<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
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
(State or other jurisdiction
of incorporation or organization)
98-0150790
(IRS Employer
Identification Number)
10 DUKE STREET
MONTREAL, QUEBEC, CANADA H3C 2L7
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (514) 393-1616
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
29,882,793 shares of the registrant's Common Shares, without par value, were
outstanding as of November 9, 1998.
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER PAGE
- - ----------- ----
<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..................................................... 11
PART II: OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 19
Item 6. Exhibits and Reports on Form 8-K.......................................... 19
SIGNATURES............................................................................ 20
</TABLE>
2
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PART I
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------ --------------
1998 1998
------------ --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................... $ 43,746 $ 44,035
Accounts receivable (less reserves for doubtful accounts)............... 32,102 27,346
Inventory--
Resale............................................................... 7,881 10,187
Demonstration........................................................ 4,776 5,287
Other current assets.................................................... 4,719 6,411
-------- --------
93,224 93,266
Property and equipment--less accumulated depreciation and amortization.... 9,576 8,970
Deferred income taxes..................................................... 878 752
Other assets.............................................................. 6,548 6,405
Assets held for resale.................................................... 4,384 4,473
-------- --------
$114,610 $113,866
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses................................... $ 36,099 $ 35,102
Deferred revenue........................................................ 6,545 6,593
Income taxes payable.................................................... 9,883 7,338
Customer deposits....................................................... 288 477
-------- --------
52,815 49,510
-------- --------
Deferred income taxes................................................... 2,229 2,843
-------- --------
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--29,617,504 shares at June 30, 1998 and
29,852,253 at September 30, 1998................................... 106,841 108,163
Accumulated deficit..................................................... (43,251) (41,716)
Cumulative translation adjustment....................................... (4,024) (4,934)
-------- --------
Total shareholders' equity........................................... 59,566 61,513
-------- --------
$114,610 $113,866
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1998
---- ----
<S> <C> <C>
Total revenues......................................... $ 38,405 $27,431
Cost of revenues....................................... 17,280 12,759
-------- -------
Gross profit......................................... 21,125 14,672
-------- -------
Operating expenses:
Research and development (net of tax credits)........ 3,512 3,750
Sales and marketing.................................. 7,433 7,914
General and administrative........................... 1,884 2,157
Charge for purchased research and development........ 21,000 --
-------- -------
Total operating expenses.......................... 33,829 13,821
-------- -------
Operating income (loss)........................... (12,704) 851
Other income net....................................... 377 1,547
-------- -------
Income (loss) before income taxes.................... (12,327) 2,398
Provision for income taxes............................. 2,775 863
-------- -------
Net income (loss).................................... $(15,102) $ 1,535
======== =======
Earnings (loss) per share:
Basic................................................ $ (0.53) $ 0.05
======== =======
Diluted.............................................. $ (0.53) $ 0.05
======== =======
Weighted average common shares outstanding:
Basic................................................ 28,659 29,681
======== =======
Diluted.............................................. 28,659 30,826
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1997 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................................................... $(15,102) $ 1,535
Adjustments to reconcile net income (loss) to cash used in operating activities -
Depreciation and amortization........................................................... 1,997 2,164
Deferred income taxes................................................................... 1,369 740
Write-off of in-process research and development........................................ 21,000 --
Write-off of assets related to restructuring............................................ 109 --
Compensation expense related to stock options........................................... 167 183
Changes in assets and liabilities--
Restricted cash....................................................................... (10,800) --
Accounts receivable................................................................... (1,704) 4,756
Inventory............................................................................. (275) (2,996)
Income taxes receivable............................................................... 448 --
Other current assets.................................................................. (1,276) (1,692)
Accounts payable and accrued expenses................................................. (2,644) (3,059)
Insurance proceeds related to class action litigation................................. 3,459 --
Deferred revenue...................................................................... 936 48
Income taxes payable.................................................................. 211 (2,544)
Customer deposits..................................................................... (930) 189
-------- -------
Net cash used in operating activities................................................... (3,035) (676)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......................................................... (2,323) (976)
Increase in other assets................................................................... -- (231)
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................................................... (11,847) (1,207)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from government loan.............................................................. -- 2,061
Proceeds from the exercise of stock options................................................ 506 831
Proceeds from employee stock purchase plan................................................. 217 308
-------- -------
Net cash provided by financing activities............................................... 723 3,200
-------- -------
Foreign exchange effect on cash.............................................................. (987) (1,028)
-------- -------
(Decrease) increase in cash and cash equivalents............................................. (15,146) 289
Unrestricted cash and cash equivalents, beginning of period.................................. 31,668 43,746
-------- -------
Unrestricted cash and cash equivalents, end of period........................................ $ 16,522 $44,035
======== =======
Supplemental disclosure of cash flow information:
Interest paid during the period............................................................ $ 21 $ 20
-------- -------
Income taxes paid during the period........................................................ $ 2,110 $ 2,425
-------- -------
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'' 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 included in the Company's
Annual Report on Form 10-K for the year ended June 30, 1998. The accompanying
condensed consolidated financial statements reflect all adjustments (consisting
solely of normal, recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of results for the interim periods
presented. The results of operations for the three-month period ended September
30, 1998 are not necessarily indicative of the results to be expected for any
other interim period or for the full fiscal year.
(2) PROPOSED MERGER WITH AUTODESK, INC.
On August 20, 1998, the Company announced that it had entered into a
definitive agreement providing for the acquisition of the Company by Autodesk,
Inc. (''Autodesk''). Under the terms of the agreement, Discreet shareholders
would receive 0.525 shares of Autodesk common stock for each outstanding share
of common stock of Discreet. The transaction is intended to be accounted for as
a pooling of interests. Subject to several conditions, including approval of the
shareholders of both companies, the transaction is expected to close by December
31, 1998. Until this transaction is finalized, both companies shall operate as
separate entities.
(3) LITIGATION AND RELATED SETTLEMENT EXPENSES
(a) Class action securities litigation
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
6
<PAGE>
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.
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.
In the twelve-month period ended June 30, 1998, the Company reversed $405,000
of litigation and related settlement expenses in order to adjust previously
estimated legal costs to the actual amount of costs incurred.
(b) Griffith & Tekushan, Inc.
On June 2, 1998, the Company was named as a defendant in a breach of warranty
action filed in the Supreme Court of the State of New York for the County of New
York entitled Griffith & Tekushan, Inc. v. Discreet Logic, Inc. (Index No.
602684/98) (the ''Action''). The complaint alleges, among other things, that the
Company breached certain warranties arising out of a software licensing
agreement and seeks damages of $1 million. On July 10, 1998, the Action was
removed from state court to the United States District Court for the Southern
District of New York (Case No. 98 Civ. 4909 (BSJ)). On July 17, 1998, the
Company filed a motion to dismiss the Action in its entirety. The motion to
dismiss is currently pending. The Company intends to contest this case
vigorously; however, the ultimate outcome of the case cannot be predicted at
this time.
