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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934.
For The Fiscal Year Ended: June 30, 1998
or
[_]Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934. [No Fee Required]
For the transition period from
COMMISSION FILE NUMBER: 0-26100
DISCREET LOGIC INC.
(Exact name of registrant as specified in its charter)
QUEBEC 98-0150790
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10 DUKE STREET
MONTREAL, QUEBEC, CANADA H3C 2L7
(Address of principal executive (Zip Code)
offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (514) 393-1616
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Shares, without par value
(Title of class)
Indicate by check mark whether the 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of September 24, 1998 (based on the closing price as quoted by
Nasdaq National Market as of such date) was $239,788,835. As of September 24,
1998, 29,819,358 of the registrant's common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A are
incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW AND RECENT DEVELOPMENTS
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 systems have
played key roles in the creation of special visual effects for films such as
Armageddon, Titanic, Forrest Gump, Independence Day, The Fifth Element, Batman
& Robin, Contact and Air Force One; television programs and special events
such as ABC's "World News Tonight with Peter Jennings" and the 1996 United
States Presidential elections on ABC and CBS; music videos by artists
including U2, REM, Rolling Stones and The Beatles; and commercials for clients
such as Nike, Pepsi, AT&T and McDonald's. Discreet believes that creative
professionals and designers require tools that simplify their work, enabling
them to devote more time to creative activities and less time to technical
tasks.
Discreet offers turnkey systems for high end post production and broadcast
facilities focused towards three markets: special effects, editing and
broadcast production (its "Advanced Systems"). Discreet's Advanced Systems are
comprised of proprietary software utilizing workstations manufactured by SGI,
scalable disk arrays and other peripherals. These can be networked together to
enable users to manage data more efficiently and collaborate in an integrated
production environment. Discreet's systems include its inferno* and flame*
systems (special effects), its fire* and smoke* systems (editing), and its
frost* system (broadcast production). Discreet's special effects and editing
Advanced Systems are used to manipulate digital media in an on-line, real-time
environment, providing instant feedback to the creative professional. These
systems are currently or are currently being designed to be resolution
independent and to allow users to work on uncompressed images from a variety
of media sources in the full range of resolutions necessary for film, video
and HDTV. In the broadcast production market, Discreet offers its frost*
system, a set of modeling, animation and rendering tools for the creation and
manipulation of 3D environments, including virtual sets, for broadcast
companies. Discreet sells its Advanced Systems worldwide through a direct
sales force as well as through high-end, sophisticated distributors.
During the last 18 months, Discreet has entered the new media marketplace
through a series of acquisitions and now offers editing and special effects
software which runs on the Microsoft Windows NT, the Apple Macintosh and/or
the Unix operating systems. The new media market is characterized by
institutional and educational customers, designers and prosumers. Discreet's
desktop or new media software (its "New Media Software") products include its
edit* software (formerly D-Vision OnLine) (video editing), its effect*
software (formerly Flint and Illuminaire Composition) (special effects), its
paint* software (formerly Illuminaire Paint) (special effects), and its light*
software (formerly Lightscape) (radiosity). Discreet's New Media Software is
primarily used to create, manipulate, and finish computer graphics images,
interactive and on-line content. effect* provides 3D video composition, clip
animation, and visual effects enabling artists to combine, enhance and modify
video frames or sequences of frames with a very high level of efficiency and
interactivity. paint* is a vector-based, object-oriented painting and
animation system for the manipulation and enhancement of both multi-frame
clips and single-frame graphic images. edit* is a real-time non-linear,
compressed editing software solution which performs compositing, keying and
visual effects on the desktop. light* is a 3D rendering solution that uses
advanced radiosity techniques to significantly enhance realism and lighting
accuracy in 3D environments created for virtual sets, film and video effects,
interactive games and architectural design projects.
Discreet's goal is to become a leading supplier of digital tools used to
manipulate still and moving pictures to the high-end professional, post-
production and broadcast markets, the desktop or new media market, and the
consumer markets. To achieve this goal, Discreet plans to further expand and
leverage its technology base, customer relationships and existing reputation,
extend its product line to include other aspects of the content creation
process, and expand its worldwide sales and distribution organization.
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Discreet is a company incorporated by Articles of Incorporation on September
10, 1991 under Part IA of the Companies Act (Quebec) (the "Quebec Act") whose
head office is located at 10 Duke Street, Montreal, Quebec, Canada H3C 2L7.
Discreet has sales offices in the United States in New York, Chicago, Los
Angeles; Rio de Janeiro, Brazil; London, England; Paris, France; Madrid,
Spain; Munich, Germany; Singapore; Bombay, India; Hong Kong, China; Madrid,
Spain and Tokyo, Japan. As of August 31, 1998, Discreet had 405 employees.
RECENT DEVELOPMENTS
Proposed Transaction with Autodesk
On August 20, 1998, Discreet announced that it has entered into a definitive
agreement providing for the acquisition of Discreet by Autodesk, Inc.
("Autodesk"). Under the terms of the agreement, Autodesk will exchange 0.525
shares of its common stock for each outstanding share of Discreet. The merger
transaction is intended to be accounted for as a pooling of interests. Subject
to several conditions, including regulatory approvals and approval of the
shareholders of both companies, the transaction is expected to close by
December 31, 1998. Until this transaction is finalized, both companies will
operate as separate entities.
Recent Acquisitions
On July 15, 1997, Discreet acquired all of the outstanding shares of capital
stock of D-Vision pursuant to a Stock Purchase Agreement dated as of July 10,
1997, among Discreet, D-Vision, the former stockholders of D-Vision and
certain other individuals. As a result of the D-Vision acquisition, Discreet
acquired the D-Vision OnLINE and PRO software products for non-linear video
and digital media editing solutions including related know-how and goodwill.
The purchase price was paid in a combination of 555,000 newly issued Discreet
Common Shares and approximately $10,750,000 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, pending satisfactory resolution of a dispute
regarding an indemnification claim against such escrow, and (ii) the
resolution of any indemnification claims made by Discreet pursuant to the
Stock Purchase Agreement. The D-Vision acquisition was accounted for as a
purchase. The cash used by Discreet to fund the acquisition was derived
primarily from cash flow from operations. A substantial portion of the
purchase price, net liabilities of D-Vision and transaction costs was
allocated to purchased in-process research and development, that had not yet
reached technical feasibility and had no alternative use, for which Discreet
incurred a one-time charge against earnings in the amount of $21,000,000
($0.72 per share), in the quarter ending September 30, 1997, based on an
independent appraisal. The terms of the transaction and the consideration
received by the D-Vision stockholders were the result of arms-length
negotiations between the representatives of Discreet and D-Vision. D-Vision
develops Microsoft Windows NT-based non-linear, digital editing solutions.
On December 2, 1997, Discreet 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 ("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 "Lightscape Merger")
with and into Lightscape with Lightscape as the surviving corporation and a
wholly-owned subsidiary of Discreet. As a result of the Lightscape Merger,
Discreet acquired, among other products, the Lightscape 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 Lightscape Merger 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, that had not yet reached technical feasibility and had no
alternative use, for which Discreet incurred a one-time charge against
earnings in the amount of $5,800,000 ($0.20 per share), based on an
independent appraisal, in the quarter ended December 31, 1997 and
approximately $1,087,000 was allocated to intangible assets, which include
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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 arm's-length negotiations between the
representatives of Discreet and Lightscape.
PRODUCTS
The following table sets forth the Discreet products, their market, the date
of first shipment by Discreet, and their platform or operating system.
<TABLE>
<CAPTION>
DATE OF FIRST
SHIPMENT BY
PRODUCT MARKET DISCREET PLATFORM/OPERATING SYSTEM
------- -------------------- ------------- --------------------------------
<S> <C> <C> <C>
ADVANCED SYSTEMS
inferno*................ Special effects October 1995 SGI Onyx2/Unix
flame*.................. Special effects January 1993 SGI Octane/Unix
fire*................... Editing October 1996 SGI Onyx2/Unix
smoke*.................. Editing October 1997 SGI Octane/Unix
frost*(includes product
formerly sold as
Vapour)................ Broadcast Production October 1995 SGI Onyx2 and SGI Octane/Unix
NEW MEDIA SOFTWARE
effect* (formerly
Flint)................. Special effects December 1993 SGI O2/Unix
effect* (formerly
Illuminaire
Composition)........... Special effects June 1997 Microsoft NT and Apple Macintosh
paint* (formerly
Illuminaire Paint)..... Special effects June 1997 Microsoft NT and Apple Macintosh
edit* (formerly D-Vision
OnLine)................ Editing July 1997 Microsoft NT
light* (formerly
Lightscape)............ Radiosity December 1997 Microsoft NT
</TABLE>
ADVANCED SYSTEMS
Discreet's systems are designed to be intuitive and easy to use. Discreet's
systems provide the speed and operational flexibility demanded by the
professional film and video industries. The systems use a consistent interface
through which operations are controlled via on-screen menus (which users can
organize to fit their preferences) and a pressure-sensitive stylus. Discreet's
systems include a Sparks developers kit, which allows customers to integrate
their own proprietary software or third party software into Discreet's
systems' environments. Discreet's systems also offer comprehensive image
input/output ("I/O") functions, allowing image or object data to be captured
and exchanged between workstations in a studio environment in a variety of
formats. For sites with multiple systems, work generated on other platforms
can be imported and placed directly onto Discreet's systems' local disk array
for integration into the current production. In addition, Discreet's image
files can be transferred among local disk arrays. For example, if a user
prepares a production on an effect* system, the user can transfer video or
film data to the flame* or inferno* systems or video data to the fire* system,
for finishing with the client. The flexible systems architecture can result in
different system configurations and enables clients to differentiate
themselves from their competitors by allowing them to customize their systems.
