<PAGE>
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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 December 31, 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 (IRS EMPLOYER
JURISDICTION IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
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 [_]
28,880,561 shares of the registrant's Common Shares, without par value, were
outstanding as of February 11, 1998.
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<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1997
CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER PAGE
----------- ----
<C> <S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements...................
Balance Sheets................................................ 3
Statements of Operations...................................... 4
Statements of Cash Flows...................................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
Certain Factors That May Affect Future Results................ 16
PART II:OTHER INFORMATION
Item 1. Legal Proceedings............................................. 18
Item 4. Submissions of Matters to a Vote of Security Holders.......... 18
Item 6. Exhibits and Reports on Form 8-K.............................. 19
Signatures............................................................. 20
</TABLE>
2
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 31,668 $ 12,649
Accounts receivable (less reserves for doubtful
accounts)............................................ 26,893 29,559
Inventory--
Resale.............................................. 10,867 9,725
Demonstration....................................... 3,054 4,073
Income taxes receivable............................... 448 --
Other current assets.................................. 3,889 4,291
-------- --------
76,819 60,297
Property and equipment--less accumulated depreciation
and amortization....................................... 7,728 9,583
Deferred income taxes................................... 3,489 2,467
Other assets............................................ 2,660 7,344
Assets held for resale.................................. 5,248 4,241
-------- --------
$ 95,944 $ 83,932
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses................. $ 44,086 $ 36,824
Deferred revenue...................................... 8,103 5,740
Income taxes payable.................................. 4,734 5,707
Customer deposits..................................... 1,359 426
-------- --------
58,282 48,697
-------- --------
Deferred income taxes................................. 713 2,268
-------- --------
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 28,840,493 at December 31, 1997....... 80,402 92,128
Accumulated deficit................................... (42,639) (56,951)
Cumulative translation adjustment..................... (814) (2,210)
-------- --------
Total shareholders' equity........................ 36,949 32,967
-------- --------
$ 95,944 $ 83,932
======== ========
</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>
TWO THREE FIVE SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues............. $16,833 $37,268 $40,096 $ 75,673
Cost of revenues........... 8,003 13,548 20,290 30,827
------- ------- ------- --------
Gross profit............. 8,830 23,720 19,806 44,846
------- ------- ------- --------
Operating expenses:
Research and development
(net of tax credits).... 1,575 3,901 4,253 7,413
Sales and marketing...... 4,610 8,407 10,627 15,840
General and
administrative.......... 1,189 2,012 2,705 3,896
Charge for purchased
research and
development............. -- 5,800 -- 26,800
------- ------- ------- --------
Total operating
expenses.............. 7,374 20,120 17,585 53,949
------- ------- ------- --------
Operating income
(loss)................ 1,456 3,600 2,221 (9,103)
Other income (expense),
net....................... 1,819 287 894 663
------- ------- ------- --------
Income (loss) before
income taxes............ 3,275 3,887 3,115 (8,440)
Provision for income
taxes..................... 1,310 3,097 1,962 5,872
------- ------- ------- --------
Net income (loss)........ $ 1,965 $ 790 $ 1,153 $(14,312)
======= ======= ======= ========
Earnings (Loss) Per Share:
Basic.................... $ 0.07 $ 0.03 $ 0.04 $ (0.50)
======= ======= ======= ========
Diluted.................. $ 0.07 $ 0.03 $ 0.04 $ (0.50)
======= ======= ======= ========
Weighted average common
shares outstanding:
Basic.................... 27,931 28,833 27,852 28,746
======= ======= ======= ========
Diluted.................. 28,444 30,597 28,412 28,746
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 1,153 $(14,312)
Adjustments to reconcile net loss to cash provided
by (used in) operating activities--
Depreciation and amortization.................... 2,597 3,996
Deferred income taxes............................ (463) 2,577
Write-off of in-process research and
development..................................... -- 26,800
Write-off of assets for restructuring............ -- 109
Compensation expense related to stock options.... -- 300
Changes in assets and liabilities--
Settlement of class action litigations......... -- (10,800)
Accounts receivable............................ 2,614 (1,783)
Inventory...................................... 9,089 935
Income taxes receivable........................ 2,907 448
Other current assets........................... (527) (255)
Insurance proceeds related to class action
litigation.................................... -- 3,459
Accounts payable and accrued expenses.......... (2,415) (13,347)
Deferred revenue............................... 3,294 (2,363)
Income taxes payable........................... -- 973
Customer deposits.............................. (934) (933)
Due to related parties......................... (25) --
-------- --------
Net cash provided by (used in) operating
activities...................................... 17,290 (4,196)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment................. (3,084) (4,350)
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............ (3,084) (13,874)
-------- --------
Cash flows from financing activities:
Proceeds from option exercises..................... 640 560
Proceeds from employee stock purchase plan......... 200 217
-------- --------
Net cash provided by financing activities........ 840 777
-------- --------
Foreign exchange effect on cash.................... (437) (1,726)
-------- --------
(Decrease) increase in cash and cash equivalents... 14,609 (19,019)
Cash and cash equivalents, beginning of period..... 21,658 31,668
-------- --------
Cash and cash equivalents, end of period........... $ 36,267 $ 12,649
======== ========
Supplemental disclosure of cash flow information:
Interest paid during the period.................... $ 14 $ 46
-------- --------
Income taxes paid during the period................ $ 622 $ 2,293
-------- --------
In connection with the acquisition of Lightscape in
December 1997, the following non-cash transaction
occurred:
Fair value of assets acquired...................... $ -- $ 7,615
Liabilities assumed................................ -- (7,615)
-------- --------
Cash paid for acquisition, net of cash acquired..... $ -- $ --
======== ========
In connection with the acquisition of D-Vision in
July 1997, the following non-cash transaction
occurred:
Fair value of assets acquired...................... $ -- $ 27,210
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
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Discreet Logic Inc. ("Discreet Logic" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the consolidated financial statements and notes thereto for
the year ended 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 and six month periods ended December 31, 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 and
six month periods ended December 31, 1997 and the two and five month periods
ended December 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 and six month periods ended December 31, 1997 are not directly
comparable to the results of the two and five month periods ended December 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>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 or about November 25, 1997, a settlement of all three shareholder class
actions received final court approval. Under the $10,800,000 settlement, the
Company contributed approximately $7,400,000 from its own funds, with the
remainder provided by insurance.
In the year ended July 31, 1996, the Company had provided a $2,506,000
litigation reserve for legal costs associated with defending the class action
lawsuits. During the eleven month period ended June 30, 1997, the Company
recorded a provision of $6,500,000 to accrue the additional estimated
settlement costs to be borne by the Company.
(4) RELATED PARTY TRANSACTIONS
In the three month period ended December 31, 1997, the Company recorded
revenues from sales made to Behaviour Entertainment Inc. ("Behaviour"), a
company owned by the Company's Chairman and Chief Executive Officer, in the
amount of $309,000. The Company also purchased marketing services, in the
amount of $250,000, from Behaviour.
(5) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share. The new standard simplifies the computation of earnings per share (EPS)
and increases comparability to international standards. Under SFAS No. 128,
primary EPS is replaced by Basic EPS, which excludes dilution and is computed
by dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The Company is
required to disclose both basic and diluted EPS. All prior period EPS data
have been restated to conform to SFAS No. 128.
The following tables present a reconciliation of Basic EPS to Diluted EPS as
required by SFAS No. 128:
<TABLE>
<CAPTION>
TWO MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------- -------------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common
shareholders......................... $1,965 27,931 $0.07 $790 28,833 $0.03
===== =====
EFFECT OF DILUTIVE SECURITIES
Impact of exercise of stock options
under treasury stock method.......... -- 513 -- 1,764
------ ------ ---- ------
DILUTED EPS
Income available to common
shareholders and assumed exercises... $1,965 28,444 $0.07 $790 30,597 $0.03
====== ====== ===== ==== ====== =====
</TABLE>
7
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options to purchase 199 and 474 shares of common stock were outstanding
during the two month period ended December 31, 1996, and the three month
period ended December 31, 1997, respectively, but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares
<TABLE>
<CAPTION>
FIVE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------- -----------------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common
shareholders.................... $1,153 27,852 $0.04 $(14,312) 28,746 $(0.50)
===== ======
EFFECT OF DILUTIVE SECURITIES
Impact of exercise of stock
options under treasury stock
method.......................... -- 560 -- --
------ ------ -------- ------
DILUTED EPS
Income available to common
shareholders and assumed
exercises....................... $1,153 28,412 $0.04 $(14,312) 28,746 $(0.50)
====== ====== ===== ======== ====== ======
</TABLE>
Options to purchase 297 and 349 shares of common stock were outstanding
during the five month period ended December 31, 1996, and the six month period
ended December 31, 1997, respectively, but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares
(6) REVENUE RECOGNITION
In November 1997, the AICPA issued Statement of Position (SOP) 97-2,
Software Revenue Recognition. This statement is effective for all transactions
entered into in fiscal years beginning after December 15, 1997, however, early
adoption is permitted. SOP 97-2 establishes standards for recognizing revenues
related to software products and related services. The Company intends to
implement SOP 97-2 in its consolidated financial statements for the third
quarter of fiscal 1998. The Company does not anticipate that the
implementation of this statement will have a material impact on the
consolidated financial statements.
(7) ACQUISITION OF LIGHTSCAPE TECHNOLOGIES, INC.
On December 2, 1997, Discreet Logic entered into an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement") with Lantern Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of Discreet Logic
("Merger Sub"), and Lightscape Technologies, Inc., a Delaware corporation
("Lightscape"). On December 30, 1997, pursuant to the Merger Agreement, and
upon the satisfaction of certain closing conditions, Merger Sub merged (the
"Merger") with and into Lightscape with Lightscape as the surviving
corporation and a wholly-owned subsidiary of Discreet Logic. As a result of
the Merger, Discreet Logic acquired, among other products, the Lightscape TM
product, a software application which integrates radiosity and raytracing with
physically based lighting, including related know-how and goodwill. The
aggregate purchase price for Lightscape includes the assumption of
approximately $5,700,000 of net liabilities (of which approximately $3,400,000
was paid at the closing), not including costs associated with the transaction,
and up to $6,800,000 in contingent consideration to be paid only if certain
revenue objectives are achieved by Lightscape in calendar 1998 and 1999. The
acquisition has been accounted for as a purchase. A substantial portion of the
purchase price and transaction costs was allocated to purchased in-process
research and development for which Discreet Logic incurred a one-time charge
against earnings in the amount of $5,800,000 ($0.19 per share on a diluted
basis), based on an independent appraisal, in the quarter ended December 31,
1997 and approximately $1,087,000 was allocated to intangible assets, which
include goodwill and acquired technology, and is being amortized on a
straight-line basis over their estimated useful lives of three to five years.
The terms of the transaction were the result of arms'-length negotiations
between the representatives of Discreet Logic and Lightscape.
8
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following presents, on an unaudited basis, certain items on the Company's
result of operations, for the five month period ended December 31, 1996, and
six month period ended December 31, 1997, as though the acquisition and related
transactions discussed above had occurred at the beginning of those periods:
<TABLE>
<CAPTION>
FIVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Net sales............................................. $40,457 $ 76,392
Operating loss........................................ $ (15) $(10,569)
Net loss.............................................. $(1,977) $(16,448)
EPS................................................... $ (0.07) $ (0.57)
</TABLE>
9
<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 or about November 25, 1997, a
settlement of all three shareholder class actions received final court
approval. Under the $10,800,000 settlement, the Company contributed
approximately $7,400,000 from its own funds, with the remainder provided by
insurance.
Recent Acquisitions
On December 2, 1997, Discreet Logic entered into an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement") with Lantern Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of Discreet Logic
("Merger Sub"), and Lightscape Technologies, Inc., a Delaware corporation
("Lightscape"). On December 30, 1997, pursuant to the Merger Agreement, and
upon the satisfaction of certain closing conditions, Merger Sub merged (the
"Merger") with and into Lightscape with Lightscape as the surviving
corporation and a wholly-owned subsidiary of Discreet Logic. As a result of
the Merger, Discreet Logic acquired, among other products, the Lightscape TM
product, a software application which integrates radiosity and raytracing with
physically based lighting, including related know-how and goodwill. The
aggregate purchase price for Lightscape includes the assumption of
approximately $5,700,000 of net liabilities (of which approximately $3,400,000
was paid at the closing), not including costs associated with the transaction,
and up to $6,800,000 in contingent consideration to be paid only if certain
revenue objectives are achieved by Lightscape in calendar 1998 and 1999. The
acquisition has been accounted for as a purchase. A substantial portion of the
purchase price and transaction costs was allocated to purchased in-process
research and development for which Discreet Logic incurred a one-time charge
against earnings in the amount of $5,800,000 ($0.19 per share on a diluted
basis), based on an independent appraisal, in the quarter ended December 31,
1997 and approximately $1,087,000 was allocated to intangible assets, which
include goodwill and acquired technology, and is being amortized on a
straight-line basis over their estimated useful lives of three to five years.
The terms of the transaction were the result of arms'-length negotiations
between the representatives of Discreet Logic and Lightscape.
