<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 September 30, 1997
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
of incorporation or organization) Identification Number)
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
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
--- ---
28,829,919 shares of the registrant's Common Shares, without par value,
were outstanding as of November 10, 1997.
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended September 30, 1997
CONTENTS
<TABLE>
<CAPTION>
Item Number Page
----------- ----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Balance Sheets: June 30, 1997 and September 30, 1997................................... 3
Statements of Operations: Three months ended September 30, 1997 and October 31, 1996... 4
Statements of Cash Flows: Three months ended September 30, 1997 and October 31, 1996... 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................. 8
Certain Factors That May Affect Future Results......................................... 13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 15
Item 2. Changes in Securities and Use of Proceeds.............................................. 16
Item 6. Exhibits and Reports on Form 8-K....................................................... 16
Signatures........................................................................................... 17
</TABLE>
2
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DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands of U.S. dollars, except for share data)
<TABLE>
<CAPTION>
June 30, September 30,
1997 1997
------ ------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................. $ 31,668 $ 16,522
Cash restricted for settlement of class action litigation............. -- 10,800
Accounts receivable (less reserves for doubtful accounts)............. 26,893 29,416
Inventory--
Resale........................................................... 10,867 11,019
Demonstration.................................................... 3,054 3,539
Income taxes receivable............................................... 448 --
Other current assets.................................................. 3,889 5,165
--------- ---------
76,819 76,461
Property and equipment--less accumulated depreciation and amortization..... 7,728 9,134
Deferred income taxes...................................................... 3,489 2,467
Other assets............................................................... 2,660 6,310
Assets held for resale..................................................... 5,248 4,186
--------- ---------
$ 95,944 $ 98,558
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses................................. $ 44,086 $ 50,712
Deferred revenue...................................................... 8,103 9,039
Income taxes payable.................................................. 4,734 4,945
Customer deposits..................................................... 1,359 429
-------- ---------
58,282 65,125
-------- ---------
Deferred income taxes................................................. 713 1,060
-------- ---------
Shareholders' Equity:
Preferred shares--no par value
Authorized--unlimited number of shares
Issued and outstanding--none
Common shares--no par value
Authorized--unlimited number of shares
Issued and outstanding--28,117,415 shares at June 30, 1997 and
28,822,636 at September 30, 1997.............................. 80,402 91,941
Accumulated deficit................................................... (42,639) (57,742)
Cumulative translation adjustment..................................... (814) (1,826)
-------- ---------
Total shareholders' equity....................................... 36,949 32,373
-------- ---------
$ 95,944 $ 98,558
======== =========
</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
October 31, September 30,
1996 1997
---------- ------------
<S> <C> <C>
Total revenues........................................... $ 23,263 $ 38,405
Cost of revenues......................................... 12,287 17,280
--------- ----------
Gross profit........................................ 10,976 21,125
--------- ----------
Operating expenses:
Research and development (net of tax credits)....... 2,678 3,512
Sales and marketing................................. 6,017 7,433
General and administrative.......................... 1,516 1,884
Charge for purchased research and development....... -- 21,000
--------- ----------
Total operating expenses....................... 10,211 33,829
--------- ----------
Operating income (loss)........................ 765 (12,704)
Other income (expense), net.............................. (925) 377
--------- ----------
Loss before income taxes............................ (160) (12,327)
Provision for income taxes............................... 652 2,775
--------- ----------
Net loss............................................ $ (812) $ (15,102)
========= ==========
Net loss per common share................................ $ (0.03) $ (0.53)
========= ==========
Weighted average common shares outstanding............... 27,800 28,659
========= ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands of U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION> Three Months Ended
October 31, September 30,
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................................... $ (812) $(15,102)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities--
Depreciation and amortization................................................. 1,580 1,997
Deferred income taxes......................................................... (135) 1,369
Write-off of in-process research and development.............................. -- 21,000
Write-off of assets for restructuring......................................... 197 109
Compensation expense related to stock options................................. -- 167
Changes in assets and liabilities--
Restricted cash.......................................................... -- (10,800)
Accounts receivable...................................................... 2,373 (1,704)
Inventory................................................................ 5,480 (275)
Income taxes receivable.................................................. 1,407 448
Other current assets..................................................... (1,013) (1,276)
Accounts payable and accrued expenses.................................... (2,724) (2,644)
Insurance proceeds related to class action litigation.................... -- 3,459
Deferred revenue......................................................... 3,235 936
Income taxes payable..................................................... -- 211
Customer deposits........................................................ (1,108) (930)
Due to related parties................................................... (26) --
------- -------
Net cash provided by (used in) operating activities........................... 8,454 (3,035)
------- -------
Cash flows from investing activities:
Purchase of property and equipment................................................. (1,707) (2,323)
Proceeds on disposal of assets held for resale..................................... -- 818
Cash paid for D-Vision acquisition and related costs............................... -- (10,342)
------- -------
Net cash used in investing activities......................................... (1,707) (11,847)
------- -------
Cash flows from financing activities:
Proceeds from option exercises..................................................... 184 506
Proceeds from employee stock purchase plan......................................... 201 217
------- -------
Net cash provided by financing activities..................................... 385 723
------- -------
Foreign exchange effect on cash.................................................... 834 (987)
------- -------
(Decrease) increase in cash and cash equivalents................................... 7,966 (15,146)
Unrestricted cash and cash equivalents, beginning of period........................ 21,658 31,668
------- -------
Unrestricted cash and cash equivalents, end of period.............................. $ 29,624 $ 16,522
======= =======
Supplemental disclosure of cash flow information:
Interest paid during the period.................................................... $ 7 $ 21
------- -------
Income taxes paid during the period................................................ $ 454 $ 2,110
-------- -------
In connection with the acquisition of D-Vision in July 1997, the following non-
cash transaction occurred:
Fair value of assets acquired............................................ $ -- $ 27,210
Liabilities assumed...................................................... -- (5,811)
Cash acquired............................................................ -- (408)
Issuance of 555,000 shares of Common Stock............................... -- (10,649)
-------- -------
Cash paid for acquisition, net of cash acquired......................................... $ -- $(10,342)
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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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 June 30, 1997. The
accompanying condensed consolidated 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 month period ended September 30, 1997 are not necessarily
indicative of the results to be expected for any other interim period or
for the full fiscal year.
