<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 8-K/A (1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 15, 1997
Discreet Logic Inc.
-------------------
(Exact name of Registrant as specified in its charter)
Quebec 0-26100 98-0150790
- ----------------------------- --------- ------------
(State or other jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
10 Duke Street
Montreal, Quebec, Canada H3C 2L7
- ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (514) 393-1616
__________________
(1) This Report amends the Registrant's Report on Form 8-K originally filed on
July 30, 1997 with the Securities and Exchange Commission.
<PAGE>
Item 2. Acquisition or Disposition of Assets
On July 15, 1997, Discreet Logic Inc. ("Discreet") acquired all of the
outstanding shares of the capital stock of D-Vision Systems, Inc., an Illinois
corporation ("D-Vision"), pursuant to that certain Stock Purchase Agreement
dated as of July 10, 1997 (the "Stock Purchase Agreement"), by and among
Discreet, D-Vision, the former stockholders of D-Vision and certain other
individuals (the "Acquisition").
As a result of the 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 $10.75 million in cash. Discreet will
be filing a resale registration statement with respect to the 555,000 Discreet
common shares issued in connection with the Acquisition. In addition,
approximately $4.0 million of the cash consideration is being held in escrow
until September 30, 1999, subject to (i) earlier release from escrow of up to
$1.9 million on September 30, 1998, and (ii) the resolution of indemnification
claims made by Discreet pursuant to the Stock Purchase Agreement.
The 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 for which Discreet
expects to incur a one-time charge against earnings in the range of $20 million
to $21 million, or $.70 to $.73 per share, in the quarter ending 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 Discreet and D-Vision. The terms of the transaction are more
fully described in the Stock Purchase Agreement, Registration Rights Agreement
and Escrow Agreement, copies of which are filed as Exhibit 2.1, 2.2, 2.3,
respectively to this Discreet's Current Report on Form 8-K dated July 15, 1997
and are incorporated herein by reference.
The Acquisition of D-Vision is part of Discreet's new multi-platform
software initiative which includes the formation of two new product development
groups: Discreet Logic Systems Group and the Discreet Logic Software Group. The
new product organization is part of Discreet's strategy to develop a
comprehensive business model of selling software across Apple Macintosh,
Microsoft Windows NT and UNIX platforms, in addition to its existing fully
integrated real-time turnkey systems solutions.
<PAGE>
Certain Factors that May Affect Future Results
Information provided by Discreet from time to time, including statements in
this Form 8-K which are not historical facts, constitute forward looking
statements that involve risks and uncertainties and are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and the releases of the Securities and Exchange Commission. Actual results of
operations in connection with the Acquisition of D-Vision may vary significantly
based on a number of factors, including the integration of the D-Vision software
products into Discreet's product line, including the recently acquired Denim
software products, market acceptance of D-Vision's products, successful
penetration of new markets for institutional customers and professional
consumers, the impact of the Acquisition on the Company's current business, the
timely development and acceptance of new products, the impact of competitive
products and pricing, the timely development and release of products by
strategic suppliers, and other risks discussed from time to time in Discreet's
other filings with the Securities and Exchange Commission.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
The following financial statements of D-Vision, together with the report
thereon manually signed by Arthur Andersen LLP, appear as Exhibit 99.1 to this
Current Report on Form 8-K and are incorporated herein by this reference:
Consolidated Balance Sheet as of June 30, 1997.
Consolidated Statement of Operations for the year ended June 30, 1997.
Consolidated Statement of Stockholders' Deficit
Consolidated Statement of Cash Flows for the year ended June 30, 1997.
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information.
The following unaudited pro forma combined financial statements appear
as Exhibit 99.2 to this Current Report on Form 8-K and are incorporated herein
by this reference:
<PAGE>
(c) Exhibits.
Exhibit No. Description
- ----------- -----------
2.1 Stock Purchase Agreement dated as of July 10, 1997 among
Discreet, D-Vision, its former stockholders and certain
individuals (filed as Exhibit 2.1 to Discreet's Current Report
on Form 8-K dated July 15, 1997 as incorporated herein by
reference)
2.2 Registration Rights Agreement dated as of July 15, 1997 among
Discreet, D-Vision and its former stockholders (filed as
Exhibit 2.1 to Discreet's Current Report on Form 8-K dated
July 15, 1997 as incorporated herein by reference)
2.3 Escrow Agreement dated as of July 15, 1997 among Discreet,
D-Vision, its former stockholders and certain individuals
(filed as Exhibit 2.1 to Discreet's Current Report on Form 8-K
dated July 15, 1997 as incorporated herein by reference)
23.1 Consent of Arthur Andersen LLP
99.1 Financial Statements of D-Vision Systems, Inc.
99.2 Unaudited Pro Forma Financial Statements
<PAGE>
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 hereunto duly authorized.