On July 15, 1997, the Company acquired all of the outstanding shares of
capital stock of D-Vision Systems, Inc. ("D-Vision"), an Illinois corporation,
pursuant to a Stock Purchase Agreement dated as of July 10, 1997, among the
Company, D-Vision, the former stockholders of D-Vision (the "Selling
Stockholders") and certain other individuals (the "D-Vision Acquisition"). As
a result of the D-Vision Acquisition, the Company acquired the D-Vision OnLINE
(subsequently renamed D-VISION) 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
10
<PAGE>
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. 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. 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 $3,335,000 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 and
six month period ended December 31, 1997 and the two and five month periods
ended December 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 and six month periods ended December 31, 1997 are not directly
comparable to the results of the two and five month periods ended December 31,
1996.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues represented
by certain line items in the statements of operations:
<TABLE>
<CAPTION>
TWO MONTHS THREE MONTHS FIVE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues............. 100% 100% 100% 100%
Cost of revenues........... 48 36 51 41
--- --- --- ----
Gross profit............. 52 64 49 59
--- --- --- ----
Operating expenses:
Research and
development............. 9 10 10 10
Sales and marketing...... 27 23 26 21
General and
administrative.......... 7 5 7 5
Charge for purchased
research and
development............. -- 16 -- 35
--- --- --- ----
Total operating
expenses.............. 43 54 43 71
--- --- --- ----
Operating income (loss).. 9 10 6 (12)
Other income (expense),
net....................... 11 -- 2 1
--- --- --- ----
Income (loss) before
income taxes............ 20 10 8 (11)
Provision for income
taxes..................... 8 8 5 8
--- --- --- ----
Net income (loss)........ 12% 2% 3% (19)%
=== === === ====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997 AND TWO MONTHS ENDED DECEMBER 31, 1996
AND SIX MONTHS ENDED DECEMBER 31, 1997 AND FIVE MONTHS ENDED DECEMBER 31, 1996
As discussed above, it is not practicable to recast prior quarterly results
to reflect new fiscal periodic reporting resulting from the Company's
previously announced change in fiscal year end. Therefore, the results for the
three and six month periods ended December 31, 1997 are not directly
comparable to the results of the two and five month periods ended December 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. Beginning with its third quarter of fiscal 1998, the Company
intends to implement SOP 97-2 (See Note 6 of Notes to Condensed Consolidated
Financial Statements).
Total revenues were $37,268,000 and $16,833,000 for the three month period
ended December 31, 1997, and the two month period ended December 31, 1996,
respectively, and $75,673,000 and $40,096,000 for the six month period ended
December 31, 1997, and the five month period ended December 31, 1996,
respectively. The increase in total revenues in both the three and six month
periods ended December 31, 1997, when compared to the two and five month
periods ended December 31, 1996, respectively, was primarily due to the
additional month in the fiscal 1998 periods, and an increase in worldwide
revenues generated by the Company's Special Effects and Editing (including
initial commercial shipments of SMOKE, the Company's non-linear digital
editing tool introduced in the second quarter of fiscal 1998) product lines.
These increases were partially offset by a decrease in revenues, in the six
month period ended December 31, 1997, from the Company's Broadcast Production
product line, as compared to the five month period ended December 31, 1996.
12
<PAGE>
Revenues from customers outside of North America were $21,702,000 (58% of
total revenues) and $10,255,000 (61% of total revenues) for the three month
period ended December 31, 1997, and the two month period ended December 31,
1996, respectively, and $39,965,000 (53% of total revenues) and $21,779,000
(54% of total revenues) for the six month period ended December 31, 1997, and
the five month period ended December 31, 1996, respectively. Revenues from
customers outside North America increased in both the three and six months
ended December 31, 1997 when compared to the two and five months ended
December 31, 1996, respectively, due to the additional month in the fiscal
1998 periods, and the increased 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, as a percentage of total revenues, remain
approximately the same as current levels.
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 $13,548,000 (36% of total
revenues) and $8,003,000 (48% of total revenues) for the three month period
ended December 31, 1997, and the two month period ended December 31, 1996,
respectively, and $30,827,000 (41% of total revenues) and $20,290,000 (51% of
total revenues) for the six month period ended December 31, 1997, and the five
month period ended December 31, 1996, respectively. The decrease in cost of
revenues, as a percentage of total revenues, in both the three and six months
ended December 31, 1997 when compared to the two and five months ended
December 31, 1996, respectively, was primarily due to: (1) an increase in
sales to the Company's indirect channel partners, whose purchases from
Discreet Logic are predominantly software only and software and storage media
bundles since these indirect channel partners are themselves hardware
resellers; (2) porting certain of the Company's software products to recently
available, lower priced workstations, resulting in a lower cost to the Company
for the hardware component of system sales; and (3) the increased penetration
of the Company's products in the Asian market where customers typically
purchase from the Company only software or software and storage media bundles.
The decrease in cost of revenues, as a percentage of total revenues, in the
six months ended December 31, 1997 when compared to the five months ended
December 31, 1996 is also attributable to lower margins realized on systems
sold in the three month period ended October 31, 1996 under an aggressive
sales program, including product discounts, designed to reduce the inventory
on hand at the end of the fourth fiscal quarter of 1996. The Company expects
that cost of revenues, as a percentage of total revenues, should increase from
its current level. However, cost of revenues remains difficult to predict and
is subject to fluctuations due to a number of factors including product and
product configuration mix and the proportion of direct and indirect sales.
Research and Development. Research and development expenses consist
primarily of the cost of research and development personnel and the
facilities, depreciation on research and development equipment, 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 $3,901,000 (10% of total revenues) and $1,575,000 (9% of total revenues)
for the three month period ended December 31, 1997, and the two month period
ended December 31, 1996, respectively, and $7,413,000 (10% of total revenues)
and $4,253,000 (10% of total revenues) for the six month period ended December
31, 1997, and the five month period ended December 31, 1996, respectively. The
increase in research and development expenses in both the three and six months
ended December 31, 1997 when compared to the two and five months ended
December 31, 1996, respectively, was primarily due to: (1) the additional
month in both of the fiscal 1998 periods; (2) 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; (3) an increase in depreciation
charges on the additional research and development equipment required for the
additional personnel; and (4) 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
13
<PAGE>
that research and development expenses will increase from current levels.
Should revenues increase, the Company expects that research and development
expenses, as a percentage of total revenues, should remain approximately the
same as their current levels.
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 $8,407,000
(23% of total revenues) and $4,610,000 (27% of total revenues) for the three
month period ended December 31, 1997, and the two month period ended December
31, 1996, respectively, and $15,840,000 (21% of total revenues) and
$10,627,000 (26% of total revenues) for the six month period ended December
31, 1997, and the five month period ended December 31, 1996, respectively. The
increase in sales and marketing expenses, in both the three and six months
ended December 31, 1997 when compared to the two and five months ended
December 31, 1996, respectively, is explained by the additional month in the
fiscal 1998 periods, 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
decrease in sales and marketing expenses, as a percentage of total revenues,
in both the three and six months ended December 31, 1997 when compared to the
two and five months ended December 31, 1996, respectively, is explained in
part by the growth of sales to the indirect channel partners which require a
reduced level of expenditures than direct sales to end-users. The Company
expects that sales and marketing expenses will increase from their current
levels. Should revenues increase, the Company expects that sales and marketing
expenses, as a percentage of total revenues, should remain approximately the
same as their current levels.
General and Administrative. General and administrative expenses include the
costs of finance and accounting, human resources, facilities, corporate
information systems, legal and other administrative functions of the Company
and reserves for doubtful accounts receivable. General and administrative
expenses were $2,012,000 (5% of total revenues) and $1,189,000 (7% of total
revenues) for the three month period ended December 31, 1997, and the two
month period ended December 31, 1996, respectively, and $3,896,000 (5% of
total revenues) and $2,705,000 (7% of total revenues) for the six month period
ended December 31, 1997, and the five month period ended December 31, 1996,
respectively. The increase in general and administrative expenses in both the
three and six months ended December 31, 1997 when compared to the two and five
months ended December 31, 1996, respectively, is explained by the additional
month in the later periods being compared, and 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 as their current levels.
Charge for Purchased Research and Development. In connection with the
Lightscape Acquisition, the Company expensed $5,800,000 (16% of total
revenues) of in-process research and development in the three month period
ended December 31, 1997. In connection with the D-Vision Acquisition, the
Company expensed $21,000,000 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 $179,000 for the three month period ended December 31,
1997 compared to $1,539,000 for the two month period ended December 31, 1996.
Foreign currency translation gains were $308,000 for the six month period
ended December 31, 1997 compared to $458,000 for the five month period ended
December 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 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
$3,097,000 and $1,310,000 for the three month period ended December 31, 1997,
and the two month period ended December 31, 1996,
14
<PAGE>
respectively, and $5,872,000 and $1,962,000 for the six month period ended
December 31, 1997, and the five month period ended December 31, 1996,
respectively. The provision for all periods is based upon the Canadian federal
statutory rate of 38% and reflects the impact of various tax credits and
foreign taxes. The tax provision for the three and six month periods ended
December 31, 1997 differed from the statutory rate primarily as a result of
the Company recording charges for acquired in-process research and development
for which no benefit was recorded due to the uncertainty of realizing any
future tax benefit associated with these charges 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 five month period ended December 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 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, 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 December 31, 1997, the Company had cash of
approximately $12,649,000. 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 $4,885,000 at December 31, 1997). Advances
under the line accrue interest monthly at the Canadian prime rate (6.0% at
December 31, 1997) plus 0.25%. Additionally, the Company has a CDN$600,000
(approximately $419,000 at December 31, 1997) demand leasing facility, and a
CDN$600,000 (approximately $419,000 at December 31, 1997) demand research and
development tax credit facility. Advances under these facilities accrue
interest monthly at the Canadian prime rate (6.0% at December 31, 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 December 31, 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 used cash of $4,196,000 and provided cash
of $17,290,000 for the six month period ended December 31, 1997 and the five
month period ended December 31, 1996, respectively. The principal uses of cash
for the six months ended December 31, 1997 were the disbursement of funds used
to settle the class action litigations and the decrease in accounts payable
and accrued expenses resulting from the Company paying many of the liabilities
assumed in connection with the D-Vision and Lightscape acquisitions. These
uses of cash were offset primarily by cash provided by net income before non-
cash charges, including the charges for purchased in-process research and
development, and the receipt of insurance proceeds related to the settlement
of the class action litigations. Net cash provided by operations in the five
month period ended December 31, 1996 was composed primarily of net income
before non-cash charges and decreases in accounts receivable and inventory.
The Company's investing activities used cash of $13,874,000 in the six month
period ended December 31, 1997 primarily for the acquisition of D-Vision
Systems, Inc. and the purchase of research and development equipment and
related software. During the six month period ended December 31, 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 $3,084,000 in the five month period ended December 31, 1996, primarily for
renovations to 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 $777,000 and $840,000 in the six month
period ended December 31, 1997 and five month period ended December 31, 1996,
respectively, from proceeds from common stock option exercises and the
issuance of shares under the Employee Stock Purchase Plan.
15
<PAGE>
As of December 31, 1997, the Company did not have any material commitments
for capital expenditures.
The Company's ability to meet its future liquidity requirements is dependent
upon its ability to operate profitably, or in the absence thereof, to obtain
additional 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 calendar 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) 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.
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 markets in which the Company competes are 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 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 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
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
16
<PAGE>
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 (including the recent currency volatility
in Asia) and other barriers. In addition, foreign customers may have longer
payment cycles and the protection of intellectual property in foreign
countries may be more difficult to enforce. 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 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 D-VISION (formerly named 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.
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
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.
17
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 29, 1996, a lawsuit entitled Sandra Esner and Jerry Krim, On Behalf
of Themselves and All Others Similarly Situated, vs. [... ]Discreet Logic Inc.,
et al., case No. 978584, was filed in the Superior Court of the State of
California, City and County of San Francisco. Named as defendants are the
Company, certain of the Company's former and existing directors, officers, and
affiliates, and certain underwriters and financial analysts. The plaintiffs
purport to represent a class of all persons who purchased the Company's common
stock between September 13, 1995, and May 1, 1996. The complaint alleges
violations of California law through material misrepresentations and
omissions, 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 or about November 25, 1997, a settlement of all three shareholder class
actions received final court approval. Under the $10,800,000 settlement, the
Company contributed approximately $7,400,000 from its own funds, with the
remainder provided by insurance.
In the year ended July 31, 1996, the Company had provided a $2,506,000
litigation reserve for legal costs associated with defending the class action
lawsuits. During the eleven month period ended June 30, 1997, the Company
recorded a provision of $6,500,000 to accrue the additional estimated
settlement costs to be borne by the Company.
ITEMS 2-3. NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Shareholders held on November 20, 1997 pursuant to
the Notice of Annual Meeting of Shareholders dated October 24, 1997.
1. The proposal to elect the following nominees as directors, to serve for a
two-year term or until their successors are elected and qualified, was
approved. Vote results as follows:
<TABLE>
<CAPTION>
CLASS OF VOTES
NOMINEE DIRECTOR VOTES FOR WITHHELD ABSTAINED
------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Richard Szalwinski.................... I 24,164,903 18,264 0
Thomas Cantwell....................... I 24,164,303 18,864 0
Pierre Desjardins..................... I 24,164,753 18,414 0
</TABLE>
18
<PAGE>
At the Annual Meeting of Shareholders held on January 9, 1997, Messrs. Brian
P. Drummond, Perry M. Simon and Gary G. Tregaskis were elected to Class II of
the Company's Board of Directors to hold office until the Annual Meeting of
Shareholders for fiscal 1998 and until their successors have been duly elected
and qualified.
2. The proposal to approve an amendment to the Company's 1994 Amended and
Restated Restricted Stock and Stock Option Plan to reserve an additional
2,000,000 shares of common stock for issuance thereunder was approved. Vote
results as follows: 14,641,810 shares in favor; 7,814,761 shares against, with
8,090 shares abstaining; and 1,718,506 counted as "non-votes'.
3. The proposal to appoint Arthur Andersen & Cie as independent accountants
for the Company for fiscal 1998 and to authorize the Board of Directors to fix
their remuneration was approved. Vote results as follows: 24,169,287 shares in
favor; 7,640 shares against, with 6,240 shares abstaining.
There were no other matters submitted to a vote of the Company's
shareholders during the second quarter of the fiscal year covered by this
report through the solicitation of proxies or otherwise.
ITEM 5. NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
Exhibit 10.1 Employment Agreement, dated August 29, 1997, by and between
the Company and Richard Szalwinski.
Exhibit 10.2 Lease Agreement for 10 Duke Street, Montreal, dated July 4,
1997, by and between TGR Zone Corporation and Discreet Logic
Inc.
Exhibit 27.1 Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K.