(2) CHANGE OF FISCAL YEAR
On January 9, 1997, the Board of Directors of the Company approved the
change of the Company's fiscal year end from July 31 to June 30. This
change was effective beginning with the Company's second fiscal quarter of
1997. The condensed consolidated financial statements are presented for
the three month periods ended September 30, 1997 and October 31, 1996. The
Company prepares consolidated financial statements, re-measures accounts
in foreign currencies to reflect changes in exchange rates, and examines
and adjusts certain reserve accounts at the end of each quarter.
Therefore, it is not practicable to recast prior quarterly results to
reflect the new fiscal period. Consequently, the results for the three
month period ended September 30, 1997 are not directly comparable to the
results of the three month period ended October 31, 1996.
(3) LITIGATION AND RELATED SETTLEMENT EXPENSES
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, among other things. The Company believes
that the allegations in the complaint are without merit and has defended
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 plaintiff
purports to represent a class of all persons who purchased the Company's
common stock between November 14, 1995, and February 13, 1996. On October
11, 1996, the plaintiff filed an amended complaint which asserts
substantially the same factual allegations as the first complaint and
proposes the identical class period. The complaint alleges violations of
the United States Federal Securities law through material
misrepresentations and omissions. The Company believes that the
allegations in the complaint are without merit and has defended the
lawsuit vigorously.
6
<PAGE>
On April 29, 1997, a lawsuit entitled Anton Paparella, Sandra Esner and
Geoffrey L. Sherwood, On Behalf of Themselves and All Others Similarly
Situated vs. Discreet Logic Inc., et al., case No. C-97-1570, was filed in
the United States District Court, Northern District of California. Named
as defendants are the Company and certain of Company's former and existing
officers, directors and affiliates, and certain underwriters. The
complaint asserts, in all material respects, the same factual allegations
and proposes the same class period as the above-described California state
court complaint filed in May 1996, except asserts claims under federal
securities law instead of state law. The Company believes that the
allegations in the California federal complaint are without merit and has
defended the lawsuit vigorously.
On August 12, 1997, the Company announced that it had reached an
agreement-in-principle to settle all three of the shareholder class
action litigations. The parties to the class action litigations have
executed a settlement agreement which is now awaiting final court
approval. The proposed $10,800,000 settlement requires the Company to
contribute approximately $7,400,000 from its own funds, with the remainder
provided by insurance. The settlement is subject to final court approval.
There can be no assurance that the settlement will be finally approved and
that the Company will not have to continue its defense of the lawsuits.
Should the proposed settlement not be finally approved for any reason, the
Company intends to defend the lawsuits vigorously.
In the year ended July 31, 1996, the Company had provided a $2,506,000
litigation reserve for legal costs associated with defending the class
action lawsuits. During the eleven month period ended June 30, 1997, the
Company recorded a provision of $6,500,000 to accrue the additional
estimated settlement costs to be borne by the Company, should the proposed
settlement be finally approved. At September 30, 1997, the Company had on
its balance sheet cash restricted for the above-mentioned settlement, in
the amount of $10,800,000. The corresponding obligation is included in
accounts payable and accrued expenses.
7
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Discreet Logic Inc. ("Discreet Logic" or the "Company") develops,
assembles, markets and supports non-linear, digital systems and software for
creating, editing and compositing imagery and special effects for film, video,
and HDTV. The Company's systems and software are utilized by creative
professionals for a variety of applications, including feature films, television
programs, commercials, music videos, interactive game production and live
broadcasting.
Recent Developments
Litigation Settlement
On May 29, 1996, June 13, 1996 and April 29, 1997 certain of the Company's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against the Company and certain of its officers
and directors, among others. The three lawsuits were filed in the Superior Court
of the State of California, the United States District Court, District of
Massachusetts and the United States District Court, Northern District of
California, respectively. On August 12, 1997 the Company announced that it had
reached an agreement-in-principle to settle all three of the shareholder class
action litigations. The parties to the class action litigations have executed a
settlement agreement which is now awaiting final court approval. The proposed
$10.8 million settlement requires the Company to contribute approximately $7.4
million from its own funds, with the remainder provided by insurance. The
settlement is subject to final court approval. There can be no assurance that
the settlement will be finally approved and that the Company will not have to
continue its defense of the lawsuits. Should the proposed settlement not be
finally approved for any reason, the Company intends to defend the lawsuits
vigorously.
Recent Acquisitions
On June 12, 1997, the Company, through its wholly-owned subsidiary 3380491
Canada Inc. ("Acquisition Sub"), acquired substantially all of the assets and
assumed certain liabilities of Denim Software L.L.C., a Delaware limited
liability company ("Denim"), pursuant to the terms of an Asset Purchase
Agreement dated as of June 12, 1997, among Acquisition Sub, Denim, Sam Khulusi,
Frank Khulusi, Westco Denim Investments Group, Ltd., a California limited
partnership, and Frank Khulusi Family Limited Partnership, a California limited
partnership (the "Denim Acquisition"). The purchased assets consisted primarily
of Denim software products, including ILLUMINAIRE Paint, ILLUMINAIRE Composition
and ILLUMINAIRE Studio and related know-how and goodwill. The aggregate purchase
price for the assets was comprised of (i) approximately $9,126,000 in cash, (ii)
the assumption of certain enumerated liabilities in an amount equal to no more
than approximately $2,209,000 in the aggregate, and (iii) the assumption of
certain on-going obligations under certain existing contracts of Denim. At
closing, cash consideration, of approximately $9,126,000 and certain
liabilities, of approximately $655,000, were paid. The cash used by the Company
to fund the acquisition was derived primarily from cash flow from operations.
