<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended April 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________ to _________
Commission file number 0-26100
DISCREET LOGIC INC.
(Exact name of registrant as specified in its charter)
Quebec 98-0150790
------ ----------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
5505 Boulevard St. Laurent, Suite 5200
Montreal, Quebec, Canada H2T 1S6
--------------------------------
(Address of principal executive offices)
(Zip code)
Registrant's telephone number, including area code: (514) 272-0525
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
27,644,906 shares of the registrant's Common shares, without par value, were
outstanding as of June 13, 1996.
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended April 30, 1996
CONTENTS
Item Number Page
- - ----------- ----
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Balance Sheets: 3
July 31, 1995 and April 30, 1996
Statements of Operations: 4
Three months ended April 30, 1995 and 1996
Nine months ended April 30, 1995 and 1996
Statements of Cash Flows: 5
Nine months ended April 30, 1995 and 1996
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Certain Factors That May Effect Future Results 15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on 8-K 17
-2-
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands of U.S. dollars, except for share data)
<TABLE>
<CAPTION>
July 31, April 30,
1995 1996
-------- --------
ASSETS
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 40,987 $33,868
Accounts receivable (less reserves for 15,019 19,623
uncollectible accounts)
Inventory -
Resale 6,361 17,820
Demonstration 3,201 1,640
Income taxes receivable - 4,694
Other current assets 1,752 2,617
-------- --------
67,320 80,262
Building held for sale - 940
Property and equipment, net 6,759 15,448
Other assets 2,779 6,090
-------- --------
$76,858 $102,740
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $17,924 $ 29,101
Deferred revenue 3,808 5,002
Income taxes payable 2,579 -
Current portion of obligation under 250 -
capital leases
Customer deposits 811 996
Due to related parties 101 85
-------- --------
25,473 35,184
Deferred income taxes 1,261 -
-------- --------
Total liabilities 26,734 35,184
-------- --------
Shareholders' equity:
Preferred shares - no par value
Authorized - unlimited number of shares
Issued and outstanding - none
Common shares
Authorized - unlimited number of shares
Issued and outstanding 25,166,860 shares
at July 31, 1995 and 27,639,114
at April 30, 1996 43,232 78,790
Retained earnings (deficit) 8,258 (11,284)
Share subscriptions receivable (1,645) -
Cumulative translation adjustment 279 50
-------- --------
Total shareholders' equity 50,124 67,556
-------- --------
$76,858 $102,740
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF operations
(All amounts in thousands of U.S. Dollars, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
---------------------- ---------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues $ 17,579 $ 14,677 $ 42,329 $ 64,946
Cost of revenues 8,189 12,008 19,809 36,324
-------- -------- -------- --------
Gross profit 9,390 2,669 22,520 28,622
-------- -------- -------- --------
Operating expenses:
Research and development (net of tax credits) 1,086 6,567 2,394 12,461
Sales and marketing 3,346 7,224 7,633 18,810
General and administrative 1,308 4,016 3,221 7,580
Charge for purchased research and
development - - - 8,500
-------- -------- -------- --------
Total operating expenses 5,740 17,807 13,248 47,351
-------- -------- -------- --------
Operating income (loss) 3,650 (15,138) 9,272 (18,729)
Other income (expense), net (191) (1,334) (122) 437
-------- -------- -------- --------
Income (loss) before income taxes and
minority interest 3,459 (16,472) 9,150 (18,292)
Provision (benefit) for income taxes 1,453 (1,363) 3,843 1,249
-------- -------- -------- --------
Net income (loss) before minority interest 2,006 (15,109) 5,307 (19,541)
Minority interest - - 14 -
-------- -------- -------- --------
Net income (loss) $ 2,006 $(15,109) $ 5,293 $(19,541)
-------- -------- -------- --------
Net income (loss) per common share $ .08 $ (.55) $ .21 $ (.74)
======== ======== ======== ========
Weighted average common shares outstanding 24,559 27,398 25,413 26,557
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands of U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
------------------
1995 1996
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,293 $(19,541)
Adjustments to reconcile net income
(loss) to cash provided
by (used in) operating activities -
Depreciation and amortization 865 4,143
Deferred income taxes 181 (1,592)
Increase in minority interest 14 -
Gain on sale of fixed assets (5) -
Write off of in process research and
development - 8,500
Changes in assets and liabilities -
Accounts receivable (7,186) (4,604)
Inventory (3,945) (8,960)
Other current assets (641) (865)
Accounts payable and accrued expenses 6,265 10,832
Deferred revenue 2,220 1,194
Income taxes payable 2,855 (7,273)
Customer deposits (596) 185
Due to related parties (150) (16)
------ ------
Net cash provided by (used in)
operating activities 5,170 (17,997)
------ ------
Cash flows from investing activities:
Purchase of property and equipment (3,540) (13,678)
Proceeds from disposal of property and
equipment 80 -
Increase in other assets (867) (200)
Cash paid for COSS/IMP acquisition and
related costs - (5,545)
------ ------
Net cash used in investing activities (4,327) (19,423)
------ ------
Cash flows from financing activities:
Proceeds from issuance of common
shares, net of issuance costs' - 27,382
Proceeds from subscription receivable - 1,645
Proceeds from option exercises 107 1,119
Proceeds from employee stock purchase plan - 302
Payment of capital lease obligations (835) (250)
Borrowings under demand line of credit 1,403 -
------ ------
Net cash provided by financing activities 675 30,198
------ ------
Foreign exchange effect on cash (22) 103
------ ------
Increase (decrease) in cash and cash equivalents 1,496 (7,119)
Cash and cash equivalents, beginning of period 826 40,987
------ ------
Cash and cash equivalents, end of period $ 2,322 $ 33,868
------ ------
Supplemental disclosure of cash flow information:
Interest paid during the period $ 57 $ 264
------ ------
Income taxes paid during the period $ 98 $ 7,932
------ ------
In connection with the acquisition of
COSS/IMP in October 1995, the following non
cash transaction occurred:
Fair value of assets acquired $ $ 12,408
Liabilities assumed - (344)
Cash acquired - (519)
Issuance of 300,000 shares of Common Stock - (6,000)
------ ------
Cash paid for acquisition, net of cash acquired $ - $ 5,545
====== ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by Discreet Logic Inc. ("Discreet Logic" or "the Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read
in conjunction with the consolidated financial statements and notes thereto
for the year ended July 31, 1995. The accompanying consolidated condensed
financial statements reflect all adjustments (consisting solely of normal,
recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of results for the interim periods presented. The
results of operations for the three and nine month periods ended April 30,
1996 are not necessarily indicative of the results to be expected for the
full fiscal year.
