<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
DISCREET LOGIC INC.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
DISCREET LOGIC INC.
------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
________________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
________________________________________________________________________
(5) Total fee paid:
________________________________________________________________________
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
________________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
________________________________________________________________________
(3) Filing Party:
________________________________________________________________________
(4) Date Filed:
________________________________________________________________________
<PAGE>
DISCREET LOGIC INC.
10 DUKE STREET
MONTREAL, QUEBEC, CANADA H3C 2L7
________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
________________________
To the Shareholders of Discreet Logic Inc.:
The Annual Meeting of Shareholders of Discreet Logic Inc. (the
"Corporation"), a Quebec corporation, will be held on November 20, 1997 at
9:00 a.m., local time, at the Museum of Contemporary Art, 185 St. Catherine
Street West, Montreal, Quebec, Canada H2X 1Z8, for the following purposes:
1. To elect three Class I directors to serve for a two-year term or until
their successors are elected and qualified.
2. To approve an amendment to the Corporation's 1994 Amended and Restated
Restricted Stock and Stock Option Plan to reserve an additional 2,000,000
shares of common stock for issuance thereunder.
3. To appoint Arthur Andersen & Cie as independent accountants for the
fiscal year ending June 30, 1998 and to authorize the Board of Directors to
fix their remuneration.
4. To transact such other business as may properly come before the meeting
or any adjournments thereof.
Only shareholders of record at the close of business on October 15, 1997 are
entitled to notice of and to vote at the meeting.
All shareholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed proxy card as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any shareholder attending
the meeting may vote in person even if such shareholder has returned a proxy.
By Order of the Board of Directors
Francois Plamondon
Secretary
Montreal, Quebec
October 24, 1997
<PAGE>
DISCREET LOGIC INC.
10 DUKE STREET
MONTREAL, QUEBEC, CANADA H3C 2L7
PROXY STATEMENT
October 24, 1997
Proxies in the form enclosed with this proxy statement are solicited by the
Board of Directors of Discreet Logic Inc., a Quebec corporation (the
"Corporation"), for use at the Annual Meeting of Shareholders to be held on
November 20, 1997 at 9:00 a.m., local time, at the Museum of Contemporary Art,
185 St. Catherine Street West, Montreal, Quebec, Canada H2X 1Z8, and any
adjournments thereof (the "Meeting").
Only shareholders of record at the close of business on October 15, 1997 (the
"Record Date") will be entitled to receive notice of and to vote at the Meeting.
As of that date, 28,829,244 common shares, without par value (the "Common
Shares"), of the Corporation were issued and outstanding. The holders of Common
Shares are entitled to one vote per share on any proposal presented at the
Meeting. Shareholders may vote in person or by proxy. Execution of a proxy
will not in any way affect a shareholder's right to attend the Meeting and vote
in person. Any shareholder giving a proxy has the right to revoke it by written
notice delivered to the Secretary of the Corporation at any time up to and
including the last business day before the day of the Meeting or to the Chairman
of the Meeting on the day of the Meeting.
The representation in person or by proxy of at least a majority of the
outstanding Common Shares entitled to vote at the Meeting is necessary to
constitute a quorum for the transaction of business. Votes withheld from any
nominee, abstentions and broker "non-votes" are counted as present or
represented for purposes of determining the presence or absence of a quorum for
the Meeting. A non-vote occurs when a nominee holding shares for a beneficial
owner votes on one proposal, but does not vote on another proposal because, in
respect of such other proposal, the nominee does not have discretionary voting
power and has not received instructions from the beneficial owner.
In the election of directors, the nominees receiving the highest number of
affirmative votes of the shares present or represented and entitled to vote at
the Meeting shall be elected as directors. On all other matters being submitted
to shareholders, an affirmative vote of a majority of the shares present or
represented and voting on each such matter is required for approval. An
automated system administered by the Corporation's transfer agent tabulates the
votes. The vote on each matter submitted to shareholders is tabulated
separately. Abstentions are included in the number of shares present or
represented and voting on each matter. Broker non-votes are not so included.
The persons named as attorneys-in-fact in the proxies are officers and/or
directors of the Corporation. All properly executed proxies returned in time to
be counted at the Meeting will be voted. In addition to the election of
directors, the shareholders will consider and vote upon a proposal to approve an
amendment to the Corporation's 1994 Amended and Restated Restricted Stock and
Stock Option Plan (the "1994 Plan") to reserve an additional 2,000,000 shares of
common stock for issuance thereunder, and will consider and vote upon a proposal
to ratify the selection of independent accountants and to authorize the Board of
Directors to fix their remuneration, as further described in this proxy
statement. Where a choice has been specified on the proxy with respect to the
foregoing matters, the shares represented by the proxy will be voted in
accordance with the specifications and will be voted FOR if no specification is
indicated.
The Board of Directors of the Corporation knows of no other matters to be
presented at the Meeting. If any other matter should be presented at the
Meeting upon which a vote properly may be taken, shares represented by all
proxies received by the Board of Directors will be voted with respect thereto in
accordance with the judgment of the persons named as attorneys-in-fact in the
proxies.
<PAGE>
2
An Annual Report to Shareholders, containing financial statements for the
fiscal year ended June 30, 1997, is being mailed together with this proxy
statement to all shareholders entitled to vote. During fiscal 1997, the Board
of Directors of the Corporation voted to change the end of the Corporation's
fiscal year end from July 31 to June 30. This proxy statement and the form of
proxy were first mailed to shareholders on or about October 24, 1997. All
dollar amounts included in this proxy statement are expressed in United States
dollars, unless otherwise noted.
MANAGEMENT AND PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth as of the Record Date: (i) the name of each
person who, to the knowledge of the Corporation, owned beneficially more than 5%
of the Common Shares of the Corporation outstanding at such date; (ii) the name
of each director or nominee; and (iii) the name of each executive officer
identified in the Summary Compensation Table set forth below under "Compensation
and Other Information Concerning Directors and Officers," the number of shares
owned by each of such persons and the percentage of the outstanding shares
represented thereby, and also sets forth such information for all current
officers and directors as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNER OF OWNERSHIP(1) OF CLASS
------------------------ -------------------------- ---------------
<S> <C> <C>
Richard J. Szalwinski........................................... 5,249,896 (2) 18.2%
Terrence Higgins................................................ 146,026 (3) *
Thomas Cantwell................................................. 3,248,667 11.3%
Gary G. Tregaskis............................................... 3,200,000 (4) 11.1%
Brian P. Drummond............................................... 16,666 (5) *
Perry M. Simon.................................................. 16,666 (6) *
Francois Plamondon.............................................. - *
Graham Sharp.................................................... 4,375 (7) *
Pierre Desjardins............................................... 6,666 (8) *
Putnam Investments Management, Inc.............................. 1,745,297 (9) 6.1%
All current officers and directors as a group (9 persons)....... 11,888,962(10) 41.2%
</TABLE>
- --------------------
* Less than 1%
(1) Applicable percentage of ownership as of the Record Date is based upon
28,829,244 Common Shares outstanding. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission (the
"Commission"), and includes voting and investment power with respect to
shares. Common Shares subject to options currently exercisable or
exercisable within 60 days of the Record Date are deemed outstanding for
computing the percentage ownership of the person holding such options, but
are not deemed outstanding for computing the percentage of any other person.
(2) Includes 2,567,600 shares held of record by 9002-1585 Quebec Inc., and
2,682,296 shares held of record by BHVR Communications Inc., each a holding
corporation owned by Mr. Szalwinski.
(3) Includes 35,508 Common Shares issuable upon the exercise of options, which
options are exercisable within 60 days of the Record Date.
(4) Includes 800,000 shares held of record by Nearco Trustee Company (Jersey)
Limited re: Gary Tregaskis Settlement, a trust established for the benefit
of Mr. Tregaskis.
(5) Consists of Common Shares issuable upon the exercise of options, which
options are exercisable within 60 days of the Record Date.
(6) Consists of Common Shares issuable upon the exercise of options, which
options are exercisable within 60 days of the Record Date.
(7) Consists of Common Shares issuable upon the exercise of options, which
options are exercisable within 60 days of the Record Date.
(8) Consists of Common Shares issuable upon the exercise of options, which
options are exercisable within 60 days of the Record Date
(9) Such information is based on a Form 13F dated June 30, 1997 and filed with
the Securities and Exchange Commission. Putnam Investment Management, Inc.'s
address is: One Post Office Square, Boston, Massachusetts.