DISCREET LOGIC INC.
September 29, 1997
By: /s/ Francois Plamondon
_________________________
Francois Plamondon
Senior Vice President,
Chief Financial Officer, Treasurer and
Secretary
<PAGE>
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
2.1 Stock Purchase Agreement dated as of July 10, 1997 among
Discreet, D-Vision, its former stockholders and certain
individuals (filed as Exhibit 2.1 to Discreet's Current Report
on Form 8-K dated July 15, 1997 as incorporated herein by
reference)
2.2 Registration Rights Agreement dated as of July 15, 1997 among
Discreet, D-Vision and its former stockholders (filed as
Exhibit 2.1 to Discreet's Current Report on Form 8-K dated
July 15, 1997 as incorporated herein by reference)
2.3 Escrow Agreement dated as of July 15, 1997 among Discreet,
D-Vision, its former stockholders and certain individuals
(filed as Exhibit 2.1 to Discreet's Current Report on Form 8-K
dated July 15, 1997 as incorporated herein by reference)
23.1 Consent of Arthur Andersen LLP
99.1 Financial Statements of D-Vision Systems, Inc.
99.2 Unaudited Pro Forma Financial Statements
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
RE: D-Vision Systems, Inc. and Subsidiary
Form 8-K
As independent public accountants, we hereby consent to the use of our
reports (and all references to our Firm) included in or made a part of this
Form 8-K.
/s/ Arthur Andersen LLP
-------------------------
Chicago, Illinois
September 25, 1997
<PAGE>
EXHIBIT 99.1
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of
D-Vision Systems, Inc.
We have audited the accompanying consolidated balance sheet of D-VISION SYSTEMS,
INC. AND SUBSIDIARY (an Illinois corporation) as of June 30, 1997 and the
related consolidated statements of operations, cash flows and stockholders'
deficit for the year then ended. 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 audit.
We conducted our audit 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 audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of D-Vision Systems,
Inc. and Subsidiary as of June 30, 1997, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
September 23, 1997
<PAGE>
D-VISION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 408
Accounts Receivable (net of reserves and
allowances of $ 318) 819
Inventory (net of reserve of $ 59) 133
-------------
Total current assets 1,360
DEPOSITS 36
PROPERTY & EQUIPMENT, net (Note 3) 798
-------------
Total Assets $ 2,194
=============
LIABILITIES & STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Trade payables $ 1,155
Accrued compensation expenses 443
Bank borrowings (Note 4) 1,250
Reserve for warranty expenses 124
Deferred credit for rent abatement 76
Current portion of capital lease
obligations (Note 5) 222
Other liabilities 287
-------------
Total current liabilities 3,557
CAPITAL LEASE OBLIGATIONS (Note 5) 154
-------------
Total Liabilities 3,711
-------------
COMMITMENTS (Note 5)
STOCKHOLDERS' DEFICIT
Preferred Stock - Class A, no par value,
15,000,000 shares authorized,
14,212,191 shares issued and outstanding 5,415
Preferred Stock - Class B, no par value,
20,000,000 shares authorized,
16,583,264 shares issued and outstanding 3,424
Common Stock, no par value, 50,000,000
shares authorized, 6,850,184 shares issued
and outstanding 633
Retained deficit (10,989)
-------------
Total Stockholders' Deficit (1,517)
-------------
Total Liabilities and Stockholders' Deficit $ 2,194
=============
</TABLE>
The accompanying notes to these consolidated financial statements
are an integral part of this balance sheet.
<PAGE>
D-VISION SYTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenues (Note 2):
Software Licenses $ 1,657
Hardware 3,145
-------
Total Revenues 4,802
-------
Costs of Sales (Note 2):
Cost of Software Licenses 399
Cost of Hardware 2,774
-------
Total Cost of Sales 3,173
-------
Gross Profit 1,629
Sales & Marketing Expense 1,676
Research & Development Expense 827
General & Administrative Expense 2,708
-------
Total Costs and Expenses 5,211
-------
Operating Loss (3,582)
Other Income 701
Interest Expense (227)
Interest Income 39
-------
Loss before Income Taxes (3,069)
Provision for Income Taxes -
-------
Net Loss $(3,069)
=======
</TABLE>
The accompanying notes to these consolidated financial statements
are an integral part of this statement of operations.