A Current Report on Form 8-K dated December 30, 1997 was filed on January
14, 1998. The Current Report on Form 8-K was filed pursuant to Item 2 of Form
8-K (Acquisition or Disposition of Assets) announcing the completion of the
merger of Lantern Acquisition Corp. ("Merger Sub"), a Delaware corporation and
wholly-owned subsidiary of Discreet Logic with and into Lightscape
Technologies, Inc. ("Lightscape"), a Delaware corporation, with Lightscape the
surviving corporation and a wholly-owned subsidiary of Discreet Logic,
pursuant to the Agreement and Plan of Merger and Reorganization dated as of
December 2, 1997 by and among Discreet Logic, Merger Sub and Lightscape.
19
<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
February 13, 1998
20
<PAGE>
Exhibit 10.1
August 29, 1997
Mr. Richard J. Szalwinski
c/o Discreet Logic
10 Duke Street
Montreal, Quebec, Canada
H3C 2L7
Dear Richard:
On behalf of the board of directors of Discreet Logic Inc. ("Discreet"), I am
pleased to confirm the revised terms of your employment.
1. Duties and Responsibilities
- --------------------------------
By your acceptance, you agree to serve as President and Chief Executive Officer
of Discreet. In such capacity, you shall report and be accountable to the board
of directors of Discreet.
You agree to devote substantially 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.
Discreet hereby recognizes that you also have investments in BHVR Communications
Inc. ("BHVR") and Malofilm Communications Inc. ("Malofilm") and that you need to
devote some time to BHVR and Malofilm, provided that this does not interfere
with your duties as President and Chief Executive Officer of Discreet.
You further agree that you will 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 $230,000,
effective March 1, 1997. 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 for an annual target bonus at the sole
discretion of the compensation committee of the board of directors of Discreet
based on the achievement by Discreet, on a consolidated basis, of the budgets
and forecasts approved by the board of directors from time to time, which annual
bonus shall not exceed 75% of your Salary. Notwithstanding the foregoing, in the
event that the budgets and forecasts 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 not to exceed
75% of
<PAGE>
-2-
your Salary if the board of directors is of the view that your performance was
outstanding and the failure to meet the budgets and forecasts was not
attributable to factors within your control. This annual bonus, if any, shall be
determined and paid annually.
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, 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.
Discreet shall also reimburse you for other reasonable expenses incurred by you
which are approved from time to time by the audit committee of the board of
directors of Discreet.
4. Stock Options
-------------
Discreet has granted you, effective March 1, 1997, (the "Initial Grant") an
option to purchase 450,000 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") at an exercise price of each option equal to the
"Fair Market Value" of the optioned shares (as determined in accordance with the
provisions of the Plan). Your options pursuant to the Plan will vest as
follows:
================================================================================
Number of Shares Date of Vesting
---------------- ---------------
- --------------------------------------------------------------------------------
225,000 March 1, 1999
an additional 112,500 March 1, 2000
an additional 112,500 March 1, 2001
================================================================================
You hereby agree to execute 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 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.
<PAGE>
-3-
5. Duration and Termination
- -----------------------------
This agreement is for an indeterminate term commencing on March 1, 1997.
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 twenty four (24) 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, then the options to purchase
common shares of Discreet which would have vested next as set forth above
shall immediately vest.
"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. Restrictive Covenants
---------------------
7.1 Conflict. During the term of your employment, you shall not, without the
- -------------
prior consent to such effect of Discreet, be employed by, with or either in
respect of or in
<PAGE>
-4-
relation to any person other than Discreet.
You shall not, during the term of your employment, on your behalf or on
behalf of any person, whether directly or indirectly, in any capacity
whatsoever, alone or through any person, carry on or be engaged in or have
any financial or other interest in or be otherwise commercially involved in
any endeavour, activity or business that is the same as, is substantially
similar to or is in competition with the business as now or as heretofore
or as may be conducted from time to time by Discreet and its affiliates
(the "Business"). Discreet hereby recognizes that the businesses of BHVR
and Malofilm as currently conducted are not the same, are not substantially
similar to or are not in competition with the Business as now conducted by
Discreet and its affiliates.
You shall not be in default under this paragraph by virtue of his holding,
strictly for portfolio purposes and as a passive investor, no more than
five percent (5%) of the issued and outstanding shares of any body
corporate which is listed on a recognized stock exchange, the business of
which body corporate is the same, is substantially similar to or is in
competition with the Business.
7.2 Non-Compete. You shall not, during your employment with Discreet and for a
- ----------------
period of eighteen months thereafter, on your behalf or on behalf of any
other person, whether directly or indirectly, in any capacity whatsoever
alone, 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
worldwide which is in competition with the Business or which provides
similar competing services.
7.3 Non-Solicitation of Customers. You shall not, during your employment with
- ----------------------------------
Discreet and for a period of eighteen months thereafter, on your behalf or
on behalf of any other person, whether directly or indirectly, in any
capacity whatsoever, alone, through or in connection with any person for
any purpose which is in competition, in whole or in part, directly or
indirectly, with the Business:
(a) solicit or assist in the soliciting of any person (i) for, to or in
respect of whom, or (ii) in conjunction with Discreet or any of its
affiliates, you have, during the last twelve (12) months prior to the
termination (for any reason) of your employment, provided or procured
services related to the Business (a "Customer") or solicit any
business from a Customer; or
(b) solicit any person with whom any of Discreet, its affiliates or the
Business was, at the time of termination for any reason of your
employment, pursuing active negotiations, to your knowledge, to enter
into any business relationship to provide such Person with services or
goods related to the Business (a "Prospective Customer") or solicit
any business from a Prospective Customer.
7.4 Non-Interference. You shall not, during your employment with Discreet and
- ---------------------
for a period of eighteen months thereafter, directly or indirectly,
solicit, interfere with or
<PAGE>
-5-
endeavour to entice away any employee of, any person who within six (6)
months of your departure left his or her employment with, or any consultant
under contract with, Discreet.
7.5 Acknowledgement. You hereby expressly understand, recognize and agree
- --------------------
that:
(a) The provisions of paragraph 7 of this agreement are of the essence of
this agreement and shall survive this agreement for the periods
provided therein, and that Discreet would not have entered into this
agreement without the inclusion herein of the said provisions; and
(b) the said provisions grant to Discreet only such reasonable protection
as is admittedly necessary to preserve the legitimate interests of
Discreet and the Business; and
(c) Discreet would be subject to an irreparable prejudice should one or
several of the said provisions be infringed, or should any of your
obligation thereunder be breached by you.
7.6 Specific Performance. Without limiting the remedies available to Discreet,
- -------------------------
you hereby expressly acknowledge and agree that a breach by you of any of
the covenants contained in paragraph 7 may result in materially irreparable
harm to the Business and, hence, to Discreet for which there is no adequate
remedy at law; that it will not be possible to measure damages for such
injuries precisely; and that, in the event of such a breach or threat
thereof, Discreet shall be entitled to obtain any or all of a temporary
restraining order and a preliminary or permanent injunction restraining you
from engaging in activities prohibited by the said provisions of paragraph
7 or such other relief as may be required to enforce specifically any of
the covenants in the said paragraph 7.
8. Confidentiality and Non-Disclosure
- ---------------------------------------
You hereby expressly covenant and agree that you shall not, during and for a
period of five 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
<PAGE>
-6-
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. 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.
10. Transfer and Release of Rights
------------------------------
You hereby acknowledge and agree that all right, title and interest in and to
any Work vests and is owned exclusively by Discreet immediately on its creation
and regardless of the stage of its completion. To that effect, you further
agree, and do hereby covenant with and to Discreet, to promptly and fully
disclose to Discreet and to deliver to Discreet all Work created, developed or
conceived by him during the term of your employment with Discreet. Accordingly,
you hereby irrevocably transfer, assign and release to Discreet all Intellectual
Property Rights in the or any part of the Work that you now have or may
hereafter acquire. You hereby represent and warrant that you have not granted,
and covenant and agree that you shall not grant, Intellectual Property Rights in
any Work to any other person.
For the purposes hereof:
"Computer Programs" shall mean a set of ordered steps or list of instructions
used in connection with a computer to cause the computer to indicate, perform or
achieve particular functions, tasks or results, and includes but is not limited
to, source-code listings in human or machine readable form, object codes in
machine readable form, program files, data files, program and system logic,
pseudo-code, algorithms, interfaces, routines, design concepts and program
structure.
"Derivative Work" shall mean a Work, however recorded, based upon one or more
pre-existing Works, and includes revisions, modifications, translations,
abridgements, condensations, expansions or any other forms in which such pre-
existing Works may be recast, transformed or adapted.
"Intellectual Property Rights" means all worldwide intellectual and industrial
property rights in connection with the Work, including, without limitation, (i)
patents, inventions, and discoveries, (ii) copyrights, (iii) Confidential
Information, (iv) trademarks, (v) industrial and artistic designs, (vi)
software, source codes, application codes, including the right to apply for
registration or protection of any of the foregoing, and includes proprietary,
possessory and ownership rights and interests of all kinds whatsoever or
howsoever arising.
"Work" shall mean any and all source code or other Computer Programs, any design
specifications created to describe the source code or other Computer Programs,
any
<PAGE>
-7-
methods, processes, apparatus, products, hardware, or firmware, any drawings,
reports, memoranda, specimens, models, letters or notebooks, made, developed or
conceived by you, either solely or jointly with others, during the entire period
that you are employed by Discreet or any of its affiliates, whether or not they
were, are, or will be made, developed or conceived during working hours using
Discreet or any of its affiliates' data or facilities, and which relate to
Discreet or any of its affiliates' existing or projected areas of business, and
includes, without limitation, Derivative Work, drafts, versions, and parts
thereof, disks, tapes, files, listings, screen displays, enhancements and
developments thereto, user manuals, marketing materials, demonstration reels,
technical manuals, flow charts, log books and all supporting documentation.
11. Protection of Intellectual Property Rights
------------------------------------------
You hereby acknowledge and agree that Discreet and its affiliates shall have the
exclusive right to file applications, obtain and maintain protection and
registrations for, and assign, the or any part of the Work and the Intellectual
Rights therein and to perform all acts necessary or desired by Discreet and its
affiliates to enable Discreet and its affiliates, their successors, assigns and
nominees, to secure and enjoy the full and exclusive benefits and advantages
thereof. In this respect, you agree to cooperate and to provide all necessary
assistance as may be reasonably required by Discreet and its affiliates for
these purposes. After any termination of your employment hereunder, you shall,
from time to time, at Discreet's expense (which shall be limited to a reasonable
per diem to cover lost wages in your then existing employment and reimbursement
of any expenses incurred at the request of Discreet), execute and deliver all
documents and instruments (including instruments or conveyance and waivers of
moral rights) and do all acts and things as Discreet may reasonably require to
carry out effectively, or to better evidence, or perfect the full intent and
meaning of this agreement.
12. 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 tous documents qui s'y rattachent soient rediges en langue
anglaise et s'en declarent satisfaites.
<PAGE>
-8-
If you wish to accept this position, please sign and return a signed copy to us.
/s/ Brian Drummond
- ------------------
Brian Drummond
ACCEPTED at Montreal, Quebec, on this 29th day of August, 1997.
/s/ Richard Szalwinski
- ----------------------
Richard J. Szalwinski
<PAGE>
Exhibit 10.2
Certificate
Pursuant to the requirements of the Securities Act of 1934 and Rule 306 of
Regulation S-T, I hereby certify that the attached translation of the Lease
Agreement for 10 Duke Street, Montreal between TGR Z Zone (Lessor) and Discreet
Logic Inc. (Lessee) dated as of July 4, 1997 (the "Lease Agreement") is a fair
and accurate English translation of the Lease Agreement.
/s/ Francois Plamondon
----------------------
Francois Plamondon
Vice President, Chief Financial Officer,
Treasurer and Secretary
<PAGE>
LEASE AGREEMENT
for
10 DUKE STREET, MONTREAL
BETWEEN
TGR ZONE CORPORATION
LESSOR
AND
DISCREET LOGIC INC.
LESSEE
July 4, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
1 DEFINITIONS AND INTERPRETATION.....................................................1.
1.1 Definitions...............................................................1.
1.1.1 "Lease"..........................................................1.
1.1.2 "Fiscal Year"....................................................1.
1.1.3. "Operating Costs"................................................1.
1.1.4 "Building".......................................................4.
1.1.5 "Facilities and common areas"....................................4.
1.1.6 "Leased Premises"................................................4.
1.1.7 "Proportional Share".............................................4.
1.1.8 "Leased Area(s)".................................................4.
1.1.9 "Property Taxes".................................................4.
1.1.10 "Land"...........................................................4.
1.2 Titles and Numbering......................................................5.
1.3 Interpretation............................................................5.
1.4 Null and Inoperative Provisions...........................................5.
1.5 Duration of Provisions....................................................5.
1.6 Appendices................................................................5.
2 LEASING AND DELIVERY OF LEASED PREMISES............................................5.
2.1 Leasing of Leased Premises................................................5.
2.2 Delivery and Completion of Leased Premises................................5.
2.3 Late Delivery.............................................................5.
2.4 No Relocation.............................................................6.
3 LEASE TERM.........................................................................6.
3.1 Starting Date.............................................................6.
3.2 Access Before Starting Date...............................................6.
4 RENT...............................................................................6.
4.1 Rent......................................................................6.
4.1.1 Minimum Rent.....................................................6.
4.1.2 Additional Rent..................................................7.
4.2 Place of Payment..........................................................8.
4.3 Interest..................................................................8.
4.4 Disagreement..............................................................8.
4.5 Net Lease.................................................................8.
5 OPERATING COSTS....................................................................8.
5.1 Proportional Share of Operating Costs.....................................8.
5.2 Payment of Proportional Share.............................................8.
5.3 Estimated Operating Costs.................................................8.
5.4 Actual Operating Costs....................................................8.
5.5 Reasonable Operating Costs................................................9.
6 TAXES..............................................................................9.
6.1 Proportional Share of Taxes...............................................9.
6.2 Contestation..............................................................9.
6.3 Water, Business and Public Service Taxes.................................10.
6.4 Goods and Services Tax (G.S.T. and Q.S.T)................................10.
6.5 Additional Taxes.........................................................10.
7 USE OF LEASED PREMISES............................................................10.
8 SERVICES, FACILITIES AND COMMON AREAS.............................................10.
8.1 Description of Services..................................................10.
8.2 Use of Facilities and Common Areas.......................................11.
8.3 Suspension of Services...................................................11.
8.4 Lessor's Failure to Comply...............................................11.
8.5 Additional Services......................................................12.
</TABLE>
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<TABLE>
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9 USE AND MAINTENANCE OF LEASED PREMISES............................................12.