(2) Significant Accounting Policies
a) Net Income (Loss) per Common Share
Net income per common share is computed by dividing net income by the
weighted average number of common and common equivalent shares outstanding
during the period, computed in accordance with the treasury stock method.
Net loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Pursuant to
the requirements of the Securities and Exchange Commission, common shares
issued by the Company during the 12 months immediately preceding the
initial public offering (the 12-month period subsequent to June 1, 1994),
plus options granted during the same period, have been included in the
calculation of weighted average number of common shares for the three and
nine month periods ending April 30, 1995 using the treasury stock method at
the initial public offering price of $10.50 per share.
b) Translation of Foreign Currencies
The accounts of the Company are translated in accordance with Statement of
Financial Accounting Standards 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 were translated from their respective 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 period, and revenues and expenses are translated
at the weighted average exchange rates during the period. 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.
Beginning August 1, 1995, the Company changed the functional currency of
its foreign subsidiaries from the Canadian dollar to their respective local
currencies. Accordingly, cumulative translation gain (losses) were included
as a separate component of shareholder's equity in the consolidated balance
sheets. For periods prior to August 1, 1995, foreign currency translation
gain (losses) were included in the consolidated statement of operations
since the functional currency of the Company's foreign subsidiaries was the
Canadian dollar. The impact on the consolidated financial statements of the
change
6
<PAGE>
of the functional currency of the Company's foreign subsidiaries was
not significant. In the third fiscal quarter of 1996, the Company recorded
transaction losses of approximately $1.3 million which is classified in
Other Income (Expense).
c) 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 July 31, 1995 and April
30, 1996. The Company applies SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
d) Inventory
Inventory consists primarily 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.
(3) Shareholders' Equity
a) Initial Public Offering
In July 1995, the Company closed its initial public offering of 4,189,248
Common Shares at $10.50 per share, resulting in proceeds of approximately
$40,803,000 net of issuance costs and their related tax effect.
b) Share Split
On October 16, 1995, the Company effected a 2-to-1 share split of its
Common Shares with the additional shares delivered on November 6, 1995 to
holders of record on October 16, 1995. All Common Shares have been adjusted
retroactively to give effect to the split.
c) Secondary offering
In December 1995, the Company completed a secondary offering of 970,120
common shares at a per share price of $30.25, resulting in proceeds of
approximately $28,158,000 net of issuance costs and their related tax
effects.
(4) Acquisitions and Investments
a) Brughetti Corporation
On May 26, 1995, the Company acquired substantially all the technology and
other assets of Brughetti Corporation (OBrughettiO), a Canadian
corporation. The purchase price was CDN$1,000,000 (or approximately
$741,000) in cash of which CDN$600,000 (or approximately $441,000) was paid
upon closing of the acquisition and CDN$400,000 (or approximately $300,000)
was paid in July 1995. In addition, the Company has agreed to pay up to an
additional $5,500,000 as contingent purchase price payable in cash or
securities of the Company, at the sole option of the Company. The
contingent purchase price is payable in three annual installments,
beginning October 1996, and is based upon a percentage of the amount by
which revenues derived from future sales of products and technologies
purchased from Brughetti exceed certain minimum annual revenues. In the
event that the revenues, as defined, exceed certain minimum annual revenue
levels in fiscal 1996, 1997 and 1998, the contingent consideration payable
would be up to $1,500,000, $2,000,000 and $2,000,000 for fiscal 1996, 1997
and 1998, respectively. If the minimum annual revenue levels for any fiscal
year are not reached, no payments are due for that year, provided, however,
that the second and third payments are subject to
7
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upward adjustment in the event that the initial revenue thresholds are not
met but revenue thresholds related to the subsequent fiscal years are
exceeded. In no event, however, will the contingent consideration payable
exceed an aggregate of $5,500,000. The acquisition was accounted for as a
purchase and accordingly the initial purchase price and acquisition costs
were allocated to the assets acquired which consisted of approximately
$102,000 of accounts receivable, $105,000 of property and equipment and
$534,000 of acquired technology. In addition, in accordance with APB No.