(10) Includes 79,881 Common Shares issuable upon the exercise of options, which
options are exercisable within 60 days of the Record Date.
<PAGE>
3
PROPOSAL 1
ELECTION OF DIRECTORS
NOMINEES
The Corporation's Board of Directors is currently fixed at six members. The
Corporation's By-laws divide the Board of Directors into two classes. The
members of each class of directors serve for staggered two-year terms. Messrs.
Szalwinski, Cantwell and Desjardins are Class I directors whose terms expire at
the Meeting. The Board of Directors is also composed of three Class II
directors (Messrs. Drummond, Simon and Tregaskis) whose terms expire upon the
election and qualification of directors at the Annual Meeting of Shareholders
for the fiscal year ending June 30, 1998.
The exact number of directors is fixed by the Board of Directors. Vacancies
on the Board of Directors may be filled by the Board of Directors unless and
until filled by the shareholders; however, vacancies resulting from an increase
in the number of directors can only be filled by the shareholders.
The Board of Directors has nominated and recommends that Messrs. Szalwinski,
Cantwell and Desjardins, who are currently members of the Board of Directors, be
elected Class I directors, to hold office until the Annual Meeting of
Shareholders for the fiscal year ending June 30, 1999 or until their successors
have been duly elected and qualified or until their earlier resignation or
removal. The Board of Directors knows of no reason why the nominees should be
unable or unwilling to serve, but if any nominee should for any reason be unable
or unwilling to serve, the proxies will be voted for the election of such other
person for the office of director as the Board of Directors may recommend in the
place of such nominee. Unless otherwise instructed, the proxy holders will vote
the proxies received by them for the nominees named below.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE "FOR" THE NOMINEES LISTED BELOW.
The following table sets forth the nominees to be elected at the Meeting and,
for each director whose term of office will extend beyond the Meeting, the year
such nominee or director was first elected a director, the positions currently
held by the nominees and each director with the Corporation, the year the
nominee's or director's term will expire and class of director of each nominee
and each director:
<TABLE>
<CAPTION>
NOMINEE'S OR DIRECTOR'S
NAME AND YEAR NOMINEE OR DIRECTOR POSITION(S) WITH YEAR TERM CLASS OF
FIRST BECAME A DIRECTOR THE CORPORATION WILL EXPIRE DIRECTOR
----------------------- ---------------- ----------- --------
<S> <C> <C> <C>
CONTINUING DIRECTORS:
Brian P. Drummond....................... Director 1998 II
1996
Perry M. Simon.......................... Director 1998 II
1996
Gary G. Tregaskis....................... Director 1998 II
1992
NOMINEES:
Richard J. Szalwinski................... President, Chief Executive 1997 I
1996 Officer, Chairman of the
Board of Directors and
Director
Thomas Cantwell........................ Director 1997 I
1992
Pierre Desjardins..................... Director 1997 I
1997
</TABLE>
<PAGE>
4
OCCUPATIONS OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the director nominees to be elected at the
Meeting, the directors and the executive officers of the Corporation, their
ages, and the positions currently held by each such person with the Corporation.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard J. Szalwinski(1).... 47 President, Chief Executive Officer, Chairman of the Board of
Directors and Director
Francois Plamondon.......... 39 Senior Vice President, Chief Financial Officer, Treasurer and
Secretary
Graham Sharp................ 37 Senior Vice President-Sales & Marketing
Terrence Higgins............ 38 Senior Vice President-Products
Gary G. Tregaskis........... 39 Director
Thomas Cantwell(1)(2)....... 70 Director
Brian P. Drummond(1)(2)..... 66 Director
Perry M. Simon(1)........... 42 Director
Pierre Desjardins(2)........ 55 Director
</TABLE>
- --------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
RICHARD J. SZALWINSKI, a founder of the Corporation, has served as a Director
since May 1992 and as Chairman of the Board of Directors since March 1994. Mr.
Szalwinski served as acting President and Chief Executive Officer from February
1996 and assumed that position officially in July 1996. From May 1992 to
November 1994 Mr. Szalwinski served as Chief Executive Officer of the
Corporation and served as President of the Corporation from May 1992 to March
1994. Prior to founding the Corporation, he held several positions at Softimage
Inc. from June 1988 to December 1991, most recently as a Director and Vice
President of Sales. Mr. Szalwinski also serves on the Board of Directors of
Malofilm Communications Inc., a public company.
FRANCOIS PLAMONDON joined the Corporation in July 1996 and, since August 1996,
serves as Senior Vice President, Chief Financial Officer, Treasurer and
Secretary of the Corporation. Prior to joining the Corporation, Mr. Plamondon
was a Partner at Ernst & Young, a public accounting and consulting firm, from
August 1990 to July 1996.
GRAHAM SHARP currently serves as Senior Vice President-Sales & Marketing of
the Corporation since July 1996. Mr. Sharp joined the Corporation in January
1996 as General Manager, Asia-Pacific and served in that position until July
1996. Prior to joining the Corporation, Mr. Sharp served as Regional Sales
Manager, Asia-Pacific for the broadcast division of Avid Technologies Inc., a
publicly-traded supplier of non-linear video and audio editing systems, from
January 1995 to January 1996. Prior to that, Mr. Sharp served as Sales
Director, Asia-Pacific at Dynatech Corporation, a publicly traded supplier of
broadcast and post-production equipment, from February 1993 to December 1994.
Prior to that, Mr. Sharp served as a sales manager responsible for worldwide
sales for Alpha Image Ltd., a supplier of routing and distribution equipment,
from April 1989 to February 1993.
TERRENCE HIGGINS currently serves as Senior Vice President-Products of the
Corporation since July 1996. From July 1995 to July 1996, Mr. Higgins served as
Vice President-Engineering of the Corporation. Mr. Higgins joined the
Corporation in May 1993 as a software engineer and has served in various
engineering capacities with the Corporation, most recently as Director of
Engineering, from August 1994 to July 1995. Prior to joining the Corporation,
he served as a graphic research analyst for the National Film Board of Canada,
from February 1986 to May 1993.
<PAGE>
5
GARY G. TREGASKIS has served as a Director of the Corporation since July 1992.
Mr. Tregaskis has been an independent consultant to the Corporation since
December 1995. Prior to that, Mr. Tregaskis served the Corporation as Director
of Advanced Products from February 1994 to December 1995. He has also served as
Director of Advanced System Division of the Corporation from July 1992 to
February 1994. Mr. Tregaskis was the principal designer and architect of FLAME.
Prior to joining the Corporation, Mr. Tregaskis served as the Director of
Research and Development at D.A. Technology, an Australian software development
corporation, from 1985 to June 1992.
THOMAS CANTWELL has served as a Director of the Corporation since September
1992. Dr. Cantwell has been an investor and venture capitalist since 1987. He
has served as President of Technical Computer Graphics, a computer distributor
and software development corporation, since November 1987. Dr. Cantwell also
serves as a Director of Supreme Industries, Inc., a public company and as
Chairman of the Board of Directors of Paradigm Entertainment Inc., a privately
held developer of computer and video games.
BRIAN P. DRUMMOND has served as a Director of the Corporation since January
1996. Mr. Drummond has served as President of Brican Investments Ltd., a
private holding company, since March 1979. Mr. Drummond was Vice Chairman and
Director of Richardson Greenshields of Canada Limited, an investment dealer,
from 1982 to June 1997. Mr. Drummond also serves as a Director of Atco Ltd. and
Canadian Utilities Limited, both public companies.
PERRY M. SIMON has served as a Director of the Corporation since January 1996.
Mr. Simon has been President, Viacom Television for Viacom Entertainment,
Viacom, Inc., a television and film developer and producer, since September
1993. Prior to that, Mr. Simon held several positions with NBC Entertainment,
from 1985 to 1993, most recently as Executive Vice President-Prime-time
Programs.
PIERRE DESJARDINS has served as a Director of the Corporation since January
1997. Mr. Desjardins has been Chairman, President and Chief Executive Officer
of Total Containment, a manufacturer and distributor of underground systems and
products for the conveyance and containment of fuels, since September 1996.