9.1 Peaceful Enjoyment.......................................................12.
9.2 Good condition of Leased Premises........................................12.
9.3 Lessee's Default.........................................................12.
9.4 Glass....................................................................12.
10 ALTERATIONS, REPAIRS, IMPROVEMENTS,
INSTALLATIONS AND ADDITIONS.......................................................12.
10.1 Lessor's Agreement.......................................................12.
10.2 Legal Mortgages In Favour of Persons Involved in construction work.......13.
10.3 Return of Improvements at End of Lease...................................13.
11 INSURANCE.........................................................................13.
11.1 Lessee's Insurance Coverage..............................................13.
11.2 No subrogation...........................................................13.
11.3 Increased Risk...........................................................13.
11.4 Certificate of Insurance Coverage........................................14.
11.5 Lessor's Insurance Coverage..............................................14.
11.6 Liability................................................................14.
11.7 Indemnification..........................................................14.
12 LESSOR'S ACCESS TO LEASED PREMISES................................................14.
12.1 Inspections and Repairs..................................................14.
12.2 Visit of Leased Premises.................................................15.
12.3 Lessor's Employees.......................................................15.
12.4 Maintenance Employees....................................................15.
13 DAMAGE AND DESTRUCTION............................................................15.
13.1 Destruction of Leased Premises...........................................15.
13.2 Destruction of Building..................................................16.
13.3 Insurance Benefits.......................................................16.
13.4 No Obligation to Rebuild.................................................16.
13.5 Destruction Attributable to Lessee.......................................16.
14 EXPROPRIATION.....................................................................16.
14.1 Cancellation of Lease....................................................16.
14.2 No Obligation to Contest.................................................16.
15 NO DISTURBANCE OF LESSEE..........................................................16.
15.1 Creditors................................................................16.
15.2 Sale or Assignment of Building...........................................17.
16 OBSERVANCE OF LEGISLATION AND INDEMNIFICATION.....................................17.
16.1 Observance of Legislation................................................17.
16.2 Indemnification of Lessor................................................17.
17 ASSIGNMENT AND SUBLEASING.........................................................17.
17.1 Lessor's Agreement.......................................................17.
17.2 Justified Refusal........................................................17.
17.3 Lessor's Reply...........................................................18.
17.4 Affiliated Companies.....................................................18.
17.5 Joint and Several Liability..............................................18.
17.6 Cancellation of Lease....................................................18.
18 DEFAULT, RECOURSE.................................................................18.
18.1 Default Cases............................................................18.
18.2 Cancellation of Lease....................................................19.
18.3 Damages..................................................................19.
18.4 No Waivers...............................................................19.
19 DEPOSIT...........................................................................19.
</TABLE>
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<TABLE>
<S> <C>
20 NOTICES OF REQUESTS...............................................................19.
21 EXPIRY OF LEASE...................................................................20.
21.1 No Renewal...............................................................20.
21.2 Possession after Expiry of Lease Term....................................20.
22 VARIOUS PROVISIONS................................................................20.
22.1 Assigns..................................................................20.
22.2 No Company...............................................................20.
22.3 Cancellation of Previous Agreements......................................20.
22.4 Mediation and Arbitration................................................21.
22.5 Brokerage Fees...........................................................21.
22.6 Applicable Legislation...................................................21.
22.7 Recording of Lease.......................................................21.
22.8 Regulations..............................................................21.
22.9 Negotiation of Lease.....................................................21.
23 SPECIAL PROVISIONS................................................................22.
23.1 Maximum Operating Costs..................................................22.
23.2 Right of First Refusal...................................................22.
23.3 Purchase Option..........................................................22.
23.4 Compensation Allowed in Some Cases.......................................23.
23.5 Assignment of Furniture and Fixtures.....................................23.
23.6 Parking Spaces...........................................................23.
</TABLE>
<PAGE>
LEASING AGREEMENT COVERING PREMISES LOCATED AT 10 DUKE STREET IN MONTREAL,
CONCLUDED
BETWEEN:
TGR ZONE CORPORATION / CORPORATION ZONE TGR, a body corporate legally
constituted under the laws of the Province of Quebec, having its head office in
the City of Montreal, Province of Quebec, acting and represented herein by
Matthew Carson, duly authorized for the purposes of the present by a resolution
of the Board of Directors, dated October 29, 1997, a certified copy of which is
attached hereto;
(hereinafter called the "Lessor")
PARTY OF THE FIRST PART
AND
DISCREET LOGIC INC., / LOGIQUE DISCRETE INC., a body corporate legally
constituted under the laws of the Province of Quebec, having its head office in
the City of Montreal, Province of Quebec, acting and represented herein by
Francois Plamondon, Senior Vice-President and Chief Financial Officer, duly
authorized for the purposes of the present, according to his declaration;
(hereinafter called the "Lessee")
PARTY OF THE SECOND PART
THE PARTIES HERETO AGREE AS FOLLOWS:
1 DEFINITIONS AND INTERPRETATION
1.1 Definitions
The following words and expressions, when used in the present agreement,
have the following meaning, except if they are incompatible with the
context in which they are used:
1.1.1 "Lease" and the expression "the present" and other similar
expressions mean and refer to the present agreement and its
appendices and any amendments and changes thereto;
1.1.2 "Fiscal Year" means a period starting on the first day of January
and ending on the last day of the following December, except that
the first Fiscal Year will start at the same time as the present
Lease and will end on December 31, 1997 and the last Fiscal Year
will end at the same time as the present Lease;
1.1.3 "Operating Costs" means all the expenses usually charged by a
reasonable owner for the operation, management, protection,
conservation, maintenance, supervision and repairs of the
Building, and without limiting the generality of the foregoing,
the Operating Costs include, without duplication:
1.1.3.1 the usual management and administration costs and
expenses related to the Building, the wages and
salaries as well as any costs related to all types
of fringe benefits and pension plan for those
employees of the Lessor or of his agent who are
assigned exclusively to the operation, maintenance
and repair of the Building;
1.1.3.2 the costs of all goods and services supplied for the
operation, maintenance and repair of the Building;
1
<PAGE>
1.1.3.3 the costs related to the installation, maintenance and
repair of the Facilities and Common areas of the
Building, including window cleaning, snow removal,
cleaning, repair and maintenance of the land;
1.1.3.4 the costs of repairs to the Building, as well as the
replacement of any equipment, appliance, machinery
or other Building property, except those for which
the Lessee is responsible;
1.1.3.5 the costs of electricity and energy as well as heating,
ventilation and air-conditioning costs;
1.1.3.6 the costs of all of insurance policy premiums and
deductibles related to the Building and purchased
by the Lessor;
1.1.3.7 the business and water taxes and other taxes or levies
of same nature assessed by a government,
municipal, inter-municipal or school authority,
provided these taxes or levies are not already
included in the Property Taxes or are not paid
directly by the tenants;
1.1.3.8 any other direct costs or expenses related to the
adequate conservation, protection, operation and
maintenance of the Building;
1.1.3.9 the expenses related to energy conservation measures or
programs providing they ensure a monetary
advantage resulting from an equivalent reduction
in Operating Costs;
1.1.3.10 for the purposes of determining the Proportional
Share (as described hereunder) of Operating costs,
the large corporations tax will not be included in
said Operating Costs;
1.1.3.11 the administration costs equal to ten percent
(10%) of the Operating Costs referred to in the
present clause 1.1.3, taking into account all the
exclusions stipulated hereunder and excluding the
costs referred to in sub-clause 1.1.3.10 of the
present.
The following costs will not be included in the Operating Costs
and will be fully paid for by the Lessor:
1.1.3.12 any expense or cost, or portion of same, for which
the Lessor is directly or indirectly compensated
or reimbursed, under legal or contractual
guarantees or indemnities, or for which the Lessor
receives some compensation from a company under an
insurance or similar contract, as well as any
expense for which the Lessor should have been
insured and received compensation or indemnities
had he acted in a prudent and reasonable manner,
taking into account the use made of the premises
and based on the normal standards of a building
landlord;
1.1.3.13 the bad debts of a third party lessee and the
costs incurred to collect them, as well as any
expense or tax paid for the benefit of a third
party lessee, including any surtax;
1.1.3.14 all amounts paid to third parties due to the
default, omission, error, fault or delay of the
Lessor or of the persons for whom he is legally or
contractually responsible in the fulfilment of his
or their obligations, including his
representatives, employees and agents, as well as
the cost or penalties resulting from the Lessor's
default to meet the obligations contracted under
any guarantee, bond or security affecting the
Building;
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1.1.3.15 all costs related to the replacement of major
components of the Building's basic systems
(including heating, ventilation, air-conditioning,
sprinklers, plumbing and elevators);
1.1.3.16 the costs of any major repairs to the structure or
the replacement of any inherent structural defects
or weaknesses including, without limitations, the
replacement of the roof or any repairs (other than
minor) to the cement slabs, foundations, floors,
interior or exterior sustaining walls, exterior
walls, roof, support beams, supporting pillars, as
well as any structural repairs or additions to the
Building required to make the Building in
compliance with the applicable rules and
regulations, and the costs related to any
significant extension or renovation of the
Building;
1.1.3.17 the Building's initial capital cost allowance and
any depreciation recorded against the initial cost
of the Building, as well as the depreciation on any
expansion of the Building;
1.1.3.18 the expenses incurred to meet the conditions
stipulated in the leases of the Building's tenants,
including the costs of any tenant eviction as well
as all costs that may be charged exclusively to any
other Building tenant including, without limiting
the generality of the foregoing, any expense
incurred to induce potential tenants or existing
tenants to rent or to renew their lease, as the
case may be, including taking over the existing
lease or purchasing the building then occupied, as
well as any bonus or benefit granted exclusively to
a minority of Building tenants and the cost of any
item normally included in the Operating Costs and
that would have been paid by a third party tenant
of the Building in the absence of the waiver given
to this third party tenant by the Lessor.
1.1.3.19 any repairs or replacements, or portion of same,
that become necessary due to a faulty design, a
latent defect, under the Civil Code of Quebec, or a
structural defect related to the Building;
1.1.3.20 the taxes (except the Property Taxes referred to in
clause 1.1.9) levied upon the Lessor and pertaining
to Additional Rents, whether it be the Goods and
Services tax or any other similar sales tax, that
will be paid or payable by the Lessor and for which
the Landlord will obtain a credit or reimbursement
or other reduction, credit or reimbursement.
1.1.3.21 any brokerage fees and bonuses;
1.1.3.22 any marketing, notification, market research and
advertising costs;
1.1.3.23 all financing costs and any interest on any loan to
finance the Building;
1.1.3.24 any dues or rental payable by the Lessor under an
emphyteutic lease, land lease or any other similar
agreement currently or eventually in force;
1.1.3.25 the cost of any payment that the Lessor is
obligated to make under an agreement by which he is
committed to indemnify and take the harm caused by
any person, company or corporation, except inasmuch
as agreements of this type are usually entered into
by a reasonable and prudent lessor of a building of
the same nature and
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use as the Building;
1.1.3.26 any expenses related to antennas, cables,
machinery, equipment, facilities or any other form
of communication equipment that do not usually form
part of the operations of a building of the same
category as the Building, and installed at the
request of any person or company other than the
Lessee or for the specific and limited use of such
person or company, whether or not such person or
company is a tenant in the Building;
1.1.3.27 the rental value, if applicable, of the premises
occupied by the Lessor's employees, representative
or agents assigned to its administration,
supervision or management and administrative
services, in the same proportion as that of the
management of any other building; and
1.1.3.28 the contributions to political parties or any other
contributions to social causes or other similar
causes, and to cultural, social, religious
organizations or any sum intended for the purchase
or rental of artwork;
1.1.3.29 the taxes on the Lessor's income or profits.
1.1.4 "Building" means the Land and the buildings and structures
thereon and bearing the civic addresses 10 Duke and 33 Nazareth,
in Montreal.
1.1.5 "Facilities and Common areas" means all the Building areas and
facilities, furnishings, improvements or equipment that, during
the Term of the Lease, are intended for common use or for the
benefit of all the Building tenants, their employees, clients or
visitors.
1.1.6 "Leased Premises" means the premises having a Leased Area of
fifty four thousand one hundred and fifteen (54,115) square feet
in the Building, including the furnishings supplied by the
Lessor, all the equipment and leasehold improvements already in
place or installed by the Lessor or the Lessee during the course
of the present Lease, such premises being marked off by a red
line on the plan attached hereto as Appendix "A". The Leased Area
of the Leased Premises will be adjusted following a final
measurement by an architect or land surveyor upon completion of
the Lessee's work. The certificate provided by the architect or
land surveyor will be attached to the present Lease, as Appendix
"B", and will take effect as if it were written in the present.
1.1.7 "Proportional Share" means the ratio of the Leased Area of the
Leased Premises to the Leased Area of the Building, this ratio
being currently set by the parties at one hundred percent (100%);
this percentage may vary in the event of an increase or reduction
in the Leased Area of the Leased Premises or of the Leased Area
of the Building, pursuant to the final measurement or to any
changes made to the Leased Premises.
1.1.8 "Leased Area(s)" in relation to the Leased Premises, means the
floor area of the Leased Premises, calculated as per the Standard
method to measure the floor area of spaces in office buildings,
American National Standard, (ANSI BOMA Z65.1d 1996).