<PAGE>
D-VISION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK CLASS A. CONVERTIBLE CLASS B. CONVERTIBLE
NO PAR VALUE, PREFERRED STOCK PREFERRED STOCK
50,000,000 SHARES NO PAR VALUE, NO PAR VALUE,
15,000,000 20,000,000 TOTAL
AUTHORIZED SHARES AUTHORIZED SHARES AUTHORIZED
-------------------- ------------------- ------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT DEFICIT
-------- -------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1996 - net of 370
shares of common
treasury stock
at $106 5,686 $237 2,518 $3,000 $ (7,920) $(4,683)
Net Income (loss) (3,069) (3,069)
Stock issued for cash 11,018 2,275 16,583 3,424 5,699
Stock issued in lieu
of compensation 1,164 396 676 140 536
------ ----- ------- ------- ------- ------- --------- --------
Balance at June 30, 1997 6,850 $633 14,212 $5,415 16,583 $3,424 $(10,989) $(1,517)
====== ===== ======= ======= ======= ======= ========= ========
</TABLE>
The accompanying notes to these consolidated financial statements
are an integral part of this statement of stockholders' deficit.
<PAGE>
D-VISION SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(3,069)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation & amortization 427
Changes in operating assets and
liabilities:
Accounts receivable 427
Inventory 419
Deposits (15)
Other assets 77
Accounts payable (453)
Accrued compensation expense 289
Other liabilities (262)
-------
Net cash used in operating activities (2,160)
-------
Cash flows from investing activities:
Purchases of property and equipment (368)
-------
Net cash used in investing activities (368)
-------
Cash flows from financing activities:
Payoff of line of credit (650)
Payoff bridge loans from investors (2,550)
Proceeds from sale of common &
preferred stock 5,699
Principal payments on capitalized
leases (190)
Stock issued for services rendered 536
-------
2,845
-------
Net increase in cash and cash equivalents 317
Cash and cash equivalents at beginning of period 91
-------
Cash and cash equivalents at end of period $ 408
=======
Cash paid during the year for:
Interest 227
Taxes -------
</TABLE>
The accompanying notes to these consolidated financial statements
are an integral part of this statement of cash flows.
<PAGE>
D-VISION SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
D-Vision Systems, Inc. (the "Company"), incorporated in 1990, develops, markets
and supports Windows NT based, real time, non-linear, digital video editing
software products. The Company's products are sold throughout the world
primarily to post production facilities in the broadcast, film and related video
industries. Through December 1996, the Company sold turnkey systems to its
distributors who then resold them to end users. Since January 1997, the Company
sells its software products in combination with certain audio/video hardware to
its distributors who, in turn, integrate them with other appropriate hardware
into turnkey systems which are then sold to end users.
The Company's international revenues were primarily generated from customers
located in Canada, Europe and Asia. Revenues from international customers were
approximately $ 2,375,000 in fiscal 1997. Total assets related to international
sales, composed primarily of accounts receivable, were approximately $ 430,000
or approximately 19 % of total assets as of June 30, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements
include the accounts of the Company and its subsidiary. All intercompany
balances and transactions have been eliminated in consolidation.
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.
<PAGE>
CASH & CASH EQUIVALENTS. Cash equivalents are highly liquid investments with
insignificant interest rate risk and original maturities of 90 days or less and
are stated at amounts which approximate fair value, based on quoted market
prices. At June 30, 1997, cash equivalents consisted of a short-term bank
certificate of deposit which matured within one week of the date of the balance
sheet.
CONCENTRATION OF CREDIT RISK. Financial instruments which potentially subject
the Company to a concentration of credit risk principally consist of accounts
receivable. As of June 30, 1997, approximately 32 % of gross accounts
receivable were concentrated with 4 customers. The Company generally does not
require collateral on accounts receivable as the customers to whom the Company
has granted credit are considered to be credit worthy and are well established.
The Company periodically performs credit evaluations of its customers and
maintains reserves for potential losses.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over three years.
REVENUE RECOGNITION. The Company's revenues consist of software license
revenues as well as revenues from the sale of certain types of audio/video
computer hardware which is required to operate the Company's software products.