The transaction was accounted for as a purchase. The Company incurred a one-time
charge of $9,800,000, or $0.35 per share for in-process research and
development, purchased and expensed in its fourth fiscal quarter ended June 30,
1997, based on an independent appraisal. The terms of the transaction and the
consideration received by Denim were the result of arms-length negotiations
between the representatives of the Company and Denim. Denim developed Apple
Macintosh OS and Microsoft Windows NT-based paint and compositing software for
producing effects, interactive content and graphics design.
On July 15, 1997, the Company acquired all of the outstanding shares of
capital stock of D-Vision Systems, Inc. ("D-Vision"), an Illinois corporation,
pursuant to a Stock Purchase Agreement dated as of July 10, 1997, among
8
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the Company, D-Vision, the former stockholders of D-Vision (the "Selling
Stockholders") and certain other individuals (the "D-Vision Acquisition"). As a
result of the D-Vision Acquisition, the Company acquired the D-Vision OnLINE and
PRO software products for non-linear video and digital media editing solutions
including related know-how and goodwill. The purchase price was paid in a
combination of 555,000 newly issued Discreet Logic common shares and
approximately $10,750,000 in cash. In addition, approximately $4,000,000 of the
cash consideration is being held in escrow until September 30, 1999, subject to
(i) earlier release from escrow of up to $1,900,000 on September 30, 1998 and
(ii) the resolution of any indemnification claims made by the Company pursuant
to the Stock Purchase Agreement. The cash used by the Company to fund the
acquisition was derived primarily from cash flow from operations. The D-Vision
Acquisition was accounted for as a purchase. A substantial portion of the
purchase price, net liabilities of D-Vision and transaction costs was allocated
to purchased in-process research and development for which the Company incurred
a one-time charge against earnings in the amount of $21,000,000 ($0.73 per
share), based on an independent appraisal, in the quarter ended September 30,
1997. The terms of the transaction and the consideration received by the D-
Vision stockholders were the result of arms-length negotiations between the
representatives of the Company and D-Vision. D-Vision develops Microsoft Windows
NT-based non-linear, digital editing solutions.
Restructuring
During the fiscal year ended July 31, 1996, excluding a restructuring
charge of $15,000,000 and its related tax effects, the Company incurred a net
loss of approximately $31,000,000 on revenues of approximately $83,997,000.
During the second half of fiscal 1996, the Company 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 its 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 disruption caused by platform
changes by the Company's key supplier, and (6) greater use of third party
financing by customers. In addition, during the second half of fiscal 1996,
several of the Company's senior executives resigned to pursue other
opportunities.
In response to the financial results and other developments facing the
business, the Company developed a restructuring plan during the fourth fiscal
quarter of 1996. The focus of the Company's restructuring plan was to solidify
its senior management team; reduce operating expenses through a 28% reduction of
its workforce and the closure of its Cambridge, Massachusetts, Connecticut,
London and Innsbruck offices; consolidate software research and development
activities in Montreal; discontinue the AIR, PURE, SLICE and DIPLOMAT product
lines; and restructure its sales force to emphasize indirect sales channels.
While the Company began implementation of its restructuring plan in the fourth
fiscal quarter of 1996 and had substantially completed the implementation of the
plan at the end of fiscal 1997, the Company still has approximately $3,894,000
in restructuring reserves primarily for the estimated cost of terminating
leases, resolving outstanding severance issues, and the legal and taxation
winding down of several subsidiaries.
Change of Fiscal Year
On January 9, 1997, the Board of Directors of the Company approved the
change of the Company's fiscal year end from July 31 to June 30. This change was
effective beginning with the Company's second fiscal quarter of 1997. The
condensed consolidated financial statements are presented for the three month
periods ended September 30, 1997 and October 31, 1996. The Company prepares
consolidated financial statements, remeasures accounts in foreign currencies to
reflect changes in exchange rates and examines and adjusts certain reserve
accounts at the end of each quarter. Therefore, it is not practicable to recast
the prior fiscal period's results to reflect the new fiscal period.
Consequently, the results for the three month period ended September 30, 1997
are not directly comparable to the results of the three month period ended
October 31, 1996.
9
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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
October 31, September 30,
1996 1997
---- ----
<S> <C> <C>
Total revenues........................................... 100% 100%
Cost of revenues......................................... 53 45
--- ---
Gross profit................................... 47 55
--- ---
Operating expenses:
Research and development............................ 12 9
Sales and marketing................................. 26 19
General and administrative.......................... 6 5
Charge for purchased research and development....... -- 55
--- ---
Total operating expenses....................... 44 88
--- ---
Operating income (loss)............................. 3 (33)
Other income (expense), net.............................. (4) 1
--- ---
Loss before income taxes............................ (1) (32)
Provision for income taxes............................... 3 7
--- ---
Net loss....................................... (4)% (39)%
--- ---
</TABLE>
Three Months Ended September 30, 1997 and October 31, 1996
Total Revenues. The Company's revenues consist of product revenues
(including licensing of its software, sales of the Company's proprietary
hardware, and resale of third party hardware) and, to a lesser extent, revenues
from maintenance and other services (including consulting and training). For all
periods presented, the Company has recognized revenue in accordance with
Statement of Position 91-1, entitled "Software Revenue Recognition," issued by
the American Institute of Certified Public Accountants. In accordance with this
statement, in cases where the Company has delivered hardware and/or software to
customers and has insignificant or noncritical vendor obligations related to
these deliveries, the revenue attributable to such obligations has been deferred
until such obligations have been fulfilled.