1.1.9 "Property Taxes" means all property taxes, municipal taxes,
school taxes, local improvement taxes, water and business taxes
other than those charged to the tenants or occupants of the
Building, snow removal taxes that are raised, levied, or assessed
with respect to the Building and any other extraordinary and
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special taxes, levies, assessments, contributions and charges if
they prove to be of the same nature as the foregoing. For
guidance and for the purposes of the present Lease, the Property
Taxes specifically exclude:
1.1.9.1 the surtax on non-residential buildings that the
Landlord would have to pay as a tenant or occupant
of premises in the Building;
1.1.9.2 any tax on transfer of property following a complete or
partial sale of the Building;
1.1.9.3 the tax on the Lessor's income or profits;
1.1.9.4 any tax adjustment for a period where the Lessee was
not a tenant in the Building;
1.1.9.5 the Lessor's capital tax
1.1.10 "Land" means all the lots or parts of lots described in appendix
"C" attached hereto.
1.2 Titles and Numbering
The titles, sub-titles, section, clause and sub-clause numbers and the
table of contents in the present Lease are used only for reference purposes
and in no way define, limit interpret or describe the scope or purpose of
the parties to the present Lease, nor do they affect the present Lease.
1.3 Interpretation
The words "above", "of the present", "above-mentioned" and "hereunder" and
any similar expressions used in any section, clause or sub-clause of the
present Lease refer to the complete Lease and not only to a specific
section, clause or sub-clause, unless otherwise stipulated. Where the
context requires it, the singular form includes the plural, and the
masculine includes the feminine.
1.4 Null and Inoperative Provisions
In the event any provision of the present Lease is declared null and
inoperative or illegal by a court of competent jurisdiction, then the said
provision will be considered as not forming part of the Lease, and the fact
that this provision was declared null and inoperative will in no way affect
the validity of all the other provisions of the Lease, and they will
continue to have force of law.
1.5 Duration of Provisions
Each and every provision of the Lease will be in force during the Lease
Term, as defined hereunder in clause 3.1.
1.6 Appendices
The appendices form part and parcel of this Lease and are as follows:
1.6.1 Appendix "A": Plan of Leased Premises
1.6.2 Appendix "B": Certificate of Measurement of Leased Premises
1.6.3 Appendix "C": Description of Land
1.6.4 Appendix "D": Lessor's Work and Assigned Furniture
1.6.5 Appendix "E": Lessee's Work
1.6.6 Appendix "F": Offer to Lease
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1.6.7 Appendix "G":Rules and Regulations
1.6.8 Appendix "H": Assigned Furniture
2 LEASING AND DELIVERY OF LEASED PREMISES
2.1 Leasing of Leased Premises
The Lessor hereby leases to the Lessee, present and willing, the Leased
Premises, subject to the conditions, agreements and obligations contained
herein.
2.2 Delivery and Completion of Leased Premises
The Lessee will take possession of the Leased Premises with the fixtures,
leasehold improvements and furniture in place on the date of the present,
as described above in "Appendix "D" - "Lessor's work and assigned
furniture", and which the Lessee recognizes that he has seen and accepted.
The Lessee undertakes to inspect the Leased Premises, the Lessor's work and
the assigned furniture upon taking possession of the Leased Premises and to
notify the Lessor of any fault or defect within thirty (30) days of such
date, failing which it will be deemed that the Leased Premises and the
assigned furniture were in good serviceable condition upon taking
possession, that the duly completed work was accepted and to the Lessee's
satisfaction.
However, the Lessee's omission of failure to notify the Lessor of any fault
or defect, as mentioned above, or to inform the Lessor of any problem
affecting the Leased Premises and that could not reasonably be detected
during the Lessee's inspection within the above-mentioned period, will not
be interpreted as nor will constitute a waiver of the Lessee's rights and
recourse for any fault or defect. Should the fault or defect affect a
system or any seasonal item including, without limiting the scope of the
foregoing, the heating and air-conditioning systems, then the thirty-day
(30) period will begin at the start-up of the said item or system and not
at the beginning of the Lease Term.
All the other work, particularly as described in Appendix "E" - "Lessee's
Work", without limitations, will be carried out at the Lessee's expense and
will comply with the applicable legislation, rules and regulations. The
plans of the Lessee's work will be submitted to the Lessor for prior
approval. In the event the Lessee's work is carried out by the Lessor, the
costs and expenses incurred by the Lessor for such work, plus a ten percent
(10%) administration fee, will be payable by the Lessee, as Additional
rent, upon receipt of a statement.
2.3 Late Delivery
Should the Leased Premises not be ready for delivery on the scheduled date,
the starting date of the Lease will be deferred by the number of days
corresponding to the number of late days.
2.4 No Relocation
At no time will the Lessor relocate all or part of the Leased Premises,
either in the Building or in any other building, without the written
agreement of the Lessee.
3 LEASE TERM
3.1 Starting Date
The lease term will start on the earliest of the following dates:
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3.1.1. the 7/th/ day of July 1997; or
3.1.2 on the date the Lessee begins operations in the Leased Premises,
and will end at midnight on July 6, 2007 (hereunder called the "Term").
3.2 Access Before Starting Date
If the Lessee enters in the Leased Premises before the starting date of the
Lease Term, for the purpose of carrying out work or installing fixtures,
all the conditions of the Lease will then become effective and will apply
during the duration of such occupation. However, during this period, the
Lessee will not be required to pay to the Lessor any Minimum Rent or
Proportional Share of Operating Costs or Property Taxes, but will have to
pay to the Lessor, upon request, all costs related to such occupation.
4 RENT
4.1 Rent
The Lessee will pay to the Lessor , as rent ("Rent") for the Leased
Premises, during the Lease Term, without any deductions, compensation or
reduction, the minimum rent described in clause 4.1.1. ("Minimum Rent") and
any amount or costs required under the present Lease ("Additional Rent").
4.1.1. Minimum Rent
------------
The Lessee will pay to the Lessor, without any prior request, as
Minimum Rent, equal consecutive monthly payments, in advance, on
the first day of each month as follows, subject to any adjustment
described in the present Lease:
4.1.1.1 for the first year of the Lease Term, an amount equal
to thirteen dollars ($13.00) per square foot of
Leased Area, payable in equal monthly instalments
of fifty eight thousand six hundred and twenty
four dollars and fifty eight cents ($58,624.58);
4.1.1.2 for the second year of the Lease Term, an amount equal
to thirteen dollars and seventy cents ($13.70) per
square foot of Leased Area, payable in equal
monthly instalments of sixty one thousand seven
hundred and eighty one dollars and twenty nine
cents ($61,781.29);
4.1.1.3 for the third year of the Lease Term, an amount equal
to fourteen dollars and twenty cents ($14.20) per
square foot of Leased Area, payable in equal
monthly instalments of sixty four thousand thirty
six dollars and eight cents ($64,036.08);
4.1.1.4 for the fourth year of the Lease Term, an amount equal
to fourteen dollars and seventy cents ($14.70) per
square foot of Leased Area, payable in equal
monthly instalments of sixty six thousand two
hundred and ninety dollars and eighty eight cents
($66,290.88);
4.1.1.5 for the fifth year of the Lease Term, an amount equal
to fifteen dollars and twenty cents ($15.20) per
square foot of Leased Area, payable in equal
monthly instalments of sixty eight thousand five
hundred and forty five dollars and sixty seven
cents ($68,545.67);
4.1.1.6 for the sixth year of the Lease Term, an amount equal
to fifteen dollars and seventy cents ($15.70) per
square foot of Leased Area, payable in
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equal monthly instalments of seventy thousand
eight hundred dollars and forty six cents
($70,800.46);
4.1.1.7 for the seventh year of the Lease Term, an amount equal
to sixteen dollars and twenty cents ($16.20) per
square foot of Leased Area, payable in equal
monthly instalments of seventy three thousand
fifty five dollars and twenty five cents
($73,055.25);
4.1.1.8 for the eighth year of the Lease Term, an amount equal
to sixteen dollars and seventy cents ($16.70) per
square foot of Leased Area, payable in equal
monthly instalments of seventy five thousand three
hundred and ten dollars and four cents
($75,310.04);
4.1.1.9 for the ninth year of the Lease Term, an amount equal
to seventeen dollars and twenty cents ($17.20) per
square foot of Leased Area, payable in equal
monthly instalments of seventy seven thousand five
hundred and sixty four dollars and eighty three
cents ($77,564.83);
4.1.1.10 for the tenth year of the Lease Term, an amount equal
to seventeen dollars and seventy cents ($17.70)
per square foot of Leased Area, payable in equal
monthly instalments of seventy nine thousand eight
hundred and nineteen dollars and sixty three cents
($79,819.63);
All of the above amounts are subject to adjustment following the
final measurement of the Leased Premises; if the Lease Term
starts on any day other than the first day of a month or ends on
any day other than the last day of a month, the Minimum Rent for
the month involved, will be calculated on a per diem basis.
4.1.2 Additional Rent
---------------
The Additional Rent will comprise all the other amounts that are
due and payable under the present, other than the Minimum Rent,
whether or not these amounts have been specifically designated as
Additional Rent.
4.2 Place of Payment
The Rent will be paid by the Lessee to the Lessor at the address shown
under Section 20 of the present, or at any other place in Quebec, indicated
in a written notice from the Lessor to the Lessee.
4.3 Interest
The parties undertake to pay, on any amount due under the Lease and unpaid
on the due date, under the Lease, interest at the annual rate determined by
the Canadian Imperial Bank of Commerce as the preferential or basic rate
upon which it establishes its commercial loan rates in Canadian dollars,
plus two percent (2%). The interest will be calculated on the daily past
due balance starting from the date when the amount becomes due and payable
under the Lease, without the need for a notice or formal request.
4.4 Disagreement
In the event of a disagreement regarding any sum of money to be paid by the
Lessee to the Lessor under any provision of the Lease, the certificate of a
chartered accountant, selected by mutual consent of the Lessor and the
Lessee, establishing such amount, will be final and binding upon the Lessee
and the Lessor. The chartered accountant will be instructed to submit his
report to the parties within thirty (30) days of his appointment. The
expert costs will be paid in accordance with the provisions of clause 5.4
of the present.
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4.5 Net Lease
The intention of the parties hereto is that the Lessor receive a completely
net Rent, free and clear of all taxes, costs or deductions related to the
protection, conservation, operation, maintenance and management of the
Leased Premises and the Building, except for the exclusions specifically
mentioned in the present Lease.
5 OPERATING COSTS
5.1 Proportional Share of Operating Costs
During the complete Term of the Lease, or any renewal thereof, if
applicable, the Lessee will pay, as annual Additional Rent, his
proportional Share of Operating Costs.
5.2 Payment of Proportional Share
The Lessee's Proportional Share of Operating Costs will be payable in
advance, in monthly equal and consecutive instalments, set at one-twelfth
(1/12) of the amount payable, at the same dates as those set for the
payment of the monthly Minimum Rent. If the Lease Term starts on a day
other than the first day of a month or ends on a day other than the last
day of a month, the Additional Rent for the month concerned will be
calculated on a per diem basis.
5.3 Estimated Operating Costs
For the purposes of the present section, the Lessor will give to the
Lessee, no later than forty five (45) days before the beginning of each
Fiscal Year, a statement indicating the estimated amount of Operating Costs
as well as the Lessee's Proportional Share of Operating Expenses for the
said period, and the monthly Additional Rent instalments under the present
section for the said Fiscal Year will then be based on this estimate.
5.4 Actual Operating Costs
Within ninety (90) days of the end of each Fiscal Year, the Lessor will
remit to the Lessee a statement audited by the Lessor's chartered
accountants, showing the actual amount of the Building Operating Costs for
the corresponding Fiscal Year as well as the exact amount of the Lessee's
Proportional Share for this period. If the amount then determined by the
Lessor is higher or lower than the total amounts already paid to the Lessor
by the Lessee, then the appropriate adjustments will be made within the
thirty (30)-day period following the submission of the statement to the
Lessee. The Lessee will be entitled to question the Lessor and his
accountants with respect to the statement audited by the Lessor's chartered
accountants. The Lessor agrees to reply rapidly to the Lessee's questions,
including the submission of the supporting documents requested by the
Lessee, particularly if the Lessee deems that the Operating Costs were not
calculated according to generally accepted accounting principles and the
provisions of the present Lease. However and notwithstanding this right to
question, the Lessee will pay, on request, any amount that becomes due and
payable.
If, following the Lessor's answers, the Lessee is still not satisfied with
the Operating Costs and Taxes invoiced, the Lessee may ask some independent
auditors, selected by the Lessee and accepted by the Lessor, at the
Lessee's expense, to prepare a detailed and certified report, justifying
that the Lessee's Operating Costs and Tax invoice, under the Lease, is
correct. Should this independent auditors' report show that the amounts
invoiced to the Lessee by the Lessor are more than two point five percent
(2.5%) higher than the amounts the Lessor was entitled to invoice to the
Lessee under the present, then the Lessor will refund to the Lessee the
costs incurred by the latter for the preparation of this
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detailed report as well as any overpayments made by the Lessee and these
overpayments may be deducted by the Lessee from future rent payments.
5.5 Reasonable Operating Costs
The Lessor agrees that he will make reasonable efforts to prevent any
useless or excessive overall Operating Costs, acting in this respect as a
reasonable and prudent lessor and taking into account the nature and use of
the Building. If a contract is concluded between the Lessor and one of his
subsidiaries or any other business belonging to the same group as the
Lessor, then the costs agreed upon will be included provided the said costs
do not exceed the costs normally charged by a person or business dealing at
arm's length with the Lessor.
6 TAXES
6.1 Proportional Share of Taxes
During the complete Term of the Lease, the Lessee will pay to the Lessor,
as Additional Rent, his Proportional Share of Property Taxes, which will be
payable when they become due to an authority that is lawfully authorized to
collect such taxes on the Building, upon submission of invoices with copies
of the tax accounts, any other supporting document and a statement
certifying the amount representing the Lessee's Proportional Share. The
Lessor will forward to the Lessee such invoice and supporting documents as
soon as they are available.
