrender of the
said certificates held by them, respectively, in accordance with the foregoing
provisions. Upon such payment or deposit of the total Class F Redemption
Price, the holders of the Class F Shares shall thereafter be considered and
deemed for all purposes to be holders of the Parent Common Shares delivered to
them.
4.3 Dutchco shall have the overriding right (the "Class F Redemption Call
Right"), notwithstanding the proposed redemption of Class F Shares by the
Corporation, to purchase from all but not less than all of the holders of
Class F Shares to be redeemed at the Class F Redemption Time, all but not less
than all of the Class F Shares held by each such holder on payment by Dutchco
to the holder of an amount per share equal to the Current Market Price of
0.2625 of one Parent Common Share on the last Business Day prior to the Class
F Redemption Time which shall be satisfied in full by causing to be delivered
to such holder 0.2625 of one Parent Common Share (the "Class F Redemption Call
Purchase Price"). In the event of the exercise of the Class F Redemption Call
Right by Dutchco, each holder shall be obligated to sell all the Class F
Shares held by the holder and otherwise to be redeemed to Dutchco at the Class
F Redemption Time on payment by Dutchco to the holder of the Class F
Redemption Call Purchase Price for each such share.
4.4 To exercise the Class F Redemption Call Right, Dutchco must notify the
Corporation of Dutchco's intention to exercise such right prior to the Class F
Redemption Time (which notice may be given to the Company on behalf of the
Corporation). If Dutchco exercises the Class F Redemption Call Right, Dutchco
will, at the Class F Redemption Time, purchase and the holders will sell all
of the Class F Shares to be redeemed for a price per share equal to the Class
F Redemption Call Purchase Price. Any notice by Dutchco to the Company for and
on behalf of the Corporation shall be deemed to constitute good and valid
notice by Dutchco to the Corporation.
4.5 For the purposes of completing the purchase of Class F Shares pursuant
to the Class F Redemption Call Right, Dutchco shall deposit with the Transfer
Agent, at or before the Class F Redemption Time, certificates
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representing the aggregate number of Parent Common Shares deliverable by
Dutchco in payment of the total Class F Redemption Call Purchase Price and a
cheque or cheques in the amount of the remaining portion, if any, of the total
Class F Redemption Call Purchase Price. Provided that the total Class F
Redemption Call Purchase Price has been so deposited with the Transfer Agent,
at and after the Class F Redemption Time the rights of each holder of Class F
Shares so purchased will be limited to receiving such holder's proportionate
part of the total Class F Redemption Call Purchase Price payable by Dutchco
upon presentation and surrender by the holder of certificates representing the
Class F Shares purchased by Dutchco from such holder and the holder shall at
and after the Class F Redemption Time be considered and deemed for all
purposes to be the holder of the Parent Common Shares delivered to such
holder. Upon surrender to the Transfer Agent of a certificate or certificates
representing Class F Shares, together with such other documents and
instruments as may be required to effect a transfer of Class F Shares under
the Quebec Act and the by-laws of the Corporation and such additional
documents and instruments as the Transfer Agent may reasonably require, the
holder of such surrendered certificate or certificates shall be entitled to
receive in exchange therefor, and the Transfer Agent on behalf of Dutchco
shall deliver to such holder, certificates representing the Parent Common
Shares to which the holder is entitled and a cheque or cheques of or on behalf
of Dutchco payable at par and in Canadian dollars at any branch of the bankers
of Dutchco or of the Corporation in Canada in payment of the remaining
portion, if any, of the total Class F Redemption Call Purchase Price. If
Dutchco does not exercise the Class F Redemption Call Right in the manner
described herein, at the Class F Redemption Time the holders of the Class F
Shares will be entitled to receive in exchange therefor the redemption price
otherwise payable by the Corporation in connection with the redemption of
Class F Shares.
4.6 No certificates or scrip representing fractional Parent Common Shares
shall be issued upon the surrender for exchange of certificates pursuant to
sections 4.2 or 4.5 hereof and no dividend, stock split or other change in the
capital structure of Parent shall relate to any such fractional security and
such fractional interests shall not entitle the owner thereof to vote or to
exercise any rights as a security holder of Parent. In lieu of any such
fractional securities, each person entitled to a fractional interest in a
Parent Common Share will receive from the Corporation or Dutchco as the case
may be, an amount in cash (rounded to the nearest whole cent), without
interest, equal to the product of (i) such fraction, multiplied by (ii) the
average of the closing price for the Parent Common Shares on Nasdaq as of each
of the thirty (30) consecutive trading days immediately preceding the
Effective Date as quoted in The Wall Street Journal or other reliable
financial newspaper or publication. For the purposes of the preceding
sentence, a "trading day" means a day on which trading generally takes place
on Nasdaq and on which trading in Parent Common Shares has occurred.
4.7 No dividends or other distributions declared or made after the Class F
Redemption Time with respect to Parent Common Shares with a record date after
the Class F Redemption Time shall be paid to the holder of any unsurrendered
certificate which immediately prior to the Class F Redemption Date represented
Class F Shares that were redeemed or purchased pursuant to these Class F Share
provisions, and no cash payment in lieu of fractional shares shall be paid to
any such holder pursuant to section 4.6 hereof, unless and until the holder of
record of such certificate shall surrender such certificate in accordance with
sections 4.2 or 4.5 hereof, as the case may be. Subject to applicable law, at
the time of such surrender of any such certificate there shall be paid to the
record holder of the certificates representing whole Parent Common Shares
without interest (i) the amount of any cash payable in lieu of a fractional
Parent Common Share to which such holder is entitled pursuant to section 4.6
hereof, (ii) the amount of dividends or other distributions with a record date
after the Class F Redemption Time theretofore paid with respect to such whole
Parent Common Share and (iii) the amount of dividends or other distributions
with a record date after the Class F Redemption Time but prior to surrender
and a payment date subsequent to surrender payable with respect to such whole
Parent Common Share.
4.8 In the event of a transfer of ownership of Company Common Shares which
is not registered in the transfer records of the Company prior to the
Effective Date, a certificate representing the proper number of Parent Common
Shares may be issued to a transferee if the certificate representing such
Company Common Shares is presented to the Transfer Agent, accompanied by all
documents required to evidence and effect such transfer.
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4.9 In the event any certificate which immediately prior to the Effective
Date represented outstanding Company Common Shares that were converted to
Class B Shares on the Amalgamation and subsequently converted into Class F
Shares at the Class B Conversion Time shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such certificate to be lost, stolen or destroyed, the Transfer Agent will
issue in exchange for such lost, stolen or destroyed certificate, certificates
representing Parent Common Shares (and any dividends or distributions with
respect thereto and any cash pursuant to section 4.6 hereof) deliverable in
respect thereof as determined in accordance with sections 4.2 or 4.5 hereof.
When authorizing such issuance and/or payment in exchange for any lost, stolen
or destroyed certificate, the person to whom certificates representing Parent
Common Shares are to be issued shall, at the discretion of the Corporation or
Dutchco, as the case may be, as a condition precedent to the issuance thereof,
give a bond satisfactory to the Corporation or Dutchco, as the case may be, in
such sum as the Corporation or Dutchco may direct or otherwise indemnify the
Corporation or Dutchco in a manner satisfactory to the Corporation or the
Dutchco, as the case may be, against any claim that may be made against the
Corporation or Dutchco with respect to the certificate alleged to have been
lost, stolen or destroyed.
4.10 The Corporation and Dutchco shall be entitled to deduct and withhold
from the Class F Redemption Price or the Class F Redemption Call Price, as the
case may be, payable pursuant to these Class F Share Provisions to any holder
of Class F Shares such amounts as Parent, Dutchco or the Transfer Agent
determine is required to deduct and withhold with respect to the making of
such payment under the United States Internal Revenue Code of 1986, as
amended, the Income Tax Act (Canada) or any provision of state, local,
provincial or foreign tax law. To the extent that amounts are so withheld,
such withheld amounts shall be treated for all purposes hereof as having been
paid to the holder of the shares in respect of which such deduction and
withholding was made, provided that such withheld amounts are actually
remitted to the appropriate taxing authority. To the extent any amount is
required to be deducted or withheld from any payment to a holder, the
Corporation, the Affiliate or Dutchco, as the case may be, are hereby
authorized to sell or otherwise dispose of at fair market value such portion
of such consideration as is necessary to provide sufficient funds to the
Corporation, the Affiliate or Dutchco, as the case may be, in order to enable
it to comply with such deduction or withholding requirement and the
Corporation, the Affiliate or Dutchco, as the case may be shall give an
accounting to the holder with respect thereto and any balance of such proceeds
of sale.
4.11 The Corporation shall not be entitled to redeem, nor shall Dutchco or
the Affiliate, as the case may be, be entitled to purchase, any Class F Shares
pursuant to this Section 4 unless at the same time the Corporation redeems or
Dutchco or the Affiliate, as the case may be, purchases at the same time and
in the same manner all issued and outstanding Class E Shares.
5 Issued and Paid-Up Capital Account
5.1 Where Class E Shares and Class F Shares are issued on a conversion of
Class B Shares, the amount to be added to the issued and paid-up capital
account of the Class F Shares for purposes of the Quebec Act and the paid-up
capital account of the Class F Shares for purposes of the Income Tax Act
(Canada) shall be $1.
6 Amendment and Approval
6.1 The rights, privileges, restrictions and conditions attaching to the
Class F Shares may be added to, changed or removed but only with the approval
of the holders of the Class F Shares given as hereinafter specified, and any
other approval required by law.
6.2 Any approval given by the holders of the Class F Shares to add to,
change or remove any right, privilege, restriction or condition attaching to
the Class F Shares or any other matter requiring the approval or consent of
the holders of the Class F Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to
a minimum requirement that such approval be evidenced by written resolution
signed by all holders of Class F Shares or by resolution passed by not less
than two-thirds of the votes cast on such resolution at a meeting of holders
of Class F Shares duly called and held at which the
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holders of at least 50% of the outstanding Class F Shares at that time are
present or represented by proxy; provided that if at any such meeting the
holders of at least 50% of the outstanding Class F Shares at that time are not
present or represented by proxy within one-half hour after the time appointed
for such meeting then the meeting shall be adjourned to such date not less
than ten days thereafter and to such time and place as may be designated by
the Chairman of such meeting. At such adjourned meeting the holders of Class F
Shares present or represented by proxy thereat may transact the business for
which the meeting was originally called and a resolution passed thereat by the
affirmative vote of not less than two-thirds of the votes cast on such
resolution at such meeting shall constitute the approval or consent of the
holders of the Class F Shares.
PROVISIONS ATTACHING TO EXCHANGEABLE SHARES
The exchangeable non-voting shares in the share capital of the Corporation
shall have the following rights, privileges, restrictions and conditions:
ARTICLE 1
Interpretation
1.1 For the purposes of these Exchangeable Share Provisions:
"Affiliate" of any person means any other person directly or indirectly
controlled by, or under common control of, that person. For the purposes of
this definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control of"), as applied to any person,
means the possession by another person, directly or indirectly, of the power
to direct or cause the direction of the management and policies of that first
mentioned person, whether through the ownership of voting securities, by
contract or otherwise; provided, however, that any former directors, executive
officers or principal shareholders of the Company who may be deemed to be an
affiliate of Parent after the Effective Date, shall not be considered an
"Affiliate" for purposes of these share provisions.
"Amalgamation" means the amalgamation of Discreet Logic Inc., 9066-9854
Quebec Inc., and 9066-9771 Quebec Inc. under the Quebec Act.
"Automatic Redemption" has the meaning ascribed thereto in section 7.1 of
these share provisions.
"Automatic Redemption Date" means the date for the automatic redemption by
the Corporation of Exchangeable Shares pursuant to Article 7 of these share
provisions, which date shall be eleven years from the Effective Date (as
defined in the Amalgamation Agreement) unless (a) such date shall be extended
at any time or from time to time to a specified later date by the Board of
Directors provided at least 60 days' prior written notice of any such
extension is given to the registered holders of the Exchangeable Shares or (b)
such date shall be accelerated at any time to a specified earlier date by the
Board of Directors if at such time there are less than 250,000 Exchangeable
Shares outstanding (other than Exchangeable Shares held by Parent and its
Affiliates and as such number of shares may be adjusted as deemed appropriate
by the Board of Directors to give effect to any subdivision or consolidation
of or stock dividend on the Exchangeable Shares, any issue or distribution of
rights to acquire Exchangeable Shares or securities exchangeable for or
convertible into Exchangeable Shares, any issue or distribution of other
securities or rights or evidences of indebtedness or assets, or any other
capital reorganization or other transaction affecting the Exchangeable
Shares), provided at least 60 days' prior written notice of any such extension
or acceleration, as the case may be, is given to the registered holders of the
Exchangeable Shares, in which case the Automatic Redemption Date shall be such
later or earlier date; provided, however, that the accidental failure or
omission to give any such notice of extension or acceleration, as the case may
be, to less than 5% of such holders of Exchangeable Shares shall not affect
the validity of such extension or acceleration.
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"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means any day other than a Saturday, a Sunday or a day when
banks are not open for business in either or both of San Francisco, California
and Montreal, Quebec.
"Canadian Dollar Equivalent" means in respect of an amount expressed in a
foreign currency (the "Foreign Currency Amount") at any date the product
obtained by multiplying (a) the Foreign Currency Amount by (b) the noon spot
exchange rate on such date for such foreign currency expressed in Canadian
dollars as reported by the Bank of Canada or, in the event such spot exchange
rate is not available, such exchange rate on such date for such foreign
currency expressed in Canadian dollars as may be deemed by the Board of
Directors to be appropriate for such purpose.
"Certificate of Amalgamation" means the certificate of amalgamation to be
issued to the Corporation by the Inspector General of Financial Institutions
under the Quebec Act in respect of the Amalgamation.
"Class A Shares" mean the Class A voting common shares in the share capital
of the Corporation.
"Class B Shares" means the Class B non-voting common shares in the share
capital of the Corporation.
"Class C Shares" means the Class C non-voting preferred shares in the share
capital of the Corporation.
"Class D Shares" means the Class D non-voting preferred shares in the share
capital of the Corporation.
"Class E Shares" means the Class E voting common shares in the share capital
of the Corporation.
"Class F Shares" means the Class F non-voting common shares in the share
capital of the Corporation.
"Corporation" means the company resulting from the Amalgamation.
"Current Market Price" means, in respect of a Parent Common Share on any
date, the Canadian Dollar Equivalent of the average of the closing prices of
Parent Common Shares on Nasdaq on each of the thirty (30) consecutive trading
days ending not more than five trading days before such date, or, if the
Parent Common Shares are not then quoted on Nasdaq, on such other stock
exchange or automated quotation system on which the Parent Common Shares are
listed or quoted, as the case may be, as may be selected by the Board of
Directors for such purpose; provided, however, that if there is no public
distribution or trading activity of Parent Common Shares during such period,
then the Current Market Price of a Parent Common Share shall be determined by
the Board of Directors based upon the advice of such qualified independent
financial advisors as the Board of Directors may deem to be appropriate, and
provided further that any such selection, opinion or determination by the
Board of Directors shall be conclusive and binding.
"Dutchco" means Autodesk Development B.V., a corporation subsisting under
the laws of The Netherlands or such other subsidiary of Autodesk to which
Dutchco has assigned its rights under the Combination Agreement.
"Effective Date" means the date of the Amalgamation as set forth in the
Certificate of Amalgamation.
"Exchange Act" has the meaning ascribed thereto in Section 7.1 of these
share provisions.
"Exchangeable Shares" mean the exchangeable non-voting shares of the
Corporation having the rights, privileges, restrictions and conditions set
forth herein.
"Liquidation Amount" has the meaning ascribed thereto in Section 5.1 of
these share provisions.
"Liquidation Call Purchase Price" has the meaning ascribed thereto in
Section 5.4 of these share provisions.
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"Liquidation Call Right" has the meaning ascribed thereto in Section 5.4 of
these share provisions.
"Liquidation Date" has the meaning ascribed thereto in Section 5.1 of these
share provisions.
"Nasdaq" means the Nasdaq National Market.
"Parent" means Autodesk, Inc., a body corporate existing under the laws of
the State of Delaware.
"Parent (Dutchco) Call Notice" has the meaning ascribed thereto in Section
6.3 of these share provisions.
"Parent Common Shares" mean the common shares in the share capital of
Parent.
"Parent Dividend Declaration Date" means the date on which the Board of
Directors of Parent declares any dividend on the Parent Common Shares.
"Parent Special Share" means the one share of Series B Preferred Stock of
Parent with a par value of U.S.$0.01 and having voting rights at meetings of
holders of Parent Common Shares equal to that number of votes equal to the
number of votes that the Exchangeable Shares outstanding from time to time
(other than Exchangeable Shares held by Parent and its Affiliates) would be
entitled to if exchanged for Parent Common Shares, to be issued to and voted
by the Trustee pursuant to the Voting and Exchange Trust Agreement.
"Purchase Price" has the meaning ascribed thereto in Section 6.3 of these
share provisions.
"Quebec Act" means the Companies Act (Quebec), as amended.
"Record Holders" has the meaning ascribed thereto in Section 7.1 of these
share provisions.
"Redemption Call Right" has the meaning ascribed thereto in Section 7.3 of
these share provisions.
"Redemption Call Purchase Price" has the meaning ascribed thereto in Section
7.1 of these share provisions.
"Redemption Price" has the meaning ascribed thereto in Section 7.1 of these
share provisions.
"Retracted Shares" has the meaning ascribed thereto in Section 6.1(a) of
these share provisions.
"Retraction Call Right" has the meaning ascribed thereto in Section 6.1(c)
of these share provisions.
"Retraction Date" has the meaning ascribed thereto in Section 6.1(b) of
these share provisions.
"Retraction Price" has the meaning ascribed thereto in Section 6.1 of these
share provisions.
"Retraction Request" has the meaning ascribed thereto in Section 6.1 of
these share provisions.
"Section 12(g) Redemption" has the meaning ascribed thereto in Section 7.1.
"Support Agreement" means the Support Agreement between Parent, Dutchco and
the Corporation, made as of . , 1998.
"Transfer Agent" means Harris Trust and Savings Bank or such other person as
may from time to time be the registrar and transfer agent for the Exchangeable
Shares.
"Trustee" means Montreal Trust Company of Canada, a trust company existing
under the laws of Canada and any successor trustee appointed under the Voting
and Exchange Trust Agreement.
"Voting and Exchange Trust Agreement" means the Voting and Exchange Trust
Agreement between Parent, Dutchco, the Corporation and the Trustee, made as of
. , 1998.
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ARTICLE 2
Ranking of Exchangeable Shares
2.1 The Exchangeable Shares shall be entitled to a preference over the Class
A Shares, the Class B Shares, the Class C Shares, the Class D Shares, the
Class E Shares and the Class F Shares and any other shares ranking junior to
the Exchangeable Shares with respect to the payment of dividends and the
distribution of assets in the event of the liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, or any other
distribution of the assets of the Corporation among its shareholders for the
purpose of winding up its affairs.
ARTICLE 3
Dividends
3.1 A holder of an Exchangeable Share shall be entitled to receive and the
Board of Directors shall, subject to applicable law, on each Parent Dividend
Declaration Date, declare a dividend on each Exchangeable Share (a) in the
case of a cash dividend declared on the Parent Common Shares, in an amount in
cash for each Exchangeable Share equal to the Canadian Dollar Equivalent on
the Parent Dividend Declaration Date of the cash dividend declared on each
Parent Common Share or (b) in the case of a stock dividend declared on the
Parent Common Shares to be paid in Parent Common Shares, in such number of
Exchangeable Shares for each Exchangeable Share as is equal to the number of
Parent Common Shares to be paid on each Parent Common Share or (c) in the case
of a dividend declared on the Parent Common Shares in property other than cash
or Parent Common Shares, in such type and amount of property for each
Exchangeable Share as is the same as or economically equivalent to (to be
determined by the Board of Directors as contemplated by Section 2.7 of the
Support Agreement) the type and amount of property declared as a dividend on
each Parent Common Share. Such dividends shall be paid out of money, assets or
property of the Corporation properly applicable to the payment of dividends,
or out of authorized but unissued shares of the Corporation. Any dividend
which should have been declared on the Exchangeable Shares pursuant to this
Section 3.1 but was not so declared due to the provisions of applicable law
shall be declared and paid by the Corporation as soon as payment of such
dividend is permitted by such law on a subsequent date or dates determined by
the Board of Directors.
3.2 Cheques of the Corporation or any dividend paying agent appointed by the
Corporation payable at par at any branch of the bankers of the Corporation
shall be issued in respect of any cash dividends contemplated by Section
3.1(a) hereof and the sending of such a cheque to each holder of an
Exchangeable Share shall satisfy the cash dividend represented thereby unless
the cheque is not paid on presentation. Certificates registered in the name of
the registered holder of Exchangeable Shares shall be issued or transferred in
respect of any stock dividends contemplated by Section 3.1(b) hereof and the
sending of such a certificate to each holder of an Exchangeable Share shall
satisfy the stock dividend represented thereby. Such other type and amount of
property in respect of any dividends contemplated by Section 3.1(c) hereof
shall be issued, distributed or transferred by the Corporation in such manner
as it shall determine and the issuance, distribution or transfer thereof by
the Corporation to each holder of an Exchangeable Share shall satisfy the
dividend represented thereby. No holder of an Exchangeable Share shall be
entitled to recover by action or other legal process against the Corporation
any dividend that is represented by a cheque that has not been duly presented
to the Corporation's bankers for payment or that otherwise remains unclaimed
for a period of six years from the date on which such dividend was payable.
3.3 The record date for the determination of the holders of Exchangeable
Shares entitled to receive payment of, and the payment date for, any dividend
declared on the Exchangeable Shares under Section 3.1 hereof shall be the same
dates as the record date and payment date, respectively, for the corresponding
dividend declared on the Parent Common Shares.
3.4 If on any payment date for any dividends declared on the Exchangeable
Shares under Section 3.1 hereof the dividends are not paid in full on all of
the Exchangeable Shares then outstanding, any such dividends
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that remain unpaid shall be paid on a subsequent date or dates determined by
the Board of Directors on which the Corporation shall have sufficient moneys,
assets or property properly applicable to the payment of such dividends.
ARTICLE 4
Certain Restrictions
4.1 So long as any of the Exchangeable Shares are outstanding, the
Corporation shall not at any time without, but may at any time with, the
approval of the holders of the Exchangeable Shares given as specified in
Section 10.2 of these share provisions:
(a) pay any dividends on the Class A Shares, the Class B Shares, the
Class C Shares, the Class D Shares, the Class E Shares, the Class F Shares
or any other shares ranking junior to the Exchangeable Shares, other than
stock dividends payable in Class A Shares, Class B Shares, Class C Shares,
Class D Shares, Class E Shares, Class F Shares or any such other shares
ranking junior to the Exchangeable Shares, as the case may be;
(b) redeem, retract or purchase or make any capital distribution in
respect of Class A Shares, Class B Shares, Class C Shares, Class D Shares,
Class E Shares and Class F Shares or any other shares ranking junior to the
Exchangeable Shares;
(c) redeem or purchase any other shares of the Corporation ranking
equally with or junior to the Exchangeable Shares with respect to the
payment of dividends or on any liquidation distribution; or
(d) issue any Exchangeable Shares or any other shares of the Corporation
ranking equally with respect to the payment of dividends or on any
liquidation distribution, or superior to, the Exchangeable Shares other
than by way of stock dividends to the holders of such Exchangeable Shares
or as contemplated by the Support Agreement.
The restrictions in Sections 4.1(a), 4.1(b) and 4.1(c) above shall not apply
if all dividends on the outstanding Exchangeable Shares corresponding to
dividends declared following the initial date of issue of Exchangeable Shares
on the Parent Common Shares shall have been declared on the Exchangeable
Shares and paid in full.
ARTICLE 5
Distribution on Liquidation
5.1 In the event of the liquidation, dissolution or winding-up of the
Corporation or any other distribution of the assets of the Corporation among
its shareholders for the purpose of winding up its affairs, a holder of
Exchangeable Shares shall be entitled, subject to applicable law, to receive
from the assets of the Corporation in respect of each Exchangeable Share held
by such holder on the effective date (the "Liquidation Date") of such
liquidation, dissolution or winding-up, before any distribution of any part of
the assets of the Corporation among the holders of the Class A Shares, the
Class B Shares, the Class C Shares, the Class D Shares, the Class E Shares,
the Class F Shares or any other shares ranking junior to the Exchangeable
Shares, an amount per share equal to (a) the Current Market Price of a Parent
Common Share on the last Business Day prior to the Liquidation Date, which
shall be satisfied in full by the Corporation causing to be delivered to such
holder one Parent Common Share, plus (b) an additional amount equivalent to
the full amount of all declared and unpaid dividends on each such Exchangeable
Share and all dividends declared on Parent Common Shares which have not been
declared on such Exchangeable Shares in accordance with Section 3.1 of these
share provisions (collectively the "Liquidation Amount", provided that if the
record date for any such declared and unpaid dividends occurs on or after the
Liquidation Date, the Liquidation Amount shall not include such additional
amount equivalent to such dividends).
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5.2 On or promptly after the Liquidation Date, and subject to the exercise
by Dutchco of the Liquidation Call Right, the Corporation shall cause to be
delivered to the holders of the Exchangeable Shares the Liquidation Amount
(less any tax required to be deducted and withheld therefrom by the
Corporation) for each such Exchangeable Share upon presentation and surrender
of the certificates representing such Exchangeable Shares together with such
other documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Quebec Act and the by-laws of the Corporation
and such additional documents and instruments as the Transfer Agent may be
specified by the Corporation by notice to the holders of the Exchangeable
Shares. Payment of the total Liquidation Amount for such Exchangeable Shares
shall be made by delivery to each holder, at the address of the holder
recorded in the securities register of the Corporation for the Exchangeable
Shares or by holding for pick up by the holder at the head office of the
Corporation or at any office of the Transfer Agent as may be specified by the
Corporation by notice to the holders of Exchangeable Shares, on behalf of the
Corporation of certificates representing Parent Common Shares (which shares
shall be duly issued as fully paid and non-assessable and shall be free and
clear of any lien, claim or encumbrance) and a cheque of the Corporation
payable at par at any branch of the bankers of the Corporation in respect of
the amount equivalent to the full amount of all declared and unpaid dividends
and all dividends declared on Parent Common Shares which have not been
declared on such Exchangeable Shares in accordance with Section 3.1 of these
share provisions, comprising part of the total Liquidation Amount (less any
tax required to be deducted and withheld therefrom by the Corporation). On and
after the Liquidation Date, the holders of the Exchangeable Shares shall cease
to be holders of such Exchangeable Shares and shall not be entitled to
exercise any of the rights of holders in respect thereof, other than the right
to receive their proportionate part of the total Liquidation Amount, unless
payment of the total Liquidation Amount for such Exchangeable Shares shall not
be made upon presentation and surrender of share certificates in accordance
with the foregoing provisions, in which case the rights of the holders shall
remain unaffected until the total Liquidation Amount has been paid in the
manner hereinbefore provided. The Corporation shall have the right at any time
after the Liquidation Date to deposit or cause to be deposited the total
Liquidation Amount in respect of the Exchangeable Shares represented by
certificates that have not at the Liquidation Date been surrendered by the
holders thereof in a custodial account with any chartered bank or trust
company in Canada. Upon such deposit being made, the rights of the holders of
Exchangeable Shares after such deposit shall be limited to receiving their
proportionate part of the total Liquidation Amount (less any tax required to
be deducted and withheld therefrom) for such Exchangeable Shares so deposited,
against presentation and surrender of the said certificates held by them,
respectively, in accordance with the foregoing provisions. Upon such payment
or deposit of the total Liquidation Amount, the holders of the Exchangeable
Shares shall thereafter be considered and deemed for all purposes to be the
holders of the Parent Common Shares delivered to them. To the extent that the
amount of tax required to be deducted or withheld from any payment to a holder
of Exchangeable Shares exceeds the cash portion of such payment, the
Corporation is hereby authorized to sell or otherwise dispose of at fair
market value such portion of the property then payable to the holder as is
necessary to provide sufficient funds to the Corporation in order to enable it
to comply with such deduction or withholding requirement and the Corporation
shall give an accounting to the holder with respect thereto and any balance of
such proceeds of sale.