(c) Class Action Litigation
On August 28, 1998, a complaint was filed in the Marin County, California,
Superior Court, entitled Jerry Krim, on Behalf of Himself and All Others
Similarly Situated, vs. Discreet Logic Inc., et al., case No. 174792. The
lawsuit relates to the proposed merger transaction with Autodesk and names as
defendants Discreet's directors and certain unidentified ''John Does.'' The
complaint alleges that the defendants breached their fiduciary duties to
shareholders in connection with the proposed merger transaction. The complaint
asks the court to enjoin the closing of the transaction or, alternatively, seeks
to rescind the transaction or an award of unspecified damages from the
defendants in the event the transaction is consummated. Discreet believes the
claims asserted in the complaint are without merit and intends to vigorously
contest them. On October 26, 1998, the Company filed motions to dismiss the
action, which currently are pending.
On September 29, 1998, a complaint was filed in the Marin County, California,
Superior Court, entitled William Clark, et al vs. Discreet Logic Inc., et al.,
case No.175037. The lawsuit relates to the proposed merger transaction with
Autodesk and names as defendants certain of Discreet's directors and certain
unidentified ''John Does.'' The complaint alleges that the defendants breached
their fiduciary duties to shareholders in connection with the proposed merger
transaction. The complaint asks the court to enjoin the closing of the
transaction or, alternatively, seeks to rescind the transaction or an award of
unspecified damages from the defendants in the event the transaction is
consummated. Discreet believes the claims asserted in the complaint are without
merit and intends to vigorously contest them.
(4) 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, which is computed
similarly to fully 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.
7
<PAGE>
The following table presents, in thousands (except for EPS amounts) a
reconciliation of Basic EPS to Diluted EPS as required by SFAS No. 128:
<TABLE>
<CAPTION>
THREE-MONTHS ENDED THREE-MONTHS ENDED
--------------------------------- -----------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
--------------------------------- -----------------------------
INCOME SHARES EPS INCOME SHARES EPS
----------- -------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
Common
Shareholders............. $(15,102) 28,659 $(0.53) $1,535 29,681 $0.05
====== =====
Effect of Dilutive
Securities
Impact of exercise of
stock options under
treasury stock
method................... -- -- -- 1,145
-------- ------ ------ ------ ------
Diluted EPS
Income available to
Common
Shareholders and
assumed exercises........ $(15,102) 28,659 $(0.53) $1,535 30,826 $0.05
======== ====== ====== ====== ====== =====
</TABLE>
In accordance with SFAS No. 128, in periods that the Company incurs a net
loss, all outstanding options are excluded from the calculation of diluted EPS.
2,297,000 and 760,000 options were excluded from the computation of diluted EPS
for the three-month periods ended September 30, 1997 and 1998, respectively,
because they were anti-dilutive.
(5) RELATED PARTY PURCHASES
During the quarter ended September 30, 1998, the Company purchased marketing
services in the amount of $244,000 from Behaviour Design Inc. As of September
30, 1998, a receivable of approximately $287,000, from previous sales to
Behaviour Entertainment, Inc. and Behaviour Studios, Inc., is outstanding in
other current assets. These related parties are companies controlled by the
Company's Chairman and Chief Executive Officer.
During the quarter ended September 30, 1998, the Company made rental payments
in the amount of $387,000 to TGR Zone Corporation (''TGR Zone''), a company
indirectly owned by Discreet Logic's Chairman and Chief Executive Officer, for
space in its new headquarters in Montreal. The Company made payments of $204,000
for the same period last year.
In accordance with the Company's policy, the purchase of these services was on
terms no less favorable to the Company than could be obtained by the Company
from unrelated third parties.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
a) In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
(SFAS 130), which establishes standards for the presentation and disclosure
requirements for comprehensive income. SFAS 130 became effective or fiscal
years beginning after December 15, 1997. Effective July 1, 1998, Discreet
adopted SFAS 130.
8
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The Company's total comprehensive income was as follows for the periods
presented herein:
<TABLE>
<CAPTION>
THREE-MONTHS ENDED THREE-MONTHS ENDED
------------------- -------------------
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1998
------------------- -------------------
<S> <C> <C>
Net income (loss) $(15,102) $1,535
Foreign currency translation adjustment $ (1,012) $ (911)
-------- ------
Total comprehensive income (loss) $(16,114) $ 624
======== ======
</TABLE>
b) In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131), which establishes standards
for the way public business enterprises report information in annual
statements and interim financial reports regarding operating segments,
products and services, geographic areas, and major customers. SFAS 131 will
first be reflected in the Company's fiscal year 1999 Annual Report and will
apply to both annual and interim financial reporting subsequent to this
date. The Company is currently evaluating the impact of SFAS 131 on its
financial disclosures.
c) In June 1998, the FASB issued SFAS 133, ''Accounting for Derivative
Instruments and Hedging Activities''. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS 133 will be effective
for the Company's fiscal year ending June 30, 2000. Management believes that
this statement will not have a significant impact on the Company.
d) In March 1998, the AICPA issued Statement of Position (SOP) 98-4, which
amends certain provisions of SOP 97-2. The Company believes it is in
compliance with the provisions of SOP 97-2 as amended by SOP 98-4. However,
detailed implementation guidelines for this standard have not been issued.
Once issued, such guidance could lead to unanticipated changes in the
Company's current revenue recognition practices, and such changes could be
material to the Company's results of operations.
e) In March 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This standard requires companies to
capitalize qualifying computer software costs which are incurred during the
application development stage and amortize them over the software's
estimated useful life. The Company is required to adopt this standard in
fiscal year 2000 and is currently evaluating the impact that its adoption
will have on the consolidated financial position and results of operations
of the Company.
(7) DEMAND LINE OF CREDIT, LEASING AND TAX CREDIT FACILITIES
The Company has a revolving demand line of credit and leasing facility
agreement with its bank. This agreement provides for a revolving demand line of
credit under which it can borrow up to Cdn$7,000,000 (approximately $4,580,000
at September 30, 1998). Advances under the line accrue interest monthly at the
Canadian prime rate (7.25% at September 30, 1998) plus 0.25%. Additionally, the
agreement provides for a Cdn$600,000 (approximately $393,000 at September 30,
1998) demand leasing facility, and a Cdn$600,000 (approximately $393,000 at
September 30, 1998) demand research and development tax credit facility.