16, additional consideration paid upon the achievement of the performance
criteria, if any, will be recorded as additional purchase price at such
time, allocated to the acquired technology and amortized over their
remaining estimated useful life.
b) COSS/IMP
On October 24, 1995, the Company acquired all of the outstanding shares of
Computer-und Serviceverwaltungs AG, located in Innsbruck, Austria (OCOSSO)
and certain assets of IMP Innovative Medientechnik-und Planungs-GmbH,
located in Geltendorf/Kaltenberg, Germany (OIMPO) related to the research,
development, manufacturing, marketing, sale, distribution or procurement of
real-time broadcast animation products, including software. The purchase
price for the shares of COSS was $3,000,000 in cash plus 300,000 Common
Shares of the Company. In addition, the Company has agreed to pay an
additional $500,000 in cash as contingent purchase price in the event COSS
receives orders for and licenses a certain number of VAPOUR systems by
April 1996, as defined. The purchase price for the IMP assets was
$2,000,000 in cash. As at April 30, 1996 the contingent purchase price
became due and was, therefore, accrued for in the accounts of the Company.
The acquisition was accounted for as a purchase and accordingly the initial
purchase price and acquisition costs were allocated to the assets acquired
which consisted of approximately $8,500,000 of in process research and
development and charged to operations in the first quarter of fiscal 1996,
and approximately $3,200,000 was allocated to intangible assets, which
include goodwill and acquired technology, and will be amortized on a
straight-line basis over their estimated lives of 5-7 years. These
allocations represent the fair values determined by an independent
appraisal. The appraisal incorporated proven valuation procedures and
techniques in determining the fair value of each intangible asset. The
amount allocated to in process research and development relates to projects
that had not yet reached technological feasibility and that, until
completion of the development, have no alternative future use. These
projects will require substantial high risk development and testing by the
Company prior to reaching technological feasibility.
Unaudited pro forma information has not been presented as amounts are
immaterial.
c) Essential Communications Corporation
On April 15, 1996, the Company purchased newly issued Series B convertible,
voting, preferred shares of a privately held company, Essential
Communications Corporation, representing approximately 20% of the voting
shares. The $2,500,000 investment has been expensed in the third fiscal
quarter of 1996 as research and development expense due to the uncertainty
regarding the realizability of the investment in the preferred shares.
(5) 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
$1,755,000). Additionally, in December 1995, the Company purchased land and
an office building in Montreal for CDN$1,730,000 (or approximately
$1,250,000). In the quarter ended April 30, 1996, the carrying value of the
Montreal building was written down to estimated fair market value.
8
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(6) Related Party Transactions
The Company has recorded revenue of $2,304,000 for the nine month period
ended April 30, 1996, from a company with which the Company's Chairman and
Acting Chief Executive Officer is affiliated. At April 30, 1996, the
Company had a trade accounts receivable of $1,212,000 from such company.
The Company has recorded revenue of $1,138,000 for the three and nine month
periods ended April 30, 1996, from a company with which a member of the
Company's board of directors is affiliated. At April 30, 1996, the Company
had a trade accounts receivable of $1,216,000 from such company.
(7) Subsequent Events
On May 29, 1996, a lawsuit entitled Sandra Esner and Jerry Krim, On Behalf
of Themselves and All Others Similarly Situated, vs. [...]Discreet Logic
Inc., et al., case no. 978584, was filed in the Superior Court of the
State of California, City and County of San Francisco. Named as defendants
are the Company, certain of the Company's former and existing directors,
officers, and affiliates, and certain underwriters and financial analysts.
The plaintiffs purport to represent a class of all persons who purchased
the Company's common stock between September 13, 1995, and May 1, 1996. The
complaint alleges violations of California law through material
misrepresentations and omissions. The Company believes the allegations in
the complaint are without merit and intends to defend the lawsuit
vigorously.
On June 13, 1996, a lawsuit entitled Bruce Friedberg, On Behalf of Himself
and All Others Similarly Situated, vs. Discreet Logic Inc., et al., civ no.
96-11232-EFH, was filed in the United States District Court, District of
Massachusetts. Named as defendants are the Company and certain of the
Company's former and existing directors and officers. The plaintiffs
purport to represent a class of all persons who purchased the Company's
common stock between November 14, 1995, and February 13, 1996. The
complaint alleges violations of United States Federal Securities law
through material misrepresentations and omissions. The Company believes the
allegations in the complaint are without merit and intends to defend the
lawsuit vigorously.
Although the Company denies all material allegations of these complaints
and intends to vigorously defend against all claims brought against it, the
ultimate outcome, including amount of possible loss, if any, of litigation
cannot be determined at this time. No provision for any liability that may
result from this litigation has been made in the accompanying Condensed
Consolidated Financial Statements. There can be no assurance that the
ultimate outcome of these matters will not have a material adverse effect
on the Company's business and results of operations.
9
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DISCREET LOGIC INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Discreet Logic develops, assembles, markets and supports non-linear, digital
image processing systems for creating, editing and compositing special visual
effects for film and video. The Company's systems are utilized by creative
professionals in production and post-production to create special visual effects
for various applications, including feature films, television programs,
commercials, music videos, interactive game production and broadcasting.
Recent Developments
For the three months ended April 30, 1996, the Company reported a net loss of
$15,109,000 on revenues of $14,677,000. In reviewing its results of operations
for the quarter, the Company has identified a number of difficulties and
developments facing its business, including: (1) softening of market demand in
its core high end visual effects market segment, (2) delays by the Company in
introducing new products aimed at new market segments, (3) inventory build-up in
anticipation of continued high sales in its core market segment and high growth
in new market segments, (4) expense and headcount build-up in anticipation of
continued high sales in its core market segment and high growth in new market
segments, (5) the continued disruption caused by platform changes by the
Company's key supplier, and (6) greater use of third party financing by
customers.