Prior to that, Mr. Desjardins was President and Chief Executive Officer of
Domtar Inc., a producer of paper, pulp and forest products, from September 1990
to October 1994. Mr. Desjardins also served as President of Labatt Breweries of
Canada from 1986 to September 1990. Mr. Desjardins also serves as a Director of
Canam Manac Inc., a public company.
Executive officers of the Corporation are elected by the Board of Directors on
an annual basis and serve until their successors have been duly elected and
qualified or until their earlier resignation or removal.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors met seven times and took action by unanimous written
consent two times during the fiscal year ended June 30, 1997. Each of the
directors attended at least 75% of the meetings of the Board of Directors during
fiscal 1997. The Corporation established an Audit Committee and a Compensation
Committee during the fiscal year ended July 31, 1996. During fiscal 1997, the
Audit Committee of the Board of Directors, of which Messrs. Cantwell, Drummond
and Desjardins are currently members, reviewed with the independent accountants
and management the annual financial statements and independent accountants'
opinion, reviewed the results of the examination of the Corporation's financial
statements by the independent accountants, recommended the retention of the
independent accountants to the Board of Directors and periodically reviewed the
Corporation's accounting policies and internal accounting and financial
controls. During the fiscal year ended June 30, 1997, the Audit Committee met on
four occasions. The Board of Directors has also appointed a Compensation
Committee, whose members currently are Messrs. Szalwinski, Cantwell, Drummond
and Simon. The Compensation Committee, which held one meeting and took action by
unanimous written consent one time during the fiscal year ended June 30, 1997,
is responsible for administering the Corporation's stock ownership plans and for
reviewing and approving compensation matters concerning the executive officers
and key employees of the Corporation. On April 5, 1997 the Board of Directors
appointed a Nominating Committee consisting of Messrs. Drummond, Simon,
Desjardins, and Szalwinski, as well as a Strategic Committee consisting of
Messrs. Szalwinski, Tregaskis, and Drummond. The Nominating Committee makes
recommendations to the Board regarding the size and composition
<PAGE>
6
of the Board. The Committee establishes procedures for the nomination process,
recommends candidates for election by the Board of Directors and nominates
officers for election by the Board. The Nominating Committee did not meet during
fiscal 1997. The Nominating Committee will consider nominees proposed by the
Corporation's stockholders. Any stockholder who wishes to recommend a
prospective nominee for the Board of Directors for the Nominating Committee's
consideration may do so by providing the candidate's name and qualifications in
writing to the Secretary of the Corporation, 10 Duke Street, Montreal, Quebec,
Canada H3C 2L7.
COMPENSATION AND OTHER INFORMATION
CONCERNING DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION SUMMARY
The following table sets forth summary information concerning the compensation
paid or earned for services rendered to the Corporation in all capacities during
the fiscal years ended July 31, 1995 and 1996 and June 30, 1997 to (i) the
Corporation's current Chief Executive Officer; and (ii) each of the four most
highly compensated executive officers of the Corporation who earned more than
$100,000 in salary and bonus in fiscal year 1997 (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
Compensation
------------
OPTION
NAME AND PRINCIPAL POSITION(1) Annual Compensation(1) Awards(#)
- ------------------------------------------- ----------------------------------- ---------
YEAR SALARY BONUS
-------- ------------ -----------
<S> <C> <C> <C> <C>
Richard J. Szalwinski(2)................... 1997 $192,724 $172,500 450,000
President, Chief Executive 1996 $154,557 -- --
Officer, Chairman of the 1995 $145,212 $145,212 __
Board of Directors and Director
Terrence Higgins (3)....................... 1997 $ 93,683 $25,550 --
Senior Vice President - Products 1996 $121,549 -- 40,000
1995 $ 57,813 -- 121,920
Francois Plamondon (4)..................... 1997 $133,833 $50,920 --
Senior Vice President, Chief 1996 -- -- 300,000
Financial Officer, Secretary and 1995 -- -- --
Treasurer
Graham Sharp (5)........................... 1997 $183,337(6) 25,000 300,000
Senior Vice President - Sales and 1996 $ 98,572(7) -- 10,000
Marketing 1995 -- -- --
</TABLE>
(1) 1997 amounts represent salary and bonus actually paid or earned during the
eleven month period ended June 30, 1997.
(2) In August 1997, Mr. Szalwinski's annual salary was increased from $230,000
to $255,500 effective July 1, 1997.
(3) In August 1997, Mr. Higgins' annual salary was increased from $102,200 to
$109,500 effective July 1, 1997.
(4) In August 1997, Mr. Plamondon's annual salary was increased from $145,500
to $182,500 effective July 1, 1997.
(5) In August 1997, Mr. Sharp's annual salary was increased from $125,000 to
$150,000 effective July 1, 1997.
(6) This amount includes $68,750 of sales commissions earned by Mr. Sharp
during fiscal 1997.
(7) Mr. Sharp joined the Corporation in January 1996. This amount includes his
salary as well as $57,948 of sales commissions paid to Mr. Sharp for the
seven months of fiscal 1996 during which he was employed by the Corporation.
<PAGE>
7
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------------
NAME(1) GRANTED(#) YEAR ($/SHARE) DATE 5%($) 10%($)
- ------------------------- ----------- ------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Richard J. Szalwinski.... 450,000 26.6% $6.03 4/5/07 $1,706,873 $4,325,553
Terrence Higgins (1)..... -- -- -- -- -- --
Francois Plamondon (1)... -- -- -- -- -- --
Graham Sharp............. 300,000 17.8% $4.50 8/12/06 $849,008 $2,151,552
</TABLE>
(1) On August 11, 1997, Francois Plamondon was granted an option to purchase
50,000 Common Shares and Terrence Higgins was granted an option to purchase
40,000 Common Shares, both at an exercise price per share of $24.25.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth, for each of the Named Executive Officers,
information with respect to the exercise of stock options during the year ended
June 30, 1997 and the year-end value of unexercised options:
<TABLE>
<CAPTION>
VALUE(2) OF UNEXERCISED
Shares NUMBERS OF UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON Value OPTIONS AT YEAR-END YEAR-END
NAME EXERCISE (#) Realized($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- --------------- ------------------------ -------------------------- -------------------------
<S> <C> <C> <C> <C>
Richard J. Szalwinski.... -- -- 0 / 450,000 --/ $ 4,710,915
Terrence Higgins......... -- -- 30,508 / 17,500 $446,761 / $ 245,000
Francois Plamondon....... -- -- 0 / 300,000 --/ $ 3,300,000
Graham Sharp............. -- -- 3,125 / 306,875 --/ $ 3,600,000
</TABLE>
- -----------------------------------------------
(1) Amounts disclosed in this column are calculated based on the difference
between the fair market value of the Corporation's Common Shares on the date
of exercise and the exercise price of the options in accordance with
regulations promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and do not reflect amounts actually received
by the Named Executive Officers.
(2) Value is based on the difference between the option exercise price and the
fair market value at June 30, 1997, the fiscal year-end ($16.50 per share),
multiplied by the number of shares underlying the option.
<PAGE>
8
EMPLOYMENT AGREEMENTS
In August 1997, the Corporation entered into an agreement with Richard
Szalwinski, whereby Mr. Szalwinski agreed to serve as President and Chief
Executive Officer of the Corporation.. Mr. Szalwinski previously had no
employment agreement with the Corporation. Pursuant to such agreement, Mr.
Szalwinski's annual base salary was increased from $200,000 to $230,000,
effective March 1, 1997. In addition, pursuant to such agreement, Mr. Szalwinski
is eligible to receive an annual bonus of up to 75% of his base annual salary,
based on the Corporation meeting the consolidated budgets and forecasts approved
by the Board of Directors. In the event that the Corporation does not meet such
consolidated budgets and forecasts, the Board of Directors may, at its sole
discretion, approve the payment of a bonus of up to 75% of his base annual
salary to Mr. Szalwinski if the Board of Directors determines that Mr.
Szalwinski's performance of his duties was outstanding and that the
Corporation's failure to meet such consolidated budgets and forecasts was not
attributable to factors within Mr. Szalwinski's control. In August 1997, the
Board of Directors increased Mr. Szalwinski's annual base salary to $255,500,
effective July 1, 1997. The agreement provides that Mr. Szalwinski's employment
with the Corporation may be terminated by Mr. Szalwinski upon three months
written notice to the Corporation, in which case the Corporation must pay to Mr.