5.3 After the Corporation has satisfied its obligations to pay the holders
of the Exchangeable Shares, the Liquidation Amount per Exchangeable Share
pursuant to Section 5.1 of these share provisions, such holders shall not be
entitled to share in any further distribution of the assets of the
Corporation.
5.4 Dutchco shall have the overriding right (the "Liquidation Call Right"),
in the event of and notwithstanding the proposed liquidation, dissolution or
winding-up of the Corporation pursuant to Article 5 of these share provisions,
to purchase from all but not less than all of the holders of Exchangeable
Shares on the Liquidation Date all but not less than all of the Exchangeable
Shares held by each such holder on payment by Dutchco of an amount per share
equal to (a) the Current Market Price of a Parent Common Share on the last
Business Day prior to the Liquidation Date, which shall be satisfied in full
by causing to be delivered to such holder one Parent Common Share, plus (b) an
additional amount equivalent to the full amount of all dividends declared and
unpaid on such Exchangeable Share and all dividends declared on Parent Common
Shares which have not been declared on such Exchangeable Shares in accordance
with Section 3.1 of these share provisions
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(collectively the "Liquidation Call Purchase Price", provided that if the
record date for any such declared and unpaid dividends occurs on or after the
Liquidation Date, the Liquidation Call Purchase Price shall not include such
additional amount equivalent to such dividends). In the event of the exercise
of the Liquidation Call Right by Dutchco, each holder shall be obligated to
sell all the Exchangeable Shares held by the holder to Dutchco on the
Liquidation Date on payment by Dutchco to the holder of the Liquidation Call
Purchase Price for each such share.
5.5 To exercise the Liquidation Call Right, Dutchco must notify the Transfer
Agent, as agent for the holders of Exchangeable Shares, and the Corporation of
Dutchco's intention to exercise such right at least sixty days before the
Liquidation Date in the case of a voluntary liquidation, dissolution or
winding-up of the Corporation and at least five Business Days before the
Liquidation Date in the case of an involuntary liquidation, dissolution or
winding-up of the Corporation. The Transfer Agent will notify the holders of
Exchangeable Shares as to whether or not Dutchco has exercised the Liquidation
Call Right forthwith after the expiry of the period during which the same may
be exercised by Dutchco. If Dutchco exercises the Liquidation Call Right, on
the Liquidation Date, Dutchco will purchase and the holders will sell all of
the Exchangeable Shares then outstanding for a price per share equal to the
Liquidation Call Purchase Price.
5.6 For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Liquidation Call Right, Dutchco shall deposit with the
Transfer Agent, on or before the Liquidation Date, certificates representing
the aggregate number of Parent Common Shares deliverable by Dutchco in payment
of the total Liquidation Call Purchase Price and a cheque or cheques in the
amount of the remaining portion, if any, of the total Liquidation Call
Purchase Price. Provided that the total Liquidation Call Purchase Price has
been so deposited with the Transfer Agent, on and after the Liquidation Date
the rights of each holder of Exchangeable Shares will be limited to receiving
such holder's proportionate part of the total Liquidation Call Purchase Price
payable by Dutchco upon presentation and surrender by the holder of
certificates representing the Exchangeable Shares held by such holder and the
holder shall on and after the Liquidation Date be considered and deemed for
all purposes to be the holder of the Parent Common Shares delivered to it.
Upon surrender to the Transfer Agent of a certificate or certificates
representing Exchangeable Shares, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares
under the Quebec Act and the by-laws of the Corporation and such additional
documents and instruments as the Transfer Agent may reasonably require, the
holder of such surrendered certificate or certificates shall be entitled to
receive in exchange therefor, and the Transfer Agent on behalf of Dutchco
shall deliver to such holder, certificates representing the Parent Common
Shares to which the holder is entitled and a cheque or cheques of Dutchco
payable at par and in Canadian dollars at any branch of the bankers of Dutchco
or of the Corporation in Canada in payment of the remaining portion, if any,
of the total Liquidation Call Purchase Price. If Dutchco does not exercise the
Liquidation Call Right in the manner described above, on the Liquidation Date
the holders of the Exchangeable Shares will be entitled to receive in exchange
therefor the liquidation price otherwise payable by the Corporation in
connection with the liquidation, dissolution or winding-up of the Corporation
pursuant to this Article 5.
ARTICLE 6
Retraction of Exchangeable Shares by Holder
6.1 A holder of Exchangeable Shares shall be entitled at any time, subject
to applicable law and the exercise by Dutchco of the Retraction Call Right (as
defined in subsection (c) below) and otherwise upon compliance with the
provisions of this Article 6, to require the Corporation to redeem any or all
of the Exchangeable Shares registered in the name of such holder for an amount
per share equal to (a) the Current Market Price of a Parent Common Share on
the last Business Day prior to the Retraction Date, which shall be satisfied
in full by the Corporation causing to be delivered to such holder one Parent
Common Share for each Exchangeable Share presented and surrendered by the
holder, plus (b) an additional amount equivalent to the full amount of all
dividends declared and unpaid thereon and all dividends declared on Parent
Common Shares which have not been declared on such Exchangeable Shares in
accordance with Section 3.1 of these share
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provisions (collectively the "Retraction Price", provided that if the record
date for any such declared and unpaid dividends occurs on or after the
Retraction Date the Retraction Price shall not include such additional amount
equivalent to such dividends). To effect such redemption, the holder shall
present and surrender at the head office of the Corporation or at any office
of the Transfer Agent as may be specified by the Corporation by notice to the
holders of Exchangeable Shares the certificate or certificates representing
the Exchangeable Shares which the holder desires to have the Corporation
redeem, together with such other documents and instruments as may be required
to effect a transfer of Exchangeable Shares under the Quebec Act and the by-
laws of the Corporation and such additional documents and instruments as the
Transfer Agent may reasonably require, and together with a duly executed
statement (the "Retraction Request") in such form as may be acceptable to the
Corporation:
(a) specifying that the holder desires to have all or any number
specified therein of the Exchangeable Shares represented by such
certificate or certificates (the "Retracted Shares") redeemed by the
Corporation;
(b) stating the Business Day on which the holder desires to have the
Corporation redeem the Retracted Shares (the "Retraction Date"), provided
that the Retraction Date shall be not less than five Business Days nor more
than ten Business Days after the date on which the Retraction Request is
received by the Corporation and further provided that, in the event that no
such Business Day is specified by the holder in the Retraction Request, the
Retraction Date shall be deemed to be the tenth Business Day after the date
on which the Retraction Request is received by the Corporation; and
(c) acknowledging the overriding right (the "Retraction Call Right") of
Dutchco to purchase all but not less than all the Retracted Shares directly
from the holder and that the Retraction Request shall be deemed to be a
revocable offer by the holder to sell the Retracted Shares to Dutchco in
accordance with the Retraction Call Right on the terms and conditions set
out in Section 6.3 below.
6.2 Subject to the exercise by Dutchco of the Retraction Call Right, upon
receipt by the Corporation or the Transfer Agent in the manner specified in
Section 6.1 hereof of a certificate or certificates representing the number of
Exchangeable Shares which the holder desires to have the Corporation redeem,
together with a Retraction Request, and provided that the Retraction Request
is not revoked by the holder in the manner specified in Section 6.7 hereof,
the Corporation shall redeem the Retracted Shares effective at the close of
business on the Retraction Date and shall cause to be delivered to such holder
the total Retraction Price with respect to such shares. If only a part of the
Exchangeable Shares represented by any certificate are redeemed (or purchased
by Dutchco pursuant to the Retraction Call Right), a new certificate for the
balance of such Exchangeable Shares shall be issued to the holder at the
expense of the Corporation.
6.3 Upon receipt by the Corporation of a Retraction Request, the Corporation
shall immediately notify Dutchco and Parent thereof. In order to exercise the
Retraction Call Right, Parent or Dutchco must notify the Corporation in
writing of Dutchco's determination to do so (the "Parent (Dutchco) Call
Notice") within two Business Days of notification to Parent and Dutchco by the
Corporation of the receipt by the Corporation of the Retraction Request. If
the Parent or Dutchco does not so notify the Corporation within such two
Business Day period, the Corporation will notify the holder as soon as
possible thereafter that Dutchco will not exercise the Retraction Call Right.
If Parent or Dutchco delivers the Parent (Dutchco) Call Notice within such two
Business Day time period, and provided that the Retraction Request is not
revoked by the holder in the manner specified in Section 6.7, the Retraction
Request shall thereupon be considered only to be an offer by the holder to
sell the Retracted Shares to Dutchco in accordance with the Retraction Call
Right. In such event, the Corporation shall not redeem the Retracted Shares
and Dutchco shall purchase from such holder and such holder shall sell to
Dutchco on the Retraction Date, the Retracted Shares for a purchase price (the
"Purchase Price") per share equal to the Retraction Price per share. For the
purposes of completing a purchase pursuant to the Retraction Call Right,
Dutchco shall deposit with the Transfer Agent, on or before the Retraction
Date, certificates representing Parent Common Shares and a cheque in the
amount of the remaining portion, if any, of the total Purchase Price. Provided
that the total Purchase Price has been so deposited with the Transfer Agent,
the closing of the purchase and sale of the Retracted Shares pursuant to the
Retraction Call Right shall be deemed to have occurred as at the close of
business on the Retraction Date and, for greater certainty, no redemption by
the Corporation of such Retracted Shares shall take place on the Retraction
Date. In the event that neither Parent nor Dutchco delivers a
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Parent (Dutchco) Call Notice within such two Business Day period, and provided
that Retraction Request is not revoked by the holder in the manner specified
in Section 6.7, the Corporation shall redeem the Retracted Shares on the
Retraction Date and in the manner otherwise contemplated in this Article 6.
6.4 The Corporation or Dutchco, as the case may be, shall deliver or cause
the Transfer Agent to deliver to the relevant holder, at the address of the
holder recorded in the securities register of the Corporation for the
Exchangeable Shares or at the address specified in the holder's Retraction
Request or by holding for pick up by the holder at the head office of the
Corporation or at any office of the Transfer Agent as may be specified by the
Corporation by notice to the holders of Exchangeable Shares, certificates
representing the Parent Common Shares (which shares shall be duly issued as
fully paid and non-assessable and shall be free and clear of any lien, claim
or encumbrance) registered in the name of the holder or in such other name as
the holder may request in payment of the total Retraction Price or the total
Purchase Price, as the case may be, and a cheque of the Corporation payable at
par at any branch of the bankers of the Corporation in payment of the
remaining portion, if any, of the total Retraction Price (less any tax
required to be deducted and withheld therefrom by the Corporation) or a cheque
of Dutchco payable at par and in Canadian dollars at any branch of the bankers
of Dutchco or of the Corporation in Canada in payment of the remaining
portion, if any, of the total Purchase Price, as the case may be, and such
delivery of such certificates and cheque on behalf of the Corporation or by
Dutchco, as the case may be, or by the Transfer Agent shall be deemed to be
payment of and shall satisfy and discharge all liability for the total
Retraction Price or total Purchase Price, as the case may be, to the extent
that the same is represented by such share certificates and cheque (less any
tax required and in fact deducted and withheld therefrom and remitted to the
proper tax authority), unless such cheque is not paid on due presentation. To
the extent that the amount of tax required to be deducted or withheld from any
payment to a holder of Exchangeable Shares exceeds the cash portion of such
payment, the Corporation or Dutchco, as the case may be, is hereby authorized
to sell or otherwise dispose of at fair market value such portion of the
property then payable to the holder as is necessary to provide sufficient
funds to the Corporation in order to enable it to comply with such deduction
or withholding requirement and shall give an accounting to the holder with
respect thereto and any balance of such proceeds of sale.
6.5 On and after the close of business on the Retraction Date, the holder of
the Retracted Shares shall cease to be a holder of such Retracted Shares and
shall not be entitled to exercise any of the rights of a holder in respect
thereof, other than the right to receive his proportionate part of the total
Retraction Price or total Purchase Price, as the case may be, unless upon
presentation and surrender of certificates in accordance with the foregoing
provisions, payment of the total Retraction Price or the total Purchase Price,
as the case may be, shall not be made, in which case the rights of such holder
shall remain unaffected until the total Retraction Price or the total Purchase
Price, as the case may be, has been paid in the manner hereinbefore provided.
On and after the close of business on the Retraction Date, provided that
presentation and surrender of certificates and payment of the total Retraction
Price or the total Purchase Price, as the case may be, has been made in
accordance with the foregoing provisions, the holder of the Retracted Shares
so redeemed by the Corporation or purchased by Dutchco shall thereafter be
considered and deemed for all purposes to be a holder of the Parent Common
Shares delivered to it.
6.6 Notwithstanding any other provision of this Article 6, the Corporation
shall not be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent that such redemption of Retracted Shares
would be contrary to solvency requirements or other provisions of applicable
law. If the Corporation believes that on any Retraction Date it would not be
permitted by any of such provisions to redeem the Retracted Shares tendered
for redemption on such date, and provided that Dutchco shall not have
exercised the Retraction Call Right with respect to the Retracted Shares, the
Corporation shall only be obligated to redeem Retracted Shares specified by a
holder in a Retraction Request to the extent of the maximum number that may be
so redeemed (rounded down to a whole number of shares) as would not be
contrary to such provisions and shall notify the holder at least two Business
Days prior to the Retraction Date as to the number of Retracted Shares which
will not be redeemed by the Corporation. In any case in which the redemption
by the Corporation of Retracted Shares would be contrary to solvency
requirements or other provisions of applicable law, the
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Corporation shall redeem Retracted Shares in accordance with Section 6.2 of
these share provisions on a pro rata basis and shall issue to each holder of
Retracted Shares a new certificate, at the expense of the Corporation,
representing the Retracted Shares not redeemed by the Corporation pursuant to
Section 6.2 hereof. Provided that the Retraction Request is not revoked by the
holder in the manner specified in Section 6.7 hereof, the holder of any such
Retracted Shares not redeemed by the Corporation pursuant to Section 6.2 of
these share provisions as a result of solvency requirements of applicable law
shall be deemed by giving the Retraction Request to require Dutchco to
purchase such Retracted Shares from such holder on the Retraction Date or as
soon as practicable thereafter on payment by Dutchco to such holder of the
Purchase Price for each such Retracted Share, all as more specifically
provided in the Voting and Exchange Trust Agreement.
6.7 A holder of Retracted Shares may, by notice in writing given by the
holder to the Corporation before the close of business on the Business Day
immediately preceding the Retraction Date, withdraw its Retraction Request in
which event such Retraction Request shall be null and void and, for greater
certainty, the revocable offer constituted by the Retraction Request to sell
the Retracted Shares to Dutchco shall be deemed to have been revoked.
ARTICLE 7
Redemption of Exchangeable Shares by the Corporation
7.1 Subject to applicable law, and subject to the exercise by Dutchco of the
Redemption Call Right, (a) the Corporation shall on the Automatic Redemption
Date redeem (the "Automatic Redemption") the whole of the then outstanding
Exchangeable Shares for an amount per share equal to (i) the Current Market
Price of a Parent Common Share on the last Business Day prior to the Automatic
Redemption Date, which shall be satisfied in full by the Corporation causing
to be delivered to each holder of Exchangeable Shares one Parent Common Share
for each Exchangeable Share held by such holder, plus (ii) an additional
amount equivalent to the full amount of all declared and unpaid dividends
thereon and all dividends declared on Parent Common Shares which have not been
declared on such Exchangeable Shares in accordance with Section 3.1 of these
share provisions (collectively the "Redemption Price", provided that if the
record date for any such declared and unpaid dividends occurs on or after the
Redemption Date, the Redemption Price shall not include such additional amount
equivalent to such dividends), and (b) the Corporation may, at any time when
the Corporation reasonably determines that Exchangeable Shares are "held of
record" (as such term is defined in Rule 12g5-1 promulgated under the United
States Securities Exchange Act of 1934, as amended (the "Exchange Act")) by
500 or more persons ("Record Holders"), redeem (a "Section 12(g) Redemption")
that portion of the then outstanding Exchangeable Shares held by that number
of Record Holders equal to the difference of (A) the total number of Record
Holders and (B) 499, or such smaller number that the Corporation reasonably
determines is necessary to take the position that it need not register the
Exchangeable Shares pursuant to Section 12(g) of the Exchange Act, the
identity of such Record Holders to be determined by the Corporation by lot or
other fair method of random determination, for an amount per share equal to
the Redemption Price.
7.2 In any case of a redemption of Exchangeable Shares under this Article 7,
the Corporation shall, at least 120 days before the Automatic Redemption Date
(in the case of the Automatic Redemption), or at least 30 days before the date
of a Section 12(g) Redemption (a "Section 12(g) Redemption Date"; the
Automatic Redemption Date or a Section 12(g) Redemption Date, as applicable,
being referred to in this Section 7.2 as a "Redemption Date"), send or cause
to be sent to each holder of Exchangeable Shares to be redeemed a notice in
writing of the redemption by the Corporation or the purchase by Dutchco under
the Redemption Call Right, as the case may be, of the Exchangeable Shares held
by such holder. Such notice shall set out the formula for determining the
Redemption Price or the Redemption Call Purchase Price, as the case may be,
the Redemption Date and, if applicable, particulars of the Redemption Call
Right. On or after the Redemption Date and subject to the exercise by Dutchco
of the Redemption Call Right, the Corporation shall cause to be delivered to
the holders of the Exchangeable Shares to be redeemed the Redemption Price
(less any tax required to be deducted and withheld therefrom by the
Corporation) for each such Exchangeable Share upon presentation and surrender
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at the head office of the Corporation or at any office of the Transfer Agent
as may be specified by the Corporation in such notice of the certificates
representing such Exchangeable Shares, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares
under the Quebec Act and the by-laws of the Corporation and such additional
documents and instruments as the Transfer Agent may reasonably require.
Payment of the total Redemption Price for such Exchangeable Shares shall be
made by delivery to each holder, at the address of the holder recorded in the
securities register of the Corporation or by holding for pick up by the holder
at the head office of the Corporation or at any office of the Transfer Agent
as may be specified by the Corporation in such notice, on behalf of the
Corporation of certificates representing Parent Common Shares (which shares
shall be duly issued as fully paid and non-assessable and shall be free and
clear of any lien, claim or encumbrance) and a cheque of the Corporation
payable at par at any branch of the bankers of the Corporation in respect of
the additional amount equivalent to the full amount of all declared and unpaid
dividends and all dividends declared on Parent Common Shares which have not
been declared on such Exchangeable Shares in accordance with Section 3.1 of
these share provisions comprising part of the total Redemption Price (less any
tax required to be deducted and withheld therefrom by the Corporation). On and
after the Redemption Date, the holders of the Exchangeable Shares called for
redemption shall cease to be holders of such Exchangeable Shares and shall not
be entitled to exercise any of the rights of holders in respect thereof, other
than the right to receive their proportionate part of the total Redemption
Price, unless payment of the total Redemption Price for such Exchangeable
Shares shall not be made upon presentation and surrender of certificates in
accordance with the foregoing provisions, in which case the rights of the
holders shall remain unaffected until the total Redemption Price has been paid
in the manner hereinbefore provided. The Corporation shall have the right at
any time after the sending of notice of its intention to redeem Exchangeable
Shares as aforesaid to deposit or cause to be deposited the total Redemption
Price of the Exchangeable Shares so called for redemption, or of such of the
said Exchangeable Shares represented by certificates that have not at the date
of such deposit been surrendered by the holders thereof in connection with
such redemption, in a custodial account with any chartered bank or trust
company in Canada named in such notice. Upon the later of such deposit being
made and the Redemption Date, the Exchangeable Shares in respect whereof such
deposit shall have been made shall be redeemed and the rights of the holders
thereof after such deposit or Redemption Date, as the case may be, shall be
limited to receiving their proportionate part of the total Redemption Price
(less any tax required to be deducted and withheld therefrom by the
Corporation) for such Exchangeable Shares so deposited, against presentation
and surrender of the said certificates held by them, respectively, in
accordance with the foregoing provisions. Upon such payment or deposit of the
total Redemption Price, the holders of the Exchangeable Shares shall
thereafter be considered and deemed for all purposes to be holders of the
Parent Common Shares delivered to them. To the extent that the amount of tax
required to be deducted or withheld from any payment to a holder of
Exchangeable Shares exceeds the cash portion of such payment, the Corporation
is hereby authorized to sell or otherwise dispose of at fair market value such
portion of the property then payable to the holder as is necessary to provide
sufficient funds to the Corporation in order to enable it to comply with such
deduction or withholding requirement and shall give an accounting to the
holder with respect thereto and any balance of such proceeds of sale.
7.3 Dutchco shall have the overriding right (the "Redemption Call Right"),
notwithstanding the proposed redemption of Exchangeable Shares by the
Corporation pursuant to this Article 7 of these share provisions, to purchase
from all but not less than all of the holders of Exchangeable Shares to be
redeemed on the Redemption Date, all but not less than all of the Exchangeable
Shares held by each such holder on payment by Dutchco to the holder of an
amount per share equal to (a) the Current Market Price of a Parent Common
Share on the last Business Day prior to the Redemption Date which shall be
satisfied in full by causing to be delivered to such holder one Parent Common
Share plus (b) an additional amount equivalent to the full amount of all
dividends declared and unpaid on such Exchangeable Share and all dividends
declared on Parent Common Shares that have not been declared on such
Exchangeable Share in accordance with Section 3.1 of these share provisions
(collectively the "Redemption Call Purchase Price", provided that if the
record date for any such declared and unpaid dividends occurs on or after the
Redemption Date, the Redemption Call Purchase Price shall not include such
additional amount equivalent to such dividends). In the event of the exercise
of the Redemption Call Right by Dutchco, each holder shall be obligated to
sell all the Exchangeable Shares held by the holder and otherwise
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to be redeemed to Dutchco on the Redemption Date on payment by Dutchco to the
holder of the Redemption Call Purchase Price for each such share.
7.4 To exercise the Redemption Call Right, Dutchco must notify the Transfer
Agent, as agent for the holders of Exchangeable Shares, and the Corporation of
Dutchco's intention to exercise such right at least 125 days before the
Automatic Redemption Date (in the case of the Automatic Redemption) or at
least 35 days before the Section 12(g) Redemption Date (in the case of Section
12(g) Redemption). The Transfer Agent will notify the holders of the
Exchangeable Shares as to whether or not Dutchco has exercised the Redemption
Call Right forthwith after the expiry of the period during which the same may
be exercised by Dutchco. If Dutchco exercises the Redemption Call Right, on
the Redemption Date, Dutchco will purchase and the holders will sell all of
the Exchangeable Shares to be redeemed for a price per share equal to the
Redemption Call Purchase Price.
7.5 For the purposes of completing the purchase of Exchangeable Shares
pursuant to the Redemption Call Right, Dutchco shall deposit with the Transfer
Agent, on or before the Redemption Date, certificates representing the
aggregate number of Parent Common Shares deliverable by Dutchco in payment of
the total Redemption Call Purchase Price and a cheque or cheques in the amount
of the remaining portion, if any, of the total Redemption Call Purchase Price.
Provided that the total Redemption Call Purchase Price has been so deposited
with the Transfer Agent, on and after the Redemption Date the rights of each
holder of Exchangeable Shares so purchased will be limited to receiving such
holder's proportionate part of the total Redemption Call Purchase Price
payable by Dutchco upon presentation and surrender by the holder of
certificates representing the Exchangeable Shares purchased by Dutchco from
such holder and the holder shall on and after the Redemption Date be
considered and deemed for all purposes to be the holder of the Parent Common
Shares delivered to such holder. Upon surrender to the Transfer Agent of a
certificate or certificates representing Exchangeable Shares, together with
such other documents and instruments as may be required to effect a transfer
of Exchangeable Shares under the Quebec Act and the by-laws of the Corporation
and such additional documents and instruments as the Transfer Agent may
reasonably require, the holder of such surrendered certificate or certificates
shall be entitled to receive in exchange therefor, and the Transfer Agent on
behalf of Dutchco shall deliver to such holder, certificates representing the
Parent Common Shares to which the holder is entitled and a cheque or cheques
of Dutchco payable at par and in Canadian dollars at any branch of the bankers
of Dutchco or of the Corporation in Canada in payment of the remaining
portion, if any, of the total Redemption Call Purchase Price. If Dutchco does
not exercise the Redemption Call Right in the manner described above, on the
Redemption Date the holders of the Exchangeable Shares will be entitled to
receive in exchange therefor the redemption price otherwise payable by the
Corporation in connection with the redemption of Exchangeable Shares pursuant
to this Article 7.
ARTICLE 8
Purchase for Cancellation
8.1 Subject to applicable law and the articles of the Corporation, the
Corporation may at any time and from time to time purchase for cancellation
all or any part of the outstanding Exchangeable Shares at any price by tender
to all the holders of record of Exchangeable Shares then outstanding or
through the facilities of any stock exchange on which the Exchangeable Shares
are listed or quoted at any price per share together with an amount equal to
all declared and unpaid dividends thereon. If in response to an invitation for
tenders under the provisions of this Section 8.1, more Exchangeable Shares are
tendered at a price or prices acceptable to the Corporation than the
Corporation is prepared to purchase, the Exchangeable Shares to be purchased
by the Corporation shall be purchased as nearly as may be pro rata according
to the number of shares tendered by each holder who submits a tender to the
Corporation, provided that when shares are tendered at different prices, the
pro rating shall be effected (disregarding fractions) only with respect to the
shares tendered at the price at which more shares were tendered than the
Corporation is prepared to purchase after the Corporation has purchased all
the shares tendered at lower prices. If only part of the Exchangeable Shares
represented by any certificate shall be purchased, a new certificate for the
balance of such shares shall be issued at the expense of the Corporation.
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ARTICLE 9
Voting Rights
9.1 Except as required by applicable law, the holders of the Exchangeable
Shares shall not be entitled as such to receive notice of or to attend any
meeting of the shareholders of the Corporation or to vote at any such meeting.
9.2 Pursuant to the Voting and Exchange Trust Agreement (which by this
reference is incorporated into the rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares as if set forth herein in its
entirety) the holders of Exchangeable Shares (other than Parent, its
subsidiaries and Affiliates) shall be entitled to receive notice of and
instruct the Trustee under the Voting and Exchange Trust Agreement to exercise
voting rights at meetings of holders of Parent Common Shares, all as provided
for in the Voting and Exchange Trust Agreement.
ARTICLE 10
Amendment and Approval
10.1 The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed but only with the
approval of the holders of the Exchangeable Shares given as hereinafter
specified.