During its third fiscal quarter, the Company experienced revenues significantly
below management's expectations, primarily as a result of the first two factors
above. During the third fiscal quarter, the Company entered the high end
editing market with its new product FIRE. Initial shipments of FIRE occurred at
the end of the quarter, however, the Company did not record revenues from these
shipments because, subsequent to the end of the quarter, the Company determined
that certain upgrades to be shipped during the fourth fiscal quarter were
required for customers to achieve full functionality. As a result of not
recording FIRE revenues during the quarter, revenues fell short of the Company's
earlier May 1, 1996 announcement regarding anticipated results of operations.
Revenues from the third quarter FIRE shipments are expected to be recorded
during the Company's fourth fiscal quarter.
The Company's third fiscal quarter financial results include certain charges
that reflect the recent developments, including increased inventory reserves by
$3.0 million to reflect estimated net realizable value, primarily as a result of
platform changes by its key supplier, and increased accounts receivable reserves
by $1.6 million primarily to reflect certain recourse provisions in and other
risks associated with certain third party customer financing arrangements
entered into in the third fiscal quarter. In addition, during the quarter, the
Company incurred research and development expenses of $2.5 million associated
with an investment in a company developing complementary technology.
In response to the Company's third quarter operating results and the other
developments described above, the Company is currently developing a
restructuring plan which will include, among other actions, closing and
consolidation of several Company locations, particularly R&D locations; and
reductions of operating expenses and headcount designed to reflect the Company's
current revenue levels. The Company has begun implementation of certain
actions, particularly the consolidation of its Stone + Wire operations in
Cambridge, Massachusetts into its Montreal operations and certain workforce
reductions; however the plan is not yet completed and the plan is expected to be
finalized during the fourth quarter. The Company anticipates that the plan,
which will include both long and short term objectives will be implemented
during the fourth fiscal quarter and throughout fiscal 1997. As a result of the
plan, the Company expects to take a restructuring charge during the fourth
fiscal quarter. The charge is currently estimated to be approximately $12
million, but the actual amount could increase or decrease upon final
determination of the plan.
10
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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>
Three Months Ended Nine Months Ended
April 30, April 30,
1995 1996 1995 1996
------------------ -----------------
<S> <C> <C> <C> <C>
Total revenues................... 100% 100% 100% 100%
Cost of revenues................. 47 82 47 56
--- --- --- ---
Gross profit................... 53 18 53 44
--- --- --- ---
Operating expenses:
Research and development....... 6 45 6 19
Sales and marketing............ 19 49 18 29
General and administrative..... 8 27 7 12
Charge for purchased
research and development...... - - - 13
--- --- --- ---
Total operating expenses....... 33 121 31 73
--- --- --- ---
Operating income (loss)........ 20 (103) 22 (29)
Other income (expense), net...... (1) (9) 0 1
--- --- --- ---
Income (loss) before income 19 (112) 22 (28)
taxes and minority interest.....
Provision (benefit) for
income taxes.................... 8 (9) 9 2
--- --- --- ---
Net income (loss) before
minority interest............... 11 (103) 13 (30)
Minority interest................ 0 - 0 -
--- --- --- ---
Net income (loss).............. 11% (103)% 13% (30)%
=== === === ===
</TABLE>
Three Months and Nine Months Ended April 30, 1996 and 1995
Total Revenues. Total revenues were $14,677,000 for the three months ended April
30, 1996, a decrease of 17% from $17,579,000 for the same period in fiscal 1995.
Total revenues were $64,946,000 for the nine months ended April 30, 1996, an
increase of 53% from $42,329,000 for the same period in fiscal 1995. Total
revenues for the three months and nine months ended April 30, 1996 were
significantly below management's expectations, resulting in an operating loss
for the three months and nine months ended April 30, 1996 of $15,138,000 and
$18,729,000 compared to operating income of $3,650,000 and $9,272,000 for the
three months and nine months ended April 30, 1995, respectively. The revenue
shortfall in the quarter was due primarily to softening of market demand in the
high end visual effects market segment and delays by the Company in introducing
new products aimed at new market segments. The revenue shortfall for the nine
month period was also due to an announcement by Silicon Graphics Inc. ("SGI") of
a new ONYX workstation approximately two weeks prior to January 31, 1996 which
caused the Company to discount its then current inventory of SGI workstations
and defer revenue on upgrades to the new SGI workstation. The decrease in
revenues was a result of a decline in sales of FLAME to $7,213,000 and
$34,917,000, for the three month and nine month periods ending April 30, 1996,
respectively, a decline of 48% and 2% from $14,610,000 and $35,536,000 for the
same periods in 1995, respectively. The decrease in FLAME sales was offset by
increased sales of FLINT systems, including software and hardware, to $3,185,000
and $9,712,000, for the three month and nine month periods ending April 30,
1996, respectively, an increase of 108% and 205% from $1,527,000 and $3,644,000,
for the same periods in 1995, respectively. This continued growth in FLINT
sales is primarily a result of the release of the Indigo/2/ IMPACT by SGI, the
Company's related release of the upgraded FLINT software, and continued market
penetration. Although FLINT sales increased during the fiscal 1996 periods,
FLINT revenues were less than management's expectations primarily due to the
unavailability of SGI Indigo/2/ IMPACT texture memory to the Company's
11
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distributors. In addition, sales increased in the three months ended April 30,
1996 as a result of shipments of INFERNO systems and software, which were not
sold in the three months ended April 30, 1995 and sales increased in the nine
months ended April 30, 1996 as a result of shipments of INFERNO, VAPOUR, and
FROST systems and software, which were not sold in the nine months ending April
30, 1995. Full commercial shipments of INFERNO systems began in October 1995
(including the recognition in October 1995 of approximately $1,000,000 of
previously deferred revenue of INFERNO software). The VAPOUR and FROST
technology was purchased in the October 1995 acquisition of COSS/IMP. Hardware
revenues, consisting primarily of the resale of SGI workstations and assembly
and sale of disk arrays and other peripherals, constituted 52% and 65% of total
revenues for the three months ended April 30, 1996 and 1995, respectively, of
which 35% and 37% of total revenues, respectively, were attributable to SGI
hardware. Hardware revenues constituted 55% and 61% of total revenues for the
nine month periods ended April 30, 1996 and 1995, respectively, of which 37% and
40% of total revenues, respectively, were attributable to SGI hardware. This
decrease in hardware revenues as a percentage of total revenues was primarily
due to a higher product mix of FLINT software only sales for the three months
ended April 30, 1996. The decrease for the nine months ended April 30, 1996 was
primarily due to a higher percentage of revenues during this period derived from
software only sales and the recognition of the previously deferred INFERNO
software revenue as noted above.