Szalwinski his salary and benefits for the remaining time period specified in
his notice of termination. The agreement further provides that the Corporation
may terminate the agreement at any time with or without cause, upon written
notice. In the event Mr. Szalwinski's employment is terminated by the
Corporation, without cause, the Corporation must pay Mr. Szalwinski a lump sum
amount equal to twenty-four months base annual salary at the time of such
termination. In addition, Mr. Szalwinski was granted an incentive stock option
to purchase 450,000 Common Shares under the 1994 Plan at an exercise price of
$6.03 per share. In the event that Mr. Szalwinski's employment is terminated
without cause, then all options to purchase shares of the Corporation which
would have next vested, shall immediately vest upon such termination. The
agreement further provides that in the event of a Reorganization, as defined in
the 1994 Plan, then (i) the option to purchase the 450,000 Common Shares granted
to Mr. Szalwinski will become immediately vested or (ii) if the Board of
Directors elects, in accordance with the 1994 Plan, not to accelerate the
vesting of the options granted pursuant to the 1994 Plan, Mr. Szalwinski will
receive in substitution for all of his outstanding options to purchase Common
Shares of the Corporation, whether vested or not, such securities (excluding
options) of the Corporation or of any merged, consolidated or otherwise
reorganized corporation or, only in the event of a merger of the Corporation
with one of its subsidiaries, options of the merged company, all of which
securities or options shall be of equivalent value and liquidity.
In June 1996, the Corporation entered into an agreement with Francois
Plamondon, whereby Mr. Plamondon became Senior Vice President, Chief Financial
Officer, Secretary and Treasurer of the Corporation, effective August 1, 1996.
Pursuant to such agreement, Mr. Plamondon received an annual base salary of
$145,500, and is eligible to receive an annual bonus of up to $50,920, based on
the Corporation meeting the consolidated budgets and forecasts approved by the
Board of Directors. In the event that the Corporation does not meet such
consolidated budgets and forecasts, the Board of Directors may, at its sole
discretion, approve the payment of a bonus of up to $50,920 to Mr. Plamondon if
the Board of Directors determines that Mr. Plamondon's performance of his duties
was outstanding and that the Corporation's failure to meet such consolidated
budgets and forecasts was not attributable to factors within Mr. Plamondon's
control. In August 1997, the Board of Directors increased Mr. Plamondon's annual
base salary from $145,500 to $182,500, effective July 1, 1997 and increased his
eligible annual bonus from $50,920 to 50% of his annual base salary. The
agreement provides that Mr. Plamondon's employment with the Corporation may be
terminated by Mr. Plamondon upon three months written notice to the Corporation,
in which case the Corporation must pay to Mr. Plamondon his salary and benefits
for the remaining time period specified in his notice of termination. The
agreement further provides that the Corporation may terminate the agreement at
any time with or without cause, upon written notice. In the event Mr.
Plamondon's employment is terminated by the Corporation, without cause, the
Corporation must pay Mr. Plamondon a lump sum amount equal to twelve months base
annual salary at the time of such termination. In addition, Mr. Plamondon was
granted an incentive stock option to purchase 300,000 Common Shares under the
1994 Plan at an exercise price of $5.50 per share. In the event that Mr.
Plamondon's employment is terminated without cause after August 1, 1997, then
all options to purchase shares of the Corporation which would have next vested,
shall immediately vest upon such termination. The agreement further provides
that in the event of a Reorganization, as defined in the 1994 Plan, then (i) the
option to purchase the 300,000 Common Shares granted to Mr. Plamondon will
become immediately vested or (ii) if the Board of Directors elects, in
accordance with the 1994 Plan, not to accelerate the vesting of the options
granted pursuant to the 1994 Plan, Mr. Plamondon will receive in substitution
for all of his outstanding options to
<PAGE>
9
purchase Common Shares of the Corporation, whether vested or not, such
securities (excluding options) of the Corporation or of any merged, consolidated
or otherwise reorganized corporation or, only in the event of a merger of the
Corporation with one of its subsidiaries, options of the merged company, all of
which securities or options shall be of equivalent value and liquidity.
In November 1996, the Corporation entered into an agreement with Graham Sharp
related to Mr. Sharp's employment as Senior Vice President-Sales & Marketing of
the Corporation, effective July 23, 1996. Pursuant to such agreement, Mr. Sharp
receives an annual base salary of $125,000, and is eligible to receive sales
commissions of up to $75,000, based on the Corporation meeting the sales and
margin contribution targets approved by the Board of Directors, and, in the
event the Corporation exceeds such targets, an annual bonus of $25,000. The
Board of Directors may also, at its sole discretion, approve the payment of an
additional bonus to Mr. Sharp if the Corporation exceeds the sales and margin
contribution targets. In addition, in the event the Corporation does not meet
such sales targets, the Board of Directors may, at its sole discretion, approve
the payment of a bonus to Mr. Sharp if the Board of Directors determines that
Mr. Sharp's performance of his duties was outstanding and the Corporation's
failure to meet such targets was not attributable to factors within Mr. Sharp's
control. In August 1997, the Board of Directors increased Mr. Sharp's annual
base salary from $125,000 to $150,000, effective July 1, 1997 and increased his
eligible annual bonus from $25,000 to up to 50% of his annual base salary. Under
this agreement, Mr. Sharp's eligibility to receive sales commissions remained
unchanged. The agreement provides that Mr. Sharp's employment with the
Corporation may be terminated by Mr. Sharp upon three months written notice to
the Corporation, in which case the Corporation must pay to Mr. Sharp his salary
and benefits for the remaining time period specified in his notice of
termination. The agreement further provides that the Corporation may terminate
the agreement at any time, with or without cause, upon written notice. In the
event Mr. Sharp's employment is terminated by the Corporation, without cause,
the Corporation must pay Mr. Sharp a lump sum amount equal to twelve months of
his base annual salary at the time of such termination. In addition, Mr. Sharp
was granted an incentive stock option to purchase 300,000 Common Shares under
the 1994 Plan at an exercise price of $4.50 per share. In the event that Mr.
Sharp's employment is terminated without cause after July 23, 1997, then all
options to purchase shares of the Corporation which would have next vested,
shall immediately vest upon such termination. The agreement provides that in
the event of a Reorganization, as defined in the 1994 Plan, then (i) the option
to purchase the 300,000 Common Shares granted to Mr. Sharp will become
immediately vested or (ii) if the Board of Directors elects, in accordance with
the 1994 Plan, not to accelerate the vesting of the options granted pursuant to
the 1994 Plan, Mr. Sharp will receive in substitution for all of his outstanding
options to purchase Common Shares of the Corporation, whether vested or not,
such securities (excluding options) of the Corporation or of any merged,
consolidated or otherwise reorganized corporation or, only in the event of a
merger of the Corporation with one of its subsidiaries, options of the merged
company, all of which securities or options shall be of equivalent value and
liquidity. Finally, the Corporation agreed to reimburse Mr. Sharp's documented
out-of-pocket expenses incurred in connection with his move to Montreal.
REPORT ON EXECUTIVE COMPENSATION BY THE COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS
This report is submitted by the Compensation Committee of the Board of
Directors, which administered the Corporation's executive compensation program
during the fiscal year ended June 30, 1997. The Compensation Committee of the
Board of Directors is comprised of Messrs. Cantwell, Drummond and Simon, three
outside directors of the Corporation, and Mr. Szalwinski, President and Chief
Executive Officer of the Corporation. Pursuant to authority delegated by the
Board of Directors, the Compensation Committee is responsible for reviewing and
administering the Corporation's stock ownership plans and reviewing and
approving compensation matters concerning the executive officers of the
Corporation.
The Corporation's executive compensation program is designed to provide levels
of compensation that assist the Corporation in attracting, motivating and
retaining qualified executive officers and aligning the financial interests of
the Corporation's executive officers with those of its shareholders by providing
a competitive compensation package based on corporate and individual
performance. Compensation under the executive compensation program is comprised
of cash compensation in the form of base salary and, annual incentive bonuses,
and long-term incentive awards in the form of stock option grants. In addition,
the compensation program is comprised of various benefits, including medical and
insurance plans,which plans are generally available to all employees of the
Corporation.