Under the terms of the present section, the Proportional Share, as in all
other cases, is as described by the Lessor in clause 1.1.7 of the present,
irrespective of any other percentage that may be assigned by a government,
municipal, inter-municipal, school or other authority.
6.2 Contestation
The Lessor will not be required to undertake or pursue any contestation
with respect to the Building's evaluation or the Property Taxes levied,
either by legal or other means. The Lessor may, at his discretion and
without notifying the Lessee or without the latter's agreement or approval,
deal, submit to arbitration, agree, waive or otherwise decide on any
objection to the Building's evaluation or of any present or future claim
with respect to any Property Taxes. The Lessee will not, on his own behalf
or on behalf of the Lessor, contest the Building's evaluation or the levy
or payment of Property Taxes. However, the Lessee may, if he deems that the
Building is significantly over-evaluated, ask the Lessor, in writing, to
contest the evaluation and the Lessor will then contest the evaluation,
provided he is still authorized to do so.
All the professional fees and reasonable expenses incurred by the Lessor to
try to obtain a reduction of any Building evaluation or of any Property
Taxes will be added to the amount of Property Taxes if such fees and
expenses were incurred at the request of the Lessee or with his prior
agreement. Any amount paid or payable by the Lessee as Property Tax will be
adjusted to take into account any changes made to the amount of Property
Taxes payable on the Building.
6.3 Water, Business and Public Services Taxes
The Lessee will pay to the competent authorities, when they become due and
payable and provided they are assessed directly to the Lessee, the taxes,
charges, assessments and expenses other than Property Taxes, more
specifically the water tax, the business tax, the tax on non-residential
buildings and/or any surtax, the garbage tax and any similar tax that may
be levied on business, improvements, equipment and facilities in the Leased
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Premises, as well any tax, license fees or any other charges respecting
business dealings or due to the use or occupation of the Leased Premises.
The Lessee will, within thirty (30) days of their due date, submit to the
Lessor, in a form that is satisfactory to the Lessor, the proof of payment
of all taxes payable by the Lessee under the present Lease.
6.4 Goods and Services Tax (GST & QST)
The Lessee will pay to the Lessor the Goods and Services Tax and any other
similar tax that may be implemented before or during the Term of the Lease,
or any renewal thereof, that is levied by any competent authority, that the
Lessor is presently or could be required to collect with respect to the
Rent or to any other amount payable to the Lessor or for the benefit of the
Lessor under the Lease. Notwithstanding the foregoing, the Lessee will not
be required to pay said tax paid or payable by the Lessor and for which the
Lessor will receive a credit or reimbursement or any other reduction, to
the extent of such reduction, credit or reimbursement.
6.5 Additional Taxes
Should the taxation system presently in force be amended or a new tax,
assessment or levy be charged or collected on the Building, or if such tax
is assessed to the owner of the Building or on the rental revenues (other
than a new tax on the Lessor's income), then the term "Property Tax" will
include such new tax, assessment or levy.
7 USE OF LEASED PREMISES
The Lessee will use and occupy the Leased Premises only for office
purposes, including the Lessee's software design and production activities,
and computer products and equipment.
During the Term of the Lease, the Lessee will not be required to physically
occupy the Leased Premises, subject to his complying with all the other
terms and conditions of the Lease that are not incompatible with the non-
occupation of the Leased Premises.
8 SERVICES, FACILITIES AND COMMON AREAS
8.1 Description of Services
The Lessor agrees to supply the following services to the Lessee, provided
the Lessee is not in default under the present:
8.1.1 Electricity - The Lessor, subject to his being able to obtain it
from his main supplier, will supply to the Leased Premises the
electrical energy required to meet normal and usual needs. The
Lessor's commitment under the present is subject to the rules and
regulations of Hydro-Quebec or any other municipal or government
authority.
8.1.2 Heating, Air Conditioning and Ventilation - The Lessor will provide
the heating, ventilation and air-conditioning of the Leased Premises
and the Building so that the temperature inside the Leased Premises,
the Facilities and the Common Areas is maintained at a comfortable
level during regular business hours. The Lessor recognizes that the
Lessee's business practices require that his employees frequently
work evenings, nights and week-ends. This level of comfort will in
every respect be comparable to that provided in other similar
buildings and will meet the minimum standards recommended by "The
American Society of Heating, Refrigerating and Air-Conditioning
Engineers Inc. (ASHRAE)".
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The Lessee recognizes that it may take one (1) year from the date of
occupation of the Leased Premises by the Lessee to seasonally adjust
and balance the heating, air-conditioning and ventilation systems.
8.1.3 Supplies, Services and Accessories - The Lessor will be the sole
supplier of goods, accessories, supplies and any other service or
accessory, such as lamps, bulbs, fluorescent tubes, starters and
ballasts for the Leased Premises. The Lessee will then pay to the
Lessor, as Operating costs, any amount due for such goods, services,
supplies and accessories provided for the Leased Premises, provided
these amounts are reasonable and comparable to the costs of such
goods purchased from other suppliers, upon receipt of a
corresponding statement
8.1.4 Cleaning - The Lessor will clean the Leased Premises after normal
business hours, every day, except Saturdays, Sundays and statutory
holidays. The Lessor will also wash the outside of the windows at
least twice (2) a year and the inside of the windows at least twice
(2) a year.
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8.1.5 Elevators - The Lessor will supply and keep in good working
condition one or more automatic passenger elevator(s).
8.1.6 The Lessor will repair and keep the Building in good condition,
including, and without being limited to, water lines, plumbing,
lavatories and washrooms, sprinkler systems, ducts, telephone panels
and rooms, mechanical systems and security systems.
8.2 Use of Facilities and Common areas
The Lessee may use and benefit from the Facilities and Common areas of the
Building along with all those who also have access and the right to same.
The Lessor will ensure that the elevators, common entries, halls,
stairways, hallways, washrooms, lighting and other parts of the Building
provided for all the occupants of the Building, are kept clean and operated
in accordance with the highest management standards, as would do a prudent
and reasonable owner. Consequently, the Lessor will, at all times,
diligently repair, replace or rebuild these facilities, or parts thereof,
that may be damaged or destroyed, in particular repair and replace any
structural defects or weaknesses.
8.3 Suspension of Services
8.3.1 Subject to clause 8.3.2, the Lessor may, provided an forty eight
(48) hour notice is given to the Lessee, except in case of emergency
when a notice will not be required, suspend or modify, as long as
necessary, any service that the Lessor is required to provide under
the present due to accidents or to make repairs, replacements,
changes or improvements or for any other cause over which the Lessor
has no control, and the Lessee will not be entitled to any reduction
in Rent, or any other claim against the Lessor for any costs, losses
or expenses resulting from the reduction of interruption of such
services. However, the Lessor will diligently correct the situation
within a reasonable period of time, or within four (4) hours of his
becoming aware of an emergency situation, inform the Lessee of the
situation and the proposed control measures.
8.3.2 In cases where there is no emergency, the parties will agree on the
conditions and timing of the Lessor's right to act under the present
section, to avoid any negative impact on the Lessee's business
activities.
8.4 Lessor's Failure to Comply
If the Lessor is unable to fulfill any obligation stipulated herein with
respect to the supply or performance of any public utility service, work or
repair due to an act of God, the Lessor will be entitled to extend the
period of time for the fulfilment of such obligation by a time period equal
to the duration of the occurrence. The Lessee will not be entitled to any
compensation for any inconvenience or annoyance caused or to cancel this
Lease, except if the occurrence persists during more than one hundred and
eighty (180) consecutive days, in which case the Lessee will have the right
to cancel the Lease.
8.5 Additional Services
If the Lessee requires services that are additional to those described in
the present section, he will then ask the Lessor for them in advance and
the costs and expenses incurred by the Lessor to provide such additional
services or the services mentioned in clause 8.1.3, increased by ten
percent (10%) to cover administration costs, will be payable by the Lessee
upon receipt of a statement, as Additional Rent and not as Operating Costs.
9 USE AND MAINTENANCE OF LEASED PREMISES
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9.1 Peaceful Enjoyment
The Lessor guarantees to the Lessee that he will have the peaceful and
quiet enjoyment of the Leased Premises, without interruption or trouble on
the part of the Lessor, his representatives or agents. To this end, the
Lessor undertakes to do everything reasonably within his power, including
the necessary legal steps to put an end to any disturbance caused by a
tenant of the Building and prevent any Building tenant from damaging the
Leased Premises.
9.2 Good Condition of Leased Premises
The Lessee undertakes, at his expense, to keep and maintain the Leased
Premises in good condition, to use them as a prudent administrator and to
carry out, without delay and at his expense, the leasehold repairs
required to keep and maintain their good condition (except if such repairs
are required by natural ageing) and to return them to the Lessor in good
condition at the expiry of the Lease, except any deterioration due to
normal wear and tear.
9.3 Lessee's Default
If the Lessee fails to keep and maintain the Leased Premises as mentioned
in clause 9.2 above, and has not complied, within a reasonable period of
time, based on the circumstances, with a notice to this effect given to
him by the Lessor, the latter, his officers, employees, agents,
contractors, workers and other representatives will have the right,
without further advance notice, to enter in the Leased Premises and make
any repairs on behalf of the Lessee and at his expense, the cost of which,
plus ten percent (10%) for administration costs, will be added to the Rent
payable by the Lessee, as Additional Rent, without prejudice to the
Lessor's other rights and recourse under the present.
9.4 Glass
The Lessor will replace, within a reasonable period of time, any broken
glass with glass of the same quality. If the breakage is attributable to
the fault or negligence of the Lessee, his employees or visitors, the
Lessee will reimburse the Lessor for the costs of such replacement, plus
ten percent (10%) for administration costs.
10 ALTERATIONS, REPAIRS, IMPROVEMENTS, INSTALLATIONS AND ADDITIONS
10.1 Lessor's Agreement
The Lessee may not, without the prior agreement of the Lessor, which will
not be refused without just cause, make any alterations, repairs,
improvements, installations or additions other than any decorating
improvements to the Leased Premises. Where applicable, the work will be
carried out by a contractor that is acceptable to the Lessor and be
approved in advance in writing by the Lessor. A copy of the plans, as
constructed, will be given to the Lessor at the completion of the work. If
the Lessor has to pay any inspection fees, such fees must be reasonable
under the circumstances and will be reimbursed by the Lessee, upon request
from the Lessor, plus ten percent (10%) for administration costs, as
Additional Rent.
10.2 Legal Mortgages in Favour of Persons Involved in Construction Work
If, as a result of the Lessee's work, a notice is advertised and served to
the Lessor with respect to a legal mortgage in favour of a person who
worked on the construction, the Lessee will, without delay, have the
mortgage cleared or take the necessary steps or
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procedures to this end. If the mortgage is not cleared within forty five
(45) days of its recording, the Lessee will immediately deposit with the
Lessor, or provide a guarantee deemed acceptable by the Lessor, an amount
equal to one hundred and twenty five percent (125%) of the amount of the
mortgage. If the Lessee fails to deposit the required amount within the
stipulated time period, the Lessor may undertake the necessary procedures
to have the mortgage cleared, more specifically the Lessor may deposit
with a court of competent jurisdiction or pay the amount claimed to the
rightful owner, notwithstanding any objection or procedure of the Lessee
in this respect. If the mortgage is paid by the Lessor, the Lessee will
then reimburse to the Lessor such capital, costs and interests, upon
request. Any deposit made by the Lessee to the Lessor, as mentioned above,
will be held in trust by the latter until a proof that such lien has been
completely cleared is submitted to the Lessor.
10.3 Return of Improvements at End of Lease
The Lessee will have the option, at the expiry of the Term of the Lease,
or at its premature expiry or at the expiry of any renewal of the Lease:
10.3.1 of removing, at his expense, these alterations, repairs,
improvements, installations and additions by restoring the Leased
Premises to their condition prior to such work;
10.3.2 of leaving these alterations, repairs, improvements, installations
and additions to the Lessor along with the Leased Premises in good
condition, taking normal wear and tear into consideration, without
indemnity or compensation, in which case they will form part of
the Leased Premises and become the property of the Lessor.
11 INSURANCE
11.1 Lessee's Insurance Coverage
The Lessee will, at his expense, during the Term of the Lease, keep in
force the following insurance policies, issued by reputable insurers and
whose terms and conditions are acceptable to the Lessor:
11.1.1 a comprehensive insurance policy covering the full replacement
value of the Lessee's property;
11.1.2 a public liability insurance policy covering the actions for which
the Lessee may be held responsible, including a comprehensive
liability coverage of at least ten million dollars ($10,000,000.);
11.1.3 any other insurance policy that the Lessor may, from time to time,
reasonably demand.
11.2 No subrogation
All the insurance policies purchased by the Lessee will contain a waiver
of any right of subrogation that the Lessee's insurers could have against
the Lessor, his employees or agents.
11.3 Increased Risk
The lessee will not take any action or do anything, or keep in or close to
the Leased Premises anything that would increase the risk of fire or the
rate of insurance premiums on the Building. Under no circumstances will
the Lessee bring or keep in the Lease Premises any flammable, explosive,
dangerous or contaminated materials.
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11.4 Certificate of Insurance Coverage
No later than fifteen (15) working days after obtaining a written notice
to this effect, the Lessee will provide to the Lessor, immediately after
the issue of such insurance policies, the certificates confirming the
issue and maintenance of all the insurance policies required under the
present. If the Lessee fails to purchase insurance or to supply these
certificates as required above, the Lessor, fifteen (15) days after having
notified the Lessee in writing, may purchase the required insurance
policies, for his own benefit and that of the Lessee, for a period not
exceeding one year and all the premiums paid by the Lessor, plus ten
percent (10%) for administration costs, will be reimbursed by the Lessee
upon receipt of a statement, as Additional Rent and not as Operating
Costs.