Special Effects Systems
flame*--flame* is an on-line, resolution-independent, non-linear,
uncompressed digital system. The system is used by creative professionals to
create, edit and composite special visual effects in an on-line, real-time
environment. Easily integrated into a suite environment and possessing the
power and features necessary to serve as the core of a fully digital suite,
flame* is designed to allow the operator to create desired effects with near
instantaneous feedback. A complete flame* system includes the flame* software,
an SGI Octane workstation, a stone* disk array and various I/O devices.
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inferno*--inferno* is an on-line, non-linear, resolution-independent,
uncompressed digital system providing all the features of flame* with film
tools, and increased image resolution and color control for digital film work.
The system also features tools for grain management, wire and scratch removal
and colour calibration. A complete inferno* system includes the inferno*
software, an SGI Onyx2 workstation, a stone* disk array and various I/O
devices.
Editing Systems
fire*--fire* is an uncompressed, on-line, non-linear, digital video editing
system with special effects capabilities. fire* includes a sophisticated
toolset and a gestural, picture-based editing interface, which Discreet
believes specifically address the new and expanding requirements needed for
on-line finishing. In the fourth fiscal quarter of 1998, Discreet released a
resolution independent (including HDTV resolution) fire* system. A complete
fire* system includes the fire* software, an SGI Onyx2 workstation, stone*
disk arrays and various I/O devices.
smoke*--smoke*, like fire*, is an uncompressed, on-line, non-linear, digital
video editing system with more limited special effects capabilities. smoke*
uses the same gestural, picture-based editing interface as fire*. The primary
difference in the two systems is the greater speed of interactivity and
processing of fire* as well as greater special effects capabilities than those
of smoke*. However, smoke*'s special effects capabilities are modular; effects
modules may be purchased separately by the customer to augment the special
effects capabilities of the baseline smoke* system. A complete smoke* system
includes the smoke* software, an SGI Octane workstation, a stone* disk array
and various I/O devices.
Broadcast Production Systems
frost*--frost* is a computer-based set of modeling, animation and rendering
tools for the creation and manipulation of 3D graphics, including virtual
sets, for broadcast. Virtual sets are computer generated locales typically
used for news, sports and entertainment programming. frost* is designed to
operate on the SGI Onyx2 or SGI Octane workstation and allows the user to work
completely in real-time or through a combination of real-time and post-
produced components.
SYSTEM COMPONENTS
The Workstation
inferno*, fire*, and frost* run on SGI Onyx2 workstations, typically
configured with four or eight processors. flame*, smoke* and frost* run on the
SGI Octane workstation. The SGI hardware platforms are scaleable and
upgradeable (within the same machine) to fit the price and performance
criteria of the customer. Each system can be connected to other Discreet
systems and to numerous third party software, systems and devices.
Disk Arrays
Discreet offers stone*, a disk-based storage system for use with its video
and high-performance film applications, which is targeted at the production,
post-production and broadcast markets. stone* is designed to allow real-time
playback of uncompressed video frames in any order, efficiently store any mix
of resolutions and ensure image integrity by remaining operational in the
event of disk or power supply failure. A disk array is comprised of a number
of disks working co-operatively to handle high speed data flows. flame*,
inferno*, fire*, smoke*, and frost* must be used with Discreet's stone* disk
arrays.
Networking
Discreet offers wire*, a high-performance transport system for digital film
and video for use with multiple stone* disk arrays. wire* builds on Discreet's
disk technology and is designed, if the network provides sufficient bandwidth,
to provide real-time CCIR-601 instant access to images located on a disk
anywhere within a post-production facility. wire* can be configured as a
centralized or distributed network, or both.
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I/O
Third party video tape recorders can be controlled with flame*, inferno*,
fire* and smoke*'s stylus and tablet. I/O edits can be implemented
sequentially using the EDL capabilities of the flame*, inferno*, fire* and
smoke* systems. Other third party devices, such as film scanners and
recorders, can also be used with Discreet systems for HDTV and film transfers.
NEW MEDIA SOFTWARE
Through acquisitions made in fiscal years 1997 and 1998, Discreet now offers
software-only solutions which run on the Windows NT and the Apple Macintosh
platforms. These acquisitions are part of Discreet's strategy to expand the
range of creative professionals served by Discreet and to extend its product
line to include other aspects of the content creation process. See "--Recent
Acquisitions." Discreet's New Media Software is primarily used to create,
manipulate, and finish computer graphics images, interactive and on-line
content.
Special Effects Software
effect*--Discreet offers two versions of its effect* software: effect* on
the SGI O2 workstation (formerly Flint) and effect* on the Apple Macintosh and
Microsoft Windows NT operating systems (formerly Illuminaire Composition).
effect* is a resolution-independent, non-linear, uncompressed digital system
used by creative professionals to create, edit and composite special visual
effects. effect* provides 3D video composition, clip animation, and visual
effects enabling artists to combine, enhance and modify video frames or
sequences of frames with a very high of level of efficiency and interactivity.
Discreet acquired the Illuminaire product line as part of Discreet's
acquisition of substantially all of the assets of Denim Software L.L.C.
("Denim") in June 1997 (the "Denim Acquisition").
paint* (formerly Illuminaire Paint)--paint* is an Apple Macintosh and
Microsoft Windows NT-based paint software for effects, interactive content and
graphic design creation. paint* is resolution-independent, vector-based,
object-oriented painting and animation system for the manipulation and
enhancement of both multi-frame clips and single-frame graphic images.
Discreet acquired the Illuminaire product line as part of the Denim
Acquisition.
Editing Software
edit* (formerly D-Vision OnLine)--edit* is a real-time non-linear,
compressed editing software solution which performs compositing, keying and
visual effects on the desktop and runs on the Microsoft Windows NT operating
system. Discreet acquired edit* as part of the acquisition of all the
outstanding shares of capital stock of D-Vision Systems, Inc. ("D-Vision") in
July 1997 (the "D-Vision Acquisition").
Radiosity Software
light* (formerly Lightscape)--light* is a 3D rendering solution that uses
advanced radiosity techniques to significantly enhance realism and lighting
accuracy in 3D environments created for virtual sets, film and video effects,
interactive games and architectural design projects. light* runs on the
Microsoft Windows NT operating system. Discreet acquired light* as part of the
acquisition of all the outstanding shares of capital stock of Lightscape
Technologies, Inc. in December 1997 (the "Lightscape Acquisition").
CUSTOMERS
Discreet's Advanced Systems are sold primarily to film and video production,
post-production and broadcast companies. Discreet's New Media Software
products are sold in these markets as well as to institutional and educational
customers, designers and professional consumers.
No customer accounted for 10% or more of Discreet's total revenues in fiscal
1996, 1997 or 1998.
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MARKETING AND SALES
Marketing Strategy. To date, Discreet has marketed its Advanced Systems
products primarily to production and post-production companies in the film,
video, and broadcast industries. Discreet's principal marketing strategy has
been to create awareness of its systems and software through appearances at
major international computer graphics and broadcasting tradeshows, such as
NAB, ACM SIGGRAPH (U.S.), International Broadcasters Convention ("IBC")
(Europe), INTERBEE (Japan) and Montreaux (Europe). Discreet has supported this
marketing strategy with direct-mail advertising and advertisements in trade
publications. In addition, Discreet believes that the high quality of computer
images generated using its products results in significant industry awareness.
With permission from its customers, Discreet creates promotional materials
utilizing content created using Discreet's products.
Discreet is marketing its New Media Software products primarily through
direct mail advertising, advertising in trade publications, seminars and
roadshows, as well as at both international and local tradeshows. In addition,
Discreet provides co-operative advertising funding to a number of its
distributors who locally advertise its products. As Discreet broadens the
markets for these products, Discreet intends to expand its marketing efforts
accordingly.
Sales and Distribution. In North America, sales activities are conducted
from Discreet's Montreal headquarters, sales offices in Los Angeles, Chicago
and New York and field representatives based in Boston, San Francisco, and
Atlanta. In markets outside of North America, sales activities are conducted
from sales offices located in the United Kingdom, Spain, France, Germany,
Japan, Singapore, India, Hong Kong and Brazil. Discreet's headquarters and
each of its sales offices have sales and demonstration capabilities. Since the
beginning of fiscal 1997, Discreet has pursued a strategy of increasing the
number of distributors and resellers qualified to sell its products.