<PAGE>
10
Base Salary
Base salary compensation levels for the Corporation's executive officers,
including the Chief Executive Officer, are intended to be competitive within the
range of base salaries paid to executive officers with comparable
qualifications, experience and responsibilities at other similar companies. In
establishing fiscal 1997 base salary compensation levels for the Corporation's
executive officers, the Compensation Committee considered such factors as (i)
individual performance and experience (ii) the Corporation's past financial
performance and future expectations (iii) past salary levels and (iv) in the
case of Mr. Plamondon and Mr. Sharp, the fact that salaries with such officers
had been negotiated on a case by case basis at the time of hiring or promotion.
Mr. Plamondon joined the Corporation in July 1996 and Mr. Sharp was promoted by
the Corporation in July 1996 from General Manager, Asia-Pacific to Senior Vice
President-Sales & Marketing. The Compensation Committee did not assign relative
weights or rankings to these factors, but instead made a subjective
determination based upon the consideration of all of these factors. In light of
these factors, the Compensation Committee increased Mr. Szalwinski's annual base
salary compensation was increased from $200,000 to $230,000 effective March 1,
1997 and increased Mr. Higgin's annual base salary compensation from $83,950 to
$102,200 effective July 1, 1997. Mr. Plamondon's and Mr. Sharp's base annual
salaries were not increased during fiscal 1997 due to the timing of the hiring
or promotion of such executive officer.
Incentive Compensation
Potential bonus compensation for Mr. Szalwinski and Mr. Plamondon is based on
the Corporation meeting the consolidated budgets and forecasts approved by the
Board of Directors, and for Mr. Sharp, based on the Corporation meeting and/or
exceeding the sales and margin contribution targets approved by the Board of
Directors. These potential bonus amounts were negotiated between the
Compensation Committee and the executive officers at the time of their hiring or
promotion to executive officer and are included in each of these executive
officer's employment agreements. In January 1996, the Compensation Committee
established the Corporation's Executive Bonus Plan (the "Executive Bonus Plan").
Pursuant to the terms of the Executive Bonus Plan, each of the Corporation's
executive officers was eligible to receive a cash bonus at the end of the fiscal
year based upon the Corporation's performance in fiscal 1997. In fiscal 1997,
only Mr. Higgins was eligible to receive annual bonus compensation under the
Executive Bonus Plan as Mr. Szalwinski's, Mr. Plamondon's and Mr. Sharp's bonus
compensation was negotiated outside of this plan as part of their employment
agreements. The potential annual bonus amount that Mr. Higgins was eligible to
receive for fiscal 1997 was determined by the Compensation Committee based upon
the committee members' knowledge of comparative salary and bonus arrangements at
similar companies. Bonus amounts for each of the executive officers were also
based upon evaluations and recommendations made by the Corporation's President
and Chief Executive Officer. In addition to bonus compensation under the
Executive Bonus Plan and that contained in employment agreements, the
Compensation Committee has the authority to award additional bonuses at the end
of the fiscal year to reward an executive officer for superior performance. As
the Corporation met the consolidated budgets, forecasts and sales targets
approved by the Board of Directors, Mr. Szalwinski, Mr. Plamondon and Mr. Sharp
received annual bonus compensation in the amounts specified in their employment
agreements and Mr. Higgins received an annual bonus of $25,550. No additional
discretionary bonuses were awarded by the Compensation Committee.
Stock Options
Stock options are the principal vehicle used by the Corporation for the
payment of long-term compensation, to provide a stock-based incentive to improve
the Corporation's financial performance and to assist in the recruitment,
motivation and retention of key professional and managerial personnel. The
Corporation's stock option plans were administered, during fiscal 1997, by the
Compensation Committee of the Board of Directors.
Generally, stock options are granted when an executive officer joins the
Corporation and periodically thereafter based primarily upon the individual's
actual and/or potential contributions to the Corporation and the Corporation's
financial performance. Stock options are designed to align the interests of the
Corporation's executive officers with those of its shareholders by encouraging
executive officers to enhance the value of the Corporation and, hence,
shareholder return. In addition, the exercisability of stock options over a
period of time is designed to defer the receipt of compensation by the option
holder, thus creating an incentive for the individual to remain with the
<PAGE>
11
Corporation. The Corporation periodically grants new options to provide
continuing incentives for future performance.
During the fiscal year ended June 30, 1997, 450,000 options to purchase Common
Shares were awarded to Mr. Szalwinski pursuant to his employment agreement at
the then fair market value of $6.03. In addition, pursuant to Mr. Sharp's
promotion by the Corporation in July 1996 from General Manager, Asia-Pacific to
Senior Vice President-Sales & Marketing, Mr. Sharp was granted 300,000 options
to purchase Common Shares at the then fair market value of $4.50. Other than
such grants, no options to purchase Common Shares were awarded to the
Corporation's executive officers during the fiscal year ended June 30, 1997.
Other Benefits
The Corporation also has various broad-based employee benefit plans.
Executive officers participate in these plans on the same terms as eligible,
non-executive employees, subject to any legal limits on the amounts that may be
contributed or paid to executive officers under these plans. The Corporation
offers a stock purchase plan, under which employees may purchase Common Shares
at a discount. The Corporation also maintains insurance and other benefit plans
for its employees.
Tax Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), limits the tax deduction to $1 million for compensation paid to any
of the executive officers unless certain requirements are met. The Board of
Directors has considered these requirements and the proposed regulations. It is
the Board of Directors' present intention that, so long as it is consistent with
its overall compensation objectives, substantially all executive compensation be
deductible for United States federal income tax purposes by those subsidiaries
of the Corporation that are subject to taxation in the United States. The Board
of Directors believes that the Plan currently qualifies for an exception to the
requirements of Section 162(m) and, subject to the prior sentence, will take
whatever further action is necessary to satisfy Section 162(m) requirements for
compensation paid pursuant to the Plan.
Mr. Szalwinski's Compensation
Effective March 1, 1997, Mr. Szalwinski's base salary compensation was
increased from $200,000 to $230,000 and effective July 1, 1997 was increased
from $230,000 to $255,500. The Compensation Committee increased Mr. Szalwinski's
annual base salary in light of his individual performance, the Corporation's
financial performance and after consideration of the salaries of comparably
qualified executives at similar companies. In addition, per his employment
agreement with the Corporation, Mr. Szalwinski is eligible to receive an annual
bonus of up to 75% of his base annual salary, based on the Corporation meeting
the consolidated budgets and forecasts approved by the Board of Directors. As
the Corporation met these consolidated budgets and forecasts for fiscal 1997,
Mr. Szalwinski received annual bonus compensation in the amounts specified in
his employment agreement. During fiscal 1997, the Board of Directors also
granted Mr. Szalwinski 450,000 options to purchase Common Shares in light of his
individual performance, the Corporation's past financial performance and
expected future performance and after consideration of the long-term
compensation awards of comparably qualified executives at similar companies.
Respectfully submitted by the Compensation Committee
Richard J. Szalwinski
Thomas Cantwell
Brian Drummond
Perry M. Simon
<PAGE>
12
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Corporation's Board of Directors has established a Compensation Committee
consisting of Messrs. Szalwinski, Cantwell, Drummond and Simon. During this
period, Mr. Szalwinski, the Corporation's Chairman and Chief Executive Officer,
participated in deliberations of the Corporation's Compensation Committee
concerning the compensation of executive officers other than his own. No
executive officer of the Corporation served as a member of the compensation
committee of another entity (or other committee of the Board of Directors
performing equivalent functions or, in the absence of any such committee, the
entire Board of Directors), one of whose executive officers served as a director
of the Corporation, other than Mr. Szalwinski who is a member of the
Compensation Committee of Malofilm, a corporation of which Robert J. Hogan, who
served as a director of the Corporation until January 1997, was President.
COMPENSATION OF DIRECTORS
Employee directors do not receive cash compensation for their service as
members of the Board of Directors. Non-Employee Directors (as defined below)
receive an annual fee of $10,000 for services on the Board of Directors and an
additional $2,500 for services on each committee of the Board of Directors.
Non-Employee Directors also receive reimbursement of their expenses for each
Board of Directors or committee meeting attended. The Corporation may from time
to time, and at the discretion of the Board of Directors (or the Compensation
Committee), grant stock options to directors in addition to the options
specified in the 1995 Non-Employee Director Stock Option Plan. See "1995 Non-
Employee Director Stock Option Plan", and "1997 Special Limited Non-Employee
Director Stock Option Plan."