Advances under these facilities accrue interest monthly at the Canadian prime
rate (7.25% at September 30, 1998) plus 1%. The line and facilities are secured
by essentially all of the Company's North American assets. As additional
security, the Company 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 asset ratios. As
of September 30, 1998, there were no amounts outstanding under the demand
leasing and demand research and development tax credit facilities, however, the
amount available to the Company under the line of credit was reduced by the
letter of guarantee discussed below.
The Company's Japanese subsidiary has a line of credit agreement with its
bank. Under this agreement, the subsidiary can borrow up to $3,000,000. Advances
under this line accrue interest at the prevailing overnight rate for
9
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the period (approximately 2.1% at September 30, 1998) and are secured by a
letter of guarantee, in the amount of $3,000,000, issued by the Company in favor
of the subsidiary's bank. As of September 30, 1998, the subsidiary had borrowed
(Yen)378,784,000 (approximately $2,803,000 at September 30, 1998).
(8) GOVERNMENT ASSISTANCE
(a) SDI loan
The Company entered into a loan agreement with the Societe de Developpement
Industriel du Quebec dated as of May 7, 1998 whereby an interest free loan was
granted to the Company by the Quebec government in the amount of Cdn$2,800,000
(approximately $1,834,000 at September 30, 1998) in relation with the
acquisition of Lightscape Technologies, Inc.. The loan is conditional to the
Company meeting certain criteria:
1. During the five year period following the disbursement of the loan by the
Quebec government, the Company is required to create 200 jobs and maintain
each of these jobs for a five year period after their creation;
2. The loan should not exceed Cdn$2,800,000 or 20% of the costs incurred by
the Company for the Lightscape acquisition. The loan is payable in four
annual installments of Cdn$600,000 (approximately $393,000 at September 30,
1998) commencing in July 2004 and a final installment of Cdn$400,000
(approximately $262,000 at September 30, 1998) in July 2008. The loan is
interest free until July 2004, after which it will bear interest at the
Canadian prime rate (approximately 7.25% at September 30, 1998) plus 1.5%.
If the criteria mentioned above are not respected, a portion of the loan
may have to be repaid at an earlier date. The loan was disbursed to the
Company in July 1998 and is included as a component of accounts payable and
accrued expenses as at September 30, 1998.
(b) PACST Subsidy Program
The Company entered into a financial assistance contract with the Quebec
Government dated as of March 27, 1998 under a subsidy program designed to
improve competencies in science and technology. The contract provides that
the Company is eligible to receive up to Cdn$3,012,000 (approximately
$1,971,000 at September 30, 1998) in the form of reimbursement of expenses
incurred by the Company for new employee training (mainly reimbursement of
salary). The Company's job creation estimate provided to the Quebec
Government at the time of signature of the contract was 251 science and
technology related jobs to be created over a three-year period. As of June
30, 1998, an advance of Cdn$350,000 (approximately $229,000 at September 30,
1998) was received which covers 40% of the first year estimated subsidy. The
program requires the Company to meet certain criteria in order to earn the
subsidies. Since the criteria have not yet been met by the Company, the
advance has been included as a component of accounts payable and accrued
expenses as at September 30, 1998.
(9) RESTRUCTURING
During fiscal 1996, the Company recorded a pre-tax restructuring charge of
$15,000,000 to cover the direct costs of restructuring its operations. The
following amounts were charged against the restructuring reserve:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Asset write down................... $ 118,000 -
Lease terminations and household
improvements reserve............. 88,000 -
Severance.......................... 49,000 -
Professional services and other.... 124,000 21,000
--------- --------
$ 379,000 $ 21,000
========= ========
</TABLE>
The following reflects the remaining accrued restructuring expense as of
September 30, 1997 and 1998, by major component:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
---------- ----------
<S> <C> <C>
Asset write down................... $ 382,000 -
Lease terminations and household
improvements reserve............. 2,575,000 350,000
Severance.......................... 401,000 -
Professional services and other.... 536,000 404,000
---------- --------
$3,894,000 $754,000
========== ========
</TABLE>
During the fourth fiscal quarter of 1998, the Company accrued an additional
$829,000 charge for the closure of its U.K. research and development facility.
During the three-month period ended September 30, 1998, approximately $38,000 of
professional fees was charged against this restructuring reserve. As of
September 30, 1998, the Company still has approximately $12,000 in restructuring
reserves primarily for the estimated cost of professional fees associated with
the winding down of this subsidiary.
10
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DISCREET LOGIC INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Discreet Logic, Inc. ("Discreet" or the "Company") develops, assembles,
markets and supports non-linear, on-line digital systems and software for
creating, editing and compositing imagery and special effects for film, video,
HDTV, broadcast and the Web. Discreet's systems and software are utilized by
creative professionals for a variety of applications, including feature films,
television programs, commercials, music and corporate videos, interactive game
production, live broadcasting as well as Web design. Discreet's revenues consist
of product revenues (including licensing of its software, sales of Discreet's
proprietary hardware, and resale of third party hardware) and revenues from
maintenance and other services (including consulting and training). Effective
January 1, 1998, Discreet has recognized revenue in accordance with Statement of
Position (SOP) 97-2, entitled ''Software Revenue Recognition,'' issued by the
American Institute of Certified Public Accountants. The adoption of SOP 97-2 has
not had a material impact on revenue recognition.
RECENT DEVELOPMENTS
Proposed Transaction with Autodesk
On August 20, 1998, the Company announced that it had entered into a
definitive agreement providing for the acquisition of Discreet by Autodesk, Inc.
("Autodesk"). Under the terms of the agreement, Discreet shareholders would
receive 0.525 shares of Autodesk common stock for each outstanding share of
common stock of Discreet. The transaction is intended to be accounted for as a
pooling of interests. Subject to several conditions, including approval of the
shareholders of both companies, the transaction is expected to close by December
31, 1998. Until this transaction is finalized, both companies shall operate as
separate entities.
11
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Restructurings
During the fiscal year ended July 31, 1996, excluding a restructuring charge
of $15,000,000 and its related tax effects, Discreet 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, Discreet
developed a restructuring plan during the fourth fiscal quarter of 1996.
Discreet 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. During the fourth fiscal quarter of 1998, Discreet
revised its estimates of remaining costs to be incurred and reversed
approximately $2,333,000 of reserves no longer considered to be necessary.
Discreet still has approximately $754,000 in restructuring reserves at the end
of September 30, 1998 primarily for the estimated cost of terminating leases,
and the legal and taxation winding down of several subsidiaries.