Distributors and resellers may sell Advanced Systems products, New Media
Software products, or both. Generally, customers purchasing Discreet's
products and/or peripherals from the distributors will also purchase the
workstation hardware from the distributors. Discreet currently has
distribution relationships with over 340 distributors and resellers in over 80
countries. As of August 31, 1998, Discreet employed 51 Advanced Systems and 13
New Media Software sales and sales support personnel and 34 demonstration
artists worldwide.
Discreet's Advanced Systems products are sold through its direct sales
organization in its primary markets. In the United States, Discreet maintains
a direct sales presence in its primary markets including New York, Chicago and
Los Angeles. Outside of the United States, Discreet maintains a direct sales
presence in its primary markets, including London, Paris, Munich, Singapore
and Tokyo. In geographic areas generally not served by Discreet's direct sales
organization, Discreet's Advanced Systems products are sold through high-end
distributors and resellers, who are managed by Discreet's sales managers.
Discreet's strategy of marketing its products directly to customers and
indirectly through distributors may result in distribution channel conflicts
as Discreet's direct sales efforts may compete with those of its indirect
channels. Some of these distributors or resellers may receive a finder's fee
for customer system purchases from Discreet's direct sales organization.
Discreet's New Media Software products are sold through distributors and
resellers, who are managed by Discreet's sales managers.
International Revenues. For fiscal 1996, 1997 and 1998, revenues from
customers outside North America accounted for approximately 57%, 57% and 53%,
respectively, of Discreet's total revenues. Discreet expects that revenues
from customers outside North America will continue to account for a
substantial portion of its revenues.
Reseller Arrangements. Discreet is a master value added reseller ("VAR") of
SGI workstations. 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, Discreet
has faced and may in the future face unforeseen difficulties associated with
adapting Discreet's products to future SGI products. In May 1994, Discreet
entered into a Value-Added Reseller Agreement with SGI. The agreement grants
to Discreet a non-exclusive right to purchase and license certain hardware
products from SGI, including the SGI
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Onyx2, Octane, and O2 workstations for remarketing by Discreet in the United
States. Although the agreement contains no minimum purchase requirements, the
volume of systems purchased from SGI affects the percentage discount received
by Discreet. The agreement is subject to annual renewal in May of each year
and may be terminated by SGI for cause. The agreement with SGI has been
extended through December 31, 1998, and Discreet has no reason to believe that
SGI will not renew such agreement. Discreet also acts as a reseller and
systems integrator of certain peripheral devices used in Discreet's systems,
including audio and video I/O cards and electronic tablets. Discreet receives
discounts for the purchase price of these products.
Backlog. Discreet has no significant backlog and does not believe that its
backlog at any particular point in time is indicative of future sales levels.
SYSTEMS INTEGRATION, SERVICE AND SUPPORT
Discreet provides its customers with a variety of systems integration,
support and training services including on-site and telephone support, and in-
house and on-site training in the use of Discreet's products. These services
are generally provided under separately priced arrangements with Discreet's
customers. In some markets, these services are provided by Discreet's
distributors who are compensated for such services directly by the customer.
Discreet maintains a staff of persons dedicated to training its distributors
in the performance of these services. Discreet believes that its focus on
customer service provides it with important information about the evolving
needs of its customers. Discreet derived revenues of approximately
$11,713,000, $13,606,000 and $14,050,000 from these services in fiscal 1996,
1997 and 1998, respectively.
Discreet supports its customers in North and South America from Discreet's
Montreal and other North American offices, and through its distributors.
Customers in Europe and the Pacific Rim are supported from the offices of
Discreet's European and Asian subsidiaries and by distributors. As of August
31, 1998, Discreet employed a total of 104 persons worldwide in its customer
support organization.
RESEARCH AND DEVELOPMENT
Discreet's research and product development efforts are focused on the
continued enhancement of its Advanced Systems and its New Media Software
products and the development of new products. Discreet employs a modular
development approach which it believes allows it to bring innovative
technology to market more rapidly than traditional analog or proprietary
hardware-based digital solutions and enables it to take advantage of advances
in general purpose workstation technology as they become available. Discreet
intends to continue to enhance and upgrade these products on a regular basis.
In fiscal 1996, 1997 and 1998, Discreet spent approximately $16,902,000,
$9,708,000 and $14,847,000 (net of tax credits), respectively, on research
and development, representing 20%, 10% and 10%, respectively, of total
revenues. Discreet's research and development staff consisted of 113 persons
as of August 31, 1998.
The markets for Discreet's systems and software are characterized by
evolving industry standards, changing technologies and frequent new product
introductions. Discreet believes that its future success will depend in part
on its ability to enhance its existing systems and software and to develop and
introduce new products and features which meet changing customer requirements
and emerging industry standards on a timely basis. In addition, as a master
VAR of SGI workstations, Discreet obtains certain advance access to SGI
technology which facilitates its efforts to develop compatible systems and to
modify and improve existing products. If Discreet were unable to obtain such
advance access, it could have an adverse impact on Discreet's business and
results of operations.
On March 4, 1998, Discreet entered into a Strategic Development Agreement
with Intel to develop a new high-end special effects product. Discreet Logic
plans to develop new visual effects software for demanding real-time
compositing and image processing functions. The software will be designed to
run on multi-processor workstations based on the IA-64 processors and is
expected to deliver powerful performance capabilities for the visual effects
industry. Intel will provide access to IA-64 technology, aid in optimization
of the software, and design components of Merced processor-based workstations
to run the software optimally.
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PROPRIETARY RIGHTS
Discreet's success is dependent upon its proprietary technology. Although
Discreet currently has seven patents and has 78 patent applications on its
technology, it relies principally on unregistered copyrights and trade secrets
to protect its intellectual property. Discreet generally seeks to enter into
confidentiality agreements with its employees and license agreements with its
distributors and to limit access to and distribution of its systems, software,
documentation and other proprietary information. Until fiscal 1996,
substantially all of Discreet's systems were sold without written license
agreements. There can be no assurance that Discreet will not be involved in
litigation with respect thereto or that the outcome of any such litigation
might not be more unfavorable to Discreet as a result of such omissions. Any
such litigation could have a material adverse effect on Discreet's business
and results of operations. Discreet licenses its New Media Software products
under "shrink-wrap" licenses (i.e., licenses included as part of the product
packaging). Shrink-wrap licenses are not negotiated with or signed by
individual licensees, and purport to take effect upon the opening of the
product package. Certain provisions of such licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program, may be unenforceable under the laws of many jurisdictions.
Discreet uses both software and hardware keys with respect to its systems and
software but otherwise does not copy-protect its systems and software. It may
be possible for unauthorized third parties to copy Discreet's products or to
reverse engineer or obtain and use information that Discreet regards as
proprietary. There can be no assurance that Discreet's competitors will not
independently develop technologies that are substantially equivalent or
superior to Discreet's technologies. In addition, the laws of certain
countries in which Discreet's products are or may be distributed do not
protect Discreet's products and intellectual property rights to the same
extent as the laws of Canada or the United States. As the number of software
products in the industry increases and the functionality of these products
further overlaps, Discreet believes that software products generally may
increasingly become the subject of claims that such software products infringe
the rights of others.
Significant and protracted litigation may be necessary to protect Discreet's
intellectual property rights, to determine the scope of the proprietary rights
of others or to defend against claims of infringement. Discreet is not
currently involved in any litigation with respect to intellectual property
rights. 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.
There can be no assurance that third-party claims alleging infringements will
not be asserted against Discreet in the future. For example, Discreet received
a letter from Avid Technology, Inc. ("Avid") stating its belief that certain
of Discreet's acquired products in connection with the acquisition of the
outstanding shares of the share capital of D-Vision practice inventions
claimed in a patent on a media editing system. Discreet has responded to
Avid's letter stating Discreet's belief that it is not infringing upon 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. If infringement is alleged by Avid, or any other holder of
protected intellectual property rights, Discreet could be required to
discontinue the use of certain software code or processes, to cease the
manufacture, use and sale of infringing products, to incur significant
litigation costs and expenses, to develop non-infringing technology or to
obtain licenses to use the allegedly infringed technology. There can be no
assurance that Discreet would be able to develop alternative technologies or
to obtain such licenses or, if a license were obtainable, that the terms would
be commercially reasonable or acceptable to Discreet. Moreover, there may be
pending or issued patents that extend to Discreet's products, which, together
with the growing use of patents to protect technology, increase the risk that
third parties may assert infringement claims against Discreet in the future.
There can be no assurance that a court to which any infringement claims are
submitted would not find that Discreet's products infringe any third party's
intellectual property rights. Further, such litigation, regardless of its
outcome, could result in substantial costs to and diversion of efforts by
Discreet. Litigation may also be necessary to enforce Discreet's intellectual
property rights. Any infringement claim or other litigation against or by
Discreet could have a material adverse effect on Discreet's business and
results of operations.
8
<PAGE>
MANUFACTURING AND SUPPLIERS
Discreet has historically relied on third-party vendors to manufacture and
supply all of the hardware components used in Discreet's systems.
Manufacturing at Discreet consists of assembly (including disk array
assembly), testing, and value added systems integration. Discreet's
manufacturing staff consisted of 15 persons as of August 31, 1998.