1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The 1995 Non-Employee Director Stock Option Plan (the "Director Plan") was
adopted by the Board of Directors in March 1995 and approved by the shareholders
in April 1995. The Director Plan provides for the grant of options to purchase
a maximum of 200,000 Common Shares to Non-Employee Directors of the Corporation.
The Director Plan is administered by the Compensation Committee. The Director
Plan authorizes the grant (a) to each person who becomes a member of the Board
of Directors and who is not an employee, officer or direct or indirect owner of
5% or more of the Common Shares of the Corporation (a "Non-Employee
Director"), on the date such person is first elected to the Board of Directors
without further action by the Board of Directors, of an option to purchase
20,000 Common Shares and (b) to each person receiving an option pursuant to
clause (a) who is a Non-Employee Director on the fifth anniversary of the date
such person was first elected to the Board of Directors, during the term of the
Director Plan, of an option to purchase 15,000 Common Shares; provided that such
person has continuously served as a Non-Employee Director during such 5-year
period. The exercise price per share for all options granted under the Director
Plan will be equal to 100% of the fair market value per share of the Common
Shares as of the date of grant. The options become exercisable in three equal
annual installments, with the first installment exercisable immediately,
provided that with respect to the second and third vesting dates that the
optionee remains a director at that time. The term of each option will be for a
period of ten years from the date of grant. Options may not be assigned or
transferred except by will, by the laws of descent and distribution or pursuant
to a domestic relations order. Options issued pursuant to the Director Plan are
exercisable to the extent vested only while the optionee is serving as a
director of the Corporation or within three months after the optionee ceases to
serve as a director of the Corporation (except that if a director dies or
becomes disabled while he or she is serving as a director of the Corporation,
the option shall be accelerated and shall be immediately vested and may be
exercised until the scheduled expiration date of the option). As of the Record
Date, the Corporation had outstanding options under the Director Plan to
purchase an aggregate of 60,000 Common Shares at a weighted average per share
exercise price of $14.85.
<PAGE>
13
1997 SPECIAL LIMITED NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The 1997 Special Limited Non-Employee Director Stock Option Plan (the "Limited
Director Plan") was adopted by the Board of Directors in February 1997. The
Limited Director Plan is intended to promote the interests of the Corporation by
aligning the interests of directors with the interests of the Corporation and by
providing an inducement to the two individuals named below who are not employees
or officers of the Corporation to continue to serve as members of its Board of
Directors and who are expected to contribute to the Corporation's interests.
The Limited Director Plan provides for a one-time grant of options to purchase
10,000 Common Shares to each of Messrs. Drummond and Simon for a maximum of
20,000 Common Shares reserved for issuance under the Limited Director Plan.
The Limited Director Plan is administered by the Board of Directors. The
Limited Director Plan authorizes the grant to Messrs. Drummond and Simon The
exercise price per share for all options granted under the Limited Director Plan
is equal to 100% of the fair market value per share of the Common Shares as of
the date of grant. The options become exercisable in three equal annual
installments, with the first installment exercisable immediately, provided that
with respect to the second and third vesting dates that the optionee remains a
director at that time. The term of each option will be for a period of ten
years from the date of grant. Options may not be assigned or transferred except
by will, by the laws of descent and distribution or pursuant to a domestic
relations order. Options issued pursuant to the Limited Director Plan are
exercisable to the extent vested only while the optionee is serving as a
director of the Corporation or within three months after the optionee ceases to
serve as a director of the Corporation (except that if a director dies or
becomes disabled while he or she is serving as a director of the Corporation,
the option shall be accelerated and shall be immediately vested and may be
exercised until the scheduled expiration date of the option). As of the Record
Date, the Corporation had outstanding options under the Director Plan to
purchase an aggregate of 20,000 Common Shares at a per share exercise price of
$7.88.
<PAGE>
14
STOCK PERFORMANCE GRAPH
The following graph compares the yearly change in the cumulative total
shareholder return on the Corporation's Common Shares during the period from the
Corporation's initial public offering on June 30, 1995 through June 30, 1997,
with the cumulative total return on the Center for Research in Securities Prices
Index for the Nasdaq Stock Market National Market Index ("Nasdaq National
Market Index") and the Hambrecht & Quist Technology Index ("H&Q Technology
Index"). The comparison assumes $100 was invested on June 30, 1995 in the
Corporation's Common Shares and in each of the foregoing indices and assumes
reinvestment of dividends, if any.
June 30, July 31, July 31, June 30,
1995 1995 1996 1997
------- -------- ------- --------
Discreet 100 127.27 25.75 100
Nasdaq 100 107.35 116.96 156.14
H&Q 100 109.13 104.86 145.99
_____________
(1) Prior to June 30, 1995 the Corporation's Common Shares was not publicly
traded. Comparative data is provided only for the period since that date.
<PAGE>
15
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1996 Richard Szalwinski, the Corporation's President and
Chief Executive Officer extended three loans to Smoke and Mirrors Productions
Limited ("Smoke and Mirrors") in an aggregate amount of (Pounds)1,077,975 (or
approximately $1,678,650 at July 31, 1996) and guaranteed obligations of Smoke
and Mirrors in the amount of (Pounds)300,000 (or approximately $467,200 at July
31, 1996). As at June 30, 1997, the loans have been repaid by Smoke and Mirrors
pursuant to a payment schedule. Each loan was negotiated at arm's length and
bore interest at the Canadian prime borrowing rate as quoted by the Canadian
International Banking Corporation. The Corporation recorded revenue of
$2,304,000 during fiscal 1996 from Smoke and Mirrors. The Corporation had a
trade account receivable of $836,000 from Smoke and Mirrors at July 31, 1996,
which amount was subsequently collected in full by the Corporation in fiscal
1997.
Richard Szalwinski is the sole shareholder of Behaviour Entertainment Inc.
("Behaviour"). The Corporation recorded revenue of $121,000 during fiscal 1996
from Behaviour. The Corporation had trade receivables of $113,000 from
Behaviour at July 31, 1996, which amount was subsequently collected in full by
the Corporation in fiscal 1997.
In July 1997, the Corporation agreed to rent space for its new headquarters
in Montreal from TGR Zone Corporation ("TGR Zone"), a company indirectly owned
by Richard Szalwinski. As part of this agreement, TGR Zone will assume the
Corporation's lease commitment at its previous Montreal location. The agreement
provides that the Corporation will lease approximately 55,000 square feet of
space at approximately CDN $13.00 (or approximately $9.44 at June 30, 1997) per
square foot per annum subject to normal escalation clauses. The proposed lease
is set to expire in June 2007. The Corporation will only sign the proposed
lease when the Corporation is satisfied with the assignment of its previous
lease. If this assignment is not negotiated with the previous landlord and TGR
Zone in a manner acceptable to the Corporation, the Corporation has the right to
modify the terms of its agreement with TGR Zone. The proposed lease for the
current building and the assignment of the lease for the previous building are
expected to be executed in the second fiscal quarter of 1998.
PROPOSAL 2
AMENDMENT OF AMENDED AND RESTATED 1994 RESTRICTED STOCK
AND STOCK OPTION PLAN
The 1994 Restricted Stock and Stock Option Plan was adopted by the Board of
Directors and approved by the shareholders in its original form on June 14,
1994. The 1994 Plan was amended and restated by the Board of Directors on March
27, 1995 and approved by the shareholders on April 21, 1995. The 1994 Plan
provides that the maximum number of Common Shares which may be issued or sold
pursuant to the 1994 Plan is 5,000,000.
The shareholders will be requested at the meeting to approve an amendment to
the 1994 Plan which increases by 2,000,000 the number of shares that may be
issued under the 1994 Plan. The purpose of the 1994 Plan is to promote Company
success by aligning employee financial interests with long-term shareholder
value. The Board believes that the number of shares remaining available for
issuance will be insufficient to achieve the purpose of the 1994 Plan over the
term of the plan unless the additional shares are authorized. A copy of the
1994 Plan as proposed to be amended may be obtained upon written request to the
Company's Investor Relations Department. The following paragraphs provide a
description of the 1994 Plan and its major income tax implications.
Amended and Restated 1994 Restricted Stock and Stock Option Plan.