Maintenance revenues were $1,733,000 (12% of total revenues) for the three
months ended April 30, 1996, an increase of 148% from $699,000 (4% of total
revenue) for the same period in fiscal 1995 and were $4,548,000 (7% of total
revenues) for the nine months ended April 30, 1996, an increase of 204% from
$1,494,000 (4% of total revenue) for the same period in fiscal 1995. Maintenance
revenues increased due to the increased installed base of the Company's FLAME
and FLINT systems in the nine month period ended April 30, 1996. Other revenues
were $851,000 (6% of total revenues) for the three months ended April 30, 1996,
a decrease of 15% from $743,000 (4% of total revenue) for the same period in
fiscal 1995 and were $3,549,000 (6% of total revenues) for the nine months ended
April 30, 1996, an increase of 114% from $1,655,000 (4% of total revenue) for
the same period in fiscal 1995. Other revenues for all periods consisted
primarily of rentals, systems integration, and training services provided to
customers. The decrease in other revenues for the three months ended April 30,
1996 was attributable to decreased rentals of the Company's FLAME and FLINT
systems in this quarter and increased rentals in the nine month period ended
April 30, 1996 due to increased sales and rentals of the Company's FLAME and
FLINT systems in the first six months of the fiscal year.
Revenues from customers outside of North America were $6,694,000 for the three
months ended April 30, 1996, an increase of 22% from $5,485,000 for the same
period in fiscal 1995. These revenues accounted for approximately 46% and 31%,
respectively, of total revenues for these periods. Revenues from customers
outside of North America were $32,930,000 for the nine months ended April 30,
1996, an increase of 90% from $17,340,000 for the same period in fiscal 1995.
These revenues accounted for approximately 51% and 41%, respectively, of total
revenues for the nine month periods. During fiscal 1995 and into fiscal 1996,
the Company expanded its direct sales force and distribution channels in Europe
and the Pacific Rim at a greater rate than in North America which resulted in
revenues from customers outside of North America increasing at a higher rate
than revenues from customers inside North America. The Company expects that
revenues from customers outside of North America will continue to account for a
substantial portion of its revenues.
Cost of Revenues. Cost of revenues consists primarily of the cost of hardware
sold, cost of hardware service contracts, cost of service personnel and the
computing, benefits and other administrative costs allocated to such personnel
and the provision for inventory reserves. Cost of revenues was $12,008,000 for
the three months ended April 30, 1996, as compared to $8,189,000 for the same
period in fiscal 1995, an increase of 47%. Cost of revenues was 82% and 47% of
total revenues for the fiscal 1996 and 1995 periods, respectively. The increase
as a percentage of total revenues was due to fixed costs in cost of sales being
a larger percentage of revenues in the 1996 quarter due to the shortfall in
expected revenues. In addition, the Company recorded a $3,000,000 inventory
reserve in the quarter ended April 30, 1996 to reflect estimates of net
realizable value, primarily as a result of platform changes by its key supplier.
Cost of revenues was $36,324,000 for the nine months ended April 30, 1996, as
compared to $19,809,000 for the same period in fiscal 1995, an increase of 83%.
Cost of revenues was 56% and 47% of total revenues for the nine month fiscal
1996 and 1995 periods, respectively. The increase as a percentage of total
revenues for the nine month period resulted from, in fiscal 1996, an increase in
software only sales as a percentage of revenues during the three months ended
12
<PAGE>
October 31, 1996 offset against lower margins on SGI workstations during the
three months ended January 31, 1996, fixed costs being a higher percentage of
total revenues and the $3,000,000 inventory reserve recorded during the three
months ended April 30, 1996.
Research and Development. Research and development expenses consist primarily of
the cost of research and development personnel and the facilities, computing,
benefits and other administrative costs allocated to such personnel.
Expenditures for research and development, after deducting Canadian federal and
provincial tax credits, were $6,567,000 for the three months ended April 30,
1996, an increase of 505% from $1,086,000 for the same period in fiscal 1995.