Discreet's flame*, effect*, inferno*, fire*, smoke* and frost* software
currently run on 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
is an authorized master VAR of workstations manufactured by SGI. Discreet's
agreement with SGI is subject to annual renewal in May of each year and
termination by SGI for cause. The agreement with SGI has been extended through
December 31, 1998 and Discreet has no reason to believe that SGI will not
renew such agreement. In addition, although Discreet has no reason to believe
that it will be unable to obtain sufficient quantities of SGI workstations on
a timely basis or that its status as a master VAR will be changed, there can
be no assurance that Discreet will continue to be able to procure such
workstations in sufficient quantities on a timely basis or that SGI will
continue to recognize Discreet as a master VAR. The success of Discreet also
depends, in part, on the continued market acceptance of SGI workstations, in
general, and by the professional film and video industries, in particular.
Although Discreet intends to continue to evaluate new hardware platforms and
may adapt its products as technological advances and market demands dictate,
and although Discreet has now entered the market for content creation software
which runs on the Apple Macintosh and Windows NT operating systems, Discreet
believes that it will continue to derive substantially all of its revenue for
the foreseeable future from the sale and maintenance of systems designed to
include SGI workstations. As a result, financial, market and other
developments adversely affecting SGI or the sales of workstations, the
introduction or acquisition by SGI of products which are competitive with
those of Discreet, or the unanticipated timing or pricing of SGI products that
could cause customers to defer the decision to buy or determine not to buy
Discreet's then available products or systems, could have an adverse effect
upon Discreet's business and results of operations. As a master VAR, Discreet
also obtains certain advance access to SGI technology in order to develop
compatible systems and to modify and improve existing products. If Discreet
were unable to obtain such advance access, it could have an adverse impact on
Discreet's business and results of operations.
Discreet is dependent on SGI as Discreet's sole source for video I/O cards
used in Discreet's systems. Discreet also purchases electronic tablets
manufactured by Wacom Technology Corporation and believes that, while
alternative suppliers are available, there can be no assurance that
alternative electronic tablets would be functionally equivalent or be
available on a timely basis or on similar terms. Discreet generally purchases
sole source or other components pursuant to purchase orders placed from time
to time in the ordinary course of business and has no written agreements or
guaranteed supply arrangements with its sole source suppliers. Discreet has
experienced quality control problems and supply shortages for sole source
components in the past and there can be no assurance that Discreet will not
experience significant quality control problems or supply shortages for these
components in the future. Discreet does not maintain an extensive inventory of
these components, and an interruption in supply could have a material adverse
effect on Discreet's business and results of operations. Because of Discreet's
reliance on these vendors, Discreet may also be subject to increases in
component costs which could adversely affect Discreet's business and results
of operations.
COMPETITION
The market in which Discreet competes is characterized by intense
competition. In the high-end of the special effects market, Discreet's flame*
system competes with Quantel Limited's ("Quantel") Henry product. In certain
applications in the non-real-time segment of the market, Discreet's effect* on
the SGI O2 workstation competes with Avid's Illusion product. Discreet's
inferno* system competes with Quantel's Domino product. Discreet's fire* and
smoke* systems competes with Quantel's Editbox product and Sony Corporation's
("Sony") range of proprietary editing equipment. In addition, the products
gained from the Denim Acquisition
9
<PAGE>
and the D-Vision Acquisition compete with Adobe Systems Incorporated's
("Adobe") special effects products and Avid's and Media 100 Inc.'s ("Media
100") range of editing products. Many of Discreet's current and prospective
competitors, including Quantel, Avid, Sony, and Adobe, have significantly
greater financial, technical, manufacturing and marketing resources than
Discreet. Moreover, 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. In addition,
as personal computers become more powerful, software suppliers may be able to
introduce products for personal computers that would be competitive with
Discreet's products in terms of price and performance for professional users.
Discreet believes that its ability to compete depends on elements both
within and outside its control, including the success and timing of new
product development and introduction by Discreet and its competitors, product
performance and price, distribution and customer support. There can be no
assurance that Discreet will be able to compete successfully with respect to
these factors. Although Discreet believes that it has certain technological
and other advantages over its competitors, maintaining such advantages will
require continued investment by Discreet in research and development, sales
and marketing and customer service and support. There can be no assurance that
Discreet will have sufficient resources to make such investments or that
Discreet will be able to make the technological advances necessary to maintain
such competitive advantages. In addition, as Discreet enters new markets,
distribution channels, technical requirements and levels and bases of
competition may be different than those in Discreet's current markets and
there can be no assurance that Discreet will be able to compete favorably.
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.
EMPLOYEES
As of August 31, 1998, Discreet had 405 full-time employees. Of such
employees, 113 were employed in research and development, 98 in sales, 18 in
marketing, 104 in customer support, 15 in manufacturing and 57 in
administration and finance. Discreet believes that its future success will
depend in large part upon its ability to attract and retain highly skilled
technical, management and sales and marketing personnel. Moreover, because the
development and marketing of Discreet's Advanced Systems and New Media
Software requires knowledge of film and video production and post-production,
key technical personnel must be proficient in a number of disciplines.
Competition for such technical personnel is intense, and the failure of
Discreet to hire and retain talented technical personnel or the loss of one or
more key employees could have an adverse effect on Discreet's business and
results of operations. Discreet's employees are not represented by a labor
union, and Discreet considers its employee relations to be good.
ITEM 2. PROPERTIES
In July 1997, Discreet signed an agreement to rent space for its new
headquarters in Montreal from TGR Zone Corporation ("TGR Zone"), a company
indirectly owned by Discreet's Chairman, President and Chief Executive
Officer. As part of this agreement, TGR Zone assumed Discreet's lease
commitment at its previous Montreal location. The agreement provides that
Discreet leases approximately 55,000 square feet of space at approximately
Cdn$13.00 (or approximately $8.86 at June 30, 1998) per square foot per annum
subject to normal escalation clauses. The lease is set to expire in July 2007.
The lease was signed in October 1997. As of August 31, 1998, Discreet leased
sales offices, research and development facilities and/or warehouse space in
the United States, Brazil, France, the United Kingdom, Spain, Germany,
Singapore, India, Hong Kong and Japan, pursuant to leases which expire from
September 1998 through February 2003. Discreet's current aggregate annual
rental expense for these additional facilities is approximately $1,175,000.
In August 1995, Discreet purchased an approximately 10,000 square foot
office building in London, England for use as a sales facility for
approximately (Pounds)1,148,000 (or approximately $1,916,000 at June 30,
1998). Subsequently, in December 1995, Discreet purchased an approximately
50,000 square foot office building in Montreal, Quebec for Cdn$1,730,000
(approximately $1,250,000 at June 30, 1997). The carrying values of the
10
<PAGE>
Montreal building and the London building were written down to their estimated
fair market values and the buildings were classified as assets held for resale
in fiscal 1996. In September 1997, Discreet sold the Montreal office building
for a price not materially different from its carrying value.
ITEM 3. LEGAL PROCEEDINGS
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 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year ended
June 30, 1998 to a vote of security holders of the Company, through the
solicitation of proxies or otherwise.
11
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Shares are traded on the Nasdaq National Market under
the symbol "DSLGF." Public trading of the common shares commenced on June 30,
1995. Prior to that time, there was no public market for the Company's Common
Shares. The following table sets forth the high and low sales prices for the
Common Shares as reported by Nasdaq for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1997:
$ 8 $ 3
First quarter....................................................... 5/8 1/2
9 5
Second quarter...................................................... 1/8 3/4
9 5
Third quarter....................................................... 1/2 3/4
18 5
Fourth quarter...................................................... 1/8 5/8
Fiscal 1998:
28
First quarter....................................................... 7/8 16
26 14
Second quarter...................................................... 1/2 3/4
26 15
Third quarter....................................................... 1/2 1/2
22 10
Fourth quarter...................................................... 3/8 1/8
Fiscal 1999:
$16
First quarter through September 24, 1998............................ 1/8 $10
</TABLE>
On September 24, 1998, the last reported sale price of the common shares on
the Nasdaq National Market was $13 per share. As of September 24, 1998, there
were approximately 177 holders of record of the common shares. The Company
believes that as of August 17, 1998 there were approximately 2,536 beneficial
owners of the common shares, based upon information provided by the Company's
transfer agent.
The Company has never declared or paid cash dividends and does not
anticipate paying any cash dividends on its capital stock in the foreseeable
future. In the event cash dividends are declared or paid, the Company
anticipates that they would be declared and paid in U.S. dollars. Part 1A of
the Quebec Act prohibits the Company 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. At June 30, 1998, the Company could
not distribute any dividends.