10.2 Any approval given by the holders of the Exchangeable Shares to add to,
change or remove any right, privilege, restriction or condition attaching to
the Exchangeable Shares or any other matter requiring the approval or consent
of the holders of the Exchangeable Shares shall be deemed to have been
sufficiently given if it shall have been given in accordance with applicable
law subject to a minimum requirement that such approval be evidenced by
resolution passed by not less than two-thirds of the votes cast on such
resolution at a meeting of holders of Exchangeable Shares duly called and held
at which the holders of at least 50% of the outstanding Exchangeable Shares at
that time are present or represented by proxy; provided that if at any such
meeting the holders of at least 50% of the outstanding Exchangeable Shares at
that time are not present or represented by proxy within one-half hour after
the time appointed for such meeting then the meeting shall be adjourned to
such date not less than ten days thereafter and to such time and place as may
be designated by the Chairman of such meeting. At such adjourned meeting the
holders of Exchangeable Shares present or represented by proxy thereat may
transact the business for which the meeting was originally called and a
resolution passed thereat by the affirmative vote of not less than two-thirds
of the votes cast on such resolution at such meeting shall constitute the
approval or consent of the holders of the Exchangeable Shares.
10.3 Exchangeable Shares held by Parent, Dutchco or their Affiliates shall
not be included for the purposes of determining a quorum, and shall not vote,
in connection with any approval contemplated by Section 10.2 of these share
provisions.
ARTICLE 11
Reciprocal Changes, Etc. in Respect of Parent Common Shares
11.1 (a) Pursuant to the Support Agreement, Parent will not without the
prior approval of the Corporation and the prior approval of the holders of the
Exchangeable Shares given in accordance with Section 10.2 of these share
provisions:
(i) issue or distribute Parent Common Shares (or securities exchangeable
for or convertible into or carrying rights to acquire Parent Common Shares)
to the holders of all or substantially all of the then outstanding Parent
Common Shares by way of stock dividend or other distribution, other than an
issue of
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Parent Common Shares (or securities exchangeable for or convertible into or
carrying rights to acquire Parent Common Shares) to holders of Parent
Common Shares who exercise an option to receive dividends in Parent Common
Shares (or securities exchangeable for or convertible into or carrying
rights to acquire Parent Common Shares) in lieu of receiving cash
dividends; or
(ii) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding Parent Common Shares
entitling them to subscribe for or to purchase Parent Common Shares (or
securities exchangeable for or convertible into or carrying rights to
acquire Parent Common Shares); or
(iii) issue or distribute to the holders of all or substantially all of
the then outstanding Parent Common Shares (A) shares or securities of
Parent of any class other than Parent Common Shares (other than shares
convertible into or exchangeable for or carrying rights to acquire Parent
Common Shares), (B) rights, options or warrants other than those referred
to in Section 11.1(a)(ii) above, (C) evidences of indebtedness of Parent or
(D) assets of Parent;
unless the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets is issued or
distributed simultaneously to holders of the Exchangeable Shares.
(b) Pursuant to the Support Agreement, Parent will not without the prior
approval of the Corporation and the prior approval of the holders of the
Exchangeable Shares given in accordance with Section 10.2 of these share
provisions:
(i) subdivide, redivide or change the then outstanding Parent Common
Shares into a greater number of Parent Common Shares; or
(ii) reduce, combine or consolidate or change the then outstanding Parent
Common Shares into a lesser number of Parent Common Shares; or
(iii) reclassify or otherwise change the Parent Common Shares or effect
an amalgamation, merger, reorganization or other transaction affecting the
Parent Common Shares;
unless the same or an economically equivalent change shall simultaneously be
made to, or in the rights of the holders of, the Exchangeable Shares.
Except for ministerial amendments contemplated by Section 3.5 of the Support
Agreement, the Support Agreement shall not be changed without the approval of
the holders of the Exchangeable Shares given in accordance with Section 10.2
of these share provisions.
11.2 Pursuant to the Voting and Exchange Trust Agreement, the holders of
Exchangeable Shares (other than the Parent, its subsidiaries and Affiliates)
are given certain rights to exchange their Exchangeable Shares for Parent
Common Shares.
ARTICLE 12
Actions by the Corporation Under Support Agreement
and Under Voting and Exchange Trust Agreement
12.1 The Corporation will take all such actions and do all such things as
shall be necessary or advisable to perform and comply with and to ensure
performance and compliance by Parent and Dutchco with all provisions of the
Support Agreement and the Voting and Exchange Trust Agreement applicable to
the Corporation, Dutchco and Parent, respectively, in accordance with the
respective terms thereof including, without limitation, taking all such
actions and doing all such things as shall be necessary or advisable to
enforce to the fullest extent possible for the direct benefit of the
Corporation and the holders of Exchangeable Shares all rights and benefits in
favor of the Corporation and such holders under or pursuant to such
agreements.
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12.2 The Corporation shall not propose, agree to or otherwise give effect to
any amendment to, or waiver or forgiveness of its rights or obligations under,
the Support Agreement and the Voting and Exchange Trust Agreement (except as
contemplated therein) without the approval of the holders or the Exchangeable
Shares given in accordance with Section 10.2 of these share provisions other
than such amendments, waivers and/or forgiveness as may be necessary or
advisable for the purposes of:
(a) adding to the covenants of the other party or parties to such
agreement for the protection of the Corporation or the holders of
Exchangeable Shares thereunder; or
(b) making such provisions or modifications not inconsistent with the
spirit and intent of such agreement as may be necessary or desirable with
respect to matters or questions arising thereunder which, in the opinion of
the Board of Directors, it may be expedient to make, provided that the
Board of Directors shall be of the opinion, after consultation with
counsel, that such provisions and modifications will not be prejudicial to
the interests of the holders of the Exchangeable Shares; or
(c) making such changes in or corrections to such agreement which, on the
advice of counsel to the Corporation, are required for the purpose of
curing or correcting any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error contained therein, provided
that the Board of Directors shall be of the opinion, after consultation
with counsel, that such changes or corrections will not be prejudicial to
the interests of the holders of the Exchangeable Shares.
ARTICLE 13
Legend
13.1 The certificates evidencing the Exchangeable Shares shall contain or
have affixed thereto a legend, in form and on terms approved by the Board of
Directors, with respect to the Support Agreement, the provisions relating to
the Liquidation Call Right and the Redemption Call Right, and the Voting and
Exchange Trust Agreement (including the provisions with respect to the voting
rights, exchange right and automatic exchange thereunder).
ARTICLE 14
Notices
14.1 Any notice, request or other communication to be given to the
Corporation by a holder of Exchangeable Shares shall be in writing and shall
be valid and effective if given by mail (postage prepaid) or by telecopy or by
delivery to the head office of the Corporation and addressed to the attention
of the President. Any such notice, request or other communication, if given by
mail, telecopy or delivery, shall only be deemed to have been given and
received upon actual receipt thereof by the Corporation.
14.2 Any presentation and surrender by a holder of Exchangeable Shares to
the Corporation or the Transfer Agent of certificates representing
Exchangeable Shares in connection with the liquidation, dissolution or winding
up of the Corporation or the retraction or redemption of Exchangeable Shares
shall be made by registered mail (postage prepaid) or by delivery to the head
office of the Corporation or to such office of the Transfer Agent as may be
specified by the Corporation, in each case addressed to the attention of the
President of the Corporation. Any such presentation and surrender of
certificates shall only be deemed to have been made and to be effective upon
actual receipt thereof by the Corporation or the Transfer Agent, as the case
may be. Any such presentation and surrender of certificates made by registered
mail shall be at the sole risk of the holder mailing the same.
14.3 Any notice, request or other communication to be given to a holder of
Exchangeable Shares by or on behalf of the Corporation shall be in writing and
shall be valid and effective if given by mail (postage prepaid) or by delivery
to the address of the holder recorded in the securities register of the
Corporation or, in the event
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of the address of any such holder not being so recorded, then at the last
known address of such holder. Any such notice, request or other communication,
if given by mail, shall be deemed to have been given and received on the third
Business Day following the date of mailing and, if given by delivery, shall be
deemed to have been given and received on the date of delivery. Accidental
failure or omission to give any notice, request or other communication to one
or more holders of Exchangeable Shares shall not invalidate or otherwise alter
or affect any action or proceeding to be taken by the Corporation pursuant
thereto.
ARTICLE 15
Guaranty/Assignment
15.1 Parent Guaranty/Assignment
Parent hereby unconditionally and irrevocably guarantees the full and
punctual performance of all of Dutchco's obligations hereunder. Dutchco may
assign all or a portion of its rights and obligations hereunder to Parent
without the consent of the Corporation or holders of Exchangeable Shares
provided Parent remains bound by these provisions.
ARTICLE 16
General
16.1 Withholding Rights
The Corporation, Parent, Dutchco and Transfer Agent shall be entitled to
deduct and withhold from the consideration otherwise payable to any holder of
Exchangeable Shares such amounts as Parent, Dutchco or the Transfer Agent
determine is required to deduct and withhold with respect to the making of
such payment under the United States Internal Revenue Code of 1986, as
amended, the Income Tax Act (Canada) or any provision of state, local,
provincial or foreign tax law. To the extent that amounts are so withheld,
such withheld amounts shall be treated for all purposes hereof as having been
paid to the holder of the shares in respect of which such deduction and
withholding was made, provided that such withheld amounts are actually
remitted to the appropriate taxing authority. To the extent that the amount so
required to be deducted or withheld from any payment to a holder exceeds the
cash portion of the consideration otherwise payable to the holder, the
Corporation, Dutchco and Transfer Agent are hereby authorized to sell or
otherwise dispose of at fair market value such portion of such consideration
as is necessary to provide sufficient funds to Parent, Dutchco or Transfer
Agent, as the case may be, in order to enable it to comply with such deduction
or withholding requirement and Parent, Dutchco or Transfer Agent shall give an
accounting to the holder with respect thereto and any balance of such proceeds
of sale.
ARTICLE 17
Par Value
17.1 Par Value
The Exchangeable Shares shall have a par value of $ per share.
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APPENDIX C
FORM OF SUPPORT AGREEMENT
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SUPPORT AGREEMENT
MEMORANDUM OF AGREEMENT made as of the day of , 1998
BETWEEN:
AUTODESK, INC.,
a corporation subsisting under the laws
of the State of Delaware,
(hereinafter referred to as the "Parent"),
--and--
AUTODESK DEVELOPMENT B.V.,
a corporation subsisting under the laws
of The Netherlands,
(hereinafter referred to as "Dutchco"),
--and--
DISCREET LOGIC INC.,
a corporation subsisting under the laws
of the Province of Quebec,
(hereinafter referred to as the "Corporation").
WHEREAS pursuant to an Amended and Restated Agreement and Plan of
Acquisition and Amalgamation dated as of September 23, 1998, by and among the
Parent, Dutchco, 9066-9771 Quebec Inc. ("Amalgamation Sub"), Autodesk Canada
Inc. ("ACI") 9066-9854 Quebec Inc. ("Autodesk Quebec") and Discreet Logic Inc.
(a predecessor to the Corporation) (such agreement being hereinafter referred
to as the "Combination Agreement"), the parties agreed that immediately after
the Effective Time (as such term is defined in the Combination Agreement), the
Parent, Dutchco and the Corporation would execute and deliver a Support
Agreement containing the terms and conditions set forth in Exhibit C to the
Combination Agreement, together with such other terms and conditions as may be
agreed to by the parties to the Combination Agreement acting reasonably;
AND WHEREAS pursuant to the Combination Agreement, articles of amalgamation
dated , 1998 (the "Articles of Amalgamation") were filed pursuant to the
Companies Act (Quebec) whereby Discreet Logic Inc., Autodesk Quebec and
Amalgamation Sub amalgamated to continue as the Corporation;
AND WHEREAS immediately following to the Amalgamation, holders of certain
issued and outstanding Class B non-voting common share of the Corporation (the
"Class B Shares") elected to retract such shares in exchange for Exchangeable
Non-Voting Shares of the Corporation (the "Exchangeable Shares") on the basis
of 0.525 of an Exchangeable Share for each Class B Share so retracted;
AND WHEREAS the Articles of Amalgamation set forth the rights, privileges,
restrictions and conditions (collectively, the "Exchangeable Share
Provisions") attaching to the Exchangeable Shares;
AND WHEREAS pursuant to the Transactions (as defined in the Combination
Agreement), Dutchco, an indirect wholly owned subsidiary of the Parent, is the
registered and beneficial owner of all of the issued and outstanding Class A
Shares of the Corporation and all of the issued and outstanding Class E Shares
and Class F Shares of the Corporation, and ACI, a wholly owned subsidiary of
the Parent, is the registered and beneficial owner of all of the issued and
outstanding Class C Shares of the Corporation, and is the registered
owner of all of the issued and outstanding Class D Shares of the Corporation;
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AND WHEREAS the parties hereto desire to make appropriate provision and to
establish a procedure whereby the Parent and Dutchco will take certain actions
and make certain payments and deliveries necessary to ensure that the
Corporation will be able to make certain payments and to deliver or cause to
be delivered, Parent Common Shares in satisfaction of the obligations of the
Corporation under the Exchangeable Share Provisions with respect to the
payment and satisfaction of Liquidation Amounts, Retraction Prices and
Redemption Prices, all in accordance with the Exchangeable Share Provisions;
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree
as follows:
ARTICLE 1
Definitions and Interpretation
1.1 Defined Terms. Each term denoted herein by initial capital letters and
not otherwise defined herein shall have the meaning ascribed thereto in the
Exchangeable Share Provisions, unless the context requires otherwise.
1.2 Interpretation not Affected by Headings, etc. The division of this
agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this agreement.
1.3 Number, Gender, etc. Words importing the singular number only shall
include the plural and vice versa. Words importing the use of any gender shall
include all genders.
1.4 Date for any Action. In the event that any date on or by which any
action is required or permitted to be taken under this agreement is not a
Business Day, such action shall be required or permitted to be taken on or by
the next succeeding Business Day. For the purposes of this agreement, a
"Business Day" means any day other than a Saturday, Sunday or a day when banks
are not open for business in either or both of San Francisco, California or
Montreal, Quebec.
ARTICLE 2
Covenants of the Parent, Dutchco and the Corporation
2.1 Funding of the Corporation. So long as any Exchangeable Shares are
outstanding, the Parent (and Dutchco in the case of subclauses (b), (e) and
(f)) will:
(a) not declare or pay any dividend on the Parent Common Shares unless (i)
the Corporation will have sufficient assets, funds and other property
available to enable the due declaration and the due and punctual payment in
accordance with applicable law, of an equivalent dividend on the Exchangeable
Shares and (ii) the Corporation shall simultaneously declare or pay, as the
case may be, an equivalent dividend on the Exchangeable Shares, in each case
in accordance with the Exchangeable Share Provisions;
(b) cause the Corporation to declare simultaneously with the declaration of
any dividend on the Parent Common Shares an equivalent dividend on the
Exchangeable Shares and, when such dividend is paid on
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the Parent Common Shares, cause the Corporation to pay simultaneously
therewith such equivalent dividend on the Exchangeable Shares, in each case in
accordance with the Exchangeable Share Provisions;
(c) advise the Corporation sufficiently in advance of the declaration by the
Parent of any dividend on the Parent Common Shares and take all such other
actions as are necessary, in cooperation with the Corporation, to ensure that
the respective declaration date, record date and payment date for a dividend
on the Exchangeable Shares shall be the same as the record date, declaration
date and payment date for the corresponding dividend on the Parent Common
Shares and shall correspond with any required dating for any stock exchange
purpose on which the Exchangeable Shares are listed;
(d) ensure that the record date for any dividend declared on the Parent
Common Shares is not less than 10 Business Days after the declaration date for
such dividend;
(e) take all such actions and do all such things as are necessary or
desirable to enable and permit the Corporation, in accordance with applicable
law, to pay and otherwise perform its obligations with respect to the
satisfaction of the Liquidation Amount in respect of each issued and
outstanding Exchangeable Share upon the liquidation, dissolution or winding-up
of the Corporation, including without limitation all such actions and all such
things as are necessary or desirable to enable and permit the Corporation to
cause to be delivered Parent Common Shares to the holders of Exchangeable
Shares in accordance with the provisions of Article 5 of the Exchangeable
Share Provisions; and
(f) take all such actions and do all such things as are necessary or
desirable to enable and permit the Corporation, in accordance with applicable
law, to pay and otherwise perform its obligations with respect to the
satisfaction of the Retraction Price and the Redemption Price, including
without limitation all such actions and all such things as are necessary or
desirable to enable and permit the Corporation to cause to be delivered Parent
Common Shares to the holders of Exchangeable Shares, upon the redemption of
the Exchangeable Shares in accordance with the provisions of Article 6 or
Article 7 of the Exchangeable Share Provisions, as the case may be.
2.2 Segregation of Funds. The Parent will and if applicable will cause the
Corporation to deposit a sufficient amount of funds in a separate account and
segregate a sufficient amount of such assets and other property as is
necessary to enable the Corporation to pay or otherwise satisfy the applicable
Liquidation Amount, Retraction Price or Redemption Price, in each case for the
benefit of holders from time to time of the Exchangeable Shares, and will use
such funds, assets and other property so segregated exclusively for the
payment or other satisfaction of the Liquidation Amount, the Retraction Price
or the Redemption Price, as applicable.
2.3 Reservation of Parent Common Shares. The Parent hereby represents,
warrants and covenants that it has irrevocably reserved for issuance and will
at all times keep available, free from pre-emptive and other rights, out of
its authorized and unissued capital stock such number of Parent Common Shares
(or other shares or securities into which the Parent Common Shares may be
reclassified or changed as contemplated by section 2.7 hereof) (a) as is equal
to the sum of (i) the number of Exchangeable Shares issued and outstanding
from time to time and (ii) the number of Exchangeable Shares issuable upon the
exercise of all rights to acquire Exchangeable Shares outstanding from time to
time and (b) as are now and may hereafter be required to enable and permit the
Corporation to meet its obligations hereunder, under the Voting and Exchange
Trust Agreement, under the Exchangeable Share Provisions and under any other
security or commitment pursuant to which the Parent may now or hereafter be
required to issue Parent Common Shares.
2.4 Notification of Certain Events. In order to assist the Parent and
Dutchco to comply with their obligations hereunder, the Corporation will give
the Parent and Dutchco notice of each of the following events at the time set
forth below:
(a) in the event of any determination by the Board of Directors of the
Corporation to institute voluntary liquidation, dissolution or winding up
proceedings with respect to the Corporation or to effect any other
distribution of the assets of the Corporation among its shareholders for the
purpose of winding up its affairs, at least 60 days prior to the proposed
effective date of such liquidation, dissolution, winding up or other
distribution;
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(b) immediately, upon the earlier of receipt by the Corporation of notice of
and the Corporation otherwise becoming aware of any threatened or instituted
claim, suit, petition or other proceeding with respect to the involuntary
liquidation, dissolution or winding up of the Corporation or to effect any
other distribution of the assets of the Corporation among its shareholders for
the purpose of winding up its affairs;
(c) immediately, upon receipt by the Corporation of a Retraction Request (as
defined in the Exchangeable Share Provisions);
(d) at least 130 days prior to any accelerated Automatic Redemption Date
determined by the Board of Directors of the Corporation in accordance with the
Exchangeable Share Provisions; and
(e) as soon as practicable upon the issuance by the Corporation of any
Exchangeable Shares or rights to acquire Exchangeable Shares (other than the
issuance of Exchangeable Shares upon the redemption of outstanding Class B
Shares pursuant to the Transactions).
2.5 Delivery of Parent Common Shares. In furtherance of its obligations
under sections 2.1(e) and 2.1(f) hereof, upon notice from the Corporation of
any event which requires the Corporation to cause to be delivered Parent
Common Shares to any holder of Exchangeable Shares, Dutchco shall forthwith
deliver the requisite Parent Common Shares to or to the order of the former
holder of the surrendered Exchangeable Shares, as the Corporation shall
direct. All such Parent Common Shares shall be duly issued as fully paid and
non-assessable and shall be free and clear of any lien, claim, encumbrance,
security interest or adverse claim. In consideration of the delivery of each
such Parent Common Share by Dutchco, the Corporation shall issue to Dutchco,
or as Dutchco shall direct, such number of Class A Shares of the Corporation
as is equal to the fair value of such Parent Common Share.
2.6 Qualification of Parent Common Shares in the United States. The Parent
represents and warrants that it has taken all actions and done all things as
are necessary or desirable to cause the Parent Common Shares to be issued and
delivered pursuant to the Exchangeable Share Provisions, the Exchange Right or
the Automatic Exchange Rights (as defined in the Voting and Exchange Trust
Agreement) to be freely tradeable thereafter in the United States (other than
any restrictions on transfers by reason of a holder being an "affiliate" of
the Parent or, prior to the Effective Date, for purposes of United States
federal or state securities law). The Parent will in good faith expeditiously
take all such actions and do all such things as are necessary or desirable to
cause all Parent Common Shares to be delivered pursuant to the Exchangeable
Share Provisions, Exchange Right or the Automatic Exchange Rights to be
listed, quoted or posted for trading on all stock exchanges and quotation
systems on which outstanding Parent Common Shares are listed, quoted or posted
for trading at such time.
2.7 Economic Equivalence.
(a) The Parent will not without the prior approval of the Corporation and
the prior approval of the holders of the Exchangeable Shares given in
accordance with Section 10.2 of the Exchangeable Share Provisions:
(i) issue or distribute Parent Common Shares (or securities exchangeable
for or convertible into or carrying rights to acquire Parent Common Shares)
to the holders of all or substantially all of the then outstanding Parent
Common Shares by way of stock dividend or other distribution, other than an
issue of Parent Common Shares (or securities exchangeable for or
convertible into or carrying rights to acquire Parent Common Shares) to
holders of Parent Common Shares who exercise an option to receive dividends
in Parent Common Shares (or securities exchangeable for or convertible into
or carrying rights to acquire Parent Common Shares) in lieu of receiving
cash dividends; or
(ii) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding Parent Common Shares
entitling them to subscribe for or to purchase Parent Common Shares (or
securities exchangeable for or convertible into or carrying rights to
acquire Parent Common Shares); or
(iii) issue or distribute to the holders of all or substantially all of
the then outstanding Parent Common Shares (A) shares or securities of the
Parent of any class other than Parent Common Shares (other than shares
convertible into or exchangeable for or carrying rights to acquire Parent
Common Shares), (B) rights,
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options or warrants other than those referred to in section 2.7(a)(ii)
above, (C) evidences of indebtedness of the Parent or (D) assets of the
Parent;
unless (i) the Corporation is able under applicable law to issue or distribute
the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets simultaneously
to holders of the Exchangeable Shares, and (ii) the Corporation shall issue or
distribute such rights, options, securities, shares, evidences of indebtedness
or other assets simultaneously to holders of the Exchangeable Shares.
(b) The Parent will not without the prior approval of the Corporation and
the prior approval of the holders of the Exchangeable Shares given in
accordance with Section 10.2 of the Exchangeable Share Provisions:
(i) subdivide, redivide or change the then outstanding Parent Common
Shares into a greater number of Parent Common Shares; or
(ii) reduce, combine or consolidate or change the then outstanding Parent
Common Shares into a lesser number of Parent Common Shares; or
(iii) reclassify or otherwise change the Parent Common Shares or effect
an amalgamation, merger, reorganization or other transaction affecting the
Parent Common Shares;
unless (i) the Corporation is able under applicable law to simultaneously make
the same or an economically equivalent change to, or in the rights of the
holders of, the Exchangeable Shares, and (ii) the Corporation simultaneously
does make the same or an economically equivalent change to, or in the rights
of the holders of, the Exchangeable Shares.
(c) The Parent will ensure that the record date for any event referred to in
section 2.7(a) or 2.7(b) above, or (if no record date is applicable for such
event) the effective date for any such event, is not less than 20 Business
Days (or such shorter period as the Parent and the Corporation may agree upon)
after the date on which such event is declared or announced by the Parent
(with simultaneous notice thereof to be given by the Parent to the
Corporation).
(d) The Board of Directors of the Corporation shall determine, in good faith
and in its sole discretion (with the assistance of such reputable and
qualified independent financial advisors and/or other experts as the board may
require), economic equivalence for the purposes of any event referred to in
Section 2.7(a) or 2.7(b) above and each such determination shall be conclusive
and binding on Dutchco and the Parent. In making each such determination, the
following factors shall, without excluding other factors determined by the
Board of Directors of the Corporation to be relevant, be considered by the
Board of Directors of the Corporation:
(i) in the case of any stock dividend or other distribution payable in
Parent Common Shares, the number of such shares issued in proportion to the
number of Parent Common Shares previously outstanding;
(ii) in the case of the issuance or distribution of any rights, options
or warrants to subscribe for or purchase Parent Common Shares (or
securities exchangeable for or convertible into or carrying rights to
acquire Parent Common Shares), the relationship between the exercise price
of each such right, option or warrant and the current market value (as
determined by the Board of Directors of the Corporation in the manner above
contemplated) of a Parent Common Share;
(iii) in the case of the issuance or distribution of any other form of
property (including without limitation any shares or securities of the
Parent of any class other than Parent Common Shares, any rights, options or
warrants other than those referred to in Section 2.7(d)(ii) above, any
evidences of indebtedness of the Parent or any assets of the Parent), the
relationship between the fair market value (as determined by the Board of
Directors of the Corporation in the manner above contemplated) of such
property to be issued or distributed with respect to each outstanding
Parent Common Share and the current market value (as determined by the
Board of Directors of the Corporation in the manner above contemplated) of
a Parent Common Share; and
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(iv) in the case of any subdivision, redivision or change of the then
outstanding Parent Common Shares into a greater number of Parent Common
Shares or the reduction, combination or consolidation or change of the then
outstanding Parent Common Shares into a lesser number of Parent Common
Shares or any amalgamation, merger, reorganization or other transaction
affecting the Parent Common Shares, the effect thereof upon the then
outstanding Parent Common Shares.
For purposes of the foregoing determinations, the current market value of
any security listed and traded or quoted on a securities exchange or automated
quotation system shall be the average of the closing prices of such security
during the three consecutive trading days ending not more than five trading
days before the date of determination on the principal securities exchange on
which such securities are listed and traded or quoted; provided, however, that
if there is no active public distribution or trading activity of such
securities during such period, then the current market value thereof shall be
determined by the Board of Directors of the Corporation, in good faith and in
its sole discretion (with the assistance of such reputable and qualified
independent financial advisors and/or other experts as the board may require),
and provided further that any such determination by the Board of Directors of
the Corporation shall be conclusive and binding on the Parent.
2.8 Tender Offers, Etc. In the event that a tender offer, share exchange
offer, issuer bid, take-over bid or similar transaction with respect to Parent
Common Shares (an "Offer") is proposed by the Parent or is proposed to the
Parent or its shareholders and is recommended by the Board of Directors of the
Parent, or is otherwise effected or to be effected with the consent or
approval of the Board of Directors of the Parent, the Parent will use its best
efforts expeditiously and in good faith to take all such actions and do all
such things as are necessary or desirable to enable and permit holders of
Exchangeable Shares to participate in such Offer to the same extent and on an
economically equivalent basis as the holders of Parent Common Shares, without
discrimination. Without limiting the generality of the foregoing, the Parent
will use its best efforts expeditiously and in good faith to ensure that
holders of Exchangeable Shares may participate in all such Offers without
being required to retract Exchangeable Shares as against the Corporation (or,
if so required, to ensure that any such retraction shall be effective only
upon, and shall be conditional upon, the closing of the Offer and only to the
extent necessary to tender or deposit to the Offer).