Discreet also recorded an unrelated restructuring charge in the fourth fiscal
quarter of 1998 in the amount of $829,000 for the estimated costs of closing its
U.K. research and development facility. As of September 30, 1998, the closure
was substantially complete and Discreet still has approximately $12,000 in
restructuring reserves primarily for the estimated cost of professional fees
associated with the winding down of this subsidiary.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues represented
by certain line items in the statement of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
1997 1998
---- ----
<S> <C> <C>
Total revenues............................... 100% 100%
Cost of revenues............................. 45 47
---- ----
Gross profit............................ 55 53
---- ----
Operating expenses:
Research and development................... 9 13
Sales and marketing........................ 19 29
General and administrative................. 5 8
Charge for purchased research and
development............................... 55 --
---- ----
Total operating expenses................ 88 50
---- ----
Operating income (loss).................... (33) 3
Other income net............................. 1 6
---- ----
Income (loss) before income taxes.......... (32) 9
Provision for income taxes................... 7 3
---- ----
Net income (loss)....................... (39)% 6%
==== ====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Total Revenues. Discreet's revenues consist of product revenues (including
licensing of its software, sales of Discreet's proprietary hardware, and resale
of third party hardware) and, to a lesser extent, revenues from maintenance and
other services (including consulting and training). Effective January 1, 1998,
Discreet has recognized revenue in accordance with Statement of Position (SOP)
97-2, entitled Software Revenue Recognition, issued by the American Institute of
Certified Public Accountants. The implementation of this new standard did not
have a material impact on the consolidated results of operations.
Total revenues were $27,431,000 and $38,405,000 for the three-month periods
ended September 30, 1998, and September 30, 1997, respectively. Advanced System
revenues declined in all product groups while New Media revenues increased
slightly from the three-month period ended September 30, 1997. The Company
believes that the decline in Advanced System revenues is primarily due to the
following factors: (1) seasonally slower than expected sales in Europe; (2)
general market anxiety in North America causing delays in capital spending; (3)
customers deferring purchase decisions due to confusion over HDTV timing and
standards; (4) what the Company believes to be temporary concerns in the
Advanced Systems customer base regarding the acquisition of Discreet by Autodesk
which may have lead to purchasing delays; and (5) recent changes in the
Company's sales organization leadership.
Revenues from customers outside of North America were $15,796,000 (58% of
total revenues) and $18,264,000 (48% of total revenues) for the three-month
periods ended September 30, 1998, and September 30, 1997, respectively. Although
revenues in all geographical segments declined, the above factors had a greater
impact on the Company's North American revenues. As a result, revenues from
customers outside North America increased significantly as a percentage of
total revenues. 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
historical 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 $12,759,000 (47% of total revenues) and
$17,280,000 (45% of total revenues) for the three-month periods ended September
30, 1998, and September 30, 1997, respectively. The increase in cost of
revenues as a percentage of total revenues was primarily due to the presence
of certain fixed expenses in cost of revenues partially offset by an increase in
the proportion of revenues
13
<PAGE>
from the Company's software only new media products. Should revenues increase,
the Company expects that cost of revenues as a percentage of total revenues
should decrease slightly from its current levels. 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, 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 $3,750,000 (13% of total revenues) and $3,512,000
(9% of total revenues) for the three-month periods ended September 30, 1998, and
September 30, 1997, respectively. The increase in research and development
expenses was primarily due to an increase in the number of software engineers to
develop and enhance Discreet's existing and newly acquired products and to
develop new products. The increase in research and development expenses as a
percentage of total revenues is primarily due to the decline in revenues during
the three-month period ended September 30, 1998. Research and development costs
are expensed as incurred. Software development costs are considered for
capitalization once technical feasibility has been established. Discreet 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. Discreet expects that
research and development expenses will increase from current levels, however,
should revenues increase, Discreet expects that research and development
expenses as a percentage of total revenues should decrease from current
levels.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related benefits, facilities and administrative costs
allocated to Discreet's sales and marketing personnel, tradeshow expenses,
advertising, marketing programs and dealer commissions. Sales and marketing
expenses were $7,914,000 (29% of total revenues) and $7,433,000 (19% of total
revenues) for the three-month periods ended September 30, 1998, and September
30, 1997, respectively. The increase in sales and marketing expenses was
primarily due to the continued expansion of the Company's direct and indirect
sales organization, including the operating costs of domestic sales offices and
foreign subsidiaries, and the introduction of marketing initiatives designed to
support the expanded dealer network. The increase in sales and marketing
expenses as a percentage of total revenues is primarily due to the decline in
revenues during the three-month period ended September 30, 1998. Discreet
expects that sales and marketing expenses will increase from current levels,
however, should revenues increase, Discreet expects that sales and marketing
expenses as a percentage of total revenues should decrease from 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 Discreet and
reserves for doubtful accounts receivable. General and administrative expenses
were $2,157,000 (8% of total revenues) and $1,884,000 (5% of total revenues) for
the three-month periods ended September 30, 1998, and September 30, 1997,
respectively. The increase in general and administrative expenses is explained
by additional personnel and salary increases. The increase in general and
administrative expenses as a percentage of total revenues is primarily due to
the decline in revenues during the three-month period ended September 30, 1998.
Discreet expects that general and administrative expenses will increase from
their current levels, however, should revenues increase, Discreet expects that
general and administrative expenses as a percentage of total revenues should
decrease from current levels.
Charge for Purchased Research and Development. In connection with the D-
Vision acquisition, Discreet expensed $21,000,000, based on an independent
appraisal, of in-process research and development that had not yet reached
technological feasibility and had no alternative use, in the three-month period
ended September 30, 1997.
Other Income. Other Income primarily consists of foreign currency gains and
losses and interest income and expense. Foreign currency translation resulted in
gains of $990,000 and of $128,000 for the three-month periods ended September
30, 1998, and September 30, 1997, respectively. These gains are primarily the
result of Discreet 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. In particular during the three-month period ended September 30,
1998, the Company recorded unrealized gains when translating into Canadian
dollars its U.S. dollar cash balance and its trade receivables with its U.S.
and German subsidiaries.
14
<PAGE>
Provision for Income Taxes. Discreet's provision for income taxes was
$863,000 and $2,775,000 for the three-month periods ended September 30, 1998,
and September 30, 1997, 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 effective tax rate for the three-
month period ended September 30, 1997 differed from the statutory rate primarily
as a result of Discreet recording charges for purchased 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. Discreet has foreign net operating loss carry forwards
which may be available to reduce future income tax liabilities.