12
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction with,
and are qualified in their entirety by, the Company's consolidated financial
statements, related notes and other financial information included herein. 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
selected consolidated financial data for fiscal 1997 are presented for the
eleven-month period ended June 30, 1997. The results for the eleven-month
period ended June 30, 1997 are not directly comparable with those for the
fiscal year ended July 31, 1996 or the fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
ELEVEN
MONTHS YEAR
YEARS ENDED JULY 31, ENDED ENDED
-------------------------- JUNE 30, JUNE 30,
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................. $15,392 $64,549 $83,997 $101,924 $151,558
Cost of revenues............... 8,289 29,609 49,333 47,571 62,033
------- ------- -------- -------- --------
Gross profit................ 7,103 34,940 34,664 54,353 89,525
------- ------- -------- -------- --------
Operating expenses:
Research and develop-
ment(1)(2)................... 625 4,037 16,902 9,708 14,847
Sales and marketing........... 2,785 12,588 26,088 23,206 34,321
General and administrative(3). 1,383 4,855 10,582 6,396 8,077
Gain on sale of investment(8). -- -- -- -- (2,500)
Costs related to terminated
transaction(9)............... -- -- -- -- 1,713
Write-off of purchased re-
search and
development(4)............... -- -- 8,500 9,800 26,800
Restructuring expense(5)...... -- -- 15,000 -- (1,504)
Litigation and related settle-
ment expense(6)(7)........... 1,366 -- 2,506 6,500 (405)
------- ------- -------- -------- --------
Total operating expenses.... 6,159 21,480 79,578 55,610 81,349
------- ------- -------- -------- --------
Operating income (loss)..... 944 13,460 (44,914) (1,257) 8,176
Total other income (expense)... (86) (170) 2,208 990 2,066
------- ------- -------- -------- --------
Income (loss) before income
taxes and minority interest... 858 13,290 (42,706) (267) 10,242
Provision for income taxes..... 343 5,490 1,435 6,489 10,854
------- ------- -------- -------- --------
Net income (loss) before minor-
ity interest.................. 515 7,800 (44,141) $ (6,756) (612)
Minority interest.............. 32 15 -- -- --
------- ------- -------- -------- --------
Net income (loss)........... $ 483 $ 7,785 $(44,141) $ (6,756) $ (612)
======= ======= ======== ======== ========
Net income (loss) per common
share......................... $ 0.02 $ 0 .31 $ (1.64) $ (0.24) $ (0.02)
======= ======= ======== ======== ========
Weighted average common shares
outstanding................... 23,094 24,886 26,837 27,948 29,029
======= ======= ======== ======== ========
<CAPTION>
JULY 31,
-------------------------- JUNE 30, JUNE 30,
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 826 $40,987 $ 21,658 $ 31,668 $ 43,746
Working capital (deficit)...... (382) 41,847 24,030 18,536 40,409
Total assets................... 9,431 76,858 80,148 95,945 114,610
Total shareholders' equity..... 934 50,124 42,343 36,948 59,566
</TABLE>
13
<PAGE>
(1) Research and development expenses are net of Canadian federal and
provincial tax credits of $450,000, $545,000, $711,000, $696,000, and
$1,108,000 for the fiscal years ended July 31, 1994, 1995, 1996, the
eleven months ended June 30, 1997, and the fiscal year ended June 30,
1998, respectively. See Note 7 of Notes to the Company's Consolidated
Financial Statements.
(2) In the third fiscal quarter of 1996, the Company charged to operations
$2,500,000 as research and development expense related to its investment
in Series B convertible, voting, preferred shares of Essential
Communications due to the uncertainty regarding the realizability of the
investment in the preferred shares.
(3) In fiscal 1996, the Company provided approximately $3,300,000 in reserves
for potentially doubtful accounts receivable, and provided $830,000 to
reflect certain recourse provisions in and other risks associated with
certain third party financing arrangements. See Note 2(g) of Notes to the
Company's Consolidated Financial Statements. In addition, in the third
quarter of fiscal 1996, the Company reduced the carrying value of a
building purchased in Montreal by Cdn$500,000 (approximately $365,000) to
reflect the amount expected to be realized upon its sale.
(4) As part of the Company's acquisition of all of the outstanding shares of
Computer-und Serviceverwaltungs AG ("COSS") and certain assets of IMP
Innovative Medientechnik-und Planungs-GmbH ("IMP") in October 1995, the
Company charged to operations $8,500,000 of in-process research and
development that had not yet reached technical feasibility and had no
alternative use. As part of the Company's acquisition of substantially all
of the assets of Denim Software L.L.C., the Company charged to operations
$9,800,000 of in-process research and development that had not yet reached
technical feasibility and had no alternative use. As part of the Company's
acquisition of all of the outstanding shares of D-Vision Systems, Inc. in
July 1997, and Lightscape Technologies, Inc. in December 1997, the Company
charged to operations $21,000,000 and $5,800,000, respectively, of in-
process research and development that had not yet reached technical
feasibility and had no alternative use.
(5) In the fourth quarter of fiscal 1996, the Company recorded a pre-tax
restructuring charge of $15,000,000. In the fourth fiscal quarter of 1998,
the Company reversed approximately $2,333,000 of restructuring reserves
considered to no longer be necessary and charged an additional $829,000
for costs related to the closure of its U.K. research facility. See Note
19 of Notes to the Company's Consolidated Financial Statements.
(6) The results of operations for fiscal 1994 include a charge of $1,366,000
for litigation and related settlement expenses in connection with the
Company's litigation and arbitration with Softimage.
(7) The results of operations for fiscal 1996 includes a charge of $2,506,000
to operations for legal costs associated with defending the class action
lawsuits. In fiscal 1997, an additional charge of $6,500,000 was recorded
to accrue the anticipated costs of settling all three lawsuits under the
agreement-in-principle. In fiscal 1998, the Company reversed $405,000 of
this accrual to adjust previously estimated amounts to the actual costs
incurred. See Note 5 of Notes to the Company's Consolidated Financial
Statements.
(8) In the fourth quarter of fiscal 1998, the Company realized a gain of
$2,500,000 upon the sale of its investment in the preferred shares of
Essential Communications Corporation. See Note 16 of Notes to the
Company's Consolidated Financial Statements.
(9) In the fourth quarter of fiscal 1998, the Company incurred costs
associated with the terminated merger transaction with MGI Software Corp.
See Note 17 of Notes to the Company's Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere herein.
The success of Discreet is subject to a number of risks and uncertainties,
including, without limitation, Discreet's ability to successfully develop,
introduce and gain customer acceptance of existing and new or enhanced
products; the need for the continued development of the market for Discreet's
systems; the ability of Discreet to expand its current market to include
additional applications and develop new products for related markets; the risk
that as Discreet enters new markets, the distribution channels, technical
requirements and levels
14
<PAGE>
and basis of competition may be different from those in Discreet's current
markets; the presence of competitors with greater financial, technical,
manufacturing, marketing and distribution resources; the risk that the
products and technologies acquired by Discreet through acquisitions will not
be successful, achieve market acceptance or be successfully integrated with
Discreet's existing products and business; the risk of quarterly fluctuations
in Discreet's operating results; the risk of Discreet's reliance on SGI for
the workstations included in Discreet's systems including the impact of the
timing of the development and release of SGI products as well as unforeseen
difficulties associated with adapting Discreet's products to future SGI
products; the risk that Discreet derives a significant portion of its revenues
from foreign sales; Discreet's reliance principally on unregistered copyrights
and trade secrets to protect its intellectual property; the risk that
Discreet's direct sales efforts may compete with those of its indirect
channels; the risk of Discreet's reliance on SGI as the sole source for video
input/output cards used in Discreet's systems; Discreet's dependence on key
management and technical employees; market price fluctuations due to quarter-
to-quarter variations in Discreet's operating results, announcements of
technological innovations or new products by Discreet or its competitors and
the historical fluctuations in market prices of technology companies
generally; and other risks detailed from time to time in Discreet's filings
with the SEC, including this Form 10-K.
OVERVIEW
General
Discreet 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.
Proposed Transaction with Autodesk
On August 20, 1998, the Company announced that it has entered into a
definitive agreement providing for the acquisition of Discreet by Autodesk,
Inc. ("Autodesk"). The combination is intended to create the premier total
solutions provider of digital content design, creation, and manipulation tools
for the creation of moving images. The proposed merger transaction is intended
to be accounted for as a pooling of interests. Subject to several conditions,
including regulatory approvals and 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.
Private Placement of Shares to Intel Corporation
On March 4, 1998, Discreet completed a private placement sale to Intel
Corporation of 645,000 Discreet Common Shares for proceeds to Discreet of
approximately $13,527,000, net of issuance costs.
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.
15
<PAGE>
On June 2, 1998, Discreet 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
Discreet 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, Discreet
filed a motion to dismiss the Action in its entirety. The motion to dismiss is
currently pending. Discreet 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 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.
Recent Acquisitions
On July 15, 1997, Discreet acquired all of the outstanding shares of capital
stock of D-Vision pursuant to a Stock Purchase Agreement dated as of July 10,
1997, among Discreet, D-Vision, the former stockholders of D-Vision and
certain other individuals. As a result of the D-Vision acquisition, Discreet
acquired the D-Vision OnLINE and PRO software products for non-linear video
and digital media editing solutions including related know-how and goodwill.