Total revenues were $38,405,000 and $23,263,000 for the three month periods
ended September 30, 1997 and October 31, 1996, respectively. The increase in
total revenues was primarily a result of an increase in worldwide revenues
generated by the Company's Special Effects (including the first full quarter of
ILLUMINAIRE shipments) and Editing (including initial shipments of OnLINE)
product lines. This was partially offset by a decrease in revenues from the
Company's Broadcast Production product line.
Revenues from customers outside of North America were $18,264,000 (48% of
total revenues) and $11,554,000 (50% of total revenues) for the three month
periods ended September 30, 1997 and October 31, 1996, respectively. Revenues
from customers outside North America increased due to the growing penetration of
the Company's products in the Asian and European markets. The Company expects
that revenues from customers outside of North America will continue to account
for a substantial portion of its revenues and should increase as a percentage of
total revenues.
Cost of Revenues. Cost of revenues consists primarily of the cost of
hardware sold (mainly workstations manufactured by Silicon Graphics, Inc.
("SGI")), cost of hardware service contracts, cost of integration and hardware
assembly, cost of service personnel and the facilities, computing, benefits and
other administrative costs allocated to such personnel and the provision for
inventory reserves. Cost of revenues was $17,280,000 (45% of total revenues) and
$12,287,000 (53% of total revenues) for the three month periods ended September
30, 1997 and
10
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October 31, 1996, respectively. The decrease in cost of revenues, as a
percentage of total revenues, was due to: (1) the growing penetration of the
Company's products in the Asian market where customers typically purchase only
software or software and storage media bundles; (2) an increase in software-only
sales, including sales of the newly acquired OnLINE and ILLUMINAIRE products;
and (3) lower margins realized on systems sold in the three month period ended
October 31, 1996 under an aggressive sales program, including product discounts,
designed to reduce the inventory on hand at the end of the fourth fiscal quarter
of 1996. The Company expects that cost of revenues, as a percentage of total
revenues, will remain approximately the same.
Research and Development. Research and development expenses consist
primarily of the cost of research and development personnel and the facilities,
depreciation on research and development equipment, amortization of acquired
technologies, computing, benefits and other administrative costs allocated to
such personnel, and consulting fees. Expenditures for research and development,
after deducting Canadian federal and provincial tax credits, were $3,512,000 (9%
of total revenues) and $2,678,000 (12% of total revenues) for the three month
periods ended September 30, 1997 and October 31, 1996, respectively. The
increase in research and development expenses is explained primarily by: (1) an
increase in the number of software engineers (including the engineers joining
the Company as a result of the Denim and D-Vision Acquisitions) to develop and
enhance the Company's existing products and to develop new products; (2) an
increase in depreciation charges on the additional research and development
equipment required for the additional personnel; and (3) an increase in the
amortization of acquired technologies. 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. The Company expects that
research and development expenses will increase from their current levels and
increase slightly as a percentage of total 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, tradeshow expenses,
and dealer commissions. Sales and marketing expenses were $7,433,000 (19% of
total revenues) and $6,017,000 (26% of total revenues) for the three month
periods ended September 30, 1997 and October 31, 1996, respectively. The
increase in sales and marketing expenses is explained primarily by the continued
expansion of the Company's direct and indirect sales organization, including the
operating costs of domestic sales offices and foreign subsidiaries, and an
increase in tradeshow activities. The Company expects that sales and marketing
expenses will increase from their current levels and increase slightly as a
percentage of total revenues.
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 doubtful accounts receivable. General and administrative expenses
were $1,884,000 (5% of total revenues) and $1,516,000 (6% of total revenues) for
the three month periods ended September 30, 1997 and October 31, 1996,
respectively. The increase in general and administrative expenses is explained
primarily by an increase in personnel. The Company expects that general and
administrative expenses will increase from their current levels. Should revenues
increase, the Company expects that general and administrative expenses, as a
percentage of total revenues, should remain approximately the same.
Charge for Purchased Research and Development. In connection with the
D-Vision Acquisition, the Company expensed $21,000,000 (55% of total revenues)
of in-process research and development in the three month period ended September
30, 1997.
Other Income (Expense). Other Income (Expense) primarily consists of
foreign currency gains and losses and interest income and expense. Foreign
currency translation gains were $128,000 during the three month period ended
September 30, 1997 as compared to losses of approximately $1,135,000 during the
three month period ended October 31, 1996. These gains and losses are primarily
the result of the Company and each subsidiary translating intercompany balances
denominated in a currency other than its own functional currency. These balances
are remeasured into the functional currency of each company every reporting
period. This remeasurement results in
11
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either unrealized gains or losses depending on the exchange rate fluctuation
between the functional currency of each company and the currency in which the
monetary asset or liability is denominated.
Provision for Income Taxes. The Company's provision for income taxes was
$2,775,000 and $652,000 for the three month periods ended September 30, 1997 and
October 31, 1996, respectively. The provision for both periods was based on the
Canadian federal statutory rate of 38% and reflects the impact of various tax
credits and foreign taxes. The tax provision for the three month period ended
September 30, 1997 differed from the statutory rate primarily as a result of the
Company recording a charge for acquired in-process research and development for
which no benefit was recorded due to the uncertainty of realizing any future tax
benefit associated with this charge offset by the realization of the benefit for
some prior year tax losses for which no benefit was previously recorded. The tax
provision for the three month period ended October 31, 1996 differed from the
statutory rate primarily as a result of the Company not recording a benefit
related to losses where the realization of the benefit was uncertain. The
Company has available foreign net operating loss carry forwards which may be
available to reduce future income tax liabilities.