2.9 Ownership of Outstanding Shares. Without the prior approval of the
Corporation and the prior approval of the holders of the Exchangeable Shares
given in accordance with Section 10.2 of the Exchangeable Share Provisions,
the Parent covenants and agrees in favour of the Corporation that, as long as
any outstanding Exchangeable Shares are owned by any person or entity other
than the Parent or any of its Affiliates, Parent will be and remain the direct
or indirect beneficial owner of all issued and outstanding shares in the
capital of the Corporation other than the Class D Shares and all outstanding
securities of the Corporation, in each case carrying or otherwise entitled to
voting rights in any circumstances, and in each case other than the
Exchangeable Shares or the Class D Shares.
2.10 Parent Not To Vote Exchangeable Shares. The Parent covenants and agrees
that it will appoint and cause to be appointed proxyholders with respect to
all Exchangeable Shares held by the Parent and its subsidiaries and Affiliates
for the sole purpose of attending each meeting of holders of Exchangeable
Shares in order to be counted as part of the quorum for each such meeting. The
Parent further covenants and agrees that it will not, and will cause its
subsidiaries and Affiliates not to, exercise any voting rights which may be
exercisable by holders of Exchangeable Shares from time to time pursuant to
the Exchangeable Share Provisions or pursuant to the provisions of the
Companies Act (Quebec) (or any successor or other corporate statute by which
the Corporation in the future shall be governed) with respect to any
Exchangeable Shares held by it or by its subsidiaries or Affiliates in respect
of any matter considered at any meeting of holders of Exchangeable Shares.
2.11 Due Performance. On and after the Effective Time, Parent and Dutchco
shall duly and timely perform all of their respective obligations expressed in
the Combination Agreement.
2.12 Preservation of Existence of Corporation. Without the prior approval of
the holders of Exchangeable Shares given in accordance with Section 10.2 of
the Exchangeable Shares Provisions, the Parent,
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Dutchco and Corporation covenant and agree that, so long as any Exchangeable
Shares are owned by any person or entity other than the Parent or its
Affiliates, the separate existence of Corporation shall be preserved and
Corporation shall not be liquidated, wound up or dissolved or merged with or
into another entity.
2.13 Certain Requirements in Respect of Combination, etc. The Parent shall
not enter into any transaction (whether by way of reconstruction,
reorganization, consolidation, merger, transfer, sale, lease or otherwise)
whereby all or substantially all of its undertaking, property and assets would
become the property of any other person or, in the case of a merger, of the
continuing corporation resulting therefrom unless:
(a) such other person or continuing corporation is a corporation (herein
called the "Parent Successor") incorporated under the laws of any state of the
United States or the laws of Canada or any province thereof;
(b) the Parent Successor, by operation of law, becomes, without more, bound
by the terms and provisions of this trust agreement or, if not so bound,
executes, prior to or contemporaneously with the consummation of such
transaction a trust agreement supplemental hereto and such other instruments
(if any) as are satisfactory to the Trustee and in the opinion of legal
counsel to the Trustee are necessary or advisable to evidence the assumption
by the Parent Successor of liability for all moneys payable and property
deliverable hereunder and the covenant of such Parent Successor to pay and
deliver or cause to be delivered the same and its agreement to observe and
perform all the covenants and obligations of the Parent under this trust
agreement; and
(c) such transaction shall, to the satisfaction of the Trustee and in the
opinion of legal counsel to the Trustee, be upon such terms as substantially
to preserve and not to impair in any material respect any of the rights,
duties, powers and authorities of the Trustee or of the Beneficiaries
hereunder.
ARTICLE 3
General
3.1 Term. This agreement shall come into force and be effective upon the
issue by the Corporation of Exchangeable Shares and shall terminate and be of
no further force and effect at such time as no Exchangeable Shares (or
securities or rights convertible into or exchangeable for or carrying rights
to acquire Exchangeable Shares) are held by any party other than the Parent
and any of its Affiliates.
3.2 Changes in Capital of Parent and the Corporation. Notwithstanding the
provisions of Section 3.4, at all times after the occurrence of any event
effected pursuant to Section 2.7 or 2.8 hereof, as a result of which either
the Parent Common Shares or the Exchangeable Shares or both are in any way
changed, this agreement shall forthwith be amended and modified as necessary
in order that it shall apply with full force and effect, mutatis mutandis, to
all new securities into which the Parent Common Shares or the Exchangeable
Shares or both are so changed and the parties hereto shall execute and deliver
an agreement in writing giving effect to and evidencing such necessary
amendments and modifications.
3.3 Severability. If any provision of this agreement is held invalid,
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this agreement shall not in any way be affected or improved
thereby and this agreement shall be carried and as near as possible in
accordance with its original terms and conditions; and to this end the
provisions of this agreement are intended to be and shall be deemed severable;
provided, however, that if the provision or provisions so held to be invalid,
in the reasonable judgment of the parties hereto, is or are so fundamental to
the intent of the parties hereto and the operation of this agreement that the
enforcement of the other provisions hereof, in the absence of such invalid
provision or provisions, would damage irreparably the intent of the parties in
entering into this agreement, the parties hereto shall agree to amend or
otherwise modify this agreement so as to carry out the intent and purposes
hereof and the transactions contemplated hereby.
3.4 Amendments, Modifications, etc. Except as contemplated by Section 3.5,
this agreement may not be amended or modified except by an agreement in
writing executed by the Corporation, Dutchco and the Parent
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and approved by the holders of the Exchangeable Shares in accordance with
Section 10.2 of the Exchangeable Share Provisions.
3.5 Ministerial Amendments. Notwithstanding the provisions of Section 3.4,
the parties to this agreement may in writing, at any time and from time to
time, without the approval of the holders of the Exchangeable Shares, amend or
modify this agreement for the purposes of:
(a) adding to the covenants of any of the parties for the protection of the
holders of the Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with this
agreement as may be necessary or desirable with respect to matters or
questions which, in the opinion of the Boards of Directors of each of the
Corporation, Dutchco and the Parent, it may be expedient to make, provided
that each such Board of Directors shall be of the opinion that such amendments
or modifications will not be prejudicial to the interests of the holders of
the Exchangeable Shares; or
(c) making such changes or corrections which, on the advice of counsel to
the Corporation, Dutchco and the Parent, are required for the purpose of
curing or correcting any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error, provided that the Boards of
Directors of each of the Corporation, Dutchco and the Parent shall be of the
opinion that such changes or corrections will not be prejudicial to the
interests of the holders of the Exchangeable Shares.
3.6 Meeting to Consider Amendments. The Corporation, at the request of the
Parent or Dutchco, shall call a meeting or meetings of the holders of the
Exchangeable Shares for the purpose of considering any proposed amendment or
modification requiring approval pursuant to Section 3.4 hereof. Any such
meeting or meetings shall be called and held in accordance with the by-laws of
the Corporation, the Exchangeable Share Provisions and all applicable laws.
3.7 Amendments Only in Writing. No amendment to or modification or waiver of
any of the provisions of this agreement otherwise permitted hereunder shall be
effective unless made in writing and signed by all of the parties hereto.
3.8 Enurement. This agreement shall be binding upon and enure to the benefit
of the parties hereto and their respective successors and assigns.
3.9 Notices to Parties. All notices and other communications between the
parties shall be in writing and shall be deemed to have been given if
delivered personally or by confirmed telecopy to the parties at the following
addresses (or at such other address for either such party as shall be
specified in like notice):
(a) if to the Parent or Dutchco at:
Autodesk, Inc.
20400 Stevens Creek Boulevard
Cupertino, CA 95401-2217
Attention: Marcia K. Sterling
Vice President Business Development, General Counsel and Secretary
Telecopy:
(408) 517-1886
(b) if to the Corporation at:
Discreet Logic Inc.
10 Duke Street
Montreal, Quebec
Canada H3C 2L7
Attention: Francois Plamondon
Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Telecopy:
(514) 393-3996
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Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy shall
be deemed to have been given and received on the date of confirmed receipt
thereof, provided such notice or other communication is received prior to 5:00
p.m. (local time) on a Business Day, and otherwise it shall be deemed to have
been given and received upon the immediately following Business Day.
3.10 Counterparts. This agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
3.11 Jurisdiction. This agreement shall be construed and enforced in
accordance with the laws of the Province of Quebec and the laws of Canada
applicable therein.
3.12 Attornment. The Parent, Dutchco and the Corporation agree that any
action or proceeding arising out of or relating to this agreement may be
instituted in the courts of Quebec, waive any objection which they may have
now or hereafter to the venue of any such action or proceeding, irrevocably
submits to the non-exclusive jurisdiction of the said courts in any such
action or proceeding, agree to be bound by any judgment of the said courts and
not to seek, and hereby waive, any review of the merits of any such judgment
by the courts of any other jurisdiction and the Parent and Dutchco hereby
appoint the Corporation at its registered office in the Province of Quebec as
the Parent's and Dutchco's attorney for service of process.
3.13 Guaranty/Assignment. Parent hereby unconditionally and irrevocably
guarantees the prompt and full performance by Dutchco of, and shall cause
Dutchco to comply with, its obligations hereunder and pursuant to the
Transactions. Dutchco may assign all or a portion of its rights and
obligations hereunder to Parent, which shall thereupon assume such assigned
rights and/or obligations without the consent of the Corporation subject to
the Corporation and Parent entering into a supplemental agreement reflecting
such assignment and assumption. This agreement may not be assigned by the
Parent without the prior written consent of Dutchco and the Corporation
approved by the holders of the Exchangeable Shares in accordance with Section
10.2 of the Exchangeable Share Provisions.
3.14 Language. The parties have agreed that this agreement be drafted in
English. Les parties ont convenu que cette convention soit redigee en langue
anglaise.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be duly
executed as of the date first above written.
Autodesk, Inc.
By: _________________________________
Name:
Title:
Autodesk Development B.V.
By: _________________________________
Name:
Title:
Discreet Logic Inc.
By: _________________________________
Name:
Title:
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APPENDIX D
VOTING AND EXCHANGE TRUST AGREEMENT
AGREEMENT made as of the day of , 1998
BETWEEN:
AUTODESK, INC.,
a corporation subsisting under the laws
of the State of Delaware,
(hereinafter referred to as the "Parent")
--and--
DISCREET LOGIC INC.,
a company subsisting under the laws
of the Province of Quebec,
(hereinafter referred to as the "Corporation")
--and--
AUTODESK DEVELOPMENT B.V.,
a corporation subsisting under the laws
of The Netherlands,
(hereinafter referred to as "Dutchco")
--and--
MONTREAL TRUST COMPANY OF CANADA,
a trust company incorporated under the
laws of Canada,
(hereinafter referred to as the "Trustee").
WHEREAS pursuant to an Amended and Restated Agreement and Plan of
Acquisition and Amalgamation dated as of September 23, 1998, by and among
Parent, Dutchco, 9066-9771 Quebec Inc. ("Amalgamation Sub"), 9066-9854 Quebec
Inc. ("Autodesk Quebec"), Autodesk Canada Inc. and Discreet Logic Inc. (the
"Company") (such agreement being hereinafter referred to as the "Combination
Agreement"), the parties agreed that immediately after the Effective Time (as
such term is defined in the Combination Agreement), Parent, Dutchco, the
Corporation and a Canadian trust company would execute and deliver a Voting
and Exchange Trust Agreement containing the terms and conditions set forth in
Exhibit D to the Combination Agreement together with such other terms and
conditions as may be agreed to by the parties to the Combination Agreement
acting reasonably;
AND WHEREAS to give effect to the amalgamation contemplated in the
Combination Agreement and the amalgamation agreement dated as of September 23,
1998 among the Company, Autodesk Quebec and Amalgamation Sub, articles of
amalgamation (the "Articles of Amalgamation") were filed pursuant to the
Companies Act (Quebec) whereby the Company, Autodesk Quebec and Amalgamation
Sub were amalgamated to continue as the Corporation (the "Amalgamation");
AND WHEREAS pursuant to the Amalgamation (i) the shareholders of the Company
("Discreet Shareholders") received one Class B non-voting common share of the
Corporation ("Class B Shares") for each common share of the Company held by
each such shareholder immediately prior to the Amalgamation, (ii) Dutchco, a
wholly-owned subsidiary of Parent, became the registered and beneficial owner
of all of the issued and outstanding Class A Shares of the Corporation, and
(iii) Autodesk Canada Inc., an indirect wholly-owned
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subsidiary of Parent, became the registered and beneficial owner of all of the
issued and outstanding Class C Shares of the Corporation;
AND WHEREAS subsequent to the Amalgamation, the holders of Class B Shares
had the right to elect to retract the Class B Shares received by them upon the
Amalgamation in exchange for exchangeable non-voting shares of the Corporation
(the "Exchangeable Shares") on the basis of 0.525 of one Exchangeable Share
for each Class B Share so retracted;
AND WHEREAS, immediately following the retraction of the Class B Shares by
the holders thereof, the remaining Class B Shares not so retracted were
automatically converted into units each consisting of one Class E Share and
one Class F Share;
AND WHEREAS the Articles of Amalgamation set forth the rights, privileges,
restrictions and conditions (collectively the "Exchangeable Share Provisions")
attaching to the Exchangeable Shares;
AND WHEREAS pursuant to the Combination Agreement and the terms and
conditions of the Exchangeable Shares, the Parent is to provide voting rights
in the Parent to each holder (other than the Parent, its subsidiaries and
Affiliates) from time to time of Exchangeable Shares, such voting rights per
Exchangeable Share to be equivalent to the voting rights per Parent Common
Share;
AND WHEREAS pursuant to the Combination Agreement and the terms and
conditions of the Exchangeable Shares, Dutchco is to grant to and in favour of
the holders (other than the Parent, its subsidiaries and Affiliates) from time
to time of Exchangeable Shares the right, in the circumstances set forth
herein, to require Dutchco to purchase from each such holder all or any part
of the Exchangeable Shares held by the holder;
AND WHEREAS the parties desire to make appropriate provision and to
establish a procedure whereby voting rights in the Parent shall be exercisable
by holders (other than the Parent, its subsidiaries and Affiliates) from time
to time of Exchangeable Shares by and through the Trustee, which will hold
legal title to one share of Series B Preferred Stock of the Parent to which
voting rights attach for the benefit of such holders, and whereby the right to
require Dutchco to purchase Exchangeable Shares from the holders thereof
(other than the Parent, its subsidiaries and Affiliates) shall be exercisable
by such holders from time to time of Exchangeable Shares by and through the
Trustee, which will hold legal title to such right for the benefit of such
holders;
AND WHEREAS pursuant to the provisions attaching to the Class E Shares and
the Class F Shares of the Corporation, the Corporation has the right to redeem
all of the issued and outstanding Class E Shares and Class F Shares;
AND WHEREAS pursuant to the provisions attaching to the Class E Shares and
the Class F Shares of the Corporation, Dutchco has, upon notice by the
Corporation of its intent to redeem the Class E Shares and the Class F Shares,
the right to purchase all of the issued and outstanding Class E Shares and
Class F Shares;
AND WHEREAS the parties desire to make appropriate provision whereby Dutchco
covenants to exercise the Class E Redemption Call Right and the Class F
Redemption Call Right and the Trustee shall be entitled to enforce such
covenant on behalf of the Class E and Class F Shareholders;
AND WHEREAS these recitals and any statements of fact in this trust
agreement are made by the Parent, Dutchco and the Corporation and not by the
Trustee;
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this trust agreement and for other good and valuable consideration
(the receipt and sufficiency of which are hereby acknowledged), the parties
agree as follows:
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ARTICLE 1
Definitions and Interpretation
1.1 Definitions. In this trust agreement, the following terms shall have the
following meanings:
"Affiliate" of any person means any other person directly or indirectly
controlled by, or under common control of, that person. For the purposes of
this definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control of"), as applied to any person,
means the possession by another person, directly or indirectly, of the power
to direct or cause the direction of the management and policies of that first
mentioned person, whether through the ownership of voting securities, by
contract or otherwise; provided, however, that any former directors, executive
officers or principal shareholders of Discreet Logic Inc. who may be deemed to
be an affiliate of Parent, after the Effective Date, shall not be considered
an "Affiliate" for purposes of this Agreement.
"Automatic Exchange Rights" means the benefit of the obligation of Dutchco
to effect the automatic exchange of Parent Common Shares for Exchangeable
Shares pursuant to section 5.12 hereof.
"Beneficiaries" means, for the purposes of matters relating to the Voting
Share, the Exchangeable Shares Shareholders and, for the purposes of matters
relating herein to the Covenants, the Class E and F Shareholders.
"Beneficiary Votes" has the meaning ascribed thereto in section 4.2 hereof.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means a day other than a Saturday, Sunday or a day when banks
are not open for business in either or both of San Francisco, California or
Montreal, Quebec.
"Canadian Dollar Equivalent" means in respect of an amount expressed in a
foreign currency (the "Foreign Currency Amount") at any date the product
obtained by multiplying (a) the Foreign Currency Amount by (b) the noon spot
exchange rate on such date for such foreign currency expressed in Canadian
dollars as reported by the Bank of Canada or, in the event such spot exchange
rate is not available, such exchange rate on such date for such foreign
currency expressed in Canadian dollars as may be deemed by the Board of
Directors to be appropriate for such purpose.
"Class B Conversion Time" means the time at which each outstanding Class B
Share shall automatically be converted into a unit consisting of one Class E
Share and one Class F Share as contemplated in section 5.1 of the provisions
attaching to the Class B Shares.
"Class E and F Shareholders" means the registered holders from time to time
of the Class E Shares and the Class F Shares.
"Class E Shares" means the Class E voting common shares in the share capital
of the Corporation.
"Class F Shares" means the Class F non-voting common shares in the share
capital of the Corporation.
"Class E Redemption Right" means the right of the Corporation to redeem the
Class E Shares as contemplated in section 4.1 of the provisions attaching to
the Class E Shares.
"Class F Redemption Right" means the right of the Corporation to redeem the
Class F Shares as contemplated in section 4.1 of the provisions attaching to
the Class F Shares.
"Class E Redemption Call Right" means the overriding right of Dutchco
contemplated in section 4.3 of the provisions attached to the Class E Shares
pursuant to which Dutchco is entitled, upon and notwithstanding the proposed
exercise by the Corporation of the Class E Redemption Right, to purchase all
but not less than all of
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<PAGE>
the issued and outstanding Class E Shares from all but not less than all of
the holders of the issued and outstanding Class E Shares.
"Class F Redemption Call Right" means the overriding right of Dutchco
contemplated in section 4.3 of the provisions attached to the Class F Shares
pursuant to which Dutchco is entitled, upon and notwithstanding the proposed
exercise by the Corporation of the Class F Redemption Right, to purchase all
but not less than all of the issued and outstanding Class F Shares from all
but not less than all of the holders of the issued and outstanding Class F
Shares.
"Covenants" means the covenants of the Corporation contained in section 7.1
hereof and the covenant of Dutchco contained in section 7.2 hereof.
"Current Market Price" means, in respect of a Parent Common Share on any
date, the Canadian Dollar Equivalent of the average of the closing prices of a
Parent Common Shares on Nasdaq on each of the thirty (30) consecutive trading
days ending not more than three trading days before such date, or, if the
Parent Common Shares are not then quoted on Nasdaq, on such other stock
exchange or automated quotation system on which the Parent Common Shares are
listed or quoted, as the case may be, as may be selected by the Board of
Directors for such purpose; provided, however, that if there is no public
distribution or trading activity of Parent Common Shares during such period
then the Current Market Price of a Parent Common Share shall be determined by
the Board of Directors based upon the advice of such qualified independent
financial advisors as the Board of Directors may deem to be appropriate, and
provided further that any such selection, opinion or determination by the
Board of Directors shall be conclusive and binding.
"Exchange Right" has the meaning ascribed thereto in section 5.1 hereof.
"Exchangeable Shares Shareholders" means the registered holders from time to
time of the Exchangeable Shares other than the Parent, its subsidiaries and
Affiliates.
"Insolvency Event" means the institution by the Corporation of any
proceeding to be adjudicated bankrupt or insolvent or to be dissolved or wound
up, or the consent of the Corporation to the institution of bankruptcy,
insolvency, dissolution or winding up proceedings against it, or the filing of
a petition, answer or consent seeking dissolution or winding up under any
bankruptcy, insolvency or analogous laws, including without limitation the
Companies Creditors' Arrangement Act (Canada) and the Bankruptcy and
Insolvency Act (Canada), and the failure by the Corporation to contest in good
faith any such proceedings commenced in respect of the Corporation within 15
days of becoming aware thereof, or the consent by the Corporation to the
filing of any such petition or to the appointment of a receiver, or the making
by the Corporation of a general assignment for the benefit of creditors, or
the admission in writing by the Corporation of its inability to pay its debts
generally as they become due, or the Corporation not being permitted, pursuant
to solvency requirements of applicable law, to redeem any Retracted Shares
pursuant to section 6.6 of the Exchangeable Share Provisions.
"Liquidation Call Right" has the meaning ascribed thereto in the
Exchangeable Share Provisions.
"Liquidation Event" has the meaning ascribed thereto in section 5.12(b)
hereof.
"Liquidation Event Effective Date" has the meaning ascribed thereto in
section 5.12(c) hereof.
"List" has the meaning ascribed thereto in section 4.6 hereof.
"Nasdaq" means the Nasdaq National Market.
"Officer's Certificate" means, with respect to the Parent, Dutchco or the
Corporation, as the case may be, a certificate signed by any one of the
Chairman of the Board, a Vice-Chairman of the Board, the President, any Vice-
President or any other senior officer of the Parent, Dutchco or the
Corporation, as the case may be.
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"Parent Consent" has the meaning ascribed thereto in section 4.2 hereof.
"Parent Meeting" has the meaning ascribed thereto in section 4.2 hereof.
"Parent Successor" has the meaning ascribed thereto in section 12.1(a)
hereof.
"person" includes an individual, partnership, corporation, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator and other legal representative.
"Redemption Call Right" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"Retracted Shares" has the meaning ascribed thereto in section 5.7 hereof.
"Retraction Call Right" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"Support Agreement" means that certain support agreement made as of even
date hereof between the Corporation, Dutchco and the Parent.
"Trust" means the trust created by this Agreement.
"Trust Estate" means the Voting Share, any other securities, the Exchange
Right, the Automatic Exchange Rights, the Covenants and any money or other
property which may be held by the Trustee from time to time pursuant to this
trust agreement.
"Trustee" means Montreal Trust Company of Canada and, subject to the
provisions of Article 11 hereof, includes any successor trustee.
"Voting Rights" means the voting rights attached to the Voting Share.
"Voting Share" means the one share of Series B Preferred Stock of the
Parent, issued by the Parent to and deposited with the Trustee, which entitles
the holder of record to a number of votes at meetings of holders of Parent
Common Shares equal to that number of votes that holders of the Exchangeable
Shares outstanding from time to time other than Exchangeable Shares held by
the Parent, its subsidiaries and Affiliates would be entitled to if such
Exchangeable Shares were exchanged for Parent Common Shares.
1.2 Interpretation Not Affected by Headings, etc. The division of this
Agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this Agreement.
1.3 Number, Gender, etc. Words importing the singular number only shall
include the plural and vice versa. Words importing the use of any gender shall
include all genders.
1.4 Date for any Action. If any date on which any action is required to be
taken under this trust agreement is not a Business Day, such action shall be
required to be taken on the next succeeding Business Day.
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<PAGE>
ARTICLE 2
Purpose of Agreement
2.1 Establishment of Trust. The purpose of this Agreement is to create the
Trust for the benefit of the Beneficiaries, as herein provided. The Trustee
will hold the Voting Share in order to enable the Trustee to exercise the
Voting Rights and will hold the Exchange Right and the Automatic Exchange
Rights and the other rights with respect to matters relating to the Voting
Share granted in or resulting from the Trustee being a party to this Agreement
in order to enable the Trustee to exercise or enforce such rights, in each
case as trustee for and on behalf of the Exchangeable Shares Shareholders as
provided in this Agreement. The Trustee will hold the Covenants and will hold
the other rights with respect to matters relating to the Covenants granted in
or resulting from the Trustee being a party to this Agreement in order to
enable the Trustee to exercise or enforce such rights, in each case as trustee
for and on behalf of the Class E and F Shareholders as provided in this
Agreement.
ARTICLE 3
Voting Share
3.1 Issue and Ownership of the Voting Share. The Parent hereby issues to and
deposits with the Trustee the Voting Share to be hereafter held of record by
the Trustee as trustee for and on behalf of, and for the use and benefit of,
the Beneficiaries and in accordance with the provisions of this Agreement.
Parent hereby acknowledges receipt from the Trustee as trustee for and on
behalf of the beneficiaries of good and valuable consideration (and the
sufficiency thereof) for the issuance of the Voting Share by the Parent to the
Trustee. During the term of the Trust and subject to the terms and conditions
of this Agreement, the Trustee shall possess and be vested with full legal
ownership of the Voting Share and shall be entitled to exercise all of the
rights and powers of an owner with respect to the Voting Share, provided that
the Trustee shall:
(a) hold the Voting Share and the legal title thereto as trustee solely
for the use and benefit of the Beneficiaries in accordance with the
provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, have no power or
authority to sell, transfer, vote or otherwise deal in or with the Voting
Share and the Voting Share shall not be used or disposed of by the Trustee
for any purpose other than the purposes for which this Trust is created
pursuant to this Agreement.
3.2 Legended Share Certificates. The Corporation will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Beneficiaries of their right to instruct the Trustee with respect to the
exercise of the Beneficiary Votes.
3.3 Safe Keeping of Certificate. The certificate representing the Voting
Share shall at all times be held in safekeeping by the Trustee.
ARTICLE 4
Exercise of Voting Share
4.1 Voting Share. The Trustee, as the holder of record of the Voting Share,
shall be entitled to all of the Voting Rights, including the right to consent
to or to vote the Voting Share in person or by proxy, on any matter, question
or proposition whatsoever that may properly come before the shareholders of
the Parent at a Parent Meeting or in connection with a Parent Consent (in each
case, as hereinafter defined). The Voting Rights shall be and remain vested in
and exercised by the Trustee. Subject to section 8.15 hereof, the Trustee
shall exercise the Voting Rights only:
(a) on the basis of instructions received pursuant to this Article 4 from
Beneficiaries entitled to instruct the Trustee as to the voting thereof at
the time at which the Parent Consent is sought or the Parent Meeting is
held; or
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(b) to the extent that no instructions are received from a Beneficiary
with respect to the Voting Rights to which such Beneficiary is entitled,
the Trustee shall not exercise or permit the exercise of such Voting
Rights.
4.2 Number of Votes. With respect to all meetings of shareholders of the
Parent at which holders of Parent Common Shares are entitled to vote (a
"Parent Meeting") and with respect to all written consents sought by the
Parent from its shareholders including the holders of Parent Common Shares (a
"Parent Consent"), each Beneficiary shall be entitled to instruct the Trustee
to cast and exercise, in the manner instructed, one of the votes comprised in
the Voting Rights for each Exchangeable Share owned of record by such
Beneficiary on the record date established by the Parent or by applicable law
for such Parent Meeting or Parent Consent, as the case may be (the
"Beneficiary Votes") in respect of each matter, question or proposition to be
voted on at such Parent Meeting or to be consented to in connection with such
Parent Consent.