The purchase price was paid in a combination of 555,000 newly issued Discreet
Common Shares and approximately $10,750,000 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, pending satisfactory resolution of a dispute
regarding an indemnification claim against such escrow, and (ii) the
resolution of any indemnification claims made by Discreet pursuant to the
Stock Purchase Agreement. The D-Vision acquisition was accounted for as a
purchase. The cash used by Discreet to fund the acquisition was derived
primarily from cash flow from operations. A substantial portion of the
purchase price, net liabilities of D-Vision and transaction costs was
allocated to purchased in-process research and development that had not yet
reached technical feasibility and had no alternative use for which Discreet
incurred a one-time charge against earnings in the amount of $21,000,000
($0.72 per share), in the quarter ending September 30, 1997, based on an
independent appraisal. The terms of the transaction and the consideration
received by the D-Vision stockholders were the result of arms-length
negotiations between the representatives of Discreet Logic and D-Vision. D-
Vision develops Microsoft Windows NT-based non-linear, digital editing
solutions.
On December 2, 1997, Discreet 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
"Lightscape Merger") with and into Lightscape with Lightscape as the surviving
corporation and a wholly-owned subsidiary of Discreet. As a result of the
Lightscape Merger, Discreet 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
Lightscape Merger 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 that had not yet reached technical
feasibility and had no alternative use for which Discreet incurred a one-time
charge
16
<PAGE>
against earnings in the amount of $5,800,000 ($0.20 per share), 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 and Lightscape.
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 $775,000 in restructuring reserves 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 June 30, 1998, the
closure was substantially complete and Discreet still has approximately
$50,000 in restructuring reserves primarily for the estimated cost of
professional fees associated with the winding down of this subsidiary. See
Note 19 of Notes to Discreet's Consolidated Financial Statements.
Change in Fiscal Year
On January 9, 1997, the Board of Directors approved the change of Discreet's
fiscal year end from July 31 to June 30. This change was effective beginning
with Discreet's second fiscal quarter of 1997. The consolidated financial
statements are presented for the year ended June 30, 1998, the eleven-month
period ended June 30, 1997 and the year ended July 31, 1996. Discreet 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 1996 fiscal year's results to reflect a June 30 fiscal year end.
Consequently, the results for the twelve-month period ended June 30, 1998 are
not directly comparable with those for the eleven-month period ended June 30,
1997, or the twelve-month period ended July 31, 1996.
Year 2000
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.
17
<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>
YEAR ELEVEN MONTHS YEAR
ENDED JULY 31, ENDED ENDED JUNE 30,
1996 JUNE 30, 1997 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Total revenues................. 100 % 100 % 100 %
Cost of revenues............... 59 47 41
--- --- ---
Gross profit............. 41 53 59
--- --- ---
Operating expenses:
Research and development... 20 10 10
Sales and marketing........ 31 23 23
General and
administrative............ 13 6 5
Gain on sale of
investment................ -- -- (2)
Costs related to terminated
transaction............... -- -- 1
Write-off of purchased
research and development.. 10 10 18
Restructuring expense...... 18 -- (1)
Litigation and related
settlement expense........ 3 6 0
--- --- ---
Total operating
expenses................ 95 55 54
--- --- ---
Operating income (loss).. (54) (2) 5
Other income (expense)......... 3 1 2
--- --- ---
Income (loss) before income
taxes......................... (51) (1) 7
Provision for income taxes..... 2 6 7
--- --- ---
Net loss................. (53)% (7)% (0)%
=== === ===
</TABLE>
TWELVE MONTHS ENDED JUNE 30, 1998 AND ELEVEN MONTHS ENDED JUNE 30, 1997
As discussed above, it is not practicable to recast prior quarterly results
to reflect new fiscal periodic reporting resulting from Discreet's previously
announced change in fiscal year end. Therefore, the results for the twelve-
month period ended June 30, 1998 are not directly comparable to the results of
the eleven-month period ended June 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. See Note 2(c) of Notes to Discreet's Consolidated Financial
Statements.
Total revenues were $151,558,000 and $101,924,000 for the twelve-month
period ended June 30, 1998, and the eleven-month period ended June 30, 1997,
respectively. The increase in total revenues is primarily due to:
(1) increased penetration of inferno*; (2) increased penetration of flame* due
in part to the introduction of flame* on the SGI Octane platform resulting in
a significantly reduced system cost to customers; (3) the introduction of
smoke*; (4) the introduction of the New Media Software products acquired
through the Denim, D-Vision, and Lightscape acquisitions; and (5) the
additional month in the fiscal 1998 period. These increases were partially
offset by a decrease in revenues from Discreet's Broadcast Production
products.
18
<PAGE>
Revenues from customers outside of North America were $80,691,000 (53% of
total revenues) and $58,171,000 (57% of total revenues) for the twelve-month
period ended June 30, 1998, and the eleven-month period ended June 30, 1997,
respectively. Revenues from customers outside North America increased due to
the increased penetration of Discreet's products in Discreet's European and
Asian markets as well as the additional month in the fiscal 1998 period.
Discreet 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, increase slightly from current levels.
Cost of Revenues. Cost of revenues consists primarily of the cost of
hardware sold (mainly workstations manufactured by 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 $62,033,000 (41% of total revenues) and $47,571,000 (47%
of total revenues) for the twelve-month period ended June 30, 1998, and the
eleven-month period ended June 30, 1997, respectively. The decrease in cost of
revenues, as a percentage of total revenues, was primarily due to: (1) an
increase in sales to Discreet's indirect channel partners, whose purchases
from Discreet are predominantly software only and software and storage media
bundles since these indirect channel partners are themselves hardware
resellers; (2) porting certain of Discreet's software products to recently
available, lower priced workstations, resulting in a lower cost to Discreet
for the hardware component of system sales; and (3) the increased penetration
of Discreet's products in the Asian market where customers typically purchase
from Discreet only software or software and storage media bundles. The
decrease in cost of revenues, as a percentage of total revenues, 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. Discreet 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 $14,847,000 (10% of total
revenues) and $9,708,000 (10% of total revenues) for the twelve-month period
ended June 30, 1998, and the eleven-month period ended June 30, 1997,
respectively. The increase in research and development expenses was primarily
due to: (1) an increase in the number of software engineers (including the
engineers joining Discreet as a result of the Denim, D-Vision and Lightscape
Acquisitions) to develop and enhance Discreet's existing and newly acquired
products and to develop new products, (2) an increase in depreciation charges
on the additional research and development equipment required for the
additional personnel, and (3) the additional month in the fiscal 1998 period.
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. Should revenues increase, Discreet expects that research and
development expenses, as a percentage of total revenues, should remain
approximately the same as 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, and dealer commissions. Sales and marketing expenses were
$34,321,000 (23% of total revenues) and $23,206,000 (23% of total revenues)
for the twelve-month period ended June 30, 1998, and the eleven-month period
ended June 30, 1997, respectively. The increase in sales and marketing
expenses, was primarily due to: (1) the continued expansion of Discreet's
direct and indirect sales organization, including the operating costs of
domestic sales offices and foreign subsidiaries, (2) an increase in tradeshow
activities, (3) the launch of a corporate branding initiative in the fourth
fiscal quarter of 1998, and (4) the additional month in the fiscal 1998
19
<PAGE>
period. Discreet expects that sales and marketing expenses will increase from
their current levels. Should revenues increase, Discreet expects that sales
and marketing expenses, as a percentage of total revenues, should remain
approximately the same as 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 $8,077,000 (5% of total revenues) and $6,396,000 (6% of total revenues)
for the twelve-month period ended June 30, 1998, and the eleven-month period
ended June 30, 1997, respectively. The increase in general and administrative
expenses is explained by an increase in personnel, as well as the additional
month in the fiscal 1998 period. Discreet expects that general and
administrative expenses will increase from their current levels. Should
revenues increase, Discreet expects that general and administrative expenses,
as a percentage of total revenues, should remain approximately the same as
current levels.
Gain on Sale of Investment. In the fourth fiscal quarter of 1998, Essential
Communications Corporation, a company in which Discreet held a minority
interest investment of preferred shares, was sold. As a result of this sale,
Discreet received proceeds of $2,500,000 in exchange for the preferred shares
held by it. Previously, in fiscal 1996, Discreet had taken a charge to
operations due to the uncertainty regarding the realizability of this
investment. Upon receipt of the proceeds, Discreet realized a gain of
$2,500,000.
Costs related to Terminated Transaction. In the fourth fiscal quarter of
1998, Discreet incurred $1,713,000 of costs related to the terminated
agreement to acquire MGI Software Corp.
Restructuring expense. In the fourth fiscal quarter of 1998, Discreet
reversed $2,333,000 of restructuring reserves. These reserves were considered
to no longer be necessary when the costs estimated to complete the
restructuring plan were reviewed. This reversal was offset by an additional
accrual of $829,000 to accrue the cost of closing Discreet's U.K. research and
development facility. The closure of this facility substantially was completed
by June 30, 1998. See Note 19 of Notes to Discreet's Consolidated Financial
Statements.
Charge for Purchased Research and Development. In connection with the
Lightscape acquisition, Discreet expensed $5,800,000, 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 December 31, 1997. 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. See Note 15 of Notes to Discreet's Consolidated Financial
Statements.
Litigation and Related Settlement Expenses. In the third fiscal quarter of
1998, Discreet reversed $405,000 of litigation and related settlement expenses
in order to adjust previously estimated legal costs to the actual amount of
costs incurred to settle the class action litigations. See Note 5 of Notes to
Discreet's Consolidated Financial Statements.