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 September 30,
1997, the Company had cash of approximately $27,322,000, which includes
$10,800,000 of cash that was restricted for the settlement of the class action
litigations and was being held in escrow at the balance sheet date. In August
1997, the Company amended its revolving demand line of credit with a bank under
which the Company may borrow up to CDN$7,000,000 (or approximately $5,072,000 at
September 30, 1997). Advances under the line accrue interest monthly at the
Canadian prime rate (4.75% at September 30, 1997) plus 0.25%. Additionally, the
Company has a CDN$600,000 (approximately $435,000 at September 30, 1997) demand
leasing facility, and a CDN$600,000 (approximately $435,000 at September 30,
1997) demand research and development tax credit facility. Advances under these
facilities accrue interest monthly at the Canadian prime rate (4.75% at
September 30, 1997) plus 1%. The line and facilities are secured by essentially
all of the Company's North American assets. As additional security, the Company
has assigned to the bank its insurance on these assets. The Company is required
to maintain certain financial ratios, including minimum levels of working
capital, debt service coverage and equity to assets ratios. As of September 30,
1997, no amounts were outstanding under the demand line of credit, the demand
leasing, or the demand research and development tax credit facilities.
The Company's operating activities, including research and development tax
credits, used cash of $3,035,000 and provided cash of $8,454,000 for the three
month periods ended September 30, 1997 and October 31, 1996, respectively. The
principal sources of cash for the three months ended September 30, 1997 were
cash generated from operations, the receipt of insurance proceeds related to the
settlement of the class action litigations, the decrease in income taxes
receivable, the increase in deferred revenue, and the increase in income taxes
payable. These sources of cash were offset by the transfer of cash to a
restricted escrow account to be used to settle the class action litigations, the
increases in accounts receivable, inventory and other current assets, and the
decreases in accounts payable and accrued expenses, and customer deposits.
Accounts payable and accrued expenses used cash of $2,644,000 as a result of the
Company paying most of the liabilities assumed in connection with the D-Vision
Acquisition. Accounts receivable increased due to a significant increase in
revenues experienced in September 1997 as compared to October 1996. Net cash
provided by operations in the three month period ended October 31, 1996 was
composed primarily of decreases in accounts receivable, inventory, income taxes
receivable, and the increase in deferred revenue.
The Company's investing activities used cash of $11,847,000 in the three
month period ended September 30, 1997 primarily for the acquisition of D-Vision
Systems, Inc. and the purchase of research and development equipment and related
software. Upon the acquisition of D-Vision, many of the liabilities assumed were
paid at closing. During the three month period ended September 30, 1997, the
Company received proceeds from the sale of its Montreal land and office building
which were previously included on the balance sheet as assets held for resale.
The proceeds of sale were not materially different from the carrying value of
these assets. The Company's investing activities used cash of $1,707,000 in the
three month period ended October 31, 1996, primarily for renovations to
12
<PAGE>
the office building in London, England and the purchase of computer equipment
and software used in the operations of the Company's business, primarily in the
research and development area.
Financing activities provided cash of $723,000 and $385,000 in the three
month periods ended September 30, 1997 and October 31, 1996, respectively, from
proceeds from common stock option exercises and the issuance of shares under the
Employee Stock Purchase Plan.
As of September 30, 1997, the Company did not have any material commitments
for capital expenditures. However, in August 1997, the Company entered into an
agreement-in-principle to settle the three outstanding class action lawsuits
against it. The parties to the class action litigations have executed a
settlement agreement which is now awaiting final court approval. This
settlement, should it be finally approved, requires the Company to disburse
approximately $7,400,000 from its own funds.
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 financing. The Company underwent a restructuring intended to
decrease 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 in Certain
Factors That May Affect Future Results, 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 1998.
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 forward-looking
statements, and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and releases of the 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, statements regarding
the Company's anticipated cost of revenues, statements regarding the anticipated
adequacy of cash to meet operations, statements concerning anticipated expense
levels and such expenses as a percentage of revenues, statements about the
anticipated portion of revenues from customers outside North America, and the
implementation of the restructuring plan), and in the "Legal Proceedings"
section which are not historical facts may constitute forward-looking
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, other
risks discussed in this section and elsewhere in this Form 10-Q, and the other
risks discussed in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997, as well as, from time to time, in the Company's other
filings with the Securities and Exchange Commission, including without
limitation the Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1996.
The Company's future results are subject to substantial risks and
uncertainties. 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 and software must
continue to develop and the Company must expand this market to include
additional applications within the film and video industries and develop or
acquire new products for use in related markets. There can be no assurance that
the Company will be successful in marketing its existing or any new or enhanced
products. In addition, as the Company enters new markets, distribution channels,
technical requirements and levels and bases 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 favorably. 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. Furthermore, competitive
13
<PAGE>
pressures or other factors, including the Company's entry into new markets, may
result in significant price erosion that could have a material adverse effect on
the Company's business and results of operations. The Company has recently
completed the purchase of certain products and technology through two
acquisitions. There can be no assurance that the products and technologies
acquired from these companies will be successful or will achieve market
acceptance, or that the Company will not incur disruptions and unexpected
expenses in integrating the operations of the two acquired businesses with those
of the Company.
The Company's FLAME, FLINT, INFERNO, FIRE, VAPOUR AND FROST 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 during
fiscal 1996. In addition, there may be unforeseen difficulties associated with
adapting the Company's products to future SGI products. 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 rate
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. The Company currently 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 recently received a letter from Avid Technology, Inc.
("Avid") stating its belief that certain of the Company's recently acquired
D-Vision products practice inventions claimed in a patent on a media editing
system. The Company has responded to Avid's letter stating the Company's belief
that the Company is not infringing any valid claim of Avid's patent. To the
Company's knowledge, Avid has not initiated any suit, action or other proceeding
alleging any infringement by the Company of such patent. The Company currently
markets its systems through its direct sales organization and through
distributors. This marketing strategy may result in distribution channel
conflicts as the Company's direct sales efforts may compete with those of its
indirect channels. The Company currently relies on SGI as the sole source for
video input/output cards used in the Company's systems. The Company's OnLINE
software requires a videographic card manufactured solely by Truevision, Inc..
An interruption in the supply or increase in the price of either one of these
components could have a material adverse effect on the Company's business and
results of operations. 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. 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.