4.3 Mailings to Shareholders. With respect to each Parent Meeting and Parent
Consent, the Trustee will mail or cause to be mailed (or otherwise communicate
in the same manner as the Parent utilizes in communications to holders of
Parent Common Shares, subject to the Trustee being advised in writing of such
method and its ability to provide this method of communication) to each of the
Beneficiaries named in the List (as hereinafter defined) on the same day as
the initial mailing or notice (or other communication) with respect thereto is
given by the Parent to its shareholders:
(a) a copy of such notice, together with any related materials to be
provided to shareholders of the Parent;
(b) a statement that such Beneficiary is entitled, subject to the
provisions of section 4.7, to instruct the Trustee as to the exercise of
the Beneficiary Votes with respect to such Parent Meeting or Parent
Consent, as the case may be, or, pursuant and subject to section 4.7, to
attend such Parent Meeting and to exercise personally the Beneficiary Votes
thereat;
(c) a statement as to the manner in which such instructions may be given
to the Trustee, including an express indication that instructions may be
given to the Trustee to give:
(i) a proxy to such Beneficiary or his designee to exercise
personally such Beneficiary's Beneficiary Votes; or
(ii) a proxy to a designated agent or other representative of the
management of the Parent to exercise such Beneficiary's Beneficiary
Votes;
(d) a statement that if no such instructions are received from the
Beneficiary, the Beneficiary Votes to which such Beneficiary is entitled
will not be exercised;
(e) a form of direction whereby the Beneficiary may so direct and
instruct the Trustee as contemplated herein; and
(f) a statement of the time and date by which such instructions must be
received by the Trustee in order to be binding upon it, which in the case
of a Parent Meeting shall not be earlier than the close of business on the
second Business Day prior to such meeting, and of the method for revoking
or amending such instructions.
The materials referred to above are to be provided by Parent to the Trustee,
but shall be subject to review and comment by the Trustee. For the purpose of
determining the Beneficiary Votes to which a Beneficiary is entitled in
respect of any such Parent Meeting or Parent Consent, the number of
Exchangeable Shares owned of record by the Beneficiary shall be determined at
the close of business on the record date established by the Parent or by
applicable law for purposes of determining shareholders entitled to vote at
such Parent Meeting or to give written consent in connection with such Parent
Consent. The Parent will notify the Trustee in writing of any decision of the
Board of Directors of the Parent with respect to the calling of any such
Parent Meeting or the seeking of any such Parent Consent and shall provide all
necessary information and materials to the Trustee in each case promptly and
in any event in sufficient time to enable the Trustee to perform its
obligations contemplated by this section 4.3.
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4.4 Copies of Shareholder Information. The Parent will deliver to the
Trustee copies of all proxy materials (including notices of Parent Meetings
but excluding proxies to vote Parent Common Shares), information statements,
reports (including without limitation all interim and annual financial
statements) and other written communications that are to be distributed from
time to time to holders of Parent Common Shares in sufficient quantities and
in sufficient time so as to enable the Trustee to send or cause to be sent
those materials to each Beneficiary at the same time as such materials are
first sent to holders of Parent Common Shares. The Trustee will mail or
otherwise send to each Beneficiary, at the expense of the Parent, copies of
all such materials (and all materials specifically directed to the
Beneficiaries or to the Trustee for the benefit of the Beneficiaries by the
Parent) received by the Trustee from the Parent at the same time as such
materials are first sent to holders of Parent Common Shares. The Trustee will
also make available for inspection by any Beneficiary at the Trustee's
principal corporate trust office in the cities of Toronto, Ontario and
Montreal, Quebec all proxy materials, information statements, reports and
other written communications that are:
(a) received by the Trustee as the registered holder of the Voting Share
and made available by the Parent to the holders of Parent Common Shares; or
(b) specifically directed to the Beneficiaries or to the Trustee for the
benefit of the Beneficiaries by the Parent.
4.5 Other Materials. Immediately after receipt by the Parent or any
shareholder of the Parent of any material sent or given generally to the
holders of Parent Common Shares by or on behalf of a third party, including
without limitation dissident proxy and information circulars (and related
information and material) and tender and exchange offer circulars (and related
information and material), the Parent shall use its best efforts to obtain and
deliver to the Trustee copies thereof in sufficient quantities so as to enable
the Trustee to forward such material (unless the same has been provided
directly to Beneficiaries by such third party) to each Beneficiary as soon as
possible thereafter. As soon as possible after receipt thereof, the Trustee
will mail or otherwise send to each Beneficiary, at the expense of the Parent,
copies of all such materials received by the Trustee from the Parent. The
Trustee will also make available for inspection by any Beneficiary at the
Trustee's principal corporate trust office in the cities of Toronto, Ontario
and Montreal, Quebec copies of all such materials.
4.6 List of Persons Entitled to Vote. The Corporation shall, (a) prior to
each annual, general and special Parent Meeting or the seeking of any Parent
Consent and (b) forthwith upon each request made at any time by the Trustee in
writing, prepare or cause to be prepared a list (a "List") of the names and
addresses of the Beneficiaries arranged in alphabetical order and showing the
number of Exchangeable Shares held of record by each such Beneficiary, in each
case at the close of business on the date specified by the Trustee in such
request or, in the case of a List prepared in connection with a Parent Meeting
or a Parent Consent, at the close of business on the record date established
by the Parent or pursuant to applicable law for determining the holders of
Parent Common Shares entitled to receive notice of and/or to vote at such
Parent Meeting or to give consent in connection with such Parent Consent. Each
such List shall be delivered to the Trustee promptly after receipt by the
Corporation of such request or the record date for such meeting or seeking of
consent, as the case may be, and in any event within sufficient time as to
enable the Trustee to perform its obligations under this Agreement. The Parent
agrees to give the Corporation notice (with a copy to the Trustee) of the
calling of any Parent Meeting or the seeking of any Parent Consent, together
with the record dates therefor, sufficiently prior to the date of the calling
of such meeting or seeking of such consent so as to enable the Corporation to
perform its obligations under this section 4.6.
4.7 Entitlement to Direct Votes. Any Beneficiary named in a List prepared in
connection with any Parent Meeting or any Parent Consent will be entitled (a)
to instruct the Trustee in the manner described in section 4.3 with respect to
the exercise of the Beneficiary Votes to which such Beneficiary is entitled or
(b) to attend such meeting and personally to exercise thereat (or to exercise
with respect to any written consent), as the proxy of the Trustee, the
Beneficiary Votes to which such Beneficiary is entitled.
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4.8 Voting by Trustee, and Attendance of Trustee Representative, at Parent
Meetings.
(a) In connection with each Parent Meeting and Parent Consent, the
Trustee shall exercise, either in person or by proxy, in accordance with
the instructions received from a Beneficiary pursuant to section 4.3, the
Beneficiary Votes as to which such Beneficiary is entitled to direct the
vote (or any lesser number thereof as may be set forth in the
instructions); provided, however, that such written instructions are
received by the Trustee from the Beneficiary prior to the time and date
fixed by it for receipt of such instructions in the notice given by the
Trustee to the Beneficiary pursuant to section 4.3.
(b) The Trustee shall cause such representatives as are empowered by it
to sign and deliver, on behalf of the Trustee, proxies for Voting Rights to
attend each Parent Meeting. Upon submission by a Beneficiary (or its
designee) of identification satisfactory to the Trustee's representatives,
and at the Beneficiary's request, such representatives shall sign and
deliver to such Beneficiary (or its designee) a proxy to exercise
personally the Beneficiary Votes as to which such Beneficiary is otherwise
entitled hereunder to direct the vote, if such Beneficiary either (i) has
not previously given the Trustee instructions pursuant to section 4.3 in
respect of such meeting, or (ii) submits to the Trustee's representatives
written revocation of any such previous instructions. At such meeting, the
Beneficiary exercising such Beneficiary Votes shall have the same rights as
the Trustee to speak at the meeting in respect of any matter, question or
proposition, to vote by way of ballot at the meeting in respect of any
matter, question or proposition and to vote at such meeting by way of a
show of hands in respect of any matter, question or proposition.
4.9 Distribution of Written Materials. Any written materials to be
distributed by the Trustee to Beneficiaries pursuant to this Agreement shall
be delivered or sent by mail (or otherwise communicated in the same manner as
the Parent utilizes in communications to holders of Parent Common Shares,
subject to the Trustee being advised in writing of such method and its ability
to provide this method of communication) to each Beneficiary at its address as
shown on the books of the Corporation. The Corporation shall provide or cause
to be provided to the Trustee for this purpose, on a timely basis and without
charge or other expense:
(a) current lists of the Beneficiaries and the registered holders of
Exchangeable Shares; and
(b) upon the request of the Trustee, mailing labels to enable the Trustee
to carry out its duties under this Agreement.
4.10 Termination of Voting Rights. All of the rights of a Beneficiary with
respect to the Beneficiary Votes exercisable in respect of the Exchangeable
Shares held by such Beneficiary, including the right to instruct the Trustee
as to the voting of or to vote personally such Beneficiary Votes, shall be
deemed to be surrendered by the Beneficiary to the Parent and such Beneficiary
Votes and the Voting Rights represented thereby shall cease immediately upon
the delivery by such holder to the Trustee of the certificates representing
such Exchangeable Shares in connection with the exercise by the Beneficiary of
the Exchange Right or the occurrence of the automatic exchange of Exchangeable
Shares for Parent Common Shares, as specified in Article 5 hereof (unless in
either case (a) Dutchco shall not have delivered the requisite Parent Common
Shares issuable in exchange therefor to the Trustee for delivery to the
Beneficiaries or (b) such exchange of Exchangeable Shares for Parent Common
Shares occurs after the close of business on the record date for a Parent
Meeting or the seeking of a Parent Consent but prior to such Parent Meeting or
the effective date of such Parent Consent), or upon the retraction or
redemption of Exchangeable Shares pursuant to Article 6 or Article 7 of the
Exchangeable Share Provisions, respectively, or upon the effective date of the
liquidation, dissolution or winding-up of the Corporation pursuant to Article
5 of the Exchangeable Share Provisions, or upon the purchase of Exchangeable
Shares from the holder thereof by Dutchco pursuant to the exercise by Dutchco
of the Retraction Call Right, the Redemption Call Right or the Liquidation
Call Right (unless Dutchco shall not have delivered the requisite Parent
Common Shares and cheque, if any, deliverable in exchange thereof to the
Trustee for delivery to the Beneficiaries and such redemption, retraction or
purchase occurs after the close of business on the record date for a Parent
Meeting or the seeking of a Parent Consent but prior to such Parent Meeting or
the effective date of such Parent Consent).
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ARTICLE 5
Exchange Right and Automatic Exchange
5.1 Grant and Ownership of the Exchange Right. Dutchco hereby grants to the
Trustee as trustee for and on behalf of, and for the use and benefit of, the
Beneficiaries the right (the "Exchange Right"), upon the occurrence and during
the continuance of an Insolvency Event, to require Dutchco to purchase from
each or any Beneficiary all or any part of the Exchangeable Shares held by the
Beneficiary and the Automatic Exchange Rights, all in accordance with the
provisions of this Agreement. Dutchco hereby acknowledges receipt from the
Trustee as trustee for and on behalf of the Beneficiaries of good and valuable
consideration (and the sufficiency thereof) for the grant of the Exchange
Right and the Automatic Exchange Right by Dutchco to the Trustee. During the
term of the Trust and subject to the terms and conditions of this Agreement,
the Trustee shall possess and be vested with full legal ownership of the
Exchange Right and the Automatic Exchange Rights and shall be entitled to
exercise all of the rights and powers of an owner with respect to the Exchange
Right and the Automatic Exchange Rights, provided that the Trustee shall:
(a) hold the Exchange Right and the Automatic Exchange Rights and the
legal title thereto as trustee solely for the use and benefit of the
Beneficiaries in accordance with the provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, have no power or
authority to exercise or otherwise deal in or with the Exchange Right or
the Automatic Exchange Rights, and the Trustee shall not exercise any such
rights for any purpose other than the purposes for which this Trust is
created pursuant to this Agreement.
5.2 Legended Share Certificates. The Corporation will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Beneficiaries of:
(a) their right to instruct the Trustee with respect to the exercise of
the Exchange Right in respect of the Exchangeable Shares held by a
Beneficiary; and
(b) the Automatic Exchange Rights.
5.3 General Exercise of Exchange Right. The Exchange Right shall be and
remain vested in and exercised by the Trustee. Subject to section 8.15, the
Trustee shall exercise the Exchange Right only:
(a) on the basis of instructions received pursuant to this Article 5 from
Beneficiaries entitled to instruct the Trustee as to the exercise thereof;
or
(b) to the extent that no instructions are received from a Beneficiary
with respect to the Exchange Right, the Trustee shall not exercise or
permit the exercise of the Exchange Right.
5.4 Purchase Price. The purchase price payable by Dutchco for each
Exchangeable Share to be purchased by Dutchco under the Exchange Right shall
be an amount per share equal to (a) the Current Market Price of a Parent
Common Share on the last Business Day prior to the day of closing of the
purchase and sale of such Exchangeable Share under the Exchange Right plus (b)
an additional amount equivalent to the full amount of all dividends declared
and unpaid on each such Exchangeable Share and all dividends declared on
Parent Common Shares which have not been declared on such Exchangeable Shares
in accordance with section 3.1 of the Exchangeable Share Provisions (provided
that if the record date for any such declared and unpaid dividends occurs on
or after the day of closing of such purchase and sale the purchase price shall
not include such additional amount equivalent to such declared and unpaid
dividends). In connection with each exercise of the Exchange Right, Dutchco
will provide to the Trustee an Officer's Certificate setting forth the
calculation of the purchase price for each Exchangeable Share. The purchase
price for each such Exchangeable Share so purchased may be satisfied only by
Dutchco delivering or causing to be delivered to the Trustee, on behalf of the
relevant Beneficiary, one Parent Common Share and a cheque for the balance, if
any, of the purchase price.
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5.5 Exercise Instructions. Subject to the terms and conditions herein set
forth, a Beneficiary shall be entitled, upon the occurrence and during the
continuance of an Insolvency Event, to instruct the Trustee to exercise the
Exchange Right with respect to all or any part of the Exchangeable Shares
registered in the name of such Beneficiary on the books of the Corporation. To
cause the exercise of the Exchange Right by the Trustee, the Beneficiary shall
deliver to the Trustee, in person or by certified or registered mail, at its
principal corporate trust office in Toronto, Ontario or Montreal, Quebec or at
such other places in Canada as the Trustee may from time to time designate by
written notice to the Beneficiaries, the certificates representing the
Exchangeable Shares which such Beneficiary desires Dutchco to purchase, duly
endorsed in blank, and accompanied by such other documents and instruments as
may be required to effect a transfer of Exchangeable Shares under the
Companies Act (Quebec) and the by-laws of the Corporation and such additional
documents and instruments as the Trustee or Dutchco may reasonably require
together with (a) a duly completed form of notice of exercise of the Exchange
Right, contained on the reverse of or attached to the Exchangeable Share
certificates, stating (i) that the Beneficiary thereby instructs the Trustee
to exercise the Exchange Right so as to require Dutchco to purchase from the
Beneficiary the number of Exchangeable Shares specified therein, (ii) that
such Beneficiary has good title to and owns all such Exchangeable Shares to be
acquired by Dutchco free and clear of all liens, claims and encumbrances,
(iii) the names in which the certificates representing the Parent Common
Shares deliverable in connection with the exercise of the Exchange Right are
to be issued and (iv) the names and addresses of the persons to whom such new
certificates should be delivered and (b) payment (or evidence satisfactory to
the Trustee, the Corporation and Dutchco of payment) of the taxes (if any)
payable as contemplated by section 5.8 of this Agreement. If only a part of
the Exchangeable Shares represented by any certificate or certificates
delivered to the Trustee are to be purchased by Dutchco under the Exchange
Right, a new certificate for the balance of such Exchangeable Shares shall be
issued to the holder at the expense of the Corporation.
5.6 Delivery of Parent Common Shares; Effect of Exercise. Promptly after
receipt of the certificates representing the Exchangeable Shares which the
Beneficiary desires Dutchco to purchase under the Exchange Right together with
such documents and instruments of transfer and a duly completed form of notice
of exercise of the Exchange Right (and payment of taxes, if any, or evidence
thereof), duly endorsed for transfer to Dutchco, the Trustee shall notify the
Parent, Dutchco and the Corporation of its receipt of the same, which notice
to the Parent, Dutchco and the Corporation shall constitute exercise of the
Exchange Right by the Trustee on behalf of the holder of such Exchangeable
Shares, and Dutchco shall immediately thereafter deliver or cause to be
delivered to the Trustee, for delivery to the Beneficiary of such Exchangeable
Shares (or to such other persons, if any, properly designated by such
Beneficiary), the certificates for the number of Parent Common Shares
deliverable in connection with the exercise of the Exchange Right, which
shares shall be duly issued as fully paid and non-assessable and shall be free
and clear of any lien, claim or encumbrance, and cheques for the balance, if
any, of the total purchase price therefor. Immediately upon the giving of
notice by the Trustee to the Parent, Dutchco and the Corporation of the
exercise of the Exchange Right, as provided in this section 5.6, the closing
of the transaction of purchase and sale contemplated by the Exchange Right
shall be deemed to have occurred, and the Beneficiary of such Exchangeable
Shares shall be deemed to have transferred to Dutchco all of its right, title
and interest in and to such Exchangeable Shares and in the related interest in
the Trust Estate and shall cease to be a holder of such Exchangeable Shares
and shall not be entitled to exercise any of the rights of a holder in respect
thereof, other than the right to receive such Beneficiary's proportionate part
of the total purchase price therefor, unless the requisite number of Parent
Common Shares (together with a cheque for the balance, if any, of the total
purchase price therefor) is not allotted, issued and delivered by Dutchco to
the Trustee, for delivery to such Beneficiary (or to such other persons, if
any, properly designated by such Beneficiary), within five Business Days of
the date of the giving of such notice by the Trustee, in which case the rights
of the Beneficiary shall remain unaffected until such Parent Common Shares are
so allotted, issued and delivered by Dutchco and any such cheque is so
delivered and paid. Concurrently with such Beneficiary ceasing to be a holder
of Exchangeable Shares, the Beneficiary shall be considered and deemed for all
purposes to be the holder of the Parent Common Shares to be delivered to it
pursuant to the Exchange Right.
5.7 Exercise of Exchange Right Subsequent to Retraction. In the event that a
Beneficiary has exercised its right under Article 6 of the Exchangeable Share
Provisions to require the Corporation to redeem any or all of
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the Exchangeable Shares held by the Beneficiary (the "Retracted Shares") and
is notified by the Corporation pursuant to section 6.6 of the Exchangeable
Share Provisions that the Corporation will not be permitted as a result of
solvency requirements of applicable law to redeem all such Retracted Shares,
and provided that Dutchco shall not have exercised the Retraction Call Right
with respect to the Retracted Shares and that the Beneficiary has not revoked
the retraction request delivered by the Beneficiary to the Corporation
pursuant to section 6.7 of the Exchangeable Share Provisions, the retraction
request will constitute and will be deemed to constitute notice from the
Beneficiary to the Trustee instructing the Trustee to exercise the Exchange
Right with respect to those Retracted Shares which the Corporation is unable
to redeem. In any such event, the Corporation hereby agrees with the Trustee
and in favour of the Beneficiary immediately to notify the Trustee of such
prohibition against the Corporation redeeming all of the Retracted Shares and
immediately to forward or cause to be forwarded to the Trustee all relevant
materials delivered by the Beneficiary to the Corporation or to the transfer
agent of the Exchangeable Shares (including without limitation a copy of the
retraction request delivered pursuant to section 6.1 of the Exchangeable Share
Provisions) in connection with such proposed redemption of the Retracted
Shares and the Trustee will thereupon exercise the Exchange Right with respect
to the Retracted Shares that the Corporation is not permitted to redeem and
will require the Parent to purchase such shares in accordance with the
provisions of this Article 5.
5.8 Stamp or Other Transfer Taxes. Upon any sale of Exchangeable Shares to
Dutchco pursuant to the Exchange Right or the Automatic Exchange Rights, the
share certificate or certificates representing the Parent Common Shares to be
delivered in connection with the payment of the total purchase price therefor
shall be issued in the name of the Beneficiary of the Exchangeable Shares so
sold or in such names as such Beneficiary may otherwise direct in writing
without charge to the holder of the Exchangeable Shares so sold; provided,
however, that such Beneficiary (a) shall pay (and neither the Parent, Dutchco,
the Corporation nor the Trustee shall be required to pay) any documentary,
stamp, transfer or other taxes that may be payable in respect of any transfer
involved in the issuance or delivery of such shares to a person other than
such Beneficiary or (b) shall have established to the satisfaction of the
Trustee, the Parent, Dutchco and the Corporation that such taxes, if any, have
been paid.
5.9 Notice of Insolvency Event. Immediately upon the occurrence of an
Insolvency Event or any event which with the giving of notice or the passage
of time or both would be an Insolvency Event, the Corporation, Dutchco and/or
the Parent, as the case may be, shall give written notice thereof to the
Trustee. As soon as practicable after receiving notice from the Corporation,
Dutchco and/or the Parent, as the case may be, or from any other person of the
occurrence of an Insolvency Event, the Trustee will mail to each Beneficiary,
at the expense of Dutchco and/or the Parent, a notice of such Insolvency
Event, which notice shall contain a brief statement of the right of the
Beneficiaries with respect to the Exchange Right.
5.10 Qualification of Parent Common Shares in the United States. The Parent
represents and warrants that it has taken all actions and done all things as
are necessary or desirable to cause the Parent Common Shares (and that it will
take all actions and do all things as are necessary or desirable to cause such
shares or securities into which Parent Common Shares may be reclassified or
changed) to be issued and delivered pursuant to the Exchangeable Share
Provisions, Exchange Right or the Automatic Exchange Rights to be freely
tradeable thereafter in the United States (other than any restrictions on
transfers by reason of a holder being an "affiliate" of the Parent or, prior
to the Effective Date, for purposes of United States federal or state
securities law). The Parent will in good faith expeditiously take all such
actions and do all such things as are necessary or desirable to cause all
Parent Common Shares to be delivered pursuant to the Exchangeable Share
Provisions, Exchange Right or the Automatic Exchange Rights to be listed,
quoted or posted for trading on all stock exchanges and quotation systems on
which outstanding Parent Common Shares are listed, quoted or posted for
trading at such time.
5.11 Reservation of Parent Common Shares. The Parent hereby represents,
warrants and covenants that it has irrevocably reserved for issuance and will
at all times keep available, free from pre-emptive and other rights, out of
its authorized and unissued capital stock such number of Parent Common Shares
(a) as is equal to
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the sum of (i) the number of Exchangeable Shares issued and outstanding from
time to time and (ii) the number of Exchangeable Shares issuable upon the
exercise of all rights to acquire Exchangeable Shares outstanding from time to
time and (b) as are now and may hereafter be required to enable and permit the
Corporation and Dutchco to meet their respective obligations hereunder, under
the Support Agreement, under the Exchangeable Share Provisions and under any
other security or commitment pursuant to which the Parent may now or hereafter
be required to issue Parent Common Shares.
5.12 Automatic Exchange on Liquidation of the Parent.
(a) The Parent will give the Trustee notice of each of the following events
at the time set forth below:
(i) in the event of any determination by the Board of Directors of the
Parent to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to the Parent or to effect any other distribution
of assets of the Parent among its shareholders for the purpose of winding
up its affairs, at least 60 days prior to the proposed effective date of
such liquidation, dissolution, winding-up or other distribution; and
(ii) immediately, upon the earlier of (A) receipt by the Parent of notice
of and (B) the Parent otherwise becoming aware of any threatened or
instituted claim, suit, petition or other proceedings with respect to the
involuntary liquidation, dissolution or winding-up of the Parent or to
effect any other distribution of assets of the Parent among its
shareholders for the purpose of winding up its affairs.
(b) Immediately following receipt by the Trustee from the Parent of notice
of any event (a "Liquidation Event") contemplated by section 5.12(a)(i) or
5.12(a)(ii) above, the Trustee will give notice thereof to the Beneficiaries.
Such notice shall include a brief description of the automatic exchange of
Exchangeable Shares for Parent Common Shares provided for in section 5.12(c).
(c) In order that the Beneficiaries will be able to participate on a pro
rata basis with the holders of Parent Common Shares in the distribution of
assets of the Parent in connection with a Liquidation Event, on the fifth
Business Day prior to the effective date (the "Liquidation Event Effective
Date") of a Liquidation Event all of the then outstanding Exchangeable Shares
held by Beneficiaries shall be automatically exchanged for Parent Common
Shares. To effect such automatic exchange, Dutchco shall purchase each
Exchangeable Share outstanding on the fifth Business Day prior to the
Liquidation Event Effective Date and held by Beneficiaries, and each
Beneficiary shall sell the Exchangeable Shares held by it at such time, for a
purchase price per share equal to (a) the Current Market Price of a Parent
Common Share on the fifth Business Day prior to the Liquidation Event
Effective Date, which shall be satisfied in full by Dutchco delivering or
causing to be delivered to the Beneficiary one Parent Common Share, plus (b)
an additional amount equivalent to the full amount of all dividends declared
and unpaid on each such Exchangeable Share and all dividends declared on
Parent Common Shares which have not been declared on such Exchangeable Shares
in accordance with section 3.1 of the Exchangeable Share Provisions (provided
that if the record date for any such declared and unpaid dividends occurs on
or after the day of closing of such purchase and sale the purchase price shall
not include such additional amount equivalent to such declared and unpaid
dividends). In connection with such automatic exchange, the Parent will
provide to the Trustee an Officer's Certificate setting forth the calculation
of the purchase price for each Exchangeable Share.
(d) On the fifth Business Day prior to the Liquidation Event Effective Date,
the closing of the transaction of purchase and sale contemplated by the
automatic exchange of Exchangeable Shares for Parent Common Shares shall be
deemed to have occurred, and each Beneficiary shall be deemed to have
transferred to Dutchco all of the Beneficiary's right, title and interest in
and to its Exchangeable Shares and the related interest in the Trust Estate
and shall cease to be a holder of such Exchangeable Shares and Dutchco shall
deliver or cause to be delivered to the Beneficiary the Parent Common Shares
deliverable upon the automatic exchange of Exchangeable Shares for Parent
Common Shares and shall deliver to the Trustee for delivery to the Beneficiary
a cheque for the balance, if any, of the total purchase price for such
Exchangeable Shares. Concurrently with such Beneficiary ceasing to be a holder
of Exchangeable Shares, the Beneficiary shall be considered and deemed
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for all purposes to be the holder of the Parent Common Shares issued to it
pursuant to the automatic exchange of Exchangeable Shares for Parent Common
Shares and the certificates held by the Beneficiary previously representing
the Exchangeable Shares exchanged by the Beneficiary with Dutchco pursuant to
such automatic exchange shall thereafter be deemed to represent the Parent
Common Shares delivered to the Beneficiary by Dutchco pursuant to such
automatic exchange. Upon the request of a Beneficiary and the surrender by the
Beneficiary of Exchangeable Share certificates deemed to represent Parent
Common Shares, duly endorsed in blank and accompanied by such instruments of
transfer as Dutchco may reasonably require, Dutchco shall deliver or cause to
be delivered to the Beneficiary certificates representing the Parent Common
Shares of which the Beneficiary is the holder.