15
<PAGE>
YEAR 2000 READINESS DISCLOSURE STATEMENTS
Discreet has made preliminary assessments of its products and information
systems and has determined that they are Year 2000 compliant, or that only a
limited effort will be required to achieve compliance. Discreet is currently
proceeding with detailed reviews of every application used. It is expected that
some will have to be upgraded to Year 2000 compliant applications. Some Discreet
products run on platforms, or work with peripherals that are currently not Year
2000 compliant. Accordingly, it is expected that some customers may experience
some difficulties related to non Discreet products, which may affect the
performance of Discreet products and, therefore, lead to an unusually high
number of calls to Discreet's technical support department. Discreet anticipates
that the costs related to the detailed assessments, application upgrades, and
responding to the increased volume of support calls will not be material to its
results of operations, liquidity and capital resources. Although management does
not expect Year 2000 issues to have a material impact on its business or future
results of operations, there can be no assurance that the potential problems
described above, related to the platforms and peripherals on and with which
Discreet's products operate, will be resolved in a timely manner, and that
Discreet will not experience significant costs or delays in developing versions
of its products that are compatible with Year 2000 compliant versions of these
platforms and peripherals.
LIQUIDITY AND CAPITAL RESOURCES
Discreet has funded its operations to date primarily through cash flow from
operations (including deferred revenue and customer deposits), borrowings under
its demand line of credit, capital leases, the private and public sales of
equity securities, the receipt of research and development tax credits from the
Canadian federal government and the Quebec government, and the receipt of
government grants and loans. As of September 30, 1998, Discreet had cash of
approximately $44,035,000.
Discreet's operating activities used cash of $676,000 and $3,035,000, in the
three-month periods ended September 30, 1998, and 1997, respectively. The
principal sources of cash for the three-month period ended September 30, 1998
were net income from operations, and the decrease in accounts receivable offset
by increases in inventory, and other current assets and decreases in accounts
payable and accrued expenses and income taxes payable. The decrease in accounts
receivable and the increase in inventory were primarily a result of the
shortfall in revenues during the three-month period ended September 30, 1998.
The primary sources of cash during the three-month period ended September 30,
1997, were the receipt of insurance proceeds related to the settlement of the
class action litigation, the decrease in income taxes receivable and the
increases in deferred revenue and income taxes payable, offset by the transfer
of cash to a restricted escrow account to be used to settle the class action
litigation, the increase in accounts receivable, and the decrease in accounts
payable and accrued expenses as a result of the company paying most of the
liabilities assumed in connection with the D-Vision acquisition. Discreet's
operating activities include $328,000 and $216,000 of research and development
tax credits received from the Quebec government during the three-month periods
ended September 30, 1998 and 1997, respectively.
Discreet's investing activities used cash of $1,207,000 and $11,847,000 in the
three-month periods ended September 30, 1998, and 1997, respectively. The
principal uses of cash during the three-month period ended September 30, 1998
included the purchase of capital assets, primarily computer hardware and
software, and the acquisition of other intangible assets related to the
licensing of third-party technology. The principal uses of cash during the
three-month period ended September 30, 1997 included the acquisition of D-Vision
Systems, Inc. and the purchase of capital assets, primarily computer hardware
and software.
Financing activities provided cash of $3,200,000 and $723,000 during the
three-month periods ended September 30, 1998 and 1997, respectively. The
principal sources of cash for the three-month period ended September 30, 1998
included the receipt of a government loan from the Societe de Developpement
Industriel du Quebec, and the proceeds from the exercises of common stock
options and the issuance of shares under the 1995 Employee Stock Purchase Plan.
The principal sources of cash for the three-month period ended September 30,
1997 included the receipt proceeds from the exercises of common stock options
and the issuance of shares under the 1995 Employee Stock Purchase Plan.
As of September 30, 1998, Discreet did not have any material commitments for
capital expenditures.
Discreet has never declared or paid cash dividends on its Common Shares and
does not anticipate paying any cash dividends on its Common Shares in the
forseeable future. In the event cash dividends are declared or paid, Discreet
anticipates that they would be declared and paid in U.S. dollars. Part 1A of the
Quebec Act prohibits Discreet from paying dividends that would prevent it from
discharging its liabilities when due or that would bring the book value of its
assets to an amount less than the sum of its liabilities and its issued and
paid-up share capital account.
Discreet plans to finance its long-term capital needs with cash flow from
operations and available borrowings. To the extent that such funds are
insufficient to finance Discreet's activities, Discreet may have to raise funds
to meet its operations and capital expenditure requirements through the issuance
of additional equity, or by securing additional credit facilities. Discreet's
ability to meet its future liquidity requirements is dependent upon its ability
to operate profitably or to obtain additional financing. There can be no
assurance that additional financing will be available on terms satisfactory to
Discreet or not disadvantageous to Discreet security holders. Subject to the
factors discussed in "--Certain Factors That May Affect Future Results,"
Discreet believes that, with its current levels of working capital together with
funds generated from operations, it has adequate sources of cash to meet its
operations and capital expenditure requirements through fiscal 1999.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information provided by Discreet 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
16
<PAGE>
particular, statements contained in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
are not historical facts (including, but not limited to, statements regarding
Discreet's anticipated cost of revenues, anticipated expense levels and such
expenses as a percentage of revenues, the portion of revenues from customers
outside North America and the adequacy of cash to meet cash operations and
capital expenditures, and customer concerns), as well as statements contained in
the "Legal Proceedings'' section which are not historical facts, may constitute
forward-looking statements. Discreet'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, timely completion of
the previously announced transaction with Autodesk, the ability of the Company's
computer systems and products to function properly beyond 1999, the factors
discussed below, other risks discussed in this section and elsewhere in this
Form 10-Q, and other risks discussed in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998, as well as from time to time in the
Company's other filings with the Securities and Exchange Commission.
Discreet's future results are subject to substantial risks and uncertainties.
Discreet'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 Discreet to achieve sustained
growth, the market for Discreet's systems and software must continue to develop
and Discreet 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 Discreet will be successful in
marketing its existing or any new or enhanced products. In addition, as Discreet
enters new markets, distribution channels, technical requirements and levels and
bases of competition may be different from those in Discreet's current markets
and there can be no assurance that Discreet will be able to develop adequate
distribution channels in a timely way or compete favorably. The markets in which
Discreet competes are characterized by intense competition and many of
Discreet's current and prospective competitors have significantly greater
financial, technical, manufacturing and marketing resources than Discreet. These
companies may introduce additional products that are competitive with those of
Discreet, and there can be no assurance that Discreet's products would compete
effectively with such products. Furthermore, competitive pressures or other
factors, including Discreet's entry into new markets, may result in significant
price erosion that could have a material adverse effect on Discreet's business
and results of operations. Discreet 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 Discreet will not incur
disruptions and unexpected expenses in integrating the operations of the
acquired businesses with those of Discreet. Discreet has recently announced a
proposed business combination with Autodesk. This transaction may cause a
diversion of senior management time and attention, customer purchase decision
deferrals, employee turnover, and other unanticipated costs which may have a
material adverse affect on Discreet's results of operations.