Other Income (Expense). Other Income (Expense) primarily consists of foreign
currency gains and losses and interest income and expense. Foreign currency
translation resulted in gains of $1,083,000 and losses of $188,000 for the
twelve-month period ended June 30, 1998, and the eleven-month period ended
June 30, 1997, respectively. These gains and losses 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.
Provision for Income Taxes. Discreet's provision for income taxes was
$10,854,000 and $6,489,000 for the twelve-month period ended June 30, 1998,
and the eleven-month period ended June 30, 1997, respectively. The provision
for all periods is based upon the Canadian federal statutory rate of 38% and
reflects the impact of
20
<PAGE>
various tax credits and foreign taxes. The effective tax rate for the twelve-
month period ended June 30, 1998 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. The effective tax rate for the eleven-month period
ended June 30, 1997 differed from the statutory rate primarily as a result of
Discreet not recording benefits related to losses, and charges for purchased
in-process research and development and the settlement of the class action
litigation, where the realization of the benefits were uncertain. Discreet has
foreign net operating loss carry forwards of approximately $13,841,000 which
may be available to reduce future income tax liabilities.
ELEVEN MONTHS ENDED JUNE 30, 1997 AND TWELVE MONTHS ENDED JULY 31, 1996
As discussed above, it is not practicable to recast prior quarterly results
to reflect new fiscal periodic reporting resulting from Discreet's previously
announced change in fiscal year end. Therefore, the results for the eleven-
month period ended June 30, 1997, are not directly comparable to the results
of the twelve-month period ended July 31, 1996.
Total Revenues. Total revenues were $101,924,000 and $83,997,000 for the
eleven-month period ended June 30, 1997 and the twelve-month period ended July
31, 1996, respectively. Despite the fact that fiscal 1997 was an eleven-month
period, total revenues increased in fiscal 1997 over total revenues for fiscal
1996 due to new product offerings during the year, namely FIRE and FLINT RT,
as well as wider acceptance of Discreet's premier resolution-independent
effects system, INFERNO, and a growing installed base. Revenues from FLAME
systems, including software and hardware, were $26,159,000 (26% of total
revenues) and $44,745,000 (53% of total revenues) for the eleven-month period
ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decline in FLAME revenues, both in amount and as a
percentage of total revenues, was primarily a result of an aggressive program
in the three months ended October 31, 1996 which included significant
discounting designed to reduce inventory on hand at the end of fiscal 1996,
and the wider acceptance of Discreet's premier resolution-independent effects
system, INFERNO, which began to ship commercially in October 1995. Revenues
from INFERNO systems, including software and hardware, were $16,161,000 (16%
of total revenues) and $8,887,000 (11% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decline in FLAME revenues was also offset by an increase in
FLINT revenues due to the initial commercial shipment of FLINT RT. Revenues
from FLINT (including FLINT RT) systems, including software and hardware, were
$17,263,000 (17% of total revenues) and $14,068,000 (17% of total revenues)
for the eleven-month period ended June 30, 1997 and the twelve-month period
ended July 31, 1996, respectively. Revenues from FIRE systems, including
software and hardware, were $26,482,000 (26% of total revenues) during the
eleven-month period ended June 30, 1997, the first period it was commercially
available. Revenues from VAPOUR and FROST systems, including software and
hardware, were $2,253,000 (2% of total revenues) and $4,784,000 (6% of total
revenues) for the eleven-month period ended June 30, 1997 and the twelve-month
period ended July 31, 1996, respectively. Due to the high average sales price,
the timing of purchase orders and the lengthy sales cycle of VAPOUR and FROST
systems, a limited number of sales of these systems could account for a
significant amount of revenues. The decline in VAPOUR and FROST revenues is
attributable to the fact that the 1996 revenues include the sale of several
large systems.
Software-only revenues were $7,495,000 (7% of total revenues) and $4,564,000
(5% of total revenues) for the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 31, 1996, respectively. Hardware-only revenues,
consisting primarily of the sale of disk arrays and other peripherals, were
$6,639,000 (7% of total revenues) and $4,938,000 (6% of total revenues) for
the eleven-month period ended June 30, 1997 and the twelve-month period ended
July 31, 1996, respectively. System revenues, which include software and
hardware, were $74,183,000 (73% of total revenues) and $63,183,000 (75% of
total revenues) for the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 31, 1996, respectively. The fluctuations in
software-only, hardware-only and system revenues are primarily due to the high
average sales price of Discreet's products, such that a limited number of
sales can account for a substantial portion of total
21
<PAGE>
revenues. The increase in software-only revenues as a percentage of total
revenues resulted from more revenues in fiscal 1997 being derived from
Discreet's indirect sales channel which primarily purchases only software from
Discreet.
Maintenance revenues were $9,728,000 (10% of total revenues) and $6,483,000
(8% of total revenues) for the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 31, 1996, respectively. Maintenance revenues
increased due to the increased installed base of Discreet's FLAME, INFERNO and
FLINT systems as well as the development of an installed base for Discreet's
FIRE systems. Other revenues were $3,878,000 (4% of total revenues) and
$4,829,000 (6% of total revenues) for the eleven-month period ended June 30,
1997 and the twelve-month period ended July 31, 1996, respectively. Other
revenues for all periods consisted primarily of rentals, systems integration,
and training services provided to customers. Other revenues decreased in the
eleven-month period ended June 30, 1997 as compared to the twelve-month period
ended July 31, 1996, due to the decrease in rentals of Discreet's FLAME
systems.
Revenues from customers outside of North America were $58,171,000 (57% of
total revenues) and $47,711,000 (57% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. Discreet is continuing to develop its direct and indirect
distribution channels in North America, Asia and Europe. Discreet expects that
revenues from customers outside of North America will continue to account for
a substantial portion of its revenues and, as a percentage of total revenues,
remain approximately the same.
Cost of Revenues. Cost of revenues was $47,571,000 (47% of total revenues)
and $49,333,000 (59% of total revenues) for the eleven-month period ended June
30, 1997 and the twelve-month period ended July 31, 1996, respectively. The
decrease in cost of revenues as a percentage of total revenues was a result of
the following factors: (1) Discreet's growing penetration into the Asian
market where customers typically purchase only software or software and
storage media bundles, (2) the SGI workstation component of cost of revenues
declined as Discreet's installed base purchased additional software and
storage media to add on to existing workstations, and (3) provisions to write
inventories down to their net realizable values were lower for the eleven-
month period ended June 30, 1997 as compared to the twelve-month period ended
July 31, 1996.
Research and Development. Expenditures for research and development, after
deducting Canadian federal and provincial tax credits, were $9,708,000 (10% of
total revenues) and $16,902,000 (20% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decrease in research and development expenses, after
deducting tax credits, was a result of the following factors: (1) the
provision, in the amount of $2,500,000, recorded during the quarter ended
April 30, 1996, to reflect the uncertainty regarding the realizability of
Discreet's investment in the preferred shares of Essential Communications
Corporation and (2) the implementation of Discreet's restructuring plan which
included the reduction of personnel, closure of certain research and
development offices, and consolidation of software research and development in
its Montreal headquarters during the fourth fiscal quarter of 1996 and the
eleven-month period ended June 30, 1997. See Note 19 to Notes to Discreet's
Consolidated Financial Statements. These decreases were partially offset by
general salary increases. 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. See Note 2(e) of Notes to Discreet's
consolidated financial statements. Certain research and development
expenditures are incurred substantially in advance of related revenue and in
some cases do not generate revenues.
Sales and Marketing. Sales and marketing expenses were $23,206,000 (23% of
total revenues) and $26,088,000 (31% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decrease in sales and marketing expenses resulted primarily
from the implementation of Discreet's restructuring plan, which included a
reduction of personnel and the closure of the Florida sales office and the
relocation of the New York demonstration center during the fourth fiscal
quarter of 1996. These decreases were partially offset by the continued
expansion of Discreet's direct and indirect sales organization, including the
operating costs of domestic sales offices and foreign subsidiaries.
22
<PAGE>
General and Administrative. General and administrative expenses were
$6,396,000 (6% of total revenues) and $10,582,000 (13% of total revenues) for
the eleven-month period ended June 30, 1997 and the twelve-month period ended
July 31, 1996, respectively. The decrease in general and administrative
expenses resulted primarily from the implementation of Discreet's
restructuring plan which included a reduction of administrative personnel as
well as the closure of administrative offices in Cambridge, Massachusetts.
Additionally, in fiscal 1996, Discreet provided approximately $3,300,000 in
reserves for potentially uncollectible accounts receivable and provided
$830,000 to reflect certain recourse provisions associated with third party
financing arrangements, and reduced the carrying value of a building purchased
in Montreal by CDN$500,000 (approximately $365,000) to reflect the value
expected to be realized upon sale.
Charge for Purchased Research and Development. In connection with the
acquisition of substantially all of the assets of Denim Software L.L.C.,
Discreet expensed $9,800,000 (10% of total revenues) of in-process research
and development, that had not yet reached technical feasibility and had no
alternative use, during the eleven-month period ended June 30, 1997. During
fiscal 1996, in connection with the COSS/IMP acquisition, Discreet expensed
$8,500,000 (10% of total revenues) of in-process research and development. See
Note 15 of Notes to Discreet's Consolidated Financial Statements.