On May 29, 1996, June 13, 1996 and April 29, 1997 certain of the Company's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against the Company and certain of its officers
and directors. The three lawsuits were filed in the Superior Court of the State
of California, the United States District Court, District of Massachusetts and
the United States District Court, Northern District of California, respectively.
On August 12, 1997 the Company announced that it had reached an agreement-in-
principle to settle all of the shareholder class action lawsuits. The parties to
the class action litigations have executed a settlement agreement which is now
awaiting final court approval. The proposed $10.8 million settlement requires
the Company to contribute approximately $7.4 million from its own funds, with
the remainder provided by insurance. The settlement is subject to final court
approval. There can be no assurance that the settlement will be finally approved
and that the Company will not have to continue its defense of the lawsuits.
Should the proposed settlement not be finally approved for any reason, the
Company intends to defend the lawsuits vigorously.
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, its competitors or suppliers and other events or
factors. In addition, the stock market in recent years has experienced extreme
price and volume fluctuations that have particularly affected the market prices
of many technology companies and that have often been unrelated or
disproportionate to the operational performance of these companies. These
fluctuations, as well as general economic and market conditions, may materially
and adversely affect the market price of the Company's common shares.
The Company believes that its operating results could vary significantly
from quarter to quarter. A limited number of systems sales may account for a
substantial percentage of the Company's quarterly revenue because of the high
14
<PAGE>
average sales price of such systems and the timing of purchase orders.
Historically, the Company has generally experienced greater revenues during the
period following the completion of the annual conference of the National
Association of Broadcasters ("NAB"), which is typically 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 periods ended April 30, 1996 and
July 31, 1996. In addition, the timing of revenue is influenced by a number of
other factors, including: the timing of individual orders and shipments, other
industry trade shows, competition, seasonal customer buying patterns, changes to
customer buying patterns in response to platform changes and changes in product
development and sales and marketing expenditures. Because 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. There can be no assurance that the
Company will be successful in maintaining or improving its profitability or
avoiding losses in any future period. 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.
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,
among other things. The Company believes that the allegations in the complaint
are without merit and has defended 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 plaintiff purports to represent
a class of all persons who purchased the Company's common stock between November
14, 1995, and February 13, 1996. On October 11, 1996, the plaintiff filed an
amended complaint which asserts substantially the same factual allegations as
the first complaint and proposes the identical class period. The complaint
alleges violations of the United States Federal Securities law through material
misrepresentations and omissions. The Company believes that the allegations in
the complaint are without merit and has defended the lawsuit vigorously.
On April 29, 1997, a lawsuit entitled Anton Paparella, Sandra Esner and
Geoffrey L. Sherwood, On Behalf of Themselves and All Others Similarly Situated
vs. Discreet Logic Inc., et al., case No. C-97-1570, was filed in the United
States District Court, Northern District of California. Named as defendants are
the Company and certain of Company's former and existing officers, directors and
affiliates, and certain underwriters. The complaint asserts, in all material
respects, the same factual allegations and proposes the same class period as the
above-described California state court complaint filed in May 1996, except
asserts claims under federal securities law instead of state law. The Company
believes that the allegations in the California federal complaint are without
merit and has defended the lawsuit vigorously.
On August 12, 1997, the Company announced that it had reached an agreement-
in-principle to settle all three of the shareholder class action litigations.
The parties to the class action litigations have executed a settlement agreement
which is now awaiting final court approval. The proposed $10,800,000 settlement
requires the Company to contribute approximately $7,400,000 from its own
funds, with the remainder provided by insurance. The settlement is subject to
final court approval. There can be no assurance that the settlement will be
finally approved and that the
15
<PAGE>
Company will not have to continue its defense of the lawsuits. Should the
proposed settlement not be finally approved for any reason, the Company
intends to defend the lawsuits vigorously.
In the year ended July 31, 1996, the Company had provided a $2,506,000
litigation reserve for legal costs associated with defending the class
action lawsuits. During the eleven month period ended June 30, 1997, the
Company recorded a provision of $6,500,000 to accrue the additional
estimated settlement costs to be borne by the Company, should the
proposed settlement be finally approved. At September 30, 1997, the Company
had, on its balance sheet, cash restricted for the above-mentioned
settlement, in the amount of $10,800,000. A corresponding obligation is
included in accounts payable and accrued expenses.
Item 2. Changes in Securities and Use of Proceeds.
(c) Changes in Securities
On July 15, 1997 the Company completed a private placement of 555,000
of its common shares, no par value, (the "Shares") to the holders of the
outstanding capital stock of D-Vision in exchange for all of the
outstanding shares of the capital stock of D-Vision. This private placement
was made to effect the acquisition of D-Vision by the Company. No
underwriters were involved in this sale of securities. The sales were made
in reliance on an exemption from the registration provision of the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to Rule
506 of Regulation D under the Securities Act, in reliance upon information
available to the Company as of July 15, 1997, including certain
representations and warranties of the purchasers of the Shares. The Shares
were offered only to "accredited investors" (as such term is defined in
Regulation D). On August 29, 1997, the Company filed a registration
statement on Form S-3 (File No. 333-34739) with the Securities and Exchange
Commission covering the resale of the Shares, which registration statement
became effective on September 16, 1997.
Items 3.-5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Description of Exhibit
------- ----------------------
Exhibit 10.1 Employment Agreement, dated
September 24, 1997, by and
between the Company and
Graham Sharp.
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
A Current Report on Form 8-K dated July 15, 1997 was filed on July 30,
1997. The Current Report on Form 8-K was filed pursuant to Item 2 of Form 8-
K announcing the completion by Discreet Logic of the acquisition of all of
the outstanding shares of the capital stock of D-Vision Systems, Inc.
pursuant to the terms of a Stock Purchase Agreement dated as of July 10,
1997, among the Company, D-Vision, the former stockholders of D-Vision and
certain other individuals. A Current Report on Form 8-K/A dated July 15,
1997 was filed on September 29, 1997 containing the financial statements
required by Item 7 of Form 8-K.