Such hardware is sold only in combination with its' software products. Until
December 1996, the Company's revenues consisted primarily of the sale of turnkey
computer systems which were integrated by the Company. Since January 1997,
revenues were mainly derived from the sale of software and/or audio/video
hardware kits which the Company's distributors used to build their own turnkey
systems.
Software license and hardware revenues consist of sales of software licenses
and/or hardware products which are recognized upon the execution of a purchase
order and the shipment of the software and/or hardware. There are no
significant obligations to be fulfilled by the Company once shipment is made.
<PAGE>
Customer payment terms vary. Amounts received in advance of satisfying revenue
recognition criteria are classified as deferred revenue and are included as
other liabilities in the accompanying consolidated balance sheet.
The Company generally warrants that its products will function substantially in
accordance with documentation provided to customers for approximately one year,
in the case of turnkey systems sold before December 1996, and for approximately
three months for software and/or audio/video hardware packages sold since
January 1997. As of June 30, 1997 warranty claims incurred were recognized in
the accompanying consolidated statement of operations and a reserve for probable
future warranty obligations has been made in the accompanying consolidated
balance sheet.
COST OF SOFTWARE LICENSES AND HARDWARE. Cost of software licenses and hardware
consist primarily of the cost to purchase materials for the duplication and
packaging of software products and the cost of purchasing hardware items. These
costs also include the cost of providing software maintenance to customers such
as telephone hotline support, new releases of software and updated user
documentation. Such maintenance expenses have not been significant to date.
SOFTWARE DEVELOPMENT COSTS. In accordance with SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed", software
development costs are expensed as incurred until technology feasibility has been
established, at which time such costs are capitalized until the product is
available for general release to customers. To date, establishment of
technological feasibility of the Company's products and general release of such
software have substantially coincided. As a result, software development costs
qualifying for capitalization have been insignificant and therefore, the Company
has not capitalized any software development costs.
STOCK-BASED COMPENSATION PLANS. SFAS No. 123, "Accounting for Stock-Based
Compensation", establishes financial accounting and reporting standards for the
stock-based employee compensation plans and requires a fair value based method
to determine the compensation cost of such plans. Management has determined
that the Company will not adopt
<PAGE>
the accounting method prescribed by the new standard but has, as allowed by the
standard, only provided supplemental pro-forma disclosure of the effect of such
adoption in Note 6.
3. PROPERTY & EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30 1997
----------------
<S> <C>
Computer equipment $ 806,017
Assets under capitalized leases 615,305
Furniture & fixtures 42,796
Leasehold improvements 41,320
----------------
1,505,438
Less accumulated depreciation (706,958)
----------------
$ 798,480
================
</TABLE>
4. BANK BORROWINGS
The Company's borrowings consist of a line of credit (the "Line of Credit") with
a bank (the "Lender"), which expired on June 30, 1997. The Line of Credit
contains certain general requirements for the Company to maintain the quality of
its asset base in a manner acceptable to the Lender, however it does not require
specific financial ratios or other minimum financial targets to be met.
Beginning on the expiration date, the Lender and the Company entered into a
Forbearance agreement whereby the Lender agreed to delay seeking repayment of
the loan until July 18, 1997. On July 15, 1997 the Company repaid the
outstanding balance plus accumulated interest owed to the Lender. At June 30,
1997 the Company had $ 1,250,000 of borrowings outstanding under the Line
of Credit which bear interest at the bank's prime rate (8.5 % at June 30, 1997).
<PAGE>
5. COMMITMENTS
(a) Operating Leases
The Company leases its office facilities and certain office equipment under
operating leases which expire at various dates through the year 2000. Rent
expense is recognized as each monthly payment becomes due. Per the lease
agreement for the Company's office space, a full abatement was received for the
rent payments which would have otherwise been due for the first eighteen months
of the lease. Afterwards, rent is payable for the remainder of the lease at
rates which escalate at specified intervals.
During the first eighteen months of the lease, when the abatement was in effect,
rent expense was recognized and the value of the abatement was recorded as a
deferred credit on the balance sheet. The deferred rent abatement is being
amortized evenly over the remaining term of the lease. The total rent expense
during fiscal 1997 was approximately $ 232,000 before the amortization of the
rent abatement of $ 29,000.