Discreet's flame*, effect*, inferno*, fire*, smoke* and frost* systems
currently include workstations manufactured by SGI. There are significant risks
associated with this reliance on SGI and Discreet may be impacted by the timing
of the development and release of products by SGI, as was the case during fiscal
1996. In addition, there may be unforeseen difficulties associated with adapting
Discreet's products to future SGI products. Discreet 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.
Discreet currently relies principally on unregistered copyrights and trade
secrets to protect its intellectual property. Any invalidation of Discreet's
intellectual property rights or lengthy and expensive defense of those rights
could have a material adverse effect on Discreet. Discreet receives letters from
third parties, from time to time, inquiring about Discreet's products and
discussing intellectual property matters, which Discreet reviews to determine
the appropriate response, if any. For example, Discreet received a letter from
Avid stating its belief that certain of Discreet's recently acquired D-Vision
products practice inventions claimed in a patent on a media editing system.
Discreet has responded to Avid's letter stating Discreet's belief that Discreet
is not infringing any valid claim of Avid's patent. To Discreet's knowledge,
Avid has not initiated any suit, action or other proceeding alleging any
infringement by Discreet of such patent. Discreet currently markets its systems
through its direct sales organization and through distributors. This marketing
strategy may result in distribution channel conflicts as Discreet's direct sales
efforts may compete with those of its indirect channels. Discreet currently
relies on SGI as the sole source for video input/output cards used in Discreet's
systems. An interruption of the supply or increase in the price of these
components could have a material adverse effect on Discreet's business and
results of operations. To date, Discreet has depended to a significant extent
upon a number of key management and technical employees and Discreet'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 Discreet's business and results of operations.
There can be no assurance that these factors will not have a material
17
<PAGE>
adverse effect on Discreet's future international sales and consequently, on
Discreet's business and results of operations.
The market price of Discreet Common Shares could be subject to significant
fluctuations in response to quarter-to-quarter variations in Discreet's
operating results, announcements of technological innovations or new products by
Discreet, 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 Discreet 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.
18
<PAGE>
PART II
Item 1. Legal Proceedings
On May 29, 1996, June 13, 1996 and April 29, 1997, certain of Discreet's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against Discreet 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, Discreet contributed approximately $7,400,000 from its
own funds, with the remainder provided by insurance.
On June 2, 1998, the Company was named as a defendant in a breach of warranty
action filed in the Supreme Court of the State of New York for the County of New
York entitled Griffith & Tekushan, Inc. v. Discreet Logic, Inc. (Index No.
602684/98) (the ''Action''). The complaint alleges, among other things, that the
Company breached certain warranties arising out of a software licensing
agreement and seeks damages of $1 million. On July 10, 1998, the Action was
removed from state court to the United States District Court for the Southern
District of New York (Case No. 98 Civ. 4909 (BSJ)). On July 17, 1998, the
Company filed a motion to dismiss the Action in its entirety. The motion to
dismiss is currently pending. The Company intends to contest this case
vigorously; however, the ultimate outcome of the case cannot be predicted at
this point.
On August 28, 1998 a complaint was filed in the Marin County, California,
Superior Court, entitled Jerry Krim, on Behalf of Himself and All Others
Similarly Situated, vs. Discreet Logic Inc., et al., case No. 174792. The
lawsuit relates to the proposed merger transaction with Autodesk and names as
defendants Discreet's directors and certain unidentified ''John Does.'' The
complaint alleges that the defendants breached their fiduciary duties to
shareholders in connection with the proposed merger transaction. The complaint
asks the court to enjoin the consummation of the transaction or, alternatively,
seeks to rescind the transaction or an award of unspecified damages from the
defendants in the event the transaction is consummated. Discreet believes the
claims asserted in the complaint are without merit and intends to vigorously
contest them. On October 26, 1998, the Company filed motions to dismiss the
action, which currently are pending.
On September 29, 1998, a complaint was filed in the Marin County, California,
Superior Court, entitled William Clark, et al vs. Discreet Logic Inc., et al.,
case No.175037. The lawsuit relates to the proposed merger transaction with
Autodesk and names as defendants certain of Discreet's directors and certain
unidentified ''John Does.'' The complaint alleges that the defendants breached
their fiduciary duties to shareholders in connection with the proposed merger
transaction. The complaint asks the court to enjoin the closing of the
transaction or, alternatively, seeks to rescind the transaction or an award of
unspecified damages from the defendants in the event the transaction is
consummated. Discreet believes the claims asserted in the complaint are without
merit and intends to vigorously contest them.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
Exhibit 10.1 Lease assignment, dated September 30, 1998, among Discreet
Logic Inc., and TGR Zone Corporation and "The Peck Building
Reg."
Exhibit 10.2 Amendment, dated August 10, 1998, to Employment Agreement by
and between the Company and Winston Rodrigues.
Exhibit 10.3 Amendment, dated July 29, 1998, to Employment Agreement by
and between the Company and Francois Plamondon.
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
A Current Report on Form 8-K dated June 8, 1998 was filed on July 13, 1998
pursuant to Item 5 of Form 8-K announcing the issuance of a press release in
which Discreet and MGI Software Corp. announced the mutual termination of their
Arrangement Agreement entered into on March 9, 1998.
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.
By: /s/ Francois Plamondon
-----------------------------------------
Francois Plamondon
Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
November 16, 1998
20
<PAGE>
Exhibit 10.1
ASSIGNMENT OF LEASE
This assignment made as of and effective from the 1st day of July 1997.
AMONG
DISCREET LOGIC INC., a company duly incorporated under the laws of the
province of Quebec, having its head office and principal place of
business in the City and District of Montreal, herein acting and
represented by Francois Plamondon, duly authorized for the purposes
hereof as he so declares;
(Hereinafter referred to as the "Assignor")
AND
TGR ZONE CORPORATION., a company duly incorporated under the laws of
the province of Quebec, having its head office and principal place of
business in the City and District of Montreal, herein acting and
represented by Matthew Carson, its Vice-President, duly authorized for
the purposes hereof as he so declares;
(Hereinafter referred to as the "Assignee")
AND
Page 1
<PAGE>
BENJAMIN SOFER, businessman and SUSAN KLINEBERG, businesswoman, doing
business under the name of "THE PECK BUILDING REG.", both resident and
domiciled at 285, de l'Epee Street, Outremont, H2V 3T3, hereby
represented by JOEL WEBER, duly authorised to act as their
representative and to sign the present document by power of attorney
dated August 6, 1998, copy of which is joined to the presents.