16
<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.
/s/ FRANCOIS PLAMONDON
by: --------------------------------------
Francois Plamondon
Vice President, Chief Financial
Officer, Treasurer and Secretary
November 14, 1997
17
<PAGE>
September 24, 1997
Mr. Graham Sharp
Discreet Logic Inc.
10 Duke Street
Montreal, Quebec H3C 2L7
Dear Graham:
Discreet Logic Inc. ("DISCREET") is pleased to offer you employment upon the
terms and conditions set out below.
1. Duties and Responsibilities
---------------------------
Discreet hereby agrees to engage your services as Senior Vice-President, Sales
and Marketing of Discreet. In such capacity, you shall report directly to the
Chief Executive Officer of Discreet or such other person as may be designated by
Discreet from time to time and you shall be accountable to both the latter and
the board of directors of Discreet.
By your acceptance hereof, you agree to devote all of your working time,
attention and skill to Discreet and to make every effort necessary to promote
the success of Discreet's business and perform adequately the duties that are
assigned to you as of the Date of Commencement (as defined below).
You further agree that you may not pursue any activities which could be
detrimental to Discreet's interests.
2. Compensation
------------
Discreet shall pay you a base annual salary (the "SALARY") of US $125,000 as of
the Date of Commencement. The Salary shall be reviewed annually by Discreet in
accordance with its applicable internal policies in effect from time to time.
You shall furthermore be eligible to receive annual commissions targeted at US
$75,000 based on the achievement by Discreet, on a consolidated basis, of
certain revenue and margin amounts as approved by the board of directors from
time to time. In addition, if Discreet exceeds, on a consolidated basis, these
certain annual revenue and margin amounts as approved by the board of directors
from time to time, you will receive a bonus of US $25,000 which is to be paid
annually. The compensation committee, at its sole discretion, may approve an
additional bonus payment if Discreet exceeds, on a consolidated basis, certain
operating amounts. Not withstanding the
<PAGE>
foregoing, in the event that the revenue and margin amounts approved by the
board of directors from time to time are not met, the board of directors of
Discreet shall have the right, at its sole discretion, to approve the payment of
a bonus, which amount is solely determined by the compensation committee, if the
board of directors is of the view that your performance was outstanding and the
failure to meet the revenue and margin amounts was not attributable to factors
within your control.
3. Reimbursement
-------------
Discreet will reimburse you, upon presentation of appropriate receipts or other
evidence thereof, all expenses and fees reasonably incurred by you in the
exercise of your functions hereunder, the whole provided that such expenses and
fees were incurred in direct relation to the accomplishment of your duties
hereunder, the whole in accordance with the policy of Discreet then in effect as
modified from time to time at the sole discretion of the board of directors of
Discreet.
4. Stock Options
-------------
Discreet will grant you (the "INITIAL GRANT") no later than two weeks following
the Date of Commencement an option to purchase 300,000 common shares in the
share capital of Discreet pursuant to the "Amended and Restated 1994 Restricted
Stock and Stock Option Plan" of Discreet (the "PLAN"). The exercise price of
each option will be an amount equal to the "Fair Market Value" of the optioned
shares (as determined in accordance with the provisions of the Plan) as at the
date on which the Initial Grant shall be approved by the board of directors of
Discreet (the "DATE OF INITIAL GRANT"). Your options pursuant to the Plan will
vest as follows:
<TABLE>
<CAPTION>
==========================================================================
NUMBER OF SHARES DATE OF VESTING
--------------------------------------------------------------------------
<C> <S>
150,000 Date of 2nd anniversary of Date of Initial Grant
an additional 75,000 Date of 3rd anniversary of Date of Initial Grant
an additional 75,000 Date of 4th anniversary of Date of Initial Grant
==========================================================================
</TABLE>
The Initial Grant shall be subject to you executing the standard form Stock
Option Agreement as required by the Plan.
In the event of a reorganization as defined in the Plan, then (i) all of your
options to purchase common shares in the share capital of Discreet pursuant to
the Initial Grant shall become immediately vested, or (ii) if the board of
directors of Discreet elects, in accordance with the Plan, not to accelerate the
vesting of the options to purchase common shares granted pursuant to the Plan,
you shall receive in substitution for all
-2-
<PAGE>
of your outstanding options to purchase common shares of Discreet, whether
vested or not, such securities (excluding options) of Discreet or of any
amalgamated, merged, consolidated or otherwise reorganized corporation or, only
in the event of an amalgamation of Discreet with one of its subsidiaries,
options of the amalgamated company, all of which securities or options shall be
of equivalent value and liquidity.
5. Duration and Termination
------------------------
This agreement is for an indeterminate term commencing on July 23, 1996 (the
"DATE OF COMMENCEMENT").
This agreement may be terminated, except for continuing obligations hereunder as
at any such termination, in any of the following eventualities and with the
following consequences:
(a) at any time, for Cause, on simple notice from Discreet to you the whole
without any other notice or any pay in lieu of notice or any indemnity
whatsoever from Discreet to you, and any further claims or recourse by you
against Discreet or its affiliates in respect of such termination;
(b) upon three (3) months notice in writing from you to Discreet, specifying
your intention to resign, in which event Discreet shall only be obliged to
pay you your remuneration hereunder for such remaining part of the period
specified in your notice, and Discreet shall have no further obligations
hereunder in the event of your resignation, it being understood that you
shall not benefit, after your resignation, from any additional vesting of
your options to purchase common shares referred to herein; or
(c) upon written notice from Discreet to you in the event of termination of
your employment without Cause, in which event Discreet shall pay you an
indemnity in lieu of notice in a lump sum equal to twelve (12) months of
your Salary at the time of termination, and Discreet shall have no further
obligations hereunder in the event of such termination of your employment,
and you shall have no further claims or recourse against Discreet or any of
its affiliates in respect of such termination. Notwithstanding any
provision herein to the contrary, if your employment with Discreet is
terminated without Cause after the first anniversary date of the Date of
Commencement, then the options to purchase common shares of Discreet which
would have vested next as set forth above shall immediately vest. In
addition, in the event that you are terminated without cause, Discreet
shall reimburse you, upon presentation of appropriate receipts and
justifications, all reasonable moving expenses incurred by yourself in
connection with your move from Montreal, such expenses to be approved by
Discreet before being incurred, which moving expenses shall not exceed US
$20,000.