Future minimum lease payments under all noncancellable operating leases,
including the lease for office space, in effect as of June 30, 1997 are as
follows:
1998 $208,000
1999 222,000
2000 145,000
--------
Total $575,000
========
(B) CAPITAL LEASE OBLIGATIONS
In February and March 1996, the Company entered into certain contracts to lease
computer equipment, a trade show booth and related assets under agreements which
expire in 1999 and which have been capitalized under the provisions of SFAS No.
13, "Accounting for Leases". A total of approximately $ 615,000 was
capitalized and included in fixed assets and a total of approximately $ 262,000
of accumulated depreciation has been recognized through June 30, 1997 on the
accompanying balance sheet.
<PAGE>
The notes payable under these obligations, which expire in March 1999, bear
interest at rates between 7 % and 12.62 %. Blended principal and interest
payments are approximately $ 20,000 per month.
6. STOCKHOLDERS' EQUITY
Preferred and Common Stock. In September 1996, the Company created a new class
of Preferred Class B stock. During fiscal 1997, the Company raised an
additional $ 5,699,000 of equity through the sale of 11,018,213 shares of
Preferred Class A and 16,583,264 shares of Preferred Class B stock.
The table below sets forth certain information with respect to the various
classes of preferred stock:
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------ ------------------------------
Class A Class B
------------ ----------------
<S> <C> <C> <C>
Number of shares authorized 50,000,000 15,000,000 20,000,000
Annual cumulative dividend rate --- 15 % 10 %
Liquidation preference price per share
(excluding declared but unpaid dividends) --- $ .21109 $ .34372
Redemption price per share --- $ .21109 $ .34372
</TABLE>
All classes of preferred stock are convertible at any time into an equal number
of common shares, as defined in the Articles of Incorporation, as amended. The
holders of Preferred A and B Stock have equal voting and conversion rights with
each other and with the holders of Common Stock.
In the event of a liquidation of the Company, the Preferred Shares would be
redeemed at the original price of issuance, plus accrued and unpaid dividends as
well as a pro-rata distribution of all remaining proceeds, as if all preferred
shares were converted to an equal number of common shares. Preferred stock
dividends are to be paid when and if declared by the Board of Directors.
<PAGE>
INCENTIVE STOCK OPTIONS. During fiscal 1996 and prior years, the Company issued
incentive and non-qualified stock options to a number of employees and investors
at varying exercise prices which were determined at the discretion of the Board
of Directors. For employees, such options were granted in connection with past
and continued employment with the Company whereas such options were granted to
investors for their past services rendered. The exercise prices for these
options ranged from $ .05 to $ 1.58 per share. During fiscal 1997, there were
no new options granted and no shares were issued under these option agreements.
All open option agreements at June 30, 1997 were terminated in connection with
the sale of the Company subsequent to the year-end (see Note 10).
The Company accounts for these options under APB Opinion No. 25, "Accounting for
Stock Issued to Employees", under which no compensation cost has been
recognized. Had compensation cost for these plans been determined consistent
with SFAS Statement No. 123, "Accounting for Stock Based Compensation", the
Company's net loss would have been increased as follows:
Net Loss - as reported $ (3,494,000)
Net Loss - pro forma $ (3,543,000)
A summary of the status of the Company's stock options and the changes during
fiscal 1997 is presented below:
<TABLE>
<CAPTION>
Weighted Average Range of
Options Exercise Price Exercise Prices
-------- ---------------- ---------------
<S> <C> <C> <C>
Outstanding at June 30, 1996 480,826 $.76 $.05 - 1.58
Options Granted --- --- ---
Options Exercised --- --- ---
Options Forfeited (73,840) .05 .05
Options Expired --- --- ---
-------
Outstanding at June 30, 1997 406,986 $.89 $.05 - 1.58
=======
</TABLE>
<PAGE>
The fair value of each option grant is estimated on the date of the grant using
the Black Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, a risk-free interest rate of 6.5 %, no
expected divided yield and expected life of 10 years. The weighted average fair
value of options outstanding as of June 30, 1997 is $ .67.
STOCK ISSUANCE COMMITMENTS TO EMPLOYEES. During fiscal 1997, the Company
entered into agreements with certain key employees to seek approval from its'
Board of Directors to issue Company stock or the right to such stock to these
employees. The agreements called for specified numbers of shares or the rights
to such shares to be reserved and/or issued to each employee based on the
achievement of certain goals such as number of years service, the valuation of
the Company at specified points in the future or a change in control of the
Company. A vote by the Board of Directors on these arrangements was not made
prior to the sale of the Company (see Note 10) and therefore, such a plan was
never implemented. At the time of the sale of the Company, certain agreements
were reached with each of the Company's then current employees whereby each
would receive a specified compensation payment. These payments, in the amount
of approximately $4,000,000 were made in July 1997.
7. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred taxes are determined based on the difference between the
financial statement and tax reporting basis of assets and liabilities using tax
rates in effect for the year in which the differences are expected to reverse.
Since adoption, the Company has generated deferred tax assets resulting
primarily from the net operating losses incurred that may be used to offset
future taxable income.
<PAGE>
The Company has incurred significant losses for both accounting and tax purposes
in fiscal 1997 and prior years and has accumulated tax losses of approximately $
8,550,000 and tax credits of approximately $ 20,000 as of June 30, 1997. There
was no tax expense or benefit recorded in fiscal 1997 in the accompanying
Statement of Operations.
Deferred tax assets at June 30, 1997 are comprised of the following:
Deferred tax assets:
Loss carryforwards $ 3,421,000
Research & development credits 20,000
Reserves for bad debts
and sales returns 125,000
Deferred compensation 100,000
Deferred Revenue and credits 113,000
Trade payables and accrued liabilities 296,000
Other 36,000
-----------
Total deferred tax asset 4,111,000
Less: valuation allowance (4,111,000)
-----------
Net deferred tax asset ---
===========
Net operating loss carryforwards will expire beginning June 30, 2009. Due to
changes in ownership, the amount of net operating loss carryforwards which can
be offset against future taxable income, if any, may be limited. A valuation
allowance for the full amount of the deferred tax asset has been recorded
primarily due to the uncertainty surrounding the Company's ability to generate
sufficient taxable income to realize the benefits of the net operating loss
carryforwards and other tax assets.
<PAGE>
8. MAJOR CUSTOMERS
During fiscal 1997, there were no customers which individually accounted for 10
% or more of the Company's total revenues.
9. RELATED PARTY TRANSACTIONS
As described in Note 5 (b), the Company leases certain of its assets. One of
the Company's directors is also a director of the leasing company.
In fiscal 1997, the Company issued 1,163,750 common shares to one of its'
shareholders who was also employed as the Company's Chief Executive Officer.
This transaction, which was valued at $ 395,675, was accrued for as a
compensation expense and an issuance of common stock.
As of June 30, 1997 the Company had loans receivable from certain shareholders
and directors totaling approximately $ 115,000 and had loans payable to these
shareholders and directors totaling approximately $ 186,000. The net amount of
approximately $ 71,000 was included in accounts payable and accrued liabilities.
All of these amounts were settled in full as part of the settlement agreements
made with such individuals in connection with the sale of the Company (see Note
10).
Interest in the amount of approximately $ 85,000 was payable at June 30, 1997 on
notes payable to several of the Company's investors. These notes were for bridge
loans made by these investors, between May and August 1996, in anticipation of
the equity raised in September 1996. In each instance, these loans were repaid
and the funds used by these investors to purchase Preferred A and B shares in
September 1996 (see note 6). The interest due on the bridge loans was waived as
part of the settlement agreements made with these investors in connection with
the sale of the Company (see Note 10).
<PAGE>
10. SUBSEQUENT EVENTS
On July 15, 1997 all of the Company's outstanding stock was sold to Discreet
Logic, Inc., a Quebec corporation. Proceeds from the sale consisted of 555,000
newly issued shares of Discreet Logic, Inc. common stock and approximately
$10,750,000 million in cash, of which approximately $4,000,000 is being held in
escrow until September 30, 1999 pending the resolution of certain
indemnification claims. Approximately $4,000,000 was paid to, or placed in
excrow on behalf of, the employees of the Company in settlement of their
agreements with the Company for such stock issuance commitments (see Note 6) as
well as for services rendered. Also at closing, an amount of $425,000 was paid
to investment bankers for services rendered.
11. CONTINGENCIES
The Company is a party to various lawsuits arising in the ordinary course of
business and does not believe that the outcome of these lawsuits will have a
material effect on the Company's financial position or results from operations.
<PAGE>
EXHIBIT 99.2
DISCREET LOGIC INC.