5.13 Withholding Rights. Parent, Dutchco and the Trustee shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to
this Agreement to any holder of Exchangeable Shares such amounts as Parent,
Dutchco or the Trustee is required to deduct and withhold with respect to the
making of such payment under the United States Internal Revenue Code of 1986,
as amended, the Income Tax Act (Canada) or any provision of state, local,
provincial or foreign tax law. To the extent that amounts are so withheld,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the shares in respect of which such
deduction and withholding was made, provided that such withheld amounts are
actually remitted to the appropriate taxing authority. To the extent that the
amount so required to be deducted or withheld from any payment to a holder
exceeds the cash portion of the consideration otherwise payable to the holder,
the Parent, Dutchco and the Trustee are hereby authorized to sell or otherwise
dispose of at fair market value such portion of such consideration as is
necessary to provide sufficient funds to the Parent, Dutchco or the Trustee,
as the case may be, in order to enable it to comply with such deduction or
withholding requirement and the Parent or the Trustee shall give an accounting
to the holder with respect thereto and any balance of such sale proceeds.
ARTICLE 6
Restrictions on Issue of Parent Special Voting Stock
6.1 Issue of Additional Shares. During the term of this Agreement, the
Parent will not create, issue or allot (or make any agreement to so do) any
other shares of Series B Preferred Stock of the Parent in addition to the
Voting Share.
ARTICLE 7
Covenants
7.1 Corporation Covenant. Immediately following the Class B Conversion Time,
the Corporation will give notice to Dutchco of its intention to exercise the
Class E Redemption Right and the Class F Redemption Right as provided in the
share provisions for the Class E Shares and the Class F Shares and this
Agreement shall constitute good and valid notice by the Corporation to Dutchco
of its intention to exercise such redemptions.
7.2 Dutchco Covenant. Immediately upon the Corporation providing notice to
Dutchco of its intention to exercise the Class E Redemption Right and the
Class F Redemption Right as contemplated in section 7.1 hereof, Dutchco will
exercise the Class E Redemption Call Right and the Class F Redemption Call
Right and this Agreement shall constitute good and valid notice by Dutchco to
the Corporation of its exercise of both the Class E Redemption Call Right and
the Class F Redemption Call Right.
7.3 Trust. The Corporation makes the covenant contained in section 7.1
hereof, and Dutchco makes the covenant contained in section 7.2 hereof, to and
in favour of the Trustee for the benefit of the Class E and F Shareholders and
acknowledges that the Trustee shall hold the Covenants as trustee for and on
behalf of the Class E and F Shareholders and in accordance with the provisions
of this Agreement. Each of the Corporation
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and Dutchco hereby acknowledges receipt from the Trustee as trustee for and on
behalf of such Class E and F Shareholders of good and valuable consideration
(and the sufficiency thereof) for the making of such covenants to the Trustee.
Until such time as all Class E Shares and Class F Shares held by holders other
than Parent, its subsidiaries and the Affiliates have been redeemed and
subject to the terms and conditions of this Agreement, the Trustee shall
possess and be entitled to exercise all of the rights and powers of an owner
of the Class E Shares and Class F Shares, provided that the Trustee shall:
(a) hold the rights associated with the Covenants as trustee solely for
the use and benefit of the Class E and F Shareholders in accordance with
the provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, have no power or
authority to deal in or with the Covenants or the Class E Shares and the
Class F Shares for any purpose other than the purposes for which this Trust
is created pursuant to this Agreement.
ARTICLE 8
Concerning the Trustee
8.1 Powers and Duties of the Trustee. The rights, powers and authorities of
the Trustee under this Agreement, in its capacity as trustee of the Trust,
shall include:
(a) purchasing the Voting Share from the Parent as trustee for and on
behalf of the Beneficiaries in accordance with the provisions of this
Agreement;
(b) granting proxies and distributing materials to Beneficiaries as
provided in this Agreement;
(c) voting the Beneficiary Votes in accordance with the provisions of
this Agreement;
(d) receiving the grant of the Exchange Right and the Automatic Exchange
Rights from Dutchco as trustee for and on behalf of the Beneficiaries in
accordance with the provisions of this Agreement;
(e) receiving the Covenants from Dutchco and the Corporation for and on
behalf of the Beneficiaries in accordance with the provisions of this
Agreement;
(f) exercising the Exchange Right and enforcing the benefit of the
Automatic Exchange Rights, in each case in accordance with the provisions
of this Agreement, and in connection therewith receiving from Beneficiaries
Exchangeable Shares and other requisite documents and distributing to such
Beneficiaries the Parent Common Shares and cheques, if any, to which such
Beneficiaries are entitled upon the exercise of the Exchange Right or
pursuant to the Automatic Exchange Rights, as the case may be;
(g) holding title to the Trust Estate;
(h) investing any monies forming, from time to time, a part of the Trust
Estate as provided in this Agreement;
(i) taking action on its own initiative or at the direction of a
Beneficiary or Beneficiaries to enforce the obligations of the Parent,
Dutchco and/or the Corporation under this Agreement; and
(j) taking such other actions and doing such other things as are
specifically provided in this Agreement.
In the exercise of such rights, powers and authorities, the Trustee shall
have (and is granted) such incidental and additional rights, powers and
authority not in conflict with any of the provisions of this Agreement as the
Trustee, acting in good faith and in the reasonable exercise of its
discretion, may deem necessary, appropriate or desirable to effect the purpose
of the Trust. Any exercise of such discretionary rights, powers and
authorities by the Trustee shall be final, conclusive and binding upon all
persons affected thereunder, including the Parties hereto and the
Beneficiaries. For greater certainty, the Trustee shall have only those duties
as are set out specifically in this Agreement.
The Trustee in exercising its rights, powers, duties and authorities
hereunder shall act honestly and in good faith with a view to the best
interests of the Beneficiaries and shall exercise the care, diligence and
skill that a reasonably prudent trustee would exercise in comparable
circumstances.
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8.2 No Conflict of Interest. The Trustee represents to the Corporation,
Dutchco and the Parent that at the date of execution and delivery of this
Agreement there exists no material conflict of interest in the role of the
Trustee as a fiduciary hereunder and the role of the Trustee in any other
capacity. The Trustee shall, within 90 days after it becomes aware that such a
material conflict of interest exists, either eliminate such material conflict
of interest or resign in the manner and with the effect specified in Article
11. If, notwithstanding the foregoing provisions of this section 8.2, the
Trustee has such a material conflict of interest, the validity and
enforceability of this Agreement shall not be affected in any manner
whatsoever by reason only of the existence of such material conflict of
interest. If the Trustee contravenes the foregoing provisions of this section
8.2, any Party hereto or Beneficiary may apply to the Ontario Court General
Division for an order that the Trustee be replaced as trustee hereunder.
8.3 Dealings with Transfer Agents, Registrars, etc. The Corporation, Dutchco
and the Parent irrevocably authorize the Trustee, from time to time, to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent registrar or
transfer agent, of the Exchangeable Shares and the Parent Common Shares;
and
(b) requisition, from time to time, (i) from any such registrar or
transfer agent any information readily available from the records
maintained by it which the Trustee may reasonably require for the discharge
of its duties and responsibilities under this Agreement and (ii) from the
registrar or transfer agent of the Parent Common Shares, and any subsequent
registrar or transfer agent of such shares, the share certificates issuable
upon the exercise from time to time of the Exchange Right and pursuant to
the automatic exchange of Exchangeable Shares for Parent Common Shares in
the manner specified in Article 5 hereof.
The Corporation, Dutchco and the Parent irrevocably authorize their
respective registrars and transfer agents to comply with all such requests.
The Parent and Dutchco covenant that they will supply the Parent's registrar
or transfer agent with duly executed share certificates for the purpose of
completing the exercise from time to time of the Exchange Right and the
automatic exchange of Exchangeable Shares for Parent Common Shares, in each
case pursuant to Article 5 hereof.
8.4 Books and Records. The Trustee shall keep available for inspection by
the Parent, Dutchco and the Corporation, at the Trustee's principal corporate
trust office in Toronto, Ontario and Montreal, Quebec correct and complete
books and records of account relating to the Trustee's actions under this
Agreement, including without limitation all information relating to mailings
and instructions to and from Beneficiaries and all transactions pursuant to
the Exchange Right and the Automatic Exchange Rights. On or before March 31,
1999, and on or before March 31 in every year thereafter, so long as the
Voting Share is on deposit with the Trustee, the Trustee shall transmit to the
Parent, Dutchco and the Corporation a brief report, dated as of the preceding
December 31, with respect to:
(a) the property and funds comprising the Trust Estate as of that date;
(b) the number of exercises of the Exchange Right, if any, and the
aggregate number of Exchangeable Shares received by the Trustee on behalf
of Beneficiaries in consideration of delivery by Dutchco of Parent Common
Shares and any other consideration in connection with the Exchange Right,
during the calendar year ended on such date; and
(c) all other actions taken by the Trustee in the performance of its
duties under this Agreement which it had not previously reported.
8.5 Income Tax Returns and Reports. The Trustee shall, to the extent
necessary, prepare and file on behalf of the Trust appropriate United States
and Canadian income tax returns and any other returns or reports as may be
required by applicable law or pursuant to the rules and regulations of any
securities exchange or other trading system, if any, through which the
Exchangeable Shares are traded and, in connection therewith and without
limiting the generality of section 8.10 hereof, may obtain the advice and
assistance of such experts as the Trustee may consider necessary or advisable.
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8.6 Indemnification Prior to Certain Actions by Trustee. The Trustee shall
exercise any or all of the rights, duties, powers or authorities vested in it
by this Agreement at the request, order or direction of any Beneficiary upon
such Beneficiary furnishing to the Trustee reasonable funding, security and
indemnity against the costs, expenses and liabilities which may be incurred by
the Trustee therein or thereby, provided that no Beneficiary shall be
obligated to furnish to the Trustee any such funding, security or indemnity in
connection with the exercise by the Trustee of any of its rights, duties,
powers and authorities with respect to the Voting Share pursuant to Article 4
hereof, subject to section 8.15, and with respect to the Exchange Right
pursuant to Article 5 hereof, subject to section 8.15, and with respect to the
Automatic Exchange Rights pursuant to Article 5 hereof.
None of the provisions contained in this Agreement shall require the Trustee
to expend or risk its own funds or otherwise incur financial liability in the
exercise of any of its rights, powers, duties or authorities unless funded,
given security and indemnified as aforesaid.
8.7 Actions by Beneficiaries. No Beneficiary shall have the right to
institute any action, suit or proceeding or to exercise any other remedy
authorized by this Agreement for the purpose of enforcing any of its rights or
for the execution of any trust or power hereunder unless the Beneficiary has
requested the Trustee to take or institute such action, suit or proceeding and
furnished the Trustee with the funding, security and indemnity referred to in
section 8.6 and the Trustee shall have failed to act within a reasonable time
thereafter. In such case, but not otherwise, the Beneficiary shall be entitled
to take proceedings in any court of competent jurisdiction such as the Trustee
might have taken; it being understood and intended that no one or more
Beneficiaries shall have any right in any manner whatsoever to affect, disturb
or prejudice the rights hereby created by any such action, or to enforce any
right hereunder or under the Voting Rights, the Exchange Rights or the
Automatic Exchange Rights except subject to the conditions and in the manner
herein provided, and that all powers and trusts hereunder shall be exercised
and all proceedings at law shall be instituted, had and maintained by the
Trustee, except only as herein provided, and in any event for the equal
benefit of all Beneficiaries.
8.8 Reliance upon Declarations. The Trustee shall not be considered to be in
contravention of any of its rights, powers, duties and authorities hereunder
if, when required, it acts and relies in good faith upon lists, mailing
labels, notices, statutory declarations, certificates, opinions, reports or
other papers or documents furnished pursuant to the provisions hereof or
required by the Trustee to be furnished to it in the exercise of its rights,
powers, duties and authorities hereunder if such lists, mailing labels,
notices, statutory declarations, certificates, opinions, reports or other
papers or documents comply with the provisions of section 8.9 hereof, if
applicable, and with any other applicable provisions of this Agreement.
8.9 Evidence and Authority to Trustee. The Corporation, Dutchco and/or the
Parent shall furnish to the Trustee evidence of compliance with the conditions
provided for in this Agreement relating to any action or step required or
permitted to be taken by the Corporation, Dutchco and/or the Parent or the
Trustee under this agreement or as a result of any obligation imposed under
this Agreement, including, without limitation, in respect of the Voting Rights
or the Exchange Right or the Automatic Exchange Rights and the taking of any
other action to be taken by the Trustee at the request of or on the
application of the Corporation, Dutchco and/or the Parent forthwith if and
when:
(a) such evidence is required by any other section of this Agreement to
be furnished to the Trustee in accordance with the terms of this section
8.9; or
(b) the Trustee, in the exercise of its rights, powers, duties and
authorities under this Agreement, gives the Corporation, Dutchco and/or the
Parent written notice requiring it to furnish such evidence in relation to
any particular action or obligation specified in such notice.
Such evidence shall consist of an Officer's Certificate of the Corporation,
Dutchco and/or the Parent or a statutory declaration or a certificate made by
persons entitled to sign an Officer's Certificate stating that any such
condition has been complied with in accordance with the terms of this
Agreement.
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Whenever such evidence relates to a matter other than the Voting Rights or
the Exchange Right or the automatic exchange of Exchangeable Shares for Parent
Common Shares pursuant to section 5.12, and except as otherwise specifically
provided herein, such evidence may consist of a report or opinion of any
solicitor, auditor, accountant, appraiser, valuer, engineer or other expert or
any other person whose qualifications give authority to a statement made by
him, provided that if such report or opinion is furnished by a director,
officer or employee of the Corporation, Dutchco and/or the Parent it shall be
in the form of an Officer's Certificate or a statutory declaration.
Each statutory declaration, certificate, opinion or report furnished to the
Trustee as evidence of compliance with a condition provided for in this
Agreement shall include a statement by the person giving the evidence:
(a) declaring that he has read and understands the provisions of this
Agreement relating to the condition in question;
(b) describing the nature and scope of the examination or investigation
upon which he based the statutory declaration, certificate, statement or
opinion; and
(c) declaring that he has made such examination or investigation as he
believes is necessary to enable him to make the statements or give the
opinions contained or expressed therein.
8.10 Experts, Advisers and Agents. The Trustee may:
(a) in relation to these presents act and rely on the opinion or advice
of or information obtained from any solicitor, auditor, accountant,
appraiser, valuer, engineer or other expert, whether retained by the
Trustee or by the Corporation, Dutchco and/or the Parent or otherwise, and
may employ such assistants as may be necessary to the proper discharge of
its powers and duties and determination of its rights hereunder and may pay
proper and reasonable compensation for all such legal and other advice or
assistance as aforesaid; and
(b) employ such agents and other assistants as it may reasonably require
for the proper discharge of its powers and duties hereunder, and may pay
reasonable remuneration for all services performed for it (and shall be
entitled to receive reasonable remuneration for all services performed by
it) in the discharge of the trusts hereof and compensation for all
disbursements, costs and expenses made or incurred by it in the discharge
of its duties hereunder and in the management of the Trust.
8.11 Investment of Moneys Held By Trustee. Unless otherwise provided in this
Agreement, any moneys held by or on behalf of the Trustee which under the
terms of this Agreement may or ought to be invested or which may be on deposit
with the Trustee or which may be in the hands of the Trustee may be invested
and reinvested in the name or under the control of the Trustee in securities
in which, under the laws of the Province of Ontario or the Province of Quebec,
trustees are authorized to invest trust moneys, provided that such securities
are stated to mature within two years after their purchase by the Trustee, and
the Trustee shall so invest such moneys on the written direction of the
Corporation. Pending the investment of any moneys as hereinbefore provided,
such moneys may be deposited in the name of the Trustee at a chartered bank in
Canada or, with the consent of the Corporation, in the deposit department of
the Trustee or any other loan or trust the Corporation authorized to accept
deposits under the laws of Canada or any province thereof at the rate of
interest then current on similar deposits.
8.12 Trustee Not Required to Give Security. The Trustee shall not be
required to give any bond or security in respect of the execution of the
trusts, rights, duties, powers and authorities of this Agreement or otherwise
in respect of the premises.
8.13 Trustee Not Bound to Act on the Corporation's Request. Except as in
this Agreement otherwise specifically provided, the Trustee shall not be bound
to act in accordance with any direction or request of the Corporation and/or
the Parent or of their respective Boards of Directors until a duly
authenticated copy of the instrument or resolution containing such direction
or request shall have been delivered to the Trustee, and the Trustee shall be
empowered to act and rely upon any such copy purporting to be authenticated
and believed by the Trustee to be genuine.
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8.14 Authority to Carry on Business. The Trustee represents to the
Corporation, Dutchco and the Parent that at the date of execution and delivery
by it of this Agreement it is authorized to carry on the business of a trust
company in the Province of Quebec and the Province of Ontario but if,
notwithstanding the provisions of this section 8.14, it ceases to be so
authorized to carry on business, the validity and enforceability of this
Agreement, the Covenants, the Voting Rights, the Exchange Right and the
Automatic Exchange Rights shall not be affected in any manner whatsoever by
reason only of such event but the Trustee shall, within 90 days after ceasing
to be authorized to carry on the business of a trust company in the Province
of Quebec and in the Province of Ontario, either become so authorized or
resign in the manner and with the effect specified in Article 11.
8.15 Conflicting Claims. If conflicting claims or demands are made or
asserted with respect to any interest of any Beneficiary in any Exchangeable
Shares, including any disagreement between the heirs, representatives,
successors or assigns succeeding to all or any part of the interest of any
Beneficiary in any Exchangeable Shares resulting in conflicting claims or
demands being made in connection with such interest, then the Trustee shall be
entitled, at its sole discretion, to refuse to recognize or to comply with any
such claim or demand. In so refusing, the Trustee may elect not to exercise
any Voting Rights, Exchange Right or Automatic Exchange Rights, the Covenants
subject to such conflicting claims or demands and, in so doing, the Trustee
shall not be or become liable to any person on account of such election or its
failure or refusal to comply with any such conflicting claims or demands. The
Trustee shall be entitled to continue to refrain from acting and to refuse to
act until:
(a) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Right Automatic Exchange Rights or the Covenants subject
to such conflicting claims or demands have been adjudicated by a final
judgment of a court of competent jurisdiction; or
(b) all differences with respect to the Voting Rights, Exchange Right or
Automatic Exchange Rights subject to such conflicting claims or demands
have been conclusively settled by a valid written agreement binding on all
such adverse claimants, and the Trustee shall have been furnished with an
executed copy of such agreement.
If the Trustee elects to recognize any claim or comply with any demand made by
any such adverse claimant, it may in its discretion require such claimant to
furnish such surety bond or other security satisfactory to the Trustee as it
shall deem appropriate fully to indemnify it as between all conflicting claims
or demands.
8.16 Acceptance of Trust. The Trustee hereby accepts the Trust created and
provided for by and in this Agreement and agrees to perform the same upon the
terms and conditions herein set forth and to hold all rights, privileges and
benefits conferred hereby and by law in trust for the various persons who
shall from time to time be Beneficiaries, subject to all the terms and
conditions herein set forth.
ARTICLE 9
Compensation
9.1 Fees and Expenses of the Trustee. The Parent, Dutchco and the
Corporation jointly and severally agree to pay to the Trustee reasonable
compensation for all of the services rendered by it under this Agreement and
will reimburse the Trustee for all reasonable expenses (including taxes) and
disbursements, including the cost and expense of any suit or litigation of any
character and any proceedings before any governmental agency reasonably
incurred by the Trustee in connection with its rights and duties under this
Agreement; provided that the Parent, Dutchco and the Corporation shall have no
obligation to reimburse the Trustee for any expenses or disbursements paid,
incurred or suffered by the Trustee in any suit or litigation in which the
Trustee is determined to have acted in bad faith or with negligence or wilful
misconduct.
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ARTICLE 10
Indemnification and Limitation of Liability
10.1 Indemnification of the Trustee. The Parent, Dutchco and the Corporation
jointly and severally agree to indemnify and hold harmless the Trustee and
each of its directors, officers, employees and agents appointed and acting in
accordance with this Agreement (collectively, the "Indemnified Parties")
against all claims, losses, damages, costs, penalties, fines and reasonable
expenses (including reasonable expenses of the Trustee's legal counsel) which,
without fraud, negligence, wilful misconduct or bad faith on the part of such
Indemnified Party, may be paid, incurred or suffered by the Indemnified Party
by reason of or as a result of the Trustee's acceptance or administration of
the Trust, its compliance with its duties set forth in this Agreement, or any
written or oral instructions delivered to the Trustee by the Parent, Dutchco
or the Corporation pursuant hereto. In no case shall the Parent, Dutchco or
the Corporation be liable under this indemnity for any claim against any of
the Indemnified Parties unless the Parent, Dutchco and the Corporation shall
be notified by the Trustee of the written assertion of a claim or of any
action commenced against the Indemnified Parties, promptly after any of the
Indemnified Parties shall have received any such written assertion of a claim
or shall have been served with a summons or other first legal process giving
information as to the nature and basis of the claim. Subject to clause (ii)
below, the Parent, Dutchco and the Corporation shall be entitled to
participate at their own expense in the defence and, if the Parent, Dutchco or
the Corporation so elect at any time after receipt of such notice, either of
them may assume the defence of any suit brought to enforce any such claim. The
Trustee shall have the right to employ separate counsel in any such suit and
participate in the defence thereof but the fees and expenses of such counsel
shall be at the expense of the Trustee unless: (i) the employment of such
counsel has been authorized by the Parent, Dutchco or the Corporation; or (ii)
the named parties to any such suit include both the Trustee and the Parent,
Dutchco or the Corporation and the Trustee shall have been advised by counsel
acceptable to the Parent or the Corporation that there may be one or more
legal defenses available to the Trustee which are different from or in
addition to those available to the Parent or the Corporation (in which case
the Parent, Dutchco and the Corporation shall not have the right to assume the
defence of such suit on behalf of the Trustee but shall be liable to pay the
reasonable fees and expenses of counsel for the Trustee).
10.2 Limitation of Liability. The Trustee shall not be held liable for any
loss which may occur by reason of depreciation of the value of any part of the
Trust Estate or any loss incurred on any investment of funds pursuant to this
Agreement, except to the extent that such loss is attributable to the fraud,
negligence, wilful misconduct or bad faith on the part of the Trustee.
ARTICLE 11
Change of Trustee
11.1 Resignation. The Trustee, or any trustee hereafter appointed, may at
any time resign by giving written notice of such resignation to the Parent,
Dutchco and the Corporation specifying the date on which it desires to resign,
provided that such notice shall never be given less than 60 days before such
desired resignation date unless the Parent, Dutchco and the Corporation
otherwise agree and provided further that such resignation shall not take
effect until the date of the appointment of a successor trustee and the
acceptance of such appointment by the successor trustee. Upon receiving such
notice of resignation, the Parent, Dutchco and the Corporation shall promptly
appoint a successor trustee by written instrument in duplicate, one copy of
which shall be delivered to the resigning trustee and one copy to the
successor trustee.
11.2 Removal. The Trustee, or any trustee hereafter appointed, may be
removed at any time on 60 days' prior notice by written instrument executed by
the Parent, Dutchco and the Corporation, in duplicate, one copy of which shall
be delivered to the trustee so removed and one copy to the successor trustee
provided that such removal shall not take effect until the date of the
appointment of a successor trustee and the acceptance of such appointment by
the successor trustee.
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11.3 Successor Trustee. Any successor trustee appointed as provided under
this Agreement shall execute, acknowledge and deliver to the Parent, Dutchco
and the Corporation and to its predecessor trustee an instrument accepting
such appointment. Thereupon, the resignation or removal of the predecessor
trustee shall become effective and such successor trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers,
duties and obligations of its predecessor under this Agreement, with like
effect as if originally named as trustee in this Agreement. However, on the
written request of the Parent, Dutchco and the Corporation or of the successor
trustee, the trustee ceasing to act shall, upon payment of any amounts then
due it pursuant to the provisions of this Agreement, execute and deliver an
instrument transferring to such successor trustee all the rights and powers of
the trustee so ceasing to act. Upon the request of any such successor trustee,
the Parent, Dutchco, the Corporation and such predecessor trustee shall
execute any and all instruments in writing for more fully and certainly
vesting in and confirming to such successor trustee all such rights and
powers.
11.4 Notice of Successor Trustee. Upon acceptance of appointment by a
successor trustee as provided herein, the Parent, Dutchco and the Corporation
shall cause to be mailed notice of the succession of such trustee hereunder to
each Beneficiary specified in a List. If the Parent, Dutchco or the
Corporation shall fail to cause such notice to be mailed within 10 days after
acceptance of appointment by the successor trustee, the successor trustee
shall cause such notice to be mailed at the expense of the Parent, Dutchco and
the Corporation.
ARTICLE 12
Parent Successors
12.1 Certain Requirements in Respect of Combination, etc. The Parent shall
not enter into any transaction (whether by way of reconstruction,
reorganization, consolidation, merger, transfer, sale, lease or otherwise)
whereby all or substantially all of its undertaking, property and assets would
become the property of any other person or, in the case of a merger, of the
continuing corporation resulting therefrom unless:
(a) such other person or continuing corporation is a corporation (herein
called the "Parent Successor") incorporated under the laws of any state of
the United States or the laws of Canada or any province thereof;
(b) the Parent Successor, by operation of law, becomes, without more,
bound by the terms and provisions of this Agreement or, if not so bound,
executes, prior to or contemporaneously with the consummation of such
transaction a agreement supplemental hereto and such other instruments (if
any) as are satisfactory to the Trustee and in the opinion of legal counsel
to the Trustee are necessary or advisable to evidence the assumption by the
Parent Successor of liability for all moneys payable and property
deliverable hereunder and the covenant of such Parent Successor to pay and
deliver or cause to be delivered the same and its agreement to observe and
perform all the covenants and obligations of the Parent under this
Agreement; and
(c) such transaction shall, to the satisfaction of the Trustee and in the
opinion of legal counsel to the Trustee, be upon such terms as
substantially to preserve and not to impair in any material respect any of
the rights, duties, powers and authorities of the Trustee or of the
Beneficiaries hereunder.
12.2 Vesting of Powers in Successor. Whenever the conditions of section 12.1
hereof have been duly observed and performed, the Trustee, if required, by
section 12.1 hereof, the Parent Successor and the Corporation shall execute
and deliver the supplemental agreement provided for in Article 13 and
thereupon the Parent Successor shall possess and from time to time may
exercise each and every right and power of the Parent under this Agreement in
the name of the Parent or otherwise and any act or proceeding by any provision
of this Agreement required to be done or performed by the Board of Directors
of the Parent or any officers of the Parent may be done and performed with
like force and effect by the Board of Directors or officers of such Parent
Successor.
12.3 Wholly-Owned Subsidiaries. Nothing herein shall be construed as
preventing the amalgamation or merger of any wholly-owned subsidiary of the
Parent with or into the Parent or the winding-up, liquidation or dissolution
of any wholly-owned subsidiary of the Parent provided that all of the assets
of such subsidiary are transferred to the Parent or another wholly-owned
subsidiary of the Parent and any such transactions are expressly permitted by
this Article 12.