(Hereinafter collectively referred to as the "Landlord")
WHEREAS by an offer to lease dated April 24, 1995 and a lease signed
accordingly on the 24th of February 1998, the Landlord leased to the
Assignor certain premises situated on the fifth floor of the 5505 Saint-
Laurent Boulevard in Montreal, containing a net leasable area of Forty Two
Thousand Eight Hundred Twenty Nine square feet (42,829 sq.ft.), and
measuring Forty Four Thousand Eight Hundred and Fifty Nine square feet
(44,859 sq.ft.) of gross leasable area, for a period of eight (8) years
commencing February 1, 1995 and terminating January 31, 2003;
WHEREAS by a covenant in paragraph 5 of the lease signed between the
Landlord and the Assignor, the Assignor shall not assign or sublet the
premises without the written consent of the Landlord, which consent shall
not be unreasonably withheld;
WHEREAS the Assignor has applied to the Landlord for consent to assign the
Lease to TGR ZONE CORPORATION;
WHEREAS the Landlord has agreed to grant his consent to such assignment
subject to the terms and conditions set here after;
Page 2
<PAGE>
NOW THEREFORE:
1 DEFINITIONS
When used in this Assignment or in any schedule attached to this
Assignment, the following words or expressions have the meaning
hereinafter set forth :
1.1 "Assignee" is TGR ZONE CORPORATION., a company duly
incorporated under the laws of the province of Quebec, having its
head office and principal place of business in the City and District
of Montreal;
1.2 "Assignor" is DISCREET LOGIC INC., a company duly
incorporated under the laws of the province of Quebec, having its
head office and principal place of business in the City and District
of Montreal, which is referred to as the "Tenant" in the Lease;
1.3 "Effective Date" means the 1st of July, 1997;
1.4 "Landlord" is BENJAMIN SOFER, businessman and SUSAN
KLINEBERG, businesswoman, doing business under the name of "THE PECK
BUILDING REG.";
1.5 "Lease" means the offer to lease and the lease referred to
in the preamble hereof, any written modification or amendment
thereto, and any schedule annexed thereto, said documents being
joined to the presents as Annex "A";
1.6 "Premises" means those certain premises situated on the
fifth floor of the 5505 Saint-Laurent Boulevard in Montreal,
containing a gross leasable area of approximately Forty-Four
Thousand Eight Hundred Fifty-Nine square feet (44,859 sq.ft.);
1.7 "Rent" means the rental determined in the Lease including any
increment provided for and all additional rent or sums payable to
the Landlord under any clause of the Lease;
Page 3
<PAGE>
1.8 "Term" means the remaining duration as of and from the
Effective Date, of the Lease which began on the 1st day of February,
1995 and shall expire on the 31st day of January, 2003.
1 CONSIDERATION
In consideration of one dollar ($1.00) paid by the Assignee to the
Assignor, the receipt of which is hereby acknowledged, the Assignor as
beneficial owner hereby assigns to the Assignee the Assignor's interest in
the Premises as of and from the Effective Date, together with the unexpired
residue of the term of the Lease and all benefits to be derived from it
subject to the payment of the Rent and the observance and performance of
the covenants and conditions on the part of the tenant contained in the
Lease.
1 ASSIGNOR'S COVENANT
The Assignor covenants and agrees with the Assignee that:
1.1 The Lease is a valid and subsiding lease, that the rent
reserved thereby has been duly paid to the 30th day of June 1997,
that the covenants and conditions thereof on the part of the
Assignor have been duly observed and performed up to the Effective
Date, that subject to the payment of the Rent and the observance and
performance of the covenants and conditions of the Lease the
Assignee may enjoy the Premises for the residue of the terms of
years without interruption by the Assignor or any person claiming
through him and that the Assignor shall at all times hereafter at
the request and cost of the Assignee execute such further assurances
in respect of this assignment as the Assignee may reasonably
require.
1.2 The Assignee will have the right to use the office
furniture left by the Assignor on the Premises further listed in
Annex "B", the property of which is hereby transferred in full
ownership to the Assignee.
Page 4
<PAGE>
1 ASSIGNEE'S COVENANT
1.1 The Assignee covenants with the Assignor that:
1.1.1 It will at all times during the Term pay the Rent and
observe and perform the covenants and conditions specified in
the Lease on the part of the tenant therein.
1.1.2 It will indemnify and save harmless the Assignor from
all actions, suits, costs, losses, charges, demands and
expenses for and in respect of any non-payment, non-
observance and non-performance of any covenant and condition
of the Lease.
1.1.3 It acknowledges that the Lease is not renewable and
that should the Assignee obtain a new lease with the Landlord
or its heirs, successors, administrators and assigns, the
Assignor will be released of any obligation, covenant and
condition of the Lease, and it will indemnify and save the
Assignor harmless from all actions, suits, costs, charges,
demands and expenses in respect of such new lease.
1.2 The Assignee covenants with the Landlord that:
1.2.1 It will at all times during the Term pay the Rent and
observe and perform the covenants and conditions specified in
the Lease on the part of the tenant therein, to be observed
and performed as and when the same are required to be
observed and performed.
1.2.2 It acknowledges that the Landlord shall be entitled to
all remedies in respect of non-payment of Rent and breaches
of covenants and conditions as if the Assignee were the
tenant named in the Lease.
Page 5
<PAGE>
1.2.3 It will indemnify and save harmless the Landlord from
all actions, suits, costs, losses, charges, demands and
expenses for and in respect of any non-payment, non-
observance and non- performance of any covenant and condition
of the Lease.
The Assignee acknowledges that it is familiar with the
terms, covenants and conditions of the Lease and all terms and
conditions shall apply.
1 LANDLORD'S CONSENT
The Landlord consents to this assignment of the Lease from the
Assignor to the Assignee as of and from the Effective Date, upon and
subject to the following terms and conditions:
1.1 This consent does not in any way derogate from the rights
of the Landlord under the Lease nor operate to release the Assignor
from its obligations to pay all of the Rent and from the observance
and performance of all the terms, covenants and conditions contained
in the Lease on the part of the Assignor and notwithstanding the
within assignment, the Assignor shall continue to remain liable
solidarily with the Assignee, for all of such covenants and
conditions during the balance of the Term.
1.2 This consent does not constitute a waiver of the necessity
for consent to any further assignment of subleasing of the Lease
which must be completed in accordance with the terms of the Lease.
1.3 By giving its consent pursuant to this agreement, the
Landlord acknowledges and approves the terms of this assignment as
between the Assignor and the Assignee, including, without
limitation, the provisions of section 4.1.3 hereby.
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<PAGE>
1.4 Concurrently with the giving of any notice by the Landlord
to the Assignor under the Lease, the Landlord shall give a copy of
any notice to the Assignee at:
TGR Zone Corporation
777, de la Commune Street West
Montreal, Qc
H3C 1Y1
AS/The President
Any notice to the Assignor will be hereafter given at the
following address :
Discreet Logic inc.