The 1994 Plan is intended to secure for the Corporation and its shareholders
the benefits arising from share ownership by officers, employees, consultants
and directors (provided such directors are then also officers or employees) of
the Corporation and its participating subsidiaries by providing them with
opportunities to participate in the ownership of the Corporation and its future
growth through (a) the grant of options which qualify as
<PAGE>
16
"incentive stock options" ("ISOs") under Section 422(b) of the Internal Revenue
Code of 1986, as amended (the "Code"); (b) the grant of options which do not
qualify as ISOs ("Non-Statutory Options"); and (c) awards of Common Shares
("Awards"). Both ISOs and Non-Statutory Options are referred to hereafter
individually as an "Option" and collectively as "Options." Options and Awards
are referred to hereafter collectively as "Stock Rights."
The 1994 Plan is administered by the Compensation Committee of the Board of
Directors, which currently consists of Messrs. Cantwell, Drummond, Simon, three
outside directors of the Corporation, and Mr. Szalwinski, who was a member of
management of the Corporation during fiscal 1997. Subject to the provisions of
the 1994 Plan, the Compensation Committee has the authority to select the
optionees and recipients of Awards and determine the terms of the Options and
Awards granted, including: (i) the number of shares subject to each Option or
Award, (ii) the Option exercise terms, (iii) the exercise price of the Option
and the purchase price of Common Shares to recipients of Awards, (iv) the type
and the duration of transfer and other restrictions and (v) the time and form of
payment upon exercise of an Option or Award.
The exercise price per share of ISOs granted under the 1994 Plan cannot be
less than the fair market value of the Common Shares on the date of grant (or,
in the case of ISOs granted to employees holding more than 10% of the total
combined voting power of all classes of shares of the Corporation, 110% of the
fair market value of the Common Shares on the date of grant). The Option Plan
provides that each Option shall expire on the date specified in the option
agreement, but not more than ten years from its date of grant, and five years in
the case of ISOs granted to an employee holding more than 10% of the total
combined voting power of all classes of shares of the Corporation.
Under the Code, each eligible employee may be granted ISOs only to the extent
that, in the aggregate under the Plan and all stock option plans of the
Corporation, ISOs do not become exercisable for the first time by such employee
during any calendar year with respect to more than $100,000 in fair market value
(determined at the time the ISOs are granted) of Common Shares. Any Options
granted to an employee in excess of such amount will be treated as Non-Statutory
Options.
The 1994 Plan currently authorizes the issuance of up to 5,000,000 Common
Shares. Any shares subject to an option which expires or terminates may again be
available for grant under the 1994 Plan, however, such shares are included in
the determination of the aggregate number of Common Shares deemed to have been
granted to such employee under the 1994 Plan.
Each Option granted under the 1994 Plan may be either fully exercisable at the
time of the grant or may become exercisable on such installments as the
Compensation Committee may specify. Each Option may be exercised from time to
time, in whole or in part, up to the total number of shares with respect to
which it is then exercisable.
An Option is not assignable or transferable by the option holder except by
will or the laws governing intestacy. Generally, no Option may be exercised
following three months after termination of employment. All Common Shares issued
pursuant to an Award shall be subject to certain restrictions on their
disposition and to certain obligations of resale to the Corporation (at a price
equal to the price originally paid by the optionee), and shall not be sold,
assigned, transferred, pledged, hypothecated, or otherwise disposed of until
such restrictions lapse. This obligation of resale to the Corporation extends
for a period of three months from the termination of employment.
An Option shall be exercised by giving written notice delivered to the
Corporation at its office address, together with full payment of the exercise
price. Payment may be made by cash or check, or at the discretion of the
Compensation Committee, by tendering Common Shares or through the delivery of an
assignment of a sufficient amount of the proceeds from the sale of the Common
Shares acquired upon exercise. If the Compensation Committee exercises such
discretion with respect to an ISO, it must do so in writing at the time of the
grant of the ISO.
<PAGE>
17
The following table sets forth, as of the Record Date, options granted under
the 1994 Plan to (i) the individuals named in the Summary Compensation Table,
(ii) all executive officers of the Corporation as a group, (iii) all directors
who are not executive officers of the Corporation as a group, and (iv) all
employees, including all officers who are not executive officers, as a group:
<TABLE>
<CAPTION>
NAME TITLE NO. OF OPTIONS GRANTED
- ----------------------------------------------------- ----------------------------------- ----------------------
<S> <C> <C>
Richard J. Szalwinski................................ President, Chief Executive 450,000
Officer, Chairman of the Board of
Directors and Director
Terrence Higgins..................................... Senior Vice President-Products 201,920
Francois Plamondon................................... Senior Vice President, Chief 350,000
Financial Officer, Secretary and
Treasurer
Graham Sharp......................................... Senior Vice President - Sales and 310,000
Marketing
All current executive officers as a group
(4 persons)......................................... 1,311,920
All current directors who are not executive
officers as a group (5 persons) --
All employees who are not executive officers as a
group............................................... 3,635,290
</TABLE>
The number of options available for grant under the 1994 Plan as of the Record
Date is 52,790.
As of June 30, 1997, there were 2,425,913 options outstanding under the 1994
Plan with a weighted average exercise price of $5.39.
As of the Record Date, no Awards have been granted under the 1994 Plan.
United States Federal Income Tax Consequences. The following discussion of
United States federal income tax consequences of the Awards of Common Shares and
the issuance and exercise of Options granted under the 1994 Plan is based upon
the provisions of the Code as in effect on the date of this Proxy Statement,
current regulations, and existing administrative rulings of the Internal Revenue
Service. This discussion applies only to directors, officers, employees and
consultants of the Corporation and its participating subsidiaries receiving
Options and Awards under the 1994 Plan who are United States citizens or are
treated as resident aliens for United States federal income tax purposes. It is
not intended to be a complete discussion of all of the United States federal
income tax consequences of the plan or of the requirements that must be met in
order to qualify for the described tax treatment. In addition there may be
foreign, state, and local tax consequences that are not discussed herein.
The Canadian tax considerations for directors, officers, employees and
consultants of the Corporation and its participating subsidiaries who
participate in the 1994 Plan and the Canadian tax consequences to the
Corporation and any Canadian subsidiary or parent employer are discussed below
under the caption "Canadian Federal Income Tax Considerations."
The following general rules are applicable under current United States
federal income tax law to ISOs granted under the 1994 Plan:
1. In general, no taxable income results to the optionee upon the grant
of an ISO or upon the issuance of shares to him or her upon the exercise of the
ISO, and no federal income tax deduction is allowed to the Corporation upon
either the grant or exercise of an ISO.
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2. If shares acquired upon exercise of an ISO are not disposed of within
(i) two years from the date the ISO was granted or (ii) one year after the date
the shares are issued to the optionee pursuant to the ISO exercise (the "Holding
Periods"), the difference between the amount realized on any subsequent
disposition of the shares and the exercise price will generally be treated as
capital gain or loss to the optionee.
3. If shares acquired upon exercise of an ISO are disposed of and the
Holding Periods are not satisfied (a "Disqualifying Disposition"), then,
generally, the lesser of (i) any excess of the fair market value of the shares
at the time of exercise of the ISO over the exercise price or (ii) the actual
gain on disposition, will be taxed to the optionee as ordinary income in the
year of such disposition.
4. In any year that an optionee recognizes ordinary income on a
Disqualifying Disposition of shares acquired upon exercise of an ISO, the
Corporation generally will be entitled to a corresponding deduction for federal
income tax purposes.
5. The difference between the amount realized by the optionee as the
result of a Disqualifying Disposition and the sum of (i) the exercise price and
(ii) the amount of ordinary income recognized under the above rules generally
will be treated as capital gain or loss.
6. An optionee may be entitled to exercise an ISO by delivering shares of
the Corporation's Common Stock to the Corporation in payment of the exercise
price, if the optionee's ISO agreement so provides. If an optionee exercises an
ISO in such fashion, special rules will apply.
7. In addition to the tax consequences described above, the exercise of
ISOs may result in a further "minimum tax". An "alternative minimum tax"
(at a maximum rate of 28%) will be applied against a taxable base which is equal
to "alternative minimum taxable income," reduced by a statutory exemption. In
general, the amount by which the value of the shares received upon exercise of
the ISO exceeds the exercise price is included in the optionee's alternative
minimum taxable income. A taxpayer is required to pay the higher of his regular
tax liability or the alternative minimum tax. A taxpayer who pays alternative
minimum tax attributable to the exercise of an ISO may be entitled to a tax
credit against his or her regular tax liability in later years.