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ARTICLE 13
Amendments and Supplemental Trust Agreements
13.1 Amendments, Modifications, etc. Except as contemplated by section 13.2
below, this Agreement may not be amended or modified except by an agreement in
writing executed by the Corporation, the Parent, Dutchco and the Trustee and
approved by the holders of Exchangeable Shares in accordance with section 10.2
of the Exchangeable Share Provisions provided that the Trustee shall not agree
to any amendment to the provisions of Article 7 or waive any right thereunder
without the consent of the Class E and F Shareholders at a meeting of those
holders held in accordance with the provisions attaching to the Class E Shares
and the Class F Shares.
13.2 Ministerial Amendments. Notwithstanding the provisions of section 13.1
hereof, the parties to this Agreement may in writing, at any time and from
time to time, without the approval of the Beneficiaries, amend or modify this
Agreement for the purposes of:
(a) adding to the covenants of any party hereto for the protection of the
Corporation or the Beneficiaries hereunder;
(b) making such provisions or modifications not inconsistent with this
Agreement as may be necessary or desirable with respect to matters or
questions arising hereunder which, in the opinion of the Board of Directors
of each of the Parent, Dutchco and the Corporation and in the opinion of
the Trustee and its counsel, having in mind the best interests of the
Beneficiaries as a whole, it may be expedient to make, provided that such
Boards of Directors and the Trustee and its counsel shall be of the opinion
that such provisions and modifications will not be prejudicial to the
interests of the Beneficiaries; or
(c) making such changes or corrections hereto which, on the advice of
counsel to the Corporation, the Parent, Dutchco and the Trustee, are
required for the purpose of curing or correcting any ambiguity or defect or
inconsistent provision or clerical omission or mistake or manifest error
contained herein, provided that the Trustee and its counsel and the Board
of Directors of each of the Corporation, Dutchco and the Parent shall be of
the opinion that such changes or corrections will not be prejudicial to the
interests of the Beneficiaries.
13.3 Meeting to Consider Amendments. The Corporation, at the request of the
Parent, shall call a meeting or meetings of the Beneficiaries for the purpose
of considering any proposed amendment or modification requiring approval
pursuant hereto. Any such meeting or meetings shall be called and held in
accordance with the by-laws of the Corporation, the Exchangeable Share
Provisions, the articles of the Corporation and all applicable laws.
13.4 Changes in Capital of Parent and the Corporation. At all times after
the occurrence of any event effected pursuant to section 2.7 or section 2.8 of
the Support Agreement, as a result of which either the Parent Common Shares or
the Exchangeable Shares or both are in any way changed, this Agreement shall
forthwith be amended and modified as necessary in order that it shall apply
with full force and effect, mutatis mutandis, to all new securities into which
the Parent Common Shares or the Exchangeable Shares or both are so changed and
the parties hereto shall execute and deliver a supplemental agreement giving
effect to and evidencing such necessary amendments and modifications.
13.5 Execution of Supplemental Agreements. No amendment to or modification
or waiver of any of the provisions of this Agreement otherwise permitted
hereunder shall be effective unless made in writing and signed by all of the
parties hereto. From time to time the Corporation (when authorized by a
resolution of the Board of Directors), Dutchco (when authorized by a
resolution of its Board of Directors), the Parent (when authorized by a
resolution of its Board of Directors) and the Trustee may, subject to the
provisions of these presents, and they shall, when so directed by these
presents, execute and deliver by their proper officers, agreements or other
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instruments supplemental hereto, which thereafter shall form part hereof, for
any one or more of the following purposes:
(a) evidencing the succession of Parent Successors to the Parent and the
covenants of and obligations assumed by each such Parent Successor in
accordance with the provisions of Article 12 and the successor of any
successor trustee in accordance with the provisions of Article 11;
(b) making any additions to, deletions from or alterations of the
provisions of this Agreement or the Voting Rights, the Exchange Right, the
Automatic Exchange Rights or the Covenants which, in the opinion of the
Trustee and its counsel, will not be prejudicial to the interests of the
Beneficiaries as a whole or are in the opinion of counsel to the Trustee
necessary or advisable in order to incorporate, reflect or comply with any
legislation the provisions of which apply to the Parent, Dutchco, the
Corporation, the Trustee or this Agreement; and
(c) for any other purposes not inconsistent with the provisions of this
Agreement, including without limitation to make or evidence any amendment
or modification to this Agreement as contemplated hereby, provided that, in
the opinion of the Trustee and its counsel, the rights of the Trustee and
the Beneficiaries as a whole will not be prejudiced thereby.
ARTICLE 14
Termination
14.1 Term. The Trust created by this Agreement shall be effective upon the
issuance by the Corporation of Class E Shares, Class F Shares and/or
Exchangeable Shares and shall continue until the earliest to occur of the
following events:
(a) no outstanding Exchangeable Shares are held by a Beneficiary;
(b) each of the Corporation, Dutchco and the Parent elects in writing to
terminate the Trust and such termination is approved by the Beneficiaries
of the Exchangeable Shares in accordance with section 10.2 of the
Exchangeable Share Provisions; and
(c) 21 years after the death of the last survivor of the descendants of
His Majesty King George VI of the United Kingdom of Great Britain and
Northern Ireland living on the date of the creation of the Trust.
14.2 Survival of Agreement. This Agreement shall be effective upon the
issuance by the Corporation of Class E Shares, Class F Shares and/or
Exchangeable Shares and shall survive any termination of the Trust and shall
continue until there are no Exchangeable Shares outstanding held by a
Beneficiary; provided, however, that the provisions of Articles 9 and 10 shall
survive any such termination of this Agreement.
ARTICLE 15
General
15.1 Severability. If any provision of this Agreement is held invalid,
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this Agreement shall not in any way be affected or improved
thereby and this Agreement shall be carried and as near as possible in
accordance with its original terms and conditions; and to this end the
provisions of this Agreement are intended to be and shall be deemed severable;
provided, however, that if the provision or provisions so held to be invalid,
in the reasonable judgment of the parties hereto, is or are so fundamental to
the intent of the parties hereto and the operation of this Agreement that the
enforcement of the other provisions hereof, in the absence of such invalid
provision or provisions, would damage irreparably the intent of the parties in
entering into this Agreement, the parties hereto shall agree to amend or
otherwise modify this Agreement so as to carry out the intent and purposes
hereof and the transactions contemplated hereby.
D-23
<PAGE>
15.2 Enurement. This Agreement shall be binding upon and enure to the
benefit of the parties hereto and their respective successors and permitted
assigns and to the benefit of the Beneficiaries.
15.3 Notices to Parties. All notices and other communications between the
parties hereunder shall be in writing and shall be deemed to have been given
if delivered personally or by confirmed telecopy to the parties at the
following addresses (or at such other address for such party as shall be
specified in like notice):
a) if to the Parent or Dutchco at:
AUTODESK, INC.
20400 Stevens Creek Boulevard
Cupertino, CA 95401-2217
Attention: Marcia K. Sterling
Vice President Business Development, General Counsel and
Secretary
Telecopy: (408) 517-1886
(b) if to the Corporation at:
[NEW DISCREET]
10 Duke Street
Montreal, Quebec
Canada H3C 2L7
Attention: Francois Plamondon
Executive Vice President, Chief Financial Officer, Treasurer
and Secretary
Telecopy: (514) 393-3996
(c) if to the Trustee at:
MONTREAL TRUST COMPANY OF CANADA
6th Floor
1800 McGill College Avenue
Montreal, Quebec
H3A 3K9
Attention: .
Telecopy: (514) .
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy shall
be deemed to have been given and received on the date of confirmed receipt
thereof, provided such notice or other communication is received prior to 5:00
p.m. (local time) on a Business Day, and otherwise it shall be deemed to have
been given and received upon the immediately following Business Day.
15.4 Notice of Beneficiaries. Any and all notices to be given and any
documents to be sent to any Beneficiaries may be given or sent to the address
of such Beneficiary shown on the register of holders of Exchangeable Shares,
Class E Shares or Class F Shares as the case may be, in any manner permitted
by the by-laws of the Corporation from time to time in force in respect of
notices to shareholders and the provisions of the then prevailing law and
shall be deemed to be received (if given or sent in such manner) at the time
specified in such by-laws and the provisions of the then prevailing law, the
provisions of which by-laws shall apply mutatis mutandis to notices or
documents as aforesaid sent to such holders.
15.5 Risk of Payments by Post. Whenever payments are to be made or documents
are to be sent to any Beneficiary by the Trustee or by the Corporation, or by
such Beneficiary to the Trustee or to the Parent, Dutchco or the Corporation,
the making of such payment or sending of such document sent through the post
shall be at the risk of the Corporation, in the case of payments made or
documents sent by the Trustee or the Corporation, and the Beneficiary, in the
case of payments made or documents sent by the Beneficiary.
D-24
<PAGE>
15.6 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
15.7 Jurisdiction. This Agreement shall be construed and enforced in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
15.8 Attornment. Each of the Parent, Dutchco and the Corporation agree that
any action or proceeding arising out of or relating to this Agreement may be
instituted in the courts of Ontario waive any objection which it may have now
or hereafter to the venue of any such action or proceeding, irrevocably
submits to the non-exclusive jurisdiction of the said courts in any such
action or proceeding, agrees to be bound by any judgment of the said courts
and not to seek, and hereby waives, any review of the merits of any such
judgment by the courts of any other jurisdiction and each of Parent, Dutchco
and the Corporation hereby appoint Aird & Berlis at its office in Toronto as
Parent's, Dutchco's and the Corporation's attorney for service of process.
15.9 Guaranty/Assignment. The Parent hereby unconditionally and irrevocably
guarantees the prompt and full performance by Dutchco of, and shall cause
Dutchco to comply with, its obligations hereunder. Dutchco, upon prior notice
to the Trustee, may assign all or a portion of its rights and obligations
hereunder to the Parent or any Affiliate thereof, which shall thereupon assume
such assigned rights and obligations, without the consent of the Trustee, the
Beneficiary, or the Corporation subject to the Trustee, the Corporation and
the Parent entering into a supplemental agreement pursuant to section 13.5(c)
reflecting such assignment and assumption. This Agreement may not be assigned
by the Parent without the prior written consent of Dutchco, the Trustee and
the Corporation and the approval of the holders of the Exchangeable Shares in
accordance with section 10.2 of the Exchangeable Share Provisions and the
Class E and F Shareholders other than the Parent, its subsidiaries and
Affiliates.
15.10 Language. The parties have agreed that this Agreement be drafted in
English. Les parties ont convenu que cette convention soit redigee en langue
anglaise.
D-25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
Autodesk, Inc.
By __________________________________
Name: .
Title: .
Autodesk Development B.V.
By __________________________________
Name: .
Title: .
Discreet Logic Inc.
By __________________________________
Name: .
Title: .
Montreal Trust Company of Canada
By __________________________________
Name: .
Title: .
D-26
<PAGE>
APPENDIX E-1
SPECIAL RESOLUTION OF THE HOLDERS OF COMMON STOCK OF AUTODESK, INC.
RESOLVED: That the stockholders of Autodesk, Inc., a Delaware corporation
("Autodesk"), hereby approve the issuance of new shares of common stock of
Autodesk, par value $0.01 per share ("Autodesk Common Stock"), in connection
with that certain Amended and Restated Agreement and Plan of Acquisition and
Amalgamation (the "Acquisition Agreement") dated as of September 23, 1998, by
and among Autodesk, Autodesk Development B.V., a Netherlands corporation and
indirect wholly owned subsidiary of Autodesk, Autodesk Canada Inc., an Ontario
corporation and wholly owned subsidiary of Autodesk, 9066-9077 Quebec Inc., a
Quebec company and indirect wholly owned subsidiary of Autodesk ("Amalgamation
Sub"), 9066-9854 Quebec Inc., a Quebec company and indirect wholly owned
subsidiary of Autodesk ("Autodesk Quebec"), and Discreet Logic Inc., a Quebec
company ("Discreet"), pursuant to which (i) each of the outstanding common
shares of Discreet, no par value, ultimately shall be converted, through a
series of steps, into 0.525 shares of Autodesk Common Stock, and (ii)
Amalgamation Sub, Autodesk Quebec and Discreet will combine to form a new
subsidiary of Autodesk.
E-1-1
<PAGE>
APPENDIX E-2
SPECIAL RESOLUTION OF THE HOLDERS OF
COMMON SHARES OF DISCREET LOGIC INC.
AMALGAMATION UNDER THE COMPANIES ACT (QUEBEC)
BE IT RESOLVED AS A SPECIAL RESOLUTION THAT:
1. The amalgamation of Discreet Logic Inc. with 9066-9771 Quebec Inc. and
9066-9854 Quebec Inc. under the Companies Act (Quebec), substantially as
set forth in the Amalgamation Agreement attached as Exhibit A to the
Amended and Restated Agreement and Plan of Acquisition and Amalamation (the
"Acquisition Agreement") and which is attached as Appendix A to the Joint
Proxy Statement/Prospectus of Autodesk, Inc. and Discreet Logic Inc. dated
[ ], 1998 (the "PROXY CIRCULAR") accompanying the notice of this special
general meeting of the holders of Common Shares of Discreet Logic Inc. be,
and it is hereby authorized, approved and adopted;
2. the Amalgamation Agreement, the action of the directors of Discreet Logic
Inc. in approving the Amalgamation Agreement and the actions of any
officers of Discreet Logic Inc. in executing and delivering the
Amalgamation Agreement be, and they are hereby confirmed, ratified,
authorized and approved;
3. Special By-Law 1998-1 adopted by the Board of Directors of Discreet Logic
Inc. relating to the amalgamation of Discreet Logic Inc., 9066-9771 Quebec
Inc. and 9066-9854 Quebec Inc., be and it is hereby approved;
4. notwithstanding that this resolution has been passed and the Special By-Law
1998-1 has been adopted by the shareholders of Discreet Logic Inc., the
directors of Discreet Logic Inc. be, and they are hereby authorized and
empowered (A) to amend the Acquisition Agreement to the extent permitted by
the Acquisition Agreement, and (B) decide, without further notice to or
approval of the shareholders of Discreet Logic Inc., not to proceed with
the amalgamation referred to above or revoke this resolution at any time
prior to the Articles of Amalgamation becoming effective pursuant to the
provisions of the Companies Act (Quebec);
5. the directors of Discreet Logic Inc. are hereby authorized, if they deem
appropriate, at their sole discretion, to revoke Special By-Law 1998-1 and
to not proceed with the Amalgamation without further approval of the
shareholders;
6. any director or officer of Discreet Logic Inc. are hereby authorized and
directed for and on behalf of Discreet Logic Inc. to execute or cause to be
executed, under corporate seal or otherwise, to deliver or cause to be
delivered and to file or cause to be filed all such documents, agreements
and instruments and to do or cause to be done all such other acts and
things as such director or officer of Discreet Logic Inc. shall determine
to be necessary or desirable in order to carry out the intent of the
foregoing paragraphs of this resolution and the matters authorized thereby,
such determination to be conclusively evidenced by the execution and
delivery of such document, agreement or instrument or the doing of any such
act or thing.
E-2-1
<PAGE>
APPENDIX F
LOGO
[LOGO OF PIPER JAFRAY]
August 18, 1998
PERSONAL & CONFIDENTIAL
Board of Directors
Autodesk, Inc.
111 McInnis Parkway
San Rafael, California 94903
Members of the Board:
We understand that Autodesk, Inc., a Delaware corporation ("Autodesk" or the
"Acquiror"), Autodesk Amalgamation Subsidiary, Inc., a Quebec corporation
("Amalgamation Sub"), Autodesk B.V., a Netherlands corporation ("Dutchco"),
Autodesk Canada Inc. ("ACI") and Discreet Logic Inc., a Quebec corporation
("Discreet Logic" or the "Company") propose to enter into an Agreement and
Plan of Acquisition and Arrangement (the "Agreement") pursuant to which
Amalgamation Sub, ACI and the Company will be (i) amalgamated in a transaction
(the "Transaction") in which each outstanding share of the Company's common
stock, $.01 par value per share (the "Company Shares") will be converted into
Class B shares, or units ("Units") comprised of one Class E share and one
Class F share, of the continuing corporation resulting from the Amalgamation
and (ii) the exchange of such Class B shares and Units for common stock of
Autodesk, par value $0.01 per share (the "Acquiror Shares") and/or
Exchangeable Shares (as defined in the Agreement). The Exchangeable Shares
will be exchangeable for Acquiror Shares. In connection with the Transaction,
holders of Company Shares will receive 0.525 Acquiror Shares (the "Exchange
Ratio") for each of their Company Shares. You have requested our opinion as to
whether the Exchange Ratio is fair, from a financial point of view, to the
Acquiror.
Piper Jaffray Inc. ("Piper Jaffray"), as a customary part of its investment
banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, underwritings and
secondary distributions of securities, private placements, and valuations for
estate, corporate and other purposes. For our services in rendering this
opinion, the Acquiror will pay us a fee and indemnify us against certain
liabilities. In addition, in connection with the Transaction, the Acquiror
proposes to issue 60,000 shares of capital stock to us for nominal
consideration. In the ordinary course of its business, we and our affiliates
may actively trade securities of the Company and the Acquiror for our own
account or the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities. We have performed investment
banking and other services for the Acquiror and the Company in the past and
have been compensated for such services.
In arriving at our opinion, we have reviewed the draft dated August 16, 1998
of the Agreement. We also have reviewed financial and other information that
was publicly available or furnished to us by the Acquiror and the Company,
including information provided during discussions with the management of each
company. In addition, we have compared certain financial data of the Company
with various other companies whose securities
F-1
<PAGE>
are traded in public markets, reviewed prices and premiums paid in certain
other business combinations and conducted such other financial studies,
analyses and investigations as we deemed appropriate for purposes of this
opinion.
We have relied upon and assumed the accuracy and completeness of the financial
statements and other information provided by the Company and the Acquiror or
otherwise made available to us and have not assumed responsibility
independently to verify such information. We have further relied upon the
assurances of the Company's and the Acquiror's management that the information
provided has been prepared on a reasonable basis in accordance with industry
practice, and, with respect to financial planning data, reflects the best
currently available estimates and judgment of the Company's and the Acquiror's
management and that they are not aware of any information or facts that would
make the information provided to us incomplete or misleading. Without limiting
the generality of the foregoing, for the purpose of this opinion, we have
assumed that neither the Company nor the Acquiror are a party to any pending
transaction, including external financing, recapitalizations, acquisitions or
merger discussions, other than the Transaction or in the ordinary course of
business. We have also assumed that the Transaction will result in certain
Federal tax benefits to the Acquiror and will be taxable for Federal tax
purposes to holders of Company Shares that are residents of the United States
and that the Transaction will be accounted for as a pooling of interests under
United States generally accepted accounting principles. In arriving at our
opinion, we have assumed that all the necessary regulatory approvals and
consents required for the Transaction will be obtained in a manner that will
not change the purchase price for the Company.
In arriving at our opinion, we have not performed any appraisals or valuations
of specific assets or liabilities of the Company or the Acquiror and have not
been furnished with any such appraisals or valuations. Without limiting the
generality of the foregoing, we have undertaken no independent analysis of any
pending or threatened litigation, possible unasserted claims or other
contingent liabilities, to which the Company, the Acquiror or any of their
respective affiliates is a party or may be subject and, at the Acquiror's
direction and with its consent, our opinion makes no assumption concerning and
therefore does not consider, the possible assertion of claims, outcomes or
damages arising out of any such matters.
Our opinion is necessarily based upon information available to us, facts and
circumstances and economic, market and other conditions as they exist and are
subject to evaluation on the date hereof; events occurring after the date
hereof could materially affect the assumptions used in preparing this opinion.
We have not undertaken to reaffirm or revise this opinion or otherwise comment
upon any events occurring after the date hereof and do not have any obligation
to update, revise or reaffirm this opinion. We are not expressing any opinion
herein as to the prices at which the Acquiror Shares will trade following the
consummation of the Transaction or the prices at which the Company Shares or
the Acquiror Shares will trade between the date hereof and the consummation of
the Transaction. In addition, we express no opinion or recommendation as to
how the holders of the Acquiror Shares or the Company Shares should vote at
the stockholders' meetings to be held in connection with the Transaction.
This opinion is for the benefit of the Board of Directors of the Acquiror in
evaluating the Transaction and shall not be published or otherwise used, nor
shall any public references to Piper Jaffray be made without our prior written
consent. In connection with this opinion, we were not requested to opine as
to, and this opinion does not address the underlying business decision to
proceed with or effect the Transaction.
Based upon and subject to the foregoing and based upon such other factors as
we consider relevant, it is our opinion that the Exchange Ratio is fair, from
a financial point of view, to the Acquiror, as of the date hereof.
Sincerely,
PIPER JAFFRAY INC.
F-2
<PAGE>
APPENDIX G
VOLPE BROWN WHELAN & COMPANY, LLC
INVESTMENT BANKERS
One Maritime Plaza, San Francisco, CA 94111
(415) 956-8120 FAX (415) 986-6754
PRIVATE AND CONFIDENTIAL
August 20, 1998
The Independent Committee of the Board of Directors
and The Board of Directors
Discreet Logic, Inc.
10 Rue Duke
Montreal, Quebec H3C 2L7
Canada
Members of the Independent Committee and the Board:
You have requested our opinion (the "Opinion") as to the fairness, from a
financial point of view, to the shareholders of Discreet Logic, Inc.
("Discreet Logic" or the "Company"), of the consideration to be received by
such shareholders pursuant to the Agreement and Plan of Acquisition and
Arrangement dated as of August 20, 1998 (the "Agreement") by and among
Discreet Logic, Autodesk, Inc. ("Autodesk"), and certain subsidiaries of
Autodesk established for purposes of the transaction ("Merger Subs").
The Agreement provides, in general, that Discreet Logic will be "amalgamated"
with the Merger Subs (the "Merger") and the shares of Discreet Logic common
stock, no par value ("Discreet Logic Common Stock") will ultimately be
converted into the right to receive shares of Autodesk common stock, $0.01 par
value ("Autodesk Common Stock"). We further understand that the parties intend
that after giving effect to the Merger and related transactions, holders of
Discreet Logic Common Stock will receive in respect of each share of Discreet
Logic Common Stock held by them immediately prior to the Merger 0.525 (the
"Exchange Ratio") shares of Autodesk Common Stock or, at their election,
Exchangeable Shares (as defined in the Agreement). Under the Agreement,
Exchangeable Shares are convertible on a one-for-one basis into shares of
Autodesk Common Stock at any time over an eleven-year period and the maximum
percentage of Discreet Logic Common Stock that is exchangeable for
Exchangeable Shares is 19.99 percent.
It is our understanding that the parties intend that the transaction will be
accounted for as a pooling of interests for financial reporting purposes and
that in connection therewith Autodesk intends to issue approximately 3 million
additional shares of Autodesk Common Stock prior to the Merger. It is also our
understanding that the parties intend that the transaction generally will
constitute (i) a taxable exchange for United States federal income tax
purposes and (ii) a non-taxable exchange for Canadian federal tax purposes for
those Canadian shareholders who receive Exchangeable Shares.
For the purposes of formulating the Opinion, we have, among other things:
(i) reviewed the Agreement;
(ii) interviewed management of Discreet Logic and Autodesk concerning their
respective business prospects, financial outlook and operating plans as
standalone concerns and as a combined enterprise;
(iii) reviewed certain Discreet Logic and Autodesk financial statements and
other relevant financial and operating data of Discreet Logic and
Autodesk prepared by Discreet Logic and Autodesk management teams
respectively;
G-1
<PAGE>
Independent Committee of the Board of Directors
and the Board of Directors
Discreet Logic, Inc.
August 20, 1998
Page 2
(iv) reviewed the historical stock trading patterns of both Autodesk and
Discreet Logic and analyzed implied historical exchange ratios;
(v) reviewed the premium of the per share consideration (which, for purposes
of the written analysis, was based on the closing price of Autodesk Common
Stock on August 14, 1998, and, for the purposes of the oral analysis, was
based on the closing price of Autodesk Common Stock on August 20, 1998) in
relation to selected merger and acquisition transactions that we deemed
relevant and comparable to the Merger;
(vi) reviewed the valuation of selected publicly traded companies we deemed
comparable and relevant to Discreet Logic;
(vii) reviewed, to the extent publicly available, the financial terms of
selected merger and acquisition transactions that we deemed comparable
and relevant to the Merger;
(viii) performed a valuation based upon Discreet Logic's relative
contribution, adjusted to reflect the difference in capital structures
of the two companies, to Autodesk in terms of revenue, profitability,
and book value;
(ix) performed a discounted cash flow analysis of Discreet Logic as a
standalone entity based upon the preliminary financial information
regarding business prospects provided by Discreet Logic management
through June 2000, and as extrapolated by Volpe Brown Whelan & Company,
LLC ("VBW&Co.") thereafter;
(x) performed a pro forma financial impact analysis of the combined entity,
based upon, in the case of Discreet Logic, preliminary financial
information regarding business prospects (including with respect to both
potential financial performance and potential cost savings resulting from
the Merger) provided by Discreet Logic management through June 2000 and as
extrapolated by VBW&Co. thereafter and, in the case of Autodesk,
preliminary financial information regarding business prospects provided by
Autodesk management through January 2000 and as extrapolated by VBW&Co.
thereafter;
(xi) performed such other studies, analyses and inquiries and considered such
other information as we deemed relevant.
VBW&Co. relied without independent verification upon the accuracy and
completeness of all of the financial, accounting, legal, tax, operating and
other information provided to VBW&Co. by Discreet Logic and has relied upon
the assurances of Discreet Logic that, to the best of its knowledge, all such
information is complete and accurate in all material respects and that there
is no additional material information known to Discreet Logic that would make
any of the information made available to VBW&Co. either incomplete or
misleading. Discreet Logic has also retained outside legal, accounting and tax
advisors to advise on matters relating to the Merger. Accordingly, VBW&Co. has
relied on their advice and has not reviewed and expresses no opinion on such
matters.
We were not asked to, and we did not conduct a market survey to determine the
interest of other potential acquirors in the Company. Although we were
informed by Discreet Logic of an inquiry received from a third party
concerning a potential business combination, and reviewed with management the
terms discussed by the potential acquiror, we were not aware of any proposals
being made. We are expressing no opinion as to, the relative merits of the
Merger as compared to any alternative business strategies that might exist for
Discreet Logic or the effect of any other transaction in which Discreet Logic
might engage.
With respect to data and discussions relating to business prospects, financial
outlook and operating plans of Discreet Logic and Autodesk, VBW&Co. has relied
upon the assurances of Discreet Logic and Autodesk that such data, including
the preliminary financial information regarding business prospects, has been
prepared in good faith on a reasonable basis reflecting the best currently
available estimates and judgments of Discreet Logic
G-2
<PAGE>
Independent Committee of the Board of Directors
and the Board of Directors
Discreet Logic, Inc.
August 20, 1998
Page 3
and Autodesk management as to the prospects of Discreet Logic and Autodesk
separately and as a combined enterprise, and assumed that it was reasonable to
extrapolate such estimates for periods after those periods for which estimates
were provided. Our Opinion is based, in part, on such financial data and
estimates.
VBW&Co. is relying upon the information provided to it by Discreet Logic and
Autodesk for the purposes of rendering the Opinion. VBW&Co. expresses no
opinion and has made no investigation with respect to the validity, accuracy
or completeness of the information provided to it and does not warrant any
forecasts included in such information. Actual results that Discreet Logic or
Autodesk might achieve in the future as standalone entities or as a combined
company may vary materially from those used in VBW&Co.'s analysis.