Expenditures for research and development, after deducting Canadian federal and
provincial tax credits, were $12,461,000 for the nine months ended April 30,
1996, an increase of 421% from $2,394,000 for the same period in fiscal 1995.
Research and development expenses, after deducting tax credits, were 45% and 6%
of total revenues for the three months ended April 30, 1996 and 1995,
respectively and 19% and 6% of total revenues for the nine months ended April
30, 1996 and 1995, respectively. Canadian federal and provincial tax credits
were $709,000 and $343,000 for the nine month periods ended April 30, 1996 and
1995. The increases in expenditures for both of these periods were due primarily
to the hiring of additional software engineers to develop and enhance the
Company's existing products and to develop new products, as well as an increase
in depreciation due to additional purchases of development equipment required
for the additional personnel. In connection with the investment in Essential
Communications Corporation, the Company expensed $2,500,000 of research and
development expense in its third fiscal quarter of 1996 due to the uncertainty
regarding the realizability of the investment in the preferred shares. This
write-off represented approximately 4% of total revenues for the nine months
ended April 30, 1996. See Note 4(c) to Notes to the Company's Condensed
Consolidated Financial Statements. Research and development costs are expensed
as incurred. Software development costs are considered for capitalization once
technical feasibility has been established. The Company 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.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions and related benefits, facilities and administrative costs allocated
to the Company's sales and marketing personnel and tradeshow expenses. Sales and
marketing expenses were $7,224,000 for the three months ended April 30, 1996, an
increase of 116% from $3,346,000 for the same period in fiscal 1995. Sales and
marketing expenses were $18,810,000 for the nine months ended April 30, 1996, an
increase of 146% from $7,633,000 for the same period in fiscal 1995. Sales and
marketing expenses as a percentage of total revenues were 49% and 19% for the
three months ended April 30, 1996 and 1995, respectively and 29% and 18% for the
nine months ended April 30, 1996 and 1995, respectively. These increases
resulted primarily from the continued expansion of the Company's direct sales
organization, including the opening of domestic sales offices and foreign
subsidiaries, the payment of sales commissions on increasing sales volumes and
increased presence at major tradeshows.
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 the Company and
reserves for potentially uncollectible accounts receivable. General and
administrative expenses were $4,016,000 for the three months ended April 30,
1996, an increase of 207% from $1,308,000 for the same period in fiscal 1995.
General and administrative expenses were $7,580,000 for the nine months ended
April 30, 1996, an increase of 135% from $3,221,000 for the same period in
fiscal 1995. These increases resulted from hiring the Company's former President
and Chief Executive Officer in November 1994 and the Company's Vice President
and Chief Financial Officer in February 1995, as well as additional finance,
accounting and administrative personnel, as the Company's sales increased. The
increase also reflected general salary increases, increased occupancy expenses
as the Company hired additional staff and increased professional fees and
insurance premiums associated with the growth of the Company's infrastructure.
In addition, the Company provided approximately $1,600,000 in reserves for
potentially uncollectible accounts receivable in the quarter ended April 30,
1996 to reflect certain recourse provisions in and other risks associated with
certain third party financing arrangements implemented in the third fiscal 1996
quarter. In addition, the Company reduced the carrying value of a building
purchased in Montreal by CDN$500,000 (approximately $365,000) to reflect the
amount expected to be realized upon sale. General and administrative expenses as
a percentage of total
13
<PAGE>
revenues were 27% and 8% for the three months ended April 30, 1996 and 1995,
respectively and 12% and 7% for the nine months ended April 30, 1996 and 1995,
respectively.
Charge for Purchased Research and Development. In connection with the COSS/IMP
acquisition, the Company expensed $8,500,000 of in process research and
development. This write-off represented approximately 13% of total revenues for
the nine months ended April 30, 1996. See Note 4(b) to Notes to the Company's
Condensed Consolidated Financial Statements.
Other Income (Expense). Other Income (Expense) primarily consists of foreign
currency gains and losses and interest income. In the third quarter of
fiscal 1996, the Company recorded foreign currency transaction losses of
approximately $1.3 million.
Provision (Benefit) for Income Taxes. The Company's benefit for income taxes for
the three months ended April 30, 1996 was $1,363,000 compared to a provision for
income taxes for the three month period ended April 30, 1995 of $1,453,000. The
Company's provision for income taxes was $1,249,000 and $3,843,000 for the nine
months ended April 30, 1996 and 1995, respectively. The provision/benefit for
all periods was based on the Canadian federal statutory rate of 38% and reflects
the impact of various tax credits and foreign taxes. In the nine months ended
April 30, 1996, the Company recorded a charge of $8,500,000 for acquired
research and development and has not recorded a tax benefit for such charge due
to the uncertainty of realizing the future tax benefit of such charge.
Liquidity and Capital Resources
The Company 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 Province of Quebec. As of April 30,
1996, the Company had cash of approximately $33,868,000. The Company has a
demand line of credit with a bank under which the Company may borrow at a rate
of prime plus 1% up to CDN$1,000,000 (or approximately $740,000 at April 30,
1996). Additionally, the Company has a CDN$600,000 (or approximately $440,000 at
April 30, 1996) demand leasing facility. As of April 30, 1996, approximately CDN
$60,000 (or approximately $44,000 at April 30, 1996) was outstanding under the
leasing facility and no amounts were outstanding under the line of credit.