11.5 Lessor's Insurance Coverage
The Lessor, during the entire Term of the Lease, will keep in force
insurance coverage on the Building and the rents thereof as well as public
liability insurance, for amounts and subject to the deductions and
exceptions determined by the Lessor. These insurance policies will cover
and provide protection against, among others, fire losses and other risks
and perils that the Lessor and his mortgagees may, from time to time, deem
appropriate to cover. All insurance policies purchased by the Lessor will
contain a waiver of any right of subrogation that the insurers may have
against the Lessee, his employees or agents.
11.6 Liability
Except if they are caused by his negligence or fault, or in case of
failure to fulfill one of his obligations, the Lessor will not be held
responsible for any damages whatsoever, either contractual or delictual,
resulting from bodily injuries or property damage or business or other
losses sustained by the Lessee or his employees, or resulting from any
loss or damage to property belonging to the Lessee or his employees,
clients or guests.
11.7 Indemnification
Except if they are caused by his negligence or fault, or in case of
failure to fulfill one of his obligations, the Lessee agrees to indemnify
and hold the Lessor harmless from any legal actions for bodily injuries or
death, property damage or other losses or damages resulting from the
execution of any work carried out by himself or any agent or employee of
the Lessor, and to hold the Lessor harmless from any losses, expenses and
liabilities incurred by the Lessor due to any failure of the Lessee to
execute any obligations and commitments under this Lease.
12 LESSOR'S ACCESS TO LEASED PREMISES
12.1 Inspections and Repairs
12.1.1 Subject to clause 12.1.2, the Lessor will have access to the
Leased Premises at all times in cases of emergency and following a
forty eight (48) hour notice in other cases, to inspect and check
them, for the purpose of making the repairs, replacements,
alterations or improvements that are necessary or useful for the
operation and good maintenance of the Building. The Lessor will
ensure that these repairs, replacements, alterations and
improvements are made in a diligent manner in order to cause as
little disturbance as possible to the enjoyment of the Leased
Premises by the Lessee. Within four (4) hours of becoming aware of
an emergency situation, the Lessor will notify the Lessee of the
situation and of the proposed control measures.
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12.1.2 In cases where there is no emergency, the parties will come to an
agreement as to the conditions and the timing of the Lessors'
exercise of his right of visit or access, to prevent any negative
impact on the Lessee's business activities.
12.2 Visit of Leased Premises
During the last twelve (12) months of the Term of the Lease, subject to a
forty eight (48) hour notice, the Lessee will allow the Lessor or any
other person designated by the latter to visit the Leased Premises, during
regular business hours. The Lessee will also allow the Lessor, at all
times and subject to the same notice, during regular business hours, to
have any broker, acquirer or assessor of the Building visit the Leased
Premises. The Lessor undertakes to act in such as way as to not
significantly disturb the Lessee's business activities.
12.3 Lessor's Employees
Any person directly or indirectly employed by the Lessor and having access
to the Leased Premises, for any reason whatsoever, will comply with all
the Lessee's reasonable requirements with respect to the security of the
Leased Premises. The Lessor will ensure that identification is submitted
to the Lessee, at his request, by such persons wanting to access the
Leased Premises.
12.4 Maintenance Employees
The persons assigned to the maintenance and cleaning of the Leased
Premises will ensure that all doors giving access to the Leased Premises
are locked at all times, except when otherwise instructed by the Lessee.
13 DAMAGE AND DESTRUCTION
13.1 Destruction of Leased Premises
If the Leased Premises are partially or completely destroyed or damaged as
a result of a disaster for which the Lessor is insured:
13.1.1 Damages that cannot be repaired within a period of one hundred and
eighty (180) days - If the Lessor believes that the damages or
destruction are such that the Leased Premises are totally or
significantly rendered unusable, or that it is impossible or
dangerous to use them and if, in either case, the Lessor also
believes (and will so indicate in writing to the Lessor within
thirty (30) days of the damages) that the damages cannot be
repaired with reasonable diligence in a period of one hundred and
eighty (180) days following the disaster, either party may, within
ten (10) days of this notice, cancel the Lease by giving a written
notice to that effect, in which case the Lease will end on the day
the damages or destruction occurred, and the Rent and any other
amounts for which the Lessee is responsible for at the expiry of
this Lease will then be calculated and paid in full up to the day
the destruction or damages occurred. Should the Lessor or the
Lessee not cancel this Lease, the Rent will be suspended from the
day the damages occurred up to the time when the Leased Premises
are repaired and can be occupied by the Lessee in accordance with
the conditions of the present;
13.1.2 Damages that can be repaired within a period of one hundred and
eighty (180) days - If the Lessor believes that the damages are
such that the Leased Premises are totally or significantly
rendered unusable, or that it is impossible or dangerous to use
them and if, in either case, the Lessor believes (and will so
indicate in writing to the Lessor within thirty (30) days of the
damages) that the damages can be repaired with reasonable
diligence within a period of one hundred and eighty
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(180) days following the disaster, the Lessor will make the
necessary repairs to restore the Building, and the Rent will be
suspended from the day the damages occurred up to the time the
Leased Premises are repaired and can be occupied by the Lessee. If
the Lessor believes that the damages can be repaired as mentioned
above within one hundred and eighty (180) days following the
disaster and that the nature of the damages makes it possible to
partially use the Leased Premises for the purposes for which they
had been rented, until such damages have been repaired, the Rent
will be reduced proportionately to the part of the Leased Premises
that was rendered unusable in relation to the overall Leased
Premises.
13.2 Destruction of Building
If the Building is partially destroyed or damaged so that twenty five
percent (25%) or more of the Leased Area of the Building is affected or if
the Lessor believes that the Building has become dangerous or unusable,
based on the normal use of the Building, whether or not the Leased
Premises themselves are affected, then the Lessor, if he believes that the
Building cannot with reasonable diligence be repaired within one hundred
and eighty (180) days following the disaster, will notify the Lessee in
writing within thirty (30) days of the damages that he believes the
Building cannot be repaired and either party may, within ten (10) days of
such notice, cancel this Lease, in which case this Lease will end on the
day the destruction or damages occurred, and the Rent and any other
amounts for which the Lessee is responsible at the expiry of this Lease
will then be calculated and paid in full up to the day the destruction or
the damages occurred.
13.3 Insurance Benefits
In the event the Lease is cancelled before the expiry of the Term, any
insurance benefits, except the amounts related to the Lessee's property,
provided there are no debts owing to the Lessor by the Lessee under the
present, will be and remain the Lessor's absolute property.
13.4 No Obligation to Rebuild
The present Lease does not contain any provision forcing the Lessor to
repair or rebuild the Lessee's alterations, improvements or other
property.
13.5 Destruction Attributable to Lessee
If the damages to the Leased Premises or Building are attributable to the
Lessee or to persons for whom he is legally responsible, the damages may
be repaired by the Lessor, at the Lessee's expense, up to the amount of
the Lessee's insurance coverage provided in clause 11.1, and the latter
will forfeit his right to cancel the Lease and will not be entitled to any
rent suspension or reduction under the terms of the present section,
subject to any other right or recourse of the Lessor.
14 EXPROPRIATION
14.1 Cancellation of Lease
In the event the Building is expropriated by any authority having
jurisdiction, in part or totally, the Lessor may end the Lease as of the
take-over or expropriation date, by giving a written notice to this effect
to the Lessee and without any liability to the latter. The cancellation by
the Lessor, if applicable, will not be done in a discriminatory manner
against the Lessee.
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14.2 No obligation to contest
The Lessor and the Lessee reserve the right under the present to claim
eventual damages from the expropriating authority. The Lessee recognizes
that the Lessor has no obligation under the present to contest any
expropriation procedure.
15 NO DISTURBANCE TO THE LESSEE
15.1 Creditors
The Lessor undertakes, before the start of the Lease and thereafter before
the start of any renewal period, if applicable, to take the required
measures with all mortgagees, namely the creditors who have registered a
mortgage or trust deed on the Building or any other creditor holding
encumbrances on the Building or any other creditor who could, in any way
whatsoever, affect the Lessee's rights, to obtain a written commitment
guaranteeing that the Lessee will not be prevented, for any reason
whatsoever, from enjoying the Leased Premises or exercising any other
right given to the Lessee by the Lessor and that his Lease will be
respected.
15.2 Sale or Assignment of Building
The Lessor undertakes, before the sale or assignment of the Building, to
reveal to any potential acquirer or assignee the name of the Lessee, the
Term of the Lease and to obtain from such acquirer or assignee a written
commitment to the effect that the occupation of the Leased Premises will
not be disturbed and the Lessor's obligations under the present will be
totally assumed.
16 OBSERVANCE OF LEGISLATION AND INDEMNIFICATION
16.1 Observance of Legislation
The Lessee will observe all the laws, rules, ordinances, orders and
regulations in force in the City or Urban Community, as applicable, in
which the Lease Premises are located, of the federal and provincial
governments and of each of their respective departments, commissions or
agencies, if applicable, and of any other government authority having any
jurisdiction of any kind on the Leased Premises, with respect to the
occupation of the Leased Premises by the Lessee or the conduct of the
Lessee's business in the Leased Premises. Inasmuch as they concern the
Leased Premises or the Lessee's activities, the Latter will promptly
comply with their requirements at his expense.
16.2 Indemnification of Lessor
The Lessee agrees to indemnify and hold harmless the Lessor against any
fine, penalty, charge or damage incurred by the Lessor as a result of any
violation by the Lessee, his officers or agents, of any law, ordinance or
regulation in force. The Lessee also agrees to indemnify and save the
Lessor harmless from any damage or expense resulting from any failure of
the Lessee to comply with any requirement or provision of the Lease, and
will also reimburse him for any expenses, including any legal fees
incurred by the Lessor to enforce his rights and recourse.
The Lessee recognizes that the Lessor will not be responsible for any
damage incurred by the Lessee and the Lessee will not be entitled to any
Rent reduction or the cancellation of the Lease,
(i) if the damages incurred by the Lessee result from or are attributable
to the failure
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or negligence of the Lessee, his agents, representatives, employees
or persons to whom the Lessee gives access to the Building (other
than the persons to whom the Lessee gives access because of a right
of the Lessor under the present);
(ii) if the damages incurred by the Lessee result from or are
attributable to an act of God;
(iii) if the damages incurred by the Lessee do not result from or are not
attributable to a failure of the Lessor to meet one of his
obligations under the present.
17 ASSIGNMENT AND SUBLEASING
17.1 Lessor's Agreement
The Lessee will not, at any time, assign the Lease or sublease the Leased
Premises, in whole or in part, without the prior written agreement of the
Lessor, that will not be refused without just cause.
17.2 Justified Refusal
Without limitation, the Lessor will have just cause to refuse his
agreement if the assignee or sub-tenant proposed by the Lessee is already
a tenant in the Building and that there are premises available for him in
the Building or will become available within the next three (3) months.
17.3 Lessor's Reply
The Lessor will have fifteen (15) working days, from the date of receipt
of a written request from the Lessee, to give his agreement or refusal, in
writing, with the reasons for such refusal. The Lessor's failure to inform
the Lessee in writing will be deemed to be, for all intents and purposes,
an acceptation of the sublet or assignment proposed by the Lessee.
17.4 Affiliated Companies
Upon ratification of the present Lease, the Lessee may, at all times,
without the agreement of the Lessor, assign the said Lease or sublease the
Leased Premises, in part or in whole, to a company belonging to his group,
provided, however, that the Lessor is informed in advance, in writing, and
that the Lessee remains jointly and severally responsible for the
obligations contained in the Lease.
17.5 Joint and Several Liability
Notwithstanding any assignment or subleasing, the Lessee will always
remain jointly and severally liable for the execution of the obligations
contained in this Lease and, by assignment or sublease, any assignee or
sub-tenant will assume the execution of the Lessee's obligations to the
Lessor. In all cases, the Lessor may require that the proposed sub-tenant
or assignee sign a new Lease based on the terms and conditions contained
in the assignee's or sub-tenants' offer, in which case the Lessee will
guarantee the fulfilment of all the obligations of such sub-tenant or
assignee under the new lease.
17.6 Cancellation of Lease
If, pursuant to a request for the approval of an assignment or sub-lease
made by the Lessee to the Lessor, the Lessor should decide to take back
the Leased Premises by cancelling the Lease, he will so inform the Lessee
in writing within fifteen (15) working days following receipt by the
Lessor of the Lessee's approval request.
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18 DEFAULT, RECOURSE
18.1 Default Cases
The Lessee will be in default under the present in the following cases:
18.1.1 if the Lessee does pay, on the due date, any amount due and
payable under the Lease;
18.1.2 if the Lessee becomes insolvent or makes an assignment for the
general benefit of his creditors; if the Lessee is declared
bankrupt, is liquidated, or files for protection under any
bankruptcy and insolvency act;
18.1.3 if the Lessee significantly changes or modifies the use of the
Leased Premises;
18.1.4 if steps are taken or action is initiated for the dissolution or
liquidation of the Lessee or his property or if enforcement or
seizure procedures are taken against the property of the Lessee
and are not disputed in good faith within fifteen (15) days;
18.1.5 if the Lessee does not take possession of the Leased Premises upon
delivery or abandons them for any reason whatsoever;
18.1.6 if the Lessee assigns the Lease or subleases the Leased Premises,
in part or in whole, in a manner other than that provided in the
present;
18.1.7 if the Lessee fails to meet any one of his other commitments,
obligations or any condition of the Lease.
18.2 Cancellation of Lease
Except for the cases indicated in clause 18.1.2., the Lease will be
cancelled automatically in the event of any failure of the Lessee, as
defined in the present section, and the Lessor may give the Lessee a
written notice of his intention to end the Lease and the Lease Term will
end as of
1) the fifth (5/th/) day following receipt of said notice in the
event of a violation of any provision concerning the payment of a
sum of money, or
ii) the thirtieth (30/th/) day following receipt of such notice in any
other case of default,
subject, in all cases, to the possibility for the Lessee to correct the
default, following the notice given by the Lessor.