VBW&Co. has assumed that the Merger will be consummated in accordance with the
terms of the Agreement without waiver of any of the conditions to the parties'
obligations thereunder, that there will be no material changes to the
Agreement and that the ratio of shares of Autodesk Common Stock to be received
for each share of Discreet Logic Common Stock will be 0.525.
VBW&Co. has, furthermore, not made any independent appraisals or valuations of
any assets of Discreet Logic or Autodesk, nor has VBW&Co. been furnished with
any such appraisals or valuations. VBW&Co. has performed no investigations
relating to the representations made by Discreet Logic or Autodesk, including
any representations with respect to its intellectual property or the status of
any litigation pending or threatened against either company. While VBW&Co.
believes that its review, as described herein, is an adequate basis for the
Opinion it has expressed, the Opinion is necessarily based upon market,
economic and other conditions that exist and can be evaluated as of the date
of the Opinion.
The Opinion addresses only the consideration to be received by the
shareholders of Discreet and does not address the relative merits of the
Merger and any alternatives to the Merger, Discreet Logic's decision to
proceed with the Merger, the effect of the Merger, or any other aspect of the
Merger.
The preparation of a fairness opinion involves various judgments as to
appropriate and relevant quantitative and qualitative methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, we believe our analyses and the factors utilized in
such analyses must be considered as a whole and that considering any portion
of such analyses or factors, without considering all analyses and factors
could create a misleading or incomplete view of the process underlying the
Opinion. In our analyses, we made numerous assumptions with respect to
industry performance, general business and other conditions and matters, many
of which are beyond Discreet Logic's or Autodesk's control and are not
susceptible to accurate prediction.
As a customary part of its investment banking business, VBW&Co. engages in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of its business, VBW&Co. and its affiliates may actively trade
the equity securities of Discreet Logic or Autodesk for their own account and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
VBW&Co. will receive a fee of $250,000 for rendering its Opinion, no portion
of which is conditioned upon the Opinion being favorable.
G-3
<PAGE>
Independent Committee of the Board of Directors
and the Board of Directors
Discreet Logic, Inc.
August 20, 1998
Page 4
No opinion is expressed herein as to the future trading price or range of
prices of any securities of Autodesk issued prior to or in conjunction with
the Merger. The consideration to be received by Discreet Logic shareholders is
based on a fixed exchange ratio and, accordingly, the market value of such
consideration may vary. The Opinion does not constitute a recommendation as to
the Independent Committee's or Board of Director's decision on whether to
support the Merger and recommend it to Discreet Logic's shareholders and does
not constitute a recommendation to shareholders as to whether to vote in favor
of the Merger. The Opinion and related materials have been prepared for the
use and benefit of the Independent Committee and the Board of Directors of
Discreet Logic. VBW & Co. assumes no obligation to update, revise or reaffirm
the Opinion.
Based upon and subject to the foregoing limitations and restrictions and after
considering such other matters as we deem relevant, it is our opinion that, as
of the date hereof, the consideration to be received by the shareholders of
Discreet Logic pursuant to the Agreement is fair, from a financial point of
view, to the shareholders of Discreet Logic.
Very truly yours,
VOLPE BROWN WHELAN & COMPANY, LLC
By:
-------------------------
Date:
-------------------------
G-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation, as amended, includes a provision
that eliminates the personal liability of its directors for monetary damages
for breach or alleged breach of their duty of care. In addition, as permitted
by Section 145 of the Delaware General Corporation Law, the Bylaws of the
Registrant provide that: (i) the Registrant is required to indemnify its
directors and officers and persons serving in such capacities in other
business enterprises (including, for example, subsidiaries of the Registrant)
at the Registrant's request, to the fullest extent permitted by Delaware law;
(ii) the Registrant may, in its discretion, indemnify employees and agents in
those circumstances where indemnification is not required by law; (iii) the
Registrant is required to advance expenses, as incurred, to its directors and
officers in connection with defending a proceeding, provided that payment of
expenses incurred by a director or officer of the corporation in advance of
the final disposition of such proceeding shall be made only on receipt of an
undertaking by the officer or director to repay all amounts advanced if it
should ultimately be determined that the officer or director is not entitled
to be indemnified; (iv) the rights conferred in the Bylaws are not exclusive,
and the Registrant is authorized to enter into indemnification agreements with
its directors, officers and employees; and (v) the Registrant may not
retroactively amend the Bylaw provisions in a way that is adverse to such
directors, officers and employees.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and officers that provide the maximum indemnity allowed
to directors and officers by Section 145 of the Delaware General Corporation
Law and the Bylaws, as well as certain additional procedural protections. In
addition, the indemnification agreements provide that directors and officers
will be indemnified to the fullest possible extent permitted by law against
all expenses (including attorney's fees) and settlement amounts paid or
incurred by them in an action or proceeding, including any action by or in the
right of the Registrant, arising out of such person's services as a director
or officer of the Registrant, any subsidiary of the Registrant or any other
company or enterprise to which such person provides services at the request of
the Registrant. The Registrant will not be obligated pursuant to the
indemnification agreements to indemnify or advance expenses to an indemnified
party with respect to proceedings or claims initiated by the indemnified party
and not by way of defense, except with respect to proceedings specifically
authorized by the Board of Directors or brought to enforce a right to
indemnification under the indemnification agreement, the Registrant's Bylaws
or any statute or law. Under the agreements, the Registrant is not obligated
to indemnify the indemnified party (i) for any expenses incurred by the
indemnified party with respect to any proceeding instituted by the indemnified
party to enforce or interpret the agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
indemnified party in such proceeding was not made in good faith or was
frivolous; (ii) for any amounts paid in settlement of a proceeding unless the
Registrant consents to such settlement; (iii) on account of any suit in which
judgment is rendered against the indemnified party for an accounting of
profits made from the purchase or sale by the indemnified party of securities
of the Registrant pursuant to the provisions of Section 16(b) of the Exchange
Act and related laws; or (iv) if a final decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
The indemnification provisions in the Bylaws and the indemnification
agreements entered into between the Registrant and its directors and officers
may be sufficiently broad to permit indemnification of the Registrant's
directors and officers for liabilities arising under the Securities Act.
From and after the Effective Time, (i) New Discreet and the Registrant will
fulfill and honor in all respects the obligations of Discreet and its
subsidiaries pursuant to the indemnification provisions in the Discreet
Articles and the Discreet By-laws existing as in effect on the date of the
Acquisition Agreement with respect to Discreet's directors and officers
(including without limitation advancement of legal and other expenses to the
extent provided for in the Discreet Articles and Discreet By-Laws), and (ii)
in the event any of Discreet's directors or
II-1
<PAGE>
officers is or becomes involved in any capacity in any action, proceeding or
investigation in connection with any matter relating to the Acquisition
Agreement or the transactions contemplated thereby occurring on or prior to
the Effective Time, the Registrant will, or will cause New Discreet to, pay as
incurred such reasonable legal and other expenses (including the cost of any
investigation and preparation) incurred in connection therewith, subject to an
undertaking to repay such amounts as required by applicable law.
The Registrant and New Discreet will indemnify each present director,
officer, employee, fiduciary and agent of Discreet or any of its subsidiaries
(collectively, the "Indemnified Parties"), to the fullest extent permitted
under applicable law or under the Registrant's or New Discreet's, as the case
may be, Bylaws, against any costs or expenses (including attorneys' fees),
judgments, fines, losses, claims, damages, liabilities and amounts paid in
settlement in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to any action or omission occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by the Acquisition Agreement), and to pay as incurred such legal
and other expenses (including the costs of any investigation and preparation)
incurred in connection therewith, subject to an undertaking to repay such
amounts as required by applicable law.
For a period of five years after the Effective Time, the Registrant and
Dutchco will, or will cause New Discreet to, provide officers' and directors'
liability insurance in respect of acts or omissions occurring on or prior to
the Effective Time covering each person covered by Discreet's officers' and
directors' liability insurance policy prior to the Effective Time on terms
substantially similar to those of the policy in effect as of the date of the
Acquisition Agreement.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
2.1 Amended and Restated Agreement and Plan of Acquisition and Amalgamation
by and among the Registrant, Autodesk Development B.V., 9066-9771
Quebec Inc., Autodesk Canada Inc., 9066-9854 Quebec Inc. and Discreet
Logic Inc., dated as of September 23, 1998 (attached as Appendix A to
the Joint Proxy Statement/Prospectus).
2.2 Amalgamation Agreement by an among Discreet Logic Inc., 9066-9854
Quebec Inc., 9066-9771 Quebec Inc. and the Registrant dated as of
September 23, 1998 (attached as Appendix B to the Joint Proxy
Statement/Prospectus).
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31, 1998).
3.2 Certificate of Designation of Rights, Preferences, and Privileges of
Series A Participating Preferred Stock of Autodesk, Inc. (incorporated
by reference to the exhibit filed with the Registrant's Annual Report
on Form 10-K for the fiscal year ended January 31, 1997).
3.3 Bylaws of the Registrant, as amended to date (incorporated by reference
to the exhibit filed with the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 31, 1998).
*3.4 Form of Certificate of Designation of Series B Preferred Stock of
Autodesk, Inc., (to be filed with the Delaware Secretary of State after
effectiveness of this Registration Statement).
4.1 Preferred Shares Rights Agreement dated December 14, 1995 (incorporated
by reference to the Registrant's Report on Form 8-A filed on January 5,
1996, as amended on January 8, 1996 and January 15, 1998).
4.2 Amendment No. 1 to Preferred Shares Rights Agreement (incorporated by
reference to the Registrant's Report on Form 8-A filed on January 5,
1996, as amended on January 8, 1996 and January 15, 1998).
*5.1 Opinion and Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
*8.1 Tax Opinion of Aird & Berlis.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
*8.2 Tax Opinion of Stikeman, Elliot.
9.1 Form of Voting and Exchange Trust Agreement to be entered into in
connection with the acquisition of Discreet Logic Inc. (attached as
Appendix D to the Joint Proxy Statement/Prospectus).
10.1 Form of Indemnification Agreement entered into by and between the
Registrant and each of its directors and officers (incorporated by
reference to the exhibit filed with the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1995).
10.2 The Registrant's 1987 Stock Option Plan, as amended (incorporated by
reference to the exhibit filed with the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1996).
10.3 The Registrant's Employee Qualified Stock Purchase Plan and form of
Subscription Agreement, as amended (incorporated by reference to the
exhibit filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 31, 1996).
10.4 The Registrant's 1990 Directors' Option Plan, as amended
(incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31,
1998).
10.5 The Registrant's 1996 Stock Plan, as amended (incorporated by
reference to the exhibit filed with the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1998).
10.6 Agreement between the Registrant and Carol A. Bartz, dated April 7,
1992 (incorporated by reference to the exhibit filed with the
Registrant's Report on Form 10-Q for the fiscal quarter ended April
30, 1992).
10.7 The Registrant's Nonstatutory Stock Option Plan, as amended
(incorporated by reference to the exhibit filed with the Registrant's
Report on Form S-8 filed on January 28, 1998).
10.8 Teleos Research 1996 Stock Plan (incorporated by reference to the
exhibit filed with the Registrant's Registration Statement on Form S-
8 filed on July 23, 1996).
10.9 Softdesk, Inc. 1992 Stock Option Plan (incorporated by reference to
the exhibit filed with the Registrant's Registration Statement on
Form S-8 filed on April 3, 1997).
10.10 Softdesk, Inc. 1993 Director Stock Option Plan (incorporated by
reference to the exhibit filed with the Registrant's Registration
Statement on Form S-8 filed on April 3, 1997).
10.11 Softdesk, Inc. 1993 Equity Incentive Plan (incorporated by reference
to the exhibit filed with the Registrant's Registration Statement on
Form S-8 on April 3, 1997).
10.12 Registrant's 1998 Employee Qualified Stock Purchase Plan
(incorporated by reference to the exhibit filed with the Registrant's
Report on Form 10-K for the fiscal year ended January 31, 1998).
10.13 Form of Support Agreement to be entered into in connection with the
acquisition of Discreet Logic Inc. (attached as Appendix C to the
Joint Proxy Statement/Prospectus) .
*11.1 Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant (incorporated by reference to the
exhibit filed with the Registrant's Report on Form 10-K for the
fiscal year ended January 31, 1998).
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Arthur Andersen & Cie.
*23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(see Exhibit 5.1)
23.4 Consent of Piper Jaffray, Inc., financial advisor to the Registrant.
23.5 Consent of Volpe Brown Whelan & Company, LLC, financial advisor to
Discreet.
24.1 Powers of Attorney (see signatures).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
99.1 The Registrant's Form of Proxy.
99.2 Discreet's Form of Proxy (English version).
99.3 Discreet's Form of Proxy (French version).
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules
The information required to be set forth herein is incorporated by reference
to the Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1998.
Schedules not incorporated by reference have been omitted because the
information required to be set forth therein is not applicable or is shown in
the financial statements, management's discussion and analysis or notes
thereto.
(c) Reports, Opinions or Appraisals Materially Relating to the Transactions
(i) Fairness Opinion of Piper Jaffray, Inc., financial advisor to the
Registrant, dated August 18, 1998 (attached as Appendix F to the Joint
Proxy Statement/Prospectus).
(ii) Fairness Opinion of Volpe Brown Whelan & Company, LLC, financial
advisor to Discreet, dated August 20, 1998 (attached as Appendix G to the
Joint Proxy Statement/Prospectus).
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into this prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this registration statement through
the date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of an
included in this registration statement when it became effective.
II-4
<PAGE>
(d) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(e) The undersigned Registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(f) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Rafael, State of
California, on this 30th day of September, 1998.
AUTODESK, INC.
By /s/ Carol A. Bartz
___________________________________
Carol A. Bartz, Chairman of the
Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carol A. Bartz and Marcia K. Sterling, jointly
and severally his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Registration Statement on Form S-4 and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said attorney-
in-fact, or their substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Carol A. Bartz Chairman of the Board and September 30, 1998
____________________________________ Chief Executive Officer
Carol A. Bartz (Principal Executive
Officer)
/s/ Steve Cakebread Vice President, Finance and September 30, 1998
____________________________________ Financial Officer
Steve Cakebread (Principal Financial and
Accounting Officer)
/s/ Mark A. Bertelsen Director September 30, 1998
____________________________________
Mark A. Bertelsen
/s/ Crawford W. Beveridge Director September 30, 1998
____________________________________
Crawford W. Beveridge
/s/ J. Hallam Dawson Director September 30, 1998
____________________________________
J. Hallam Dawson
/s/ Mary Alice Taylor Director September 30, 1998
____________________________________
Mary Alice Taylor
/s/ Morton Topfer Director September 30, 1998
____________________________________
Morton Topfer
</TABLE>
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 24, 1998, included in the Proxy Statement
of Autodesk, Inc. that is made a part of the Registration Statement (Form S-4)
and Prospectus of Autodesk, Inc.
We also consent to the incorporation by reference therein of our report
dated February 24, 1998 with respect to the financial statement schedules of
Autodesk, Inc. for the years ended January 31, 1998, 1997, and 1996 included
in the Annual Report (Form 10-K) for 1998 filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
San Jose, California
September 29,1998
<PAGE>
EXHIBIT 23.2
================================================================================
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
================================================================================
As independent chartered accountants, we hereby consent to the use of our report
dated July 31, 1998 (except with respect to the matters discussed in Note 22, as
to which the date is September 11, 1998) related to Discreet Logic Inc.'s
Consolidated Financial Statements as of June 30, 1997 and 1998 and for the
periods ended July 31, 1996, June 30, 1997 and June 30, 1998 and to all
references to our Firm, included in or made a part of Registration Statement on
Form S-4.
Arthur Andersen & Cie
Montreal, Quebec Chartered Accountants
September 30, 1998 General Partnership
<PAGE>
EXHIBIT 23.4
PIPER JAFFRAY
222 South Ninth St.
Minneapolis, MN 55402-3804
612 342-8569
Fax: 612 342-1037
800 333-6000
September 30, 1998
Autodesk, Inc.
111 McInnis Parkway
San Rafael, CA 94903
Dear Sirs:
We hereby consent to the inclusion in the Registration Statement of
Autodesk, Inc. ("Autodesk") on Form S-4, with respect to the shares of common
stock, par value $0.01 per share of Autodesk, of our opinion letter dated August
18, 1998 to the Board of Directors of Autodesk appearing as Annex F to the Joint
Proxy Statement/Prospectus which is a part of such Registration Statement, and
to references to our firm name therein. In giving such consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations adopted by the Securities and Exchange Commission thereunder,
nor do we admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Sincerely,
/s/ Piper Jaffray Inc.
PIPER JAFFRAY INC.
<PAGE>
EXHIBIT 23.5
Volpe Brown Whelan & Company, LLP
One Maritime Plaza
San Francisco, CA 94111
(415) 956-8120
Fax: (415) 274-7979
September 30, 1998
Autodesk, Inc.
111 McInnis Parkway
San Rafael, CA 94903
Dear Sirs:
We hereby consent to the inclusion in the Registration Statement of
Autodesk, Inc. ("Autodesk") on Form S-4, with respect to the shares of common
stock, par value $0.01 per share of Autodesk, of our opinion letter dated August
20, 1998 to the Board of Directors of Discreet Inc. appearing as Annex G to the
Joint Proxy Statement/Prospectus which is a part of such Registration Statement,
and to references to our firm name therein. In giving such consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations adopted by the Securities and Exchange Commission thereunder,
nor do we admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Sincerely,
/s/ Volpe Brown Whelan & Company, LLC
VOLPE BROWN WHELAN & COMPANY, LLC
<PAGE>
EXHIBIT 99.1
[FORM OF AUTODESK PROXY]
AUTODESK, INC.
SPECIAL MEETING OF STOCKHOLDERS--NOVEMBER [ ], 1998
The undersigned, having received notice of the meeting and management's
Proxy Statement therefor, and revoking all prior proxies, hereby appoint(s)
Carol A. Bartz, Eric B. Herr and Marcia K. Sterling, and each of them (with
full power of substitution), as proxies of the undersigned to attend the
Special Meeting of Stockholders of Autodesk, Inc. (the "Company") to be held
on November , 1998 and any adjourned sessions thereof, and there to vote and
act upon the following matters in respect of all shares of Common Stock of the
Company which the undersigned would be entitled to vote or act upon, with all
powers the undersigned would possess if personally present.
Attendance of the undersigned at the meeting or at any adjourned session
thereof will not be deemed to revoke this proxy unless the undersigned shall
affirmatively indicate thereat the intention of the undersigned to vote said
shares in person. If the undersigned hold(s) any of the shares of the Company
in a fiduciary, custodial or joint capacity or capacities, this proxy is
signed by the undersigned in every such capacity as well as individually.
IN THEIR DISCRETION, THE NAMED PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING, OR ANY ADJOURNMENT
THEREOF.
1. To approve the issuance of shares of Common Stock of the Company, $0.01
par value per share, to the shareholders of Discreet Logic Inc. ("Discreet")
pursuant to the Amended and Restated Agreement and Plan of Acquisition and
Amalgamation dated as of September 23, 1998 among the Company, Autodesk
Development B.V., 9066-9771 Quebec Inc. ("Amalgamation Sub"), Autodesk
Development Canada Inc., 9066-9854 Quebec Inc. ("Autodesk Quebec") and
Discreet (the "Agreement") providing for the amalgamation of Amalgamation Sub,
Autodesk Quebec and Discreet under the laws of the Province of Quebec.
FOR [_] AGAINST [_] ABSTAIN [_]
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
UNDERSIGNED. IF NO DIRECTION IS GIVEN WITH RESPECT TO ANY ELECTION TO OFFICE
OR ANY PROPOSAL SPECIFIED ABOVE, THIS PROXY WILL BE VOTED FOR SUCH ELECTION TO
OFFICE OR PROPOSAL.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
-------------------------------------
-------------------------------------
Signature(s)
Dated: ______________________________
Please sign name(s) exactly as appearing hereon. When signing as attorney,
executor, administrator or other fiduciary, please give your full title as
such. Joint owners should each sign personally. If a corporation, sign in full
corporate name, by authorized officer. If a partnership, please sign in
partnership name, by authorized persons.
<PAGE>
EXHIBIT 99.2
[FORM OF DISCREET PROXY]
DISCREET LOGIC INC.
PROXY
SOLICITED BY MANAGEMENT FOR THE SPECIAL GENERAL MEETING
OF SHAREHOLDERS TO BE HELD ON NOVEMBER [ ], 1998
The undersigned, shareholder of DISCREET LOGIC INC. (the "Company"), hereby
appoints Richard J. Szalwinski failing whom, Francois Plamondon, or instead of
the foregoing as the proxyholder of the undersigned to attend
and act for and on behalf of the undersigned at the Special General Meeting of
Shareholders of the Company to be held on November [ ], 1998, and at any
adjournment thereof, to the same extent and with the same power as if the
undersigned were present in person and with authority to vote and act in the
proxy holder's discretion, unless herein otherwise specified and TO VOTE AND
ACT IN THE SAID PROXY HOLDER'S DISCRETION WITH RESPECT TO AMENDMENTS OR
VARIATIONS TO MATTERS REFERRED TO IN THE NOTICE TO THE MEETING AND WITH
RESPECT TO OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING.
The said proxy holder is specifically directed to vote or withhold from
voting the shares registered in the name of the undersigned as indicated
below:
VOTE FOR [_] VOTE AGAINST [_] a special resolution approving the
amalgamation of 9066-9771 Quebec Inc., 9066-9854 Quebec Inc. and Discreet
Logic Inc., the Amended and Restated Agreement and Plan of Acquisition and
Amalgamation dated as of September 23, 1998 entered into by and among
Autodesk, Inc., 9066-9771 Quebec Inc., 9066-9854 Quebec Inc., Autodesk
Canada Inc., Autodesk Development B.V. and Discreet Logic Inc., the
Amalgamation Agreement dated as of September 23, 1998 entered into and by
among 9066-9771 Quebec Inc., 9066-9854 Quebec Inc., Discreet Logic Inc. and
Autodesk, Inc., as intervenant, and confirming special by-law 1998-1
relating to the amalgamation involving 9066-9771 Quebec, 9066-9854 Quebec
Inc. and Discreet Logic Inc., the full text of which is set out in Appendix
E-2 to the accompanying joint proxy statement/prospectus of Autodesk, Inc.
and Discreet Logic Inc.
Date:___________ Signature:____________________________________________________
Name (Please print): _______________________________________________________
Notes:
(1) This proxy must be executed by the shareholder or his/her attorney
authorized in writing or, if the shareholder is a corporation, under the
corporate seal or by an officer or attorney thereof duly authorized. Joint
holders should each sign. Executors, administrators, trustees, or other
representatives should so indicate when signing. If undated, this proxy is
deemed to bear the date it was mailed to the shareholder.
(2) A SHAREHOLDER MAY APPOINT AS PROXY HOLDER A PERSON (WHO NEED NOT BE A
SHAREHOLDER) OTHER THAN THE PERSONS DESIGNATED IN THIS PROXY TO ATTEND AND
ACT ON HIS/HER BEHALF AT THE MEETING BY INSERTING THE NAME OF SUCH OTHER
PERSON IN THE SPACE PROVIDED OR BY COMPLETING ANOTHER PROPER PROXY.
(3) The shares represented by this proxy will, on a show of hand or any ballot
that may be called for, be voted or withheld from voting in accordance
with instructions given by the shareholder; IN THE ABSENCE OF ANY CONTRARY
INSTRUCTIONS, THIS PROXY WILL BE VOTED "FOR" THE ITEMIZED MATTER.
<PAGE>
EXHIBIT 99.3
LOGIQUE DISCRETE INC.
PROCURATION
SOLLICITEE PAR LA DIRECTION POUR L'ASSEMBLEE GENERALE SPECIALE DES
ACTIONNAIRES
QUI SE TIENDRA LE [ ] NOVEMBRE 1998
Le soussigne, actionnaire de LOGIQUE DISCRETE INC. (la Societe) constitue
par les presentes Richard J. Szalwinski ou, a defaut, Francois Plamondon, ou a
leur place, son fonde de pouvoir, pour assister et agir en
son nom a l'assemblee generale speciale des actionnaires de la Societe qui
aura lieu le [ ] novembre 1998 ou a tout ajournement de cette assemblee. Il
lui confere tous les pouvoirs qu'il pourrait exercer s'il etait present a une
telle assemblee ou reprises, et avec autorite pour le fonde de pouvoir de
voter selon sa discretion a moins de mentions specifiques incluses a la
presente et LE FONDE DE POUVOIR POURRA VOTER ET AGIR SELON SA DISCRETION QUANT
AUX MODIFICATIONS OU AUX VARIATIONS APPORTEES AUX QUESTIONS ENONCEES DANS
L'AVIS DE CONVOCATION A L'ASSEMBLEE ET QUANT A TOUTE AUTRE QUESTION DUMENT
SOUMISE A L'ASSEMBLEE.
Le fonde de pouvoir est par les presentes specifiquement autorise a exercer
cette procuration afin de voter ou de s'abstenir de voter les actions qui sont
inscrites au nom du soussigne comme suit:
EN FAVEUR [_] CONTRE [_] d'une resolution speciale produite a l'annexe E-2
de la circulaire conjointe de sollicitation de procurations et prospectus
par la direction d'Autodesk, Inc. et de Logique Discrete Inc. approuvant la
convention intitulee Amended and Restated Agreement and Plan of Acquisition
and Amalgamation datee du 23 septembre 1998 intervenue entre Autodesk,
Inc., 9066-9771 Quebec Inc., 9066-9854 Quebec Inc., Autodesk Canada Inc.,
Autodesk Development B.V. et Logique Discrete Inc., la convention de fusion
datee du 23 septembre 1998 intervenue entre Logique Discrete Inc., 9066-
9854 Quebec Inc., 9066-9771 Quebec Inc. et Autodesk, Inc., a titre
d'intervenant, et confirmant le reglement special 1998-1 ayant trait a la
fusion impliquant 9066-9771 Quebec Inc., 9066-9854 Quebec Inc. et Logique
Discrete Inc.
Date:__________ Signature: ___________________________________________________
Nom (en caracteres d'imprimerie): __________________________________________
Notes:
(1) Cette procuration doit etre signee par l'actionnaire ou par son mandataire
autorise par ecrit. Si l'actionnaire est une societe, la procuration doit
porter son sceau ou etre signee par un dirigeant ou un mandataire dument
autorise. Les codetenteurs doivent tous signer. Les executeurs,
administrateurs, fiduciaires et autres representants doivent faire mention
de leur fonction lorsqu'ils signent. Une procuration non datee est reputee
porter la date de son envoi par la poste a l'actionnaire.
(2) UN ACTIONNAIRE PEUT NOMMER COMME FONDE DE POUVOIR POUR ASSISTER ET AGIR EN
SON NOM A L'ASSEMBLEE UNE PERSONNE (QUI N'A PAS A ETRE ACTIONNAIRE) AUTRE
QUE LES PERSONNES DESIGNEES DANS CETTE PROCURATION EN INSCRIVANT LE NOM DE
CETTE PERSONNE DANS L'ESPACE PREVU OU EN REMPLISSANT UNE AUTRE PROCURATION
APPROPRIEE.
(3) Lors d'un vote a main levee ou d'un scrutin, les voix afferentes aux
actions representees par cette procuration sont exprimees, selon les
directives donnees par l'actionnaire; en l'absence de directives
contraires, LES VOIX AFFERENTES AUX ACTIONS SONT EXPRIMEES EN FAVEUR DE
LA QUESTION SPECIFIEE AUX PRESENTES.