-3-
<PAGE>
"CAUSE" shall mean cause for dismissal without either notice or payment in lieu
of notice for reasons of fraud, embezzlement, gross negligence, wilful and
careless disregard or gross dereliction of duty, incapacity or refusal to
perform employment functions due to drug use or alcohol addiction, conviction of
a felony, serious breach of duty not corrected within thirty (30) days of notice
to that effect and discriminatory practices governed by statute.
6. Benefit Plans and Vacation
--------------------------
You shall have the right to participate to all benefit programs and/or plans
granted to senior employees of Discreet, the whole in accordance with the actual
programs or plans that Discreet may institute from time to time. You shall be
granted a minimum of four (4) weeks of annual vacation for each whole calendar
year of this agreement.
7. Non-Competition
---------------
Without the prior written approval of Discreet, you agree not, during your
employment with Discreet and for a subsequent period of twelve (12) months
thereafter, on your own behalf or on behalf of any other person, whether
directly or indirectly, in any capacity whatsoever alone, or through or in
connection with any person, carry on or be engaged in or do consulting work for
or have any financial or other interest in or be otherwise commercially involved
in any endeavour, activity or business in all or part of the Territory (as
hereinafter defined) which is in competition with the Business (as hereinafter
defined) or which provides similar competitive services. Notwithstanding any
provision herein to the contrary, including paragraph 5(c), in the event of a
termination of your employment without Cause, if you decide to, directly or
indirectly, in any capacity to carry on or be engaged in or do consulting work
for or have a financial or other interest in or be otherwise commercially
involved in any endeavour, activity or business which is in competition with the
Business or which provides similar competitive services before the expiration of
the aforesaid twelve (12) month period, you shall cease to be bound by the
provisions of this paragraph 7 provided that Discreet shall have no further
obligation to pay you (or you shall reimburse) any severance set forth in
paragraph 5(c) in respect of any period commencing on the date you agree to so
compete with the Business or be involved in a business which provides similar
competitive services.
"TERRITORY" shall mean worldwide.
"BUSINESS" shall mean the business now and heretofore conducted by Discreet, its
subsidiaries and its affiliates provided that such affiliate is in a business
similar or related to the business of Discreet and its subsidiaries.
-4-
<PAGE>
8. Confidentiality and Non-Disclosure
----------------------------------
You hereby expressly covenant and agree that you shall not, during and for a
period of ten years following termination of your employment with Discreet,
disclose any Confidential Information (as hereinafter defined) to any person
other than such persons as expressly approved by Discreet nor use any
Confidential Information for your own benefit, or for the benefit of any other
person, or for any purpose other than within the scope of your employment by
Discreet.
"CONFIDENTIAL INFORMATION" shall mean confidential, secret or proprietary
information of Discreet or related to the Business, whether recorded or not,
howsoever received or generated by Discreet or you from, through or relating to
Discreet or the Business and in whatever from (whether oral, written, machine
readable or otherwise) which pertains to Discreet, its affiliates, its
subsidiaries or the Business. "Confidential Information" shall not include
information which (i) is in the public domain, without any fault or violation of
this agreement on your part, (ii) is generally disclosed by Discreet without any
restriction to third parties, (iii) is properly within your legitimate
possession prior to its disclosure hereunder and without any obligation of
confidences attaching thereto, (iv) after disclosure, is lawfully received by
you from another person who is lawfully in possession of such Confidential
Information and such other person was not restricted from disclosing the said
information to you and (v) you are legally compelled to divulge by order of a
governmental agency or a court of competent jurisdiction.
9. Moving Expenses
----------------
Discreet shall reimburse you, upon presentation of appropriate receipts and
justifications, all reasonable moving expenses incurred by yourself in
connection with your relocation to Montreal, such expenses to be approved by
Discreet before being incurred.
In the event that Discreet terminates your employment without cause, Discreet
will reimburse you for your moving expenses from Montreal up to a maximum amount
of US $20,000, upon presentation of appropriate receipts and justifications,
such expenses to be approved by Discreet before being incurred.
10. Property
--------
Confidential Information and the documents, works, instruments, media or other
embodiments of or containing Confidential Information shall remain the property
of Discreet and be returned to Discreet upon request, or, at the latest,
immediately upon any termination of your employment.
-5-
<PAGE>
11. General Provisions
------------------
This agreement shall be governed, interpreted and construed by and in accordance
with the laws of the Province of Quebec and the laws of Canada applicable
therein.
This offer of employment is subject to receipt of satisfactory references.
You hereby acknowledge having received a copy of the Plan.
The parties acknowledge that they have requested and are satisfied that this
agreement and all related documents be drawn up in the English language; les
parties aux presentes reconnaissent qu'ils ont exigees que la presente
convention et touts documents qui s'y rattachent soient rediges en langue
anglaise et s'en declarent satisfaites.
If you wish to accept this position, please sign and return a signed copy to us.
We are delighted to have you join us.
/s/ Richard J. Szalwinski
Richard J. Szalwinski
ACCEPTED at Montreal, Quebec, on this 26 day of September, 1997.
/s/ Graham Sharp
- ---------------------------------------
Graham Sharp
-6-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<PERIOD-TYPE> 3-MOS
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0
0
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<SALES> 38,405
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,102)
<EPS-PRIMARY> (0.53)
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