The Company's operating activities, including research and development tax
credits, used cash of $17,997,000 for the nine months ended April 30, 1996 and
provided cash of $5,170,000 for the same period in fiscal 1995. The principal
uses of cash for the fiscal 1996 period were the increase in accounts
receivable, the increase in inventory and an income tax receivable compared to
an income tax payable at the end of fiscal 1995. Accounts receivable increased
during the nine months ended April 30, 1996 as a result of the Company extending
favorable payment terms (i.e. reduced initial deposits and longer than normal
payment terms) in January to existing customers with timely payment histories as
an enticement to purchase the current SGI ONYX workstation. Due to competitive
pressures, the Company offers customers more favorable payment terms in the form
of lower initial deposits than in the prior fiscal year. Inventory increased
during the nine months ended April 30, 1996, as a result of the Company's
purchase of inventory to meet anticipated sales in the fiscal quarter ended
April 30, 1996. Net cash provided in the fiscal 1995 period was composed
primarily of net income, increases in accounts payable and accrued expenses,
less increases in inventory and accounts receivable.
The Company's investing activities used cash of $19,423,000 for the nine months
ended April 30, 1996, primarily for the acquisition of COSS/IMP (approximately
$5,545,000), the purchase of land and an office building in London, England
((Pounds)1,148,000, or approximately $1,730,000), the purchase of land and an
office building in Montreal, Quebec for CDN$1,730,000 (or approximately
$1,250,000) and the purchase of computer equipment and software, general office
equipment, leasehold improvements and furniture and fixtures used in the
operation of the Company's business. The Company's investing activities used
cash of $4,327,000 for the nine months ended April 30, 1995, primarily for the
purchase of computer equipment and software and general office equipment used in
the operation of the Company's business.
14
<PAGE>
Financing activities provided cash of $30,198,000 for the nine months ended
April 30, 1996, 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. Financing activities provided cash
of $675,000 for the nine months ended April 30, 1995, primarily from borrowings
under the Company's demand line of credit offset by payments of capital lease
obligations.
In the quarter ended April 30, 1996, the carrying value of the building was
written down to estimated fair market value and reclassified as an asset held
for sale. The building has been listed for sale.
As of April 30, 1996, the Company did not have any material commitments for
capital expenditures.
The Company's ability to meet its future liquidity requirements is dependent
upon its ability to operate profitably, or in the absence thereof, to obtain
additional financings. The Company is undergoing a restructuring intended to
decrease future operating expenses, however there can be no assurance that the
Company will not have to take further restructurings or be profitable in the
future. Should the Company need to secure additional financing to meet its
future liquidity requirements, there can be no assurance that the Company will
be able to secure such financing, or that such financing, if available, will be
on terms favorable to the Company. Subject to the factors discussed below, the
Company 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 1997.
Certain Factors That May Affect Future Results
Information provided by the Company from time to time including statements in
this Form 10-Q which are not historical facts, are so-called Oforward-looking
statements,O and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and releases of the Securities and
Exchange Commission. In particular, statements contained in the Management's
Discussion and Analysis of Financial Condition and Results of Operations which
are not historical facts (including, but not limited to, the finalization and
implementation of the restructuring plan, and statements regarding the adequacy
of cash to meet operations) constitute Oforward-lookingO statements. The
Company'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 below, and the other risks
discussed in the Company's Prospectus dated November 14, 1995 included in its
Registration Statement on Form S-1 (Reg. No. 33-97808) and from time to time in
the Company's other filings with Securities and Exchange Commission.
The Company's future results are subject to substantial risks and uncertainties.
The Company has derived substantially all of its historical revenue from sales
of FLAME systems and related maintenance and support services. The Company'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 the Company to achieve sustained growth,
the market for the Company's systems must continue to develop and the Company
must expand this market to include additional applications within the film and
video industries and develop new products for use in related markets. There can
be no assurance that the Company will be successful in marketing its existing or
any new or enhanced products. The market in which the Company competes is
characterized by intense competition and many of the Company's current and
prospective competitors have significantly greater financial, technical,
manufacturing and marketing resources than the Company. These companies may
introduce additional products that are competitive with those of the Company,
and there can be no assurance that the Company's products would compete
effectively with such products. In addition, as the Company enters new markets,
distribution channels, technical requirements and levels and basis of
competition may be different from those in the Company's current markets and
there can be no assurance that the Company will be able to compete financially.
Furthermore, competitive pressures or other factors, including the Company's
entry into new markets, may result in significant price erosion that could have
material adverse effect on the Company's business and results of operations.
15
<PAGE>
The Company's systems currently include workstations manufactured by SGI. There
are significant risks associated with this reliance on SGI and the Company may
be impacted by the timing of the development and release of products by SGI, as
was the case for the three months ended January 31, 1996. In addition, there
may be unforeseen difficulties associated with adapting the Company's products
to future SGI products, including the recently announced SGI workstation. To
date, the Company has depended to a significant extent upon a number of key
management and technical employees and the Company'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 the Company's business and results of operations. The Company relies
principally on unregistered copyrights and trade secrets to protect its
intellectual property. Any invalidation of the Company's intellectual property
rights or lengthy and expensive defense of those rights could have a material
adverse effect on the Company. The Company derives a significant portion of its
total revenues from foreign sales. Foreign sales are subject to significant
risks, including unexpected legal, tax and exchange rates changes 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. There can be no assurance that these factors will not have a
material adverse effect on the Company's future international sales and
consequently, on the Company's business and results of operations.