18.3 Damages
In the event the Lease is cancelled under the provisions of the present
section, the Lessor may immediately claim the equivalent of the Minimum
Rent and the Additional Rent then payable on a monthly basis for the
current month and the six (6) following months; the Lessor may claim this
amount immediately as well as any overdue amount and any other amount that
the Lessee will then pay to the Lessor, subject to all the other rights
and recourse of the Lessor.
If the cancellation is due to bankruptcy or insolvency, or is based on
same, the Lessor may, in addition to the other rights and recourse
available to him, require the equivalent of three (3) months of Minimum
Rent and Additional Rent, on a monthly basis, as
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accelerated rent.
18.4 No Waivers
No leniency or oversight on the part of either party with respect to a
default of the other party concerning any one of his obligations under the
present may be considered a waiver of the Lessor's or the Lessee's rights
under the present as concerns such default or any subsequent default, nor
will it affect or modify in any manner whatsoever, the rights of the
Lessor or of the Lessee under the present as concerns this subsequent
default; in addition, no waiver will be construed as an act or omission on
the part of the Lessor or the Lessee, except if such waiver is given in
writing.
19 DEPOSIT
At the signing of the present, the Lessee will give the Lessor a deposit
of sixty eight thousand five hundred and forty five dollars and sixty
seven cents ($68,545.67), that is one (1) month of Minimum Rent in the
fifth year of the Lease, as a guarantee of the correct performance by the
Lessee of each commitment, condition and agreement stipulated in the
present.
If the Lessee is not in default under the present Lease, the Lessor will
apply the amount of the deposit to the payment of the Minimum Rent for the
last month of the fifth year of the Term.
20 NOTICES OF REQUESTS
Any notice to be given under the present or with respect to the Lease will
be considered legally given if it is delivered in person to the addressee
or sent by registered mail or sent by electronic mail (in which case any
notice sent by electronic mail will be confirmed in writing by registered
mail or delivered in person), to the following addresses:
20.1 for a notice to the Lessor, as follows:
Zone TGR Corporation
10 Duke Street
Montreal, QC
H3C 2L7
c/o the President or General Manager
20.2 for a notice to the Lessee, as follows:
Discreet Logic
10 Duke Street
Montreal, QC
H3C 2L7
c/o the President or Chief Financial Officer
or to any other location that either party will have indicated to the
other party by way of a written notice given as shown above.
Any notice sent by mail will be deemed to enter into force on the third
(3rd) working day following the date of its mailing. Any notice sent by
electronic mail will be deemed to have been given and received on the
following working day. Any notice delivered in person will be deemed to
have been received on the day of its delivery.
21 EXPIRY OF LEASE
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21.1 No Renewal
Unless it is renewed according to the terms of a renewal option granted to
the Lessee, if applicable, the Lease will end automatically and without
any other notice on the date stipulated in the present, and the occupation
of the Leased Premises by the Lessee after such date will not have the
effect of extending the Term of the Lease or renewing the Lease. The
Lessee will then be deemed to occupy the Leased Premises against the will
of the Lessor, who can then avail himself of every legal recourse
available in such circumstances.
21.2 Possession after Expiry of Term
If, in spite of the foregoing, the Lessee remains in possession of the
Leased Premises after the expiry of the Term of the Lease, the Rent for
the term of such occupation will be equal to the monthly Rent payable for
the last month of the Term of the Lease, or of its renewal, if applicable,
plus fifty percent (50%) and this Rent will be payable in advance, under
the same terms and subject to the same conditions as those provided in the
present.
22 VARIOUS PROVISIONS
22.1 Assigns
This Lease will be binding upon the successors and assigns of both the
Lessor and the Lessee.
22.2 Not a Company
The parties hereto expressly declare that none of the provisions of the
present Lease nor any of their actions is intended as and should not be
interpreted as establishing a relationship between them other than that of
Lessor and Lessee.
22.3 Cancellation of Previous Agreements
The present Lease contains all the mutual commitments and obligations of
the parties with respect to the leasing of the Leased Premises and
cancels, for all intents and purposes, any previous representations,
negotiations, agreements, of any nature whatsoever. Since the present
Lease has precedence, no other document or written or verbal
representation can be used to interpret the present except, however, the
Offer to lease, attached hereto as Appendix "F" for reference purposes, it
being understood that in case of contradiction, the text of the present
Lease will have precedence.
22.4 Mediation and Arbitration
The parties agree that, in the event of disagreement between them with
respect to the present that they cannot settle within a reasonable period
of time, they will ask, within ten (10) days of a notice given to one
party by the other, an outside conciliator, who is impartial and
objective, to help then settle the issue. The conciliator will have
fifteen (15) days from the date of his appointment to bring the parties to
an agreement.
If the parties cannot agree on the choice of the conciliator or if the
conflict cannot be settled in the period provided, they agree that any
dispute will then be submitted to arbitration. The arbitrator will be
chosen jointly by the parties and, failing an agreement on this choice
within ten (10) days of an arbitration request, either party may ask the
superior court to appoint an arbitrator. Subject to the present section,
the provisions of the Quebec Code of Civil Procedure and of the Civil Code
of Quebec will apply to such
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arbitration.
In any mediation or conciliation case, the costs will be shared equally by
the parties. In case of arbitration, the arbitrator's decision will be
final and binding on the parties. The arbitrator will rule on the sharing
of the arbitration costs.
22.5 Brokerage Fees
The Lessee and the Lessor declare that no broker is involved in the
leasing of the Leased Premises by the Lessee and that the Lessor will not
be required to pay any brokerage fees.
22.6 Applicable Legislation
This Lease will be interpreted in accordance with the laws of the Province
of Quebec.
22.7 Recording of Lease
The Lessee undertakes not to record the full Lease with the Realty
Registry, under pain of nullity. The Lessee may however record, at his
expense, a summary Lease provided the text of such summary lease is
submitted to the Lessor for approval beforehand.
22.8 Regulations
The Lessee undertakes that the rules and regulations outlined in Appendix
"G", attached hereto, and any other rules and regulations that the Lessor
may later stipulate, if they are deemed necessary for the security,
supervision or cleanliness of the Building and the Leased Premises, or for
the protection and good maintenance of the Building and its equipment or
for the comfort of the Lessees, will be observed and followed by the
Lessee, his employees, agents, visitors and representatives. The Lessor
will have the right to amend these rules or to waive, in writing or
otherwise, all or part of these regulations as concerns one or more
tenants, and the Lessor will have no responsibility to the Lessee for the
failure to observe or the violation of one of these regulations or rules
by any other tenant or any other person. The provisions of the rules and
regulations will not be considered as a limitation of any undertaking or
provision of the present Lease to be performed or fulfilled by the Lessee.
22.9 Negotiation of Lease
The parties declare and recognize:
22.9.1 that the provisions of the present were negotiated by them, were
freely agreed upon, discussed and negotiated and that none of
these provisions were imposed on either party by the other
party;
22.9.2 that they understand the meaning and the scope of all the
provisions of the present and that they received adequate, clear
and precise explanations on the nature and scope of these
clauses;
22.9.3 that, as far as they are concerned, none of the provisions in
the present is unreadable, incomprehensible, abusive, penalizes
them excessively or unreasonably or alters the nature of the
overall main obligations of the Lease.
23 SPECIAL PROVISIONS
23.1 Maximum Operating Expenses
The Lessor guarantees that, during the first twelve (12) month period of
the Term, the
24
<PAGE>
Operating Expenses will not exceed six dollars and fifty cents ($6.50) per
square foot of Leased Area. Also, during the second twelve-month period,
the Operating Expenses will not exceed seven dollars ($7.00) per square
foot of Leased Area. Thereafter, the increase in Operating Expenses will
be limited to the increase in the Consumer Price Index for the region of
Montreal, as published by Statistics Canada, subject to a maximum of 5%
per year. For the purpose of this calculation, the Operating Costs for the
second year will not exceed seven dollars ($7.00) per square foot of
Leased Area.
23.2 Right of First Refusal
23.2.1 The Lessor undertakes that he will not sell, assign or otherwise
dispose of the Building, directly or indirectly, without first
giving the Lessee the opportunity of purchasing it, as provided
hereunder.
23.2.2 The Lessor will submit to the Lessee any offer to purchase made
by a third party, who is not under the control of or controlled
by the same entity as the Lessor within the meaning of the Canada
Corporations Act, that he is prepared to accept.
23.2.3 The Lessee will have a period of ten (10) working days, starting
on the date of receipt of the offer sent by the Lessor, to advise
the latter in writing of his intention to purchase the Building
under the conditions of the said offer to purchase. Failing the
Lessee's reply within this period, it will be conclusively deemed
a refusal to purchase the Building, under his right of first
refusal.
23.2.4 Should the Lessee notify the Lessor of his intention not to
purchase the Building according to the terms and conditions of
the offer to purchase or if he neglects or omits to give the
notice mentioned in the previous clause, the Lessor may sell the
Building to the offeror, under terms and conditions that are not
less advantageous to the Lessor than those contained in the
offer. The Lessee undertakes, in such a case, to sign any
document and to become a party to any deed required to express
his agreement with the sale.
23.2.5 In the event the Building is not sold, as stipulated above,
within a period of ninety (90) days following the receipt by the
Lessee of the offer, the Lessee's right of first refusal will be
maintained with respect to any other offer to purchase.
23.3 Purchase Option
The Lessee may, at all times following the Starting Date of the Term and
as long as TGR Zone Corporation is its owner, purchase the Building, under
the following conditions:
23.3.1 The Lessee will inform the Lessor in writing of his intention to
acquire the Building.
23.3.2 Each party will hire a reputable firm of chartered appraisers to
determine the market value of the Building. The appraisers will
be allowed a thirty (30) day period to submit their assessment
report. Providing the difference between the appraisals of both
firms is not greater than ten percent (10%) and subject to clause
23.3.4 hereunder, the Lessor will sell the Building to the
Lessee, who will purchase it, at a value equal to the
25
<PAGE>
average of both appraisals.
23.3.3 If the difference between the appraisals of the two firms hired
by the parties is greater than ten percent (10%), a third
reputable firm of chartered appraisers will be hired jointly by
the parties to determine, by mutual agreement with the parties'
two firms that submitted the appraisal reports, the market value
of the Building, and the Lessee will purchase and the Lessor will
sell the Building at such market value. The closure of the sale
will take place within thirty (30) days of the determination of
the market value payable.
23.3.4 In all cases, the market value of the Building will not be less
than seven million dollars.
23.3.5 In the event of a disagreement between the parties concerning the
market value suggested by the appraisers, the parties will submit
their dispute to arbitration in accordance with the provisions of
section 22.4 of the present.
23.4 Compensation Allowed in Some Cases
Notwithstanding the provisions of section 4.1 of the present, the Lessee
may, as long as TGR Zone Corporation is the owner of the Building, make a
compensating deduction from the Minimum Rent payable under the present,
for the sums due by TGR Zone corporation to THE PECK BUILDING REG. and for
which TGR Zone Corporation would be in default under the lease assignment
agreement entered into by Discreet Logic inc., as assignor, TGR Zone
Corporation as assignee and THE PECK BUILDING REG. as owner. In the event
the Lessor sells the Building, the Lessor undertakes to give the Lessee,
as a guarantee of his obligations under the lease assignment agreement, an
irrevocable letter of credit, issued by a Canadian bank, for an amount
corresponding to one year of rent, payable to THE PECK BUILDING REG. for
the premises located at 5505 boul. St-Laurent, which letter of credit will
be renewable from year to year up to the expiry of the lease for 5505
boul. St-Laurent.
23.5 Assignment of Furniture and Fixtures
TGR Zone Corporation hereby assigns, for good and valuable consideration,
to Discreet Logic Inc., the full and complete ownership of the furniture
and fixtures located in the Leased Premises at 10 Duke Street, a list of
which is provided as Appendix "D" of the present Lease. In addition, the
furniture and fixtures belonging to Discreet Logic inc, and located in the
premises at 5505 boulevard Saint-Laurent, in Montreal, as described in the
list in Appendix "H", are hereby assigned, for good and valuable
consideration, by Discreet Logic inc. to TGR Zone Corporation.
23.6 Parking Spaces
The Lessor undertakes to provide to the Lessee, at all times during the
Term of the Lease, twenty five (25) parking spaces close to the Building.
IN WITNESS WHEREOF, WE HAVE SIGNED AT MONTREAL,
TGR Zone Corporation
Lessor
/s/ Mathew Carson 29 October 1997
- ---------------------- ---------------
by: Matthew Carson DATE
26
<PAGE>
/s/ Timothy Getz /s/ Georges Renaud
- ---------------- -----------------------------
Witness Witness
Discreet Logic inc.
Lessee
/s/ Francois Plamondon 29 October 1997
- ---------------------- ---------------
by: Francois Plamondon DATE
/s/ Timothy Getz /s/ Georges Renaud
- ---------------- -----------------------------
Witness Witness
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> OCT-01-1997 JUL-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 12,649 12,649
<SECURITIES> 0 0
<RECEIVABLES> 33,253 33,253
<ALLOWANCES> 3,694 3,694
<INVENTORY> 13,798 13,798
<CURRENT-ASSETS> 60,297 60,297
<PP&E> 27,167 27,167
<DEPRECIATION> 13,343 13,343
<TOTAL-ASSETS> 83,932 83,932
<CURRENT-LIABILITIES> 48,697 48,697
<BONDS> 0 0
92,128 92,128
0 0
<COMMON> 0 0
<OTHER-SE> (59,161) (59,161)
<TOTAL-LIABILITY-AND-EQUITY> 83,932 83,932
<SALES> 37,268 75,673
<TOTAL-REVENUES> 37,268 75,673
<CGS> 13,548 30,827
<TOTAL-COSTS> 13,548 30,827
<OTHER-EXPENSES> 20,120 53,949
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 27 43
<INCOME-PRETAX> 3,887 (8,440)
<INCOME-TAX> 3,097 5,872
<INCOME-CONTINUING> 790 (14,312)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 790 (14,312)
<EPS-PRIMARY> 0.03 (0.50)
<EPS-DILUTED> 0.03 (0.50)
</TABLE>