10, rue Duke
Montreal, Qc
H3C 2L7
AS/Executive Vice President & CFO
Page 7
<PAGE>
Any notice to the Landlord will be hereafter given at the
following address :
The Peck Building Reg'd
TOWER BUILDING MANAGEMENT
491, boul. Lebeau, suite 201
Ville Saint-Laurent, QC
H4N 1S2
1 RE-ENTRY BY ASSIGNOR
1.1 If the Assignee defaults in its obligations under this
agreement to pay the Rent and to observe and to perform the terms,
covenants and conditions of the Lease, then in addition to any other
remedies it may have, the Assignor, at his option, may give to the
Assignee or to the receiver, trustee or liquidator appointed to the
Assignee's property, a written notice of its intention to terminate
this assignment and if the Assignee is then in default, the term of
this assignment shall expire at noon upon the 30th day following the
date upon which such notice is given, as fully and completely as if
that day were the date fixed for the expiration of this assignment
without the necessity of any notice of default, "mise en demeure" or
legal process whatsoever.
The Assignee shall upon such a termination quit and
surrender the Premises to the Assignor, and the Assignor, its agents
and servants may immediately or at any time thereafter, re-enter the
Premises and dispossess the Assignee by any suitable action in law
or proceeding at law, without being liable to damages thereof.
Page 8
<PAGE>
1.1 The termination of the assignment and the re-entry by the
Assignor will, without further formality, be deemed to constitute a
reassignment from the Assignee to the Assignor of the Premises and
all appurtenances and privileges belonging to it, together with the
unexpired residue of the Term, the Lease and all benefits and
advantages to be derived therefrom.
1.2 Notwithstanding the termination of the assignment, the
re-entry and the reassignment from the Assignee to the Assignor, the
covenants of the Assignee in section 4.1 shall continue in full
force and effect and the obligations of the Assignee shall remain in
full force and effect.
1.3 The Landlord hereby consents to the re-entry and
reassignment as described hereby.
1.4 If the Assignor re-enters the Premises he may occupy the
said Premises for its own account or may, subject to the Landlord's
approval as required by the Lease, which consent shall not be
unreasonably withheld, further transfer the Lease or any part
thereof for such term and at such rental and upon such other terms
and conditions as the Assignor in its reasonable discretion
considers advisable.
1 PAYMENT BY ASSIGNOR
Without prejudice to the rights of the Assignor under the presents, the
Assignor may, in case of a default of the Assignee to pay the Rent,
elect by giving a five days written notice to the Assignee, to pay the
unhonoured Rent to the Landlord and offset the payment of the Rent
against the rent payable by the Assignor to the Assignee according to a
lease signed between the Assignor as tenant and the Assignee as
landlord for certain premises located at 10 Duke Street, in Montreal.
Page 9
<PAGE>
1 CONFIRMATION
The parties hereto do in all other respect hereby confirm that the
Lease is in full force and effect, unchanged and unmodified except in
accordance with this agreement.
1 LANGUAGE
The parties hereto have requested that this agreement be drawn up in
the English language. Les parties aux presentes reconnaissent avoir
demande que la presente entente soit redigee en anglais.
Page 10
<PAGE>
1 BINDING EFFECT
All covenants hereby contained shall be deemed to benefit to and to be
binding upon the Landlord, the Assignor and the Assignee and each of
their heirs, executors and permitted successors and permitted assigns
respectively.
IN WITNESS WHEREOF the parties hereto have duly executed this agreement as of
September 30, 1998.
- - -------------
/s/ Francois Plamondon
- - ----------------------
Discreet Logic inc. (The Assignor)
/s/ Matthew Carson
- - ------------------
TGR Zone Corporation (The Assignee)
/s/ Joel Weber
- - --------------
Joel Weber
acting in behalf of and representing
THE PECK BUILDING REG.
Page 11
<PAGE>
Exhibit 10.2
August 10, 1998
Mr Winston Rodrigues
2673 Tether Ridge
St-Lazarre, Quebec
J7T 2A1
Dear Winston,
Following the decision of the Compensation Committee, I would like to confirm
the amount of your bonus for the fiscal year ending June 30, 1998 as well as
outline the details of your compensation for fiscal year 1999.
BONUS FISCAL YEAR 1998:
You will be receiving a bonus in the amount of $43,312 (CDN). Please note that
this amount is pro-rated over the eight (8) month period of your employment.
COMPENSATION FISCAL YEAR 1999:
Your base annual salary will be $210,000 (CDN).
You will be eligible for a bonus up to 50% should the Company and you meet
objectives.
Please note that this bonus is conditional upon the approval of the Board of
Directors. This bonus is allocated according to the Compensation Framework
Guidelines which I have communicated to you.
The document outlining the guidelines will be forwarded to you shortly.
STOCK OPTIONS
You have been granted 60,000 stock options.
I would like to thank you for your contribution during this past year.
Sincerely,
/s/ Richard Szalwinski
Richard Szalwinski
<PAGE>
EXHIBIT 10.3
July 29, 1998
Mr. Francois Plamondon
6300 Northcrest Place
Montreal, Quebec
H3S 2W3
Dear Francois,
Following the decision of the Compensation Committee, I would like to confirm
the amount of your bonus for the fiscal year ending June 30, 1998 as well as
outline the details of your compensation for fiscal year 1999.
Bonus Fiscal Year 1998:
You will be receiving a bonus in the amount of $82,500 (CDN).
Compensation Fiscal Year 1999:
Your base annual salary will be $250,000 (CDN).
You will be eligible for a bonus up to 50% should the Company and you meet
objectives.
Please note that this bonus is conditional upon the approval of the
Board of Directors.
This bonus is allocated according to the Compensation Framework Guidelines
which I have communicated to you.
The document outlining the guidelines will be forwarded to you shortly.
Stock Options:
Subject to the approval of the Board of Directors, the Compensation Committee
is recommending to grant you 60,000 stock options.
I would like to thank you for your contribution during this past year.
Sincerely,
/s/ Richard Szalwinski
Richard Szalwinski
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 44,035
<SECURITIES> 0
<RECEIVABLES> 31,068
<ALLOWANCES> 3,722
<INVENTORY> 15,474
<CURRENT-ASSETS> 93,266
<PP&E> 29,465
<DEPRECIATION> 16,021
<TOTAL-ASSETS> 113,866
<CURRENT-LIABILITIES> 49,510
<BONDS> 0
108,163
0
<COMMON> 0
<OTHER-SE> (46,650)
<TOTAL-LIABILITY-AND-EQUITY> 113,866
<SALES> 27,431
<TOTAL-REVENUES> 27,431
<CGS> 12,759
<TOTAL-COSTS> 12,759
<OTHER-EXPENSES> 13,821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 2,398
<INCOME-TAX> 863
<INCOME-CONTINUING> 1,535
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,535
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