The Company is in the process of finalizing and implementing a restructuring
plan. There can be no assurance that the Company will be able to successfully
implement the restructuring plan. Furthermore, the implementation of the
restructuring plan may cause a diversion of management's time and resources and
may result in other unforeseen disruptions and unexpected expenses.
As discussed in Note 7 to the accompanying Condensed Consolidated Financial
Statements, the Company has been named as a defendant in two class action
lawsuits. Although the Company denies all material allegations of these
complaints and intends to vigorously defend against all claims brought against
it, the ultimate outcome, including amount of possible loss, if any, of
litigation cannot be determined at this time. No provision for any liability
that may result from this litigation has been made in the accompanying Condensed
Consolidated Financial Statements. There can be no assurance that the ultimate
outcome of these matters will not have a material adverse affect on the
Company's business and results of operations.
The market price of the Company's common shares could be subject to significant
fluctuations in response 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 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. These fluctuations, as well as general economic and
market conditions, may materially and adversely affect the market price of the
Company's common shares.
The Company's revenues and operating results are subject to quarterly and other
fluctuations. A limited number of systems sales may account for a substantial
percentage of the Company's quarterly revenue because of the high average sales
price of such systems and the timing of purchase orders. Prior to fiscal 1996,
the Company has generally experienced greater revenues during its third and
fourth quarters following the completion of the annual conference of the
National Association of Broadcasters ("NAB"), which is held in April. The
Company's expense levels are based, in part, on its expectations of future
revenues. Therefore, if revenue levels are below expectations, particularly
following NAB, the Company's operating results are likely to be adversely
affected, as was the case for the three month period ended April 30, 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 and changes in product
development and sales and marketing expenditures. Because the Company's
operating expenses are based on anticipated revenue levels and a high percentage
of the Company'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. The Company 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.
16
<PAGE>
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
On May 29, 1996, a lawsuit entitled Sandra Esner and Jerry Krim, On Behalf of
Themselves and All Others Similarly Situated, vs. [...]Discreet Logic Inc., et
al., case no. 978584 was filed in the Superior Court of the State of
California, City and County of San Francisco. Named as defendants are the
Company, certain of the Company's former and existing directors, officers, and
affiliates, and certain underwriters and financial analysts. The plaintiffs
purport to represent a class of all persons who purchased the Company's common
stock between September 13, 1995, and May 1, 1996. The complaint alleges
violations of California law through material misrepresentations and omissions.
The Company believes the allegations in the complaint are without merit and
intends to defend the lawsuit vigorously.
On June 13, 1996, a lawsuit entitled Bruce Friedberg, On Behalf of Himself and
All Others Similarly Situated, vs. Discreet Logic Inc., et al., civ no.
96-11232-EFH, was filed in the United States District Court, District of
Massachusetts. Named as defendants are the Company and certain of the Company's
former and existing directors and officers. The plaintiffs purport to represent
a class of all persons who purchased the Company's common stock between
November 14, 1995, and February 13, 1996. The complaint alleges violations of
United States Federal Securities law through material misrepresentations and
omissions. The Company believes the allegations in the complaint are without
merit and intends to defend the lawsuit vigorously.
Although the Company denies all material allegations of these complaints and
intends to vigorously defend against all claims brought against it, the ultimate
outcome, including amount of possible loss, if any, of litigation cannot be
determined at this time. No provision for any liability that may result from
this litigation has been made in the accompanying Condensed Consolidated
Financial Statements. There can be no assurance that the ultimate outcome of
these matters will not have a material adverse affect on the Company's business
and results of operations.
Item 2.-5. Not applicable
Item 6. Exhibits and Reports on form 8-K.
(a) Exhibits.
Exhibit Description of Exhibit
------- ----------------------
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
17
<PAGE>
DISCREET LOGIC INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DISCREET LOGIC INC.
June 14, 1996 by: /s/ DOUGLAS R. JOHNSON
----------------------
Douglas R. Johnson
Executive Vice President
and Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-1996 JUL-31-1996
<PERIOD-START> JUL-31-1995 FEB-01-1996
<PERIOD-END> APR-30-1996 APR-30-1996
<CASH> 33,868 33,868
<SECURITIES> 0 0
<RECEIVABLES> 22,268 22,268
<ALLOWANCES> 0 0
<INVENTORY> 17,820 17,820
<CURRENT-ASSETS> 80,262 80,262
<PP&E> 19,268 19,268
<DEPRECIATION> (3,820) (3,820)
<TOTAL-ASSETS> 102,740 102,740
<CURRENT-LIABILITIES> 35,184 35,184
<BONDS> 0 0
0 0
0 0
<COMMON> 78,790 78,790
<OTHER-SE> (11,289) (11,289)
<TOTAL-LIABILITY-AND-EQUITY> 102,740 102,740
<SALES> 64,946 14,677
<TOTAL-REVENUES> 64,946 14,677
<CGS> 36,324 12,008
<TOTAL-COSTS> 36,324 12,008
<OTHER-EXPENSES> 12,461<F1> 6,567<F1>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (18,292) (16,472)
<INCOME-TAX> 1,249 (1,363)
<INCOME-CONTINUING> (19,541) (15,109)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (19,541) (15,109)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (.74) (.55)
<FN>
<F1>AMOUNT REPRESENTS RESEARCH AND DEVELOPMENT EXPENSES FOR THE APPLICABLE PERIOD.
</FN>
</TABLE>