Pro Forma Combined Balance Sheet
As At June 30, 1997
(in thousands)
unaudited
<TABLE>
<CAPTION>
Discreet Logic D-Vision Pro Forma
as reported as reported (Note 2) Adjustments Pro Forma
-------------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash equivalents 31,668 408 (1) (10,750) 21,326
Accounts receivable, net
of reserves 26,893 819 27,712
Inventories 13,921 133 14,054
Income taxes receivable 448 -- 448
Other current assets 3,889 -- 3,889
------- ------- ------- -------
76,819 1,360 (10,750) 67,429
Property and equipment, net 7,728 798 8,526
Deferred income taxes 3,490 -- 3,490
Purchased research and
development (1) 21,000 --
(2) (21,000)
Goodwill (1) 916 611
Acquired technology (1) 3,100 2,480
(3) (925)
Other assets 2,660 36 2,696
Assets held for resale 5,248 -- 5,248
------- ------- ------- -------
95,945 2,194 (7,659) 90,480
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Accounts payable 23,687 1,155 24,842
Accrued expenses 20,399 1,043 (1) 1,500 22,942
Deferred revenue 8,103 -- 8,103
Customer deposits 1,360 -- 1,360
Bank borrowings 1,250 1,250
Current portion of capital
leases 222 222
Other liabilities 487 487
Income taxes payable 4,734 -- 4,734
------- ------- ------- -------
58,283 4,157 1,500 63,940
------- ------- -------
Deferred income taxes 713 -- 713
------- ------- -------
Capital lease obligations 154 154
------- ------- -------
Shareholders' Equity:
Capital stock 80,402 9,472 (1) (9,472) 91,051
(1) 10,649
Retained deficit (42,639) (11,589) (1) 11,589 (64,564)
(21,925)
Cumulative translation
adjustment (814) -- (814)
------- ------- ------- -------
36,949 (2,117) (9,159) 36,622
------- ------- ------- -------
95,945 2,194 (7,659) 90,480
======= ======= ======= =======
</TABLE>
See accompanying notes to the pro forma combined statements.
<PAGE>
DISCREET LOGIC INC.
Pro Forma Combined Statement of Operations
for the 11 month period ended June 30, 1997
(in thousands)
unaudited
<TABLE>
<CAPTION>
Discreet Logic D-Vision Pro Forma
as reported as reported (Note 2) Adjustments Pro Forma
-------------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues 101,924 4,402 106,326
Cost of revenues (47,571) (2,910) (50,481)
------- ------- ------- -------
Gross profit 54,353 1,492 55,845
------- ------- ------- -------
Operating expenses:
Research and development,
net 9,708 758 (3) 925 11,391
Sales and marketing 23,206 1,536 24,472
General and administrative 6,396 2,482 8,878
Write-off of purchased
research and development 9,800 -- (2) 21,000 30,800
Litigation and related
settlement 6,500 -- 6,500
------- ------- ------- -------
Total operating expenses 55,610 4,776 21,925 82,311
------- ------- ------- -------
Operating loss (1,257) (3,284) (21,925) (26,466)
Other income (expense):
Interest income 1,234 36 1,270
Interest expense (55) (208) (263)
Foreign currency exchange
loss (188) -- (188)
Other income 643 643
------- ------- ------- -------
Net loss before income
taxes (266) (2,813) (21,925) (25,004)
Provision for income taxes (6,489) (6,489)
------- ------- ------- -------
Net loss (6,755) (2,813) (21,925) (31,493)
======= ======= ======= =======
Net loss per common and
equivalent share $ (0.24) $ (1.11)
Weighted average common
shares outstanding 27,947,807 (1) 555,000 28,502,807
</TABLE>
See accompanying notes to the pro forma combined statements.
<PAGE>
DISCREET LOGIC INC.
NOTES TO THE PRO FORMA
COMBINED FINANCIAL STATEMENTS
AS AT JUNE 30, 1997
UNAUDITED
1. BASIS OF PRESENTATION.
The unaudited pro forma combined balance sheet as at June 30, 1997 and the
combined statement of operations for the eleven month period then ended are
pepared as if Discreet Logic Inc. had acquired all of the outstanding shares of
D-Vision on August 1, 1996.
2. ADJUSTMENTS.
The following adjustments were made to the unaudited pro forma combined balance
sheet and statement of operations.
1. To record the purchase of D-Vision, together with related costs, as of
August 1, 1996.
2. To expense purchased in-process research and development.
3. To record amortization of acquired technology and goodwill.