8. Special rules apply if the shares acquired upon the exercise of an ISO
are subject to vesting, or are subject to certain restrictions on resale under
federal securities laws applicable to directors, officers or 10% stockholders.
The following general rules are applicable under current federal income tax
law to Non-Statutory Options granted under the 1994 Plan:
1. In general, the optionee will not recognize any income upon the grant
of a Non-Statutory Option, and the Corporation will not be allowed a federal
income tax deduction by reason of such grant.
2. The optionee generally will recognize ordinary income at the time of
exercise of the Non-Statutory Option in an amount equal to the excess, if any,
of the fair market value of the shares on the date of exercise over the exercise
price. The Corporation may be required to withhold income tax on this amount.
3. When the optionee sells the shares acquired upon the exercise of a
Non-Statutory Option, the optionee generally will recognize capital gain or loss
in an amount equal to the difference between the amount realized upon the sale
of the shares and the tax basis (generally, the tax basis equals the exercise
price plus the amount recognized as ordinary income
4. When the optionee is required to recognize ordinary income in
connection with a Non-Statutory Option, the Corporation generally will be
entitled to a corresponding federal income tax deduction.
5. An optionee may be entitled to exercise a Non-Statutory Option by
delivering shares of the
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Corporation's Common Stock to the Corporation in payment of the exercise price.
If an optionee exercises a Non-Statutory Option in such fashion, special rules
apply.
6. Special rules apply if the shares acquired upon the exercise a Non-
Statutory Option are subject to vesting, or are subject to certain restrictions
on resale under federal securities laws applicable to directors, officers or 10%
stockholders.
The following general rules are applicable under current federal income tax
law to Awards of Common Shares under the 1994 Plan:
Under current federal income tax law, persons receiving shares pursuant to
an Award generally will recognize ordinary income equal to the fair market value
of the shares received, reduced by any purchase price paid. The Corporation
generally will be entitled to a corresponding federal income tax deduction.
When such shares are sold, the grantee generally will recognize capital gain or
loss. Special rules apply if the shares acquired are subject to vesting, or are
subject to certain restrictions on resale under federal securities laws
applicable to directors, officers or 10% stockholders.
Canadian Federal Income Tax Considerations. The following summary of
Canadian tax consequences applies only to optionees and recipients of Awards who
are directors, officers, or employees of the Company or any of its parent and
subsidiary corporations who: (i) are considered resident in Canada for tax
purposes; or (ii) are employed in Canada and are not exempt from Canadian
taxation by virtue of a tax treaty. Canadian income tax law is complex.
Moreover, the effects of existing income tax laws and possible changes in such
laws will vary with the particular circumstances of each 1994 Plan participant.
1. Income Tax Consequences to Employees who Receive Options under the 1994
Plan.
The tax treatment will depend in part on whether the Company was a "Canadian-
controlled private corporation" ("CCPC"), as defined in the Canadian Income
Tax Act, when the particular Options were granted. For Options granted while the
Company was a CCPC, the taxable event is the sale of the Common Shares. For
Options granted since the Company ceased to be a CCPC, the taxable event is the
exercise of the Options. It should be noted that Revenue Canada has stated on
occasion that it considers the deferral of taxation until the sale of the shares
is restricted to cases where the employer was a CCPC not only when the options
were granted, but also when such options vested.
(a) Options Granted While the Company Was a CCPC.
Neither the granting of Options nor the exercise of those Options is a
taxable event. Upon the subsequent sale of the Common Shares, the optionee
would be deemed to receive a taxable benefit from employment equal to the
difference between the price he paid for the Common Shares and the value of
such shares at the date he exercised the Options. This benefit would be added
to the optionee's tax basis for the Common Shares. As long as the exercise
price for the Options was at least equal to the fair market value of the
Common Shares on the date the Options were granted, only seventy-five percent
(75%) of such benefit would be included in the optionee's taxable income. Any
difference between the tax basis of the Common Shares and the price for which
they were sold would generally be a capital gain or capital loss, as the case
may be. Seventy-five percent (75%) of any capital gain is taxable, after
netting out any available capital loss.
(b) Options Granted After the Company Ceased to Be a CCPC.
The granting of Options is not a taxable event. Upon the exercise of
Options, the optionee would be deemed to receive a taxable benefit from
employment equal to the difference between the price he paid for the Common
Shares and the value of such shares at the date he exercised the Options. This
benefit would be added to the optionee's tax basis for the Common Shares. As
long as the optionee's price for the Options was
at least equal to the fair market value of the Common Shares on the date the
Options were granted, only seventy-five percent (75%) of such benefit would be
included in the optionee's taxable income. Any difference between
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the tax basis of the Common Shares and the price for which they were sold
would generally be a capital gain or capital loss, as the case may be.
Seventy-five percent (75%) of any capital gain is taxable, after netting out
any available capital loss.
2. Income Tax Consequences to Employees who Receive Awards under the Plan.
Upon the receipt of an Award, the recipient of the Award would be deemed to
receive a taxable benefit from employment equal to the difference between the
price he paid for the Common Shares and the value of the shares on the date of
the issuance. Such value would reflect a discount from the market price to
account for the restrictions on the transfer of the Common Shares. The benefit
would be added to the optionee's tax basis for the Common Shares. Any difference
between the tax basis for the Common Shares and the price for which they were
sold would generally be a capital gain or capital loss, as the case may be.
Seventy-five percent (75%) of any capital gain is taxable, after netting out
against any available capital loss.
3. Income Tax Consequences of the 1994 Plan to the Corporation.
The Corporation will not be entitled to any tax deduction in respect of the
taxable benefit received by a participating employee. The Corporation will have
to report such taxable benefit on the employee's T4.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A
VOTE "FOR" PROPOSAL 2.
PROPOSAL 3
APPOINTMENT OF ACCOUNTANTS
The Board of Directors proposes that the firm of Arthur Andersen & Cie
("Arthur Andersen"), independent certified public accountants, be appointed to
serve as accountants for the fiscal year ending June 30, 1998 and that the Board
of Directors be authorized to fix their remuneration. Arthur Andersen has
served as the Corporation's independent accountants since 1992. It is expected
that a member of Arthur Andersen will be present at the Meeting with the
opportunity to make a statement if so desired and will be available to respond
to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A
VOTE "FOR" THE RATIFICATION OF THIS SELECTION.
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SECTION 16 (A)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, requires the Corporation's directors,
executive officers and holders of more than 10% of the Corporation's Common
Shares (collectively, "Reporting Persons") to file with the Commission initial
reports of ownership and reports of changes in ownership of Common Shares of the
Corporation. Such persons are required by regulations of the Commission to
furnish the Corporation with copies of all such filings. Based on its review of
the copies of such filings received by it with respect to the fiscal year ended
June 30, 1997 and written representations from certain Reporting Persons, the
Corporation believes that all Reporting Persons complied with all Section 16(a)
filing requirements in the fiscal year ended June 30, 1997 with the following
exception: Mr. Desjardins filed a Form 3 in February which should have been
filed in January, following his election as a director.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended for inclusion in the proxy statement to be
furnished to all shareholders entitled to vote at the next Annual Meeting of
Shareholders of the Corporation must be received at the Corporation's principal
executive offices not later than June 30, 1998. In order to curtail controversy
as to the date on which a proposal was received by the Corporation, it is
suggested that proponents submit their proposals by Certified Mail, Return
Receipt Requested to Discreet Logic Inc., 10 Duke Street, Montreal, Quebec,
Canada H3C 2L7, attention: Secretary.
EXPENSES AND SOLICITATION
The cost of solicitation of proxies will be borne by the Corporation, and in
addition to soliciting shareholders by mail through its regular employees, the
Corporation may request banks, brokers and other custodians, nominees and
fiduciaries to solicit their customers who have stock of the Corporation
registered in the names of a nominee and, if so, will reimburse such banks,
brokers and other custodians, nominees and fiduciaries for their reasonable out-
of-pocket costs. Solicitation by officers and employees of the Corporation may
also be made of some Shareholders in person or by mail, telephone or telegraph
following the original solicitation.
The contents and the sending of this proxy statement has been approved by the
Board of Directors of the Corporation.
By Order of the Board of Directors
Francois Plamondon
Secretary
Montreal, Quebec
October 24, 1997