Restructuring Expense. In the fourth quarter of fiscal 1996, Discreet
recorded a restructuring expense of $15,000,000 (18% of total fiscal 1996
revenues). The focus of Discreet's restructuring plan was to solidify its
senior management team, reduce operating expenses through workforce reductions
and office closings, consolidate software research and development activities
in Montreal, discontinue certain product lines, and restructure its sales
force to emphasize indirect sales channels. While 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, as of June 30, 1997, Discreet had $4,272,000 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. See Note 19 of Notes to Discreet's Consolidated
Financial Statements.
Litigation and Settlement. In August 1997, Discreet announced an agreement-
in-principle to settle all three of the class action shareholder lawsuits
outstanding against it for $10,800,000. In the fiscal year ended July 31,
1996, Discreet had provided a $2,506,000 (3% of total revenues) litigation
reserve for legal costs associated with defending the class action lawsuits.
During the eleven-month period ended June 30, 1997, Discreet recorded a
provision of $6,500,000 (6% of total revenues) to accrue the additional
estimated settlement costs to be borne by Discreet. See Note 5 of Notes to
Discreet's Consolidated Financial Statements.
Other Income (Expense). Foreign currency translation losses were $188,000
during the eleven-month period ended June 30, 1997 compared to gains of
$179,000 during the year ended July 31, 1996.
Provision for Income Taxes. Discreet's provision for income taxes was
approximately $6,489,000 and $1,435,000 for the eleven-month period ended June
30, 1997 and the twelve-month period ended July 31, 1996, respectively. The
provision for all periods was based on the Canadian federal statutory rate of
38% and reflects the impact of various tax credits and foreign taxes. The tax
provision for these periods resulted from taxable earnings in jurisdictions
where Discreet did not have available tax loss carryforwards partially offset
by the realization of the benefit for some prior year tax losses for which no
benefit was previously recorded. In both fiscal years, Discreet recorded
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. In addition, in fiscal 1997, Discreet recorded
a provision for estimated litigation settlement costs for which no tax benefit
was recorded because of the uncertainty of realizing any tax benefit
associated with this charge.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain quarterly financial data for each of
the eight most recent quarters in the period ended June 30, 1998, together
with such data as a percentage of total revenues. The quarterly information
presented is unaudited. In the opinion of management, the unaudited quarterly
information has been
23
<PAGE>
prepared on the same basis as the annual audited consolidated financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
periods presented. Operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
TWO
QUARTER MONTHS QUARTERS ENDED
ENDED ENDED ----------------------------------------------------------
OCT. DEC. DEC. MARCH JUNE
31, 31, MAR. 31, JUNE 30, SEPT. 31, 31, 30,
1996 1996 1997 1997 30, 1997 1997 1998 1998
------- ------- -------- -------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $23,263 $16,833 $27,044 $ 34,784 $ 38,405 $37,268 $35,712 $40,173
Cost of revenues........ 12,287 8,003 11,255 16,026 17,280 13,548 14,191 17,015
------- ------- ------- -------- -------- ------- ------- -------
Gross profit........ 10,976 8,830 15,789 18,758 21,125 23,720 21,521 23,158
------- ------- ------- -------- -------- ------- ------- -------
Operating expenses:
Research and
development.......... 2,678 1,575 2,746 2,709 3,512 3,901 4,032 3,402
Sales and marketing... 6,017 4,610 6,534 6,045 7,433 8,407 8,610 9,870
General and
administrative....... 1,516 1,189 1,842 1,849 1,884 2,012 2,137 2,044
Gain on sale of
investment........... -- -- -- -- -- -- -- (2,500)
Costs related to
terminated
transaction.......... -- -- -- -- -- -- -- 1,713
Write-off of purchased
research and
development.......... -- -- -- 9,800 21,000 5,800 -- --
Restructuring expense. -- -- -- -- -- -- -- (1,504)
Litigation and related
settlement expenses.. -- -- -- 6,500 -- -- (405) --
------- ------- ------- -------- -------- ------- ------- -------
Total operating
expenses........... 10,211 7,374 11,122 26,903 33,829 20,120 14,374 13,025
------- ------- ------- -------- -------- ------- ------- -------
Operating income
(loss)............. 765 1,456 4,667 (8,145) (12,704) 3,600 7,147 10,133
Total other income
(expense).............. (925) 1,819 46 51 377 287 (205) 1,608
------- ------- ------- -------- -------- ------- ------- -------
Income (loss) before
income taxes........... (160) 3,275 4,713 (8,094) (12,327) 3,887 6,942 11,741
Provision for income
taxes.................. 652 1,310 1,674 2,853 2,775 3,097 1,739 3,243
------- ------- ------- -------- -------- ------- ------- -------
Net income (loss)... $ (812) $ 1,965 $ 3,039 $(10,947) $(15,102) $ 790 $ 5,203 $ 8,498
======= ======= ======= ======== ======== ======= ======= =======
Total revenues.......... 100 % 100% 100% 100 % 100 % 100% 100 % 100 %
Cost of revenues........ 53 48 42 46 45 36 40 42
------- ------- ------- -------- -------- ------- ------- -------
Gross profit......... 47 52 58 54 55 64 60 58
------- ------- ------- -------- -------- ------- ------- -------
Operating expenses:
Research and
development.......... 12 9 10 8 9 10 11 9
Sales and marketing... 26 27 24 17 19 23 24 25
General and
administrative....... 6 7 7 5 5 5 6 5
Gain on sale of
investment........... -- -- -- -- -- -- -- (6)
Costs related to
terminated
transaction.......... -- -- -- -- -- -- -- 4
Write-off of purchased
research and
development.......... -- -- -- 28 55 16 -- --
Restructuring expense. -- -- -- -- -- -- -- (4)
Litigation and related
settlement expenses.. -- -- -- 19 -- -- (1) --
------- ------- ------- -------- -------- ------- ------- -------
Total operating
expenses............ 44 43 41 77 88 54 40 33
------- ------- ------- -------- -------- ------- ------- -------
Operating income
(loss).............. 3 9 17 (23) (33) 10 20 25
Total other income
(expense).............. (4) 11 -- -- 1 -- (1) 4
------- ------- ------- -------- -------- ------- ------- -------
Income (loss) before
income taxes........... (1) 20 17 (23) (32) 10 19 29
Provision for income
taxes.................. 3 8 6 8 7 8 5 8
------- ------- ------- -------- -------- ------- ------- -------
Net income (loss).... (4)% 12% 11% (31)% (39)% 2% 14 % 21 %
======= ======= ======= ======== ======== ======= ======= =======
</TABLE>
24
<PAGE>
Discreet 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 Discreet's quarterly revenue because of the high
average sales price of such systems and the timing of purchase orders.
Historically, Discreet has generally experienced greater revenues during the
period following the completion of the annual conference of the NAB, which is
typically held in April. Discreet's expense levels are based, in part, on its
expectations of future revenues. Therefore, if revenue levels are below
expectations, particularly following NAB, Discreet'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 Discreet's operating expenses are based on anticipated
revenue levels and a high percentage of Discreet'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 Discreet will be successful in
maintaining or improving its profitability or avoiding losses in any future
period. Discreet 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.
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, and the receipt of research and development tax credits
from the Canadian federal government and the Quebec government. As of June 30,
1998, Discreet had cash of approximately $43,746,000. During fiscal 1998,
Discreet amended its revolving demand line of credit with its bank. The new
agreement provides for a revolving demand line of credit under which it may
borrow up to Cdn$7,000,000 (approximately $4,773,000 at June 30, 1998).
Advances under the line accrue interest monthly at the Canadian prime rate
(6.50% at June 30, 1998) plus 0.25%. Additionally, the agreement provides for
a Cdn$600,000 (approximately $409,000 at June 30, 1998) demand leasing
facility, and a Cdn$600,000 (approximately $409,000 at June 30, 1998) demand
research and development tax credit facility. Advances under these facilities
accrue interest monthly at the Canadian prime rate (6.50% at June 30, 1998)
plus 1%. The line and facilities are secured by essentially all of Discreet's
North American assets. As additional security, Discreet assigned to the bank
its insurance on these assets. Discreet is required to maintain certain
financial ratios, including minimum levels of working capital, debt service
coverage and equity to assets ratios. As of June 30, 1998, there were no
amounts outstanding under the demand leasing and demand research and
development tax credit facilities, however, the amount available to Discreet
under the line of credit was reduced by the letter of guarantee discussed
below.
During the year, Discreet's Japanese subsidiary entered into 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 (approximately 2.1% at June 30, 1998) and are
secured by a letter of guarantee, in the amount of $3,000,000, issued by
Discreet in favour of the subsidiary's bank. As of June 30, 1998, the
subsidiary had borrowed (Yen)376,824,000 (approximately $2,725,000 at June 30,
1998).
Discreet's operating activities, including research and development tax
credits, provided cash of $17,107,000, $26,012,000 and used cash of
$24,425,000, in the fiscal year ended June 30, 1998, and in the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31, 1996,
respectively. The principal sources of cash in the twelve-month period ended
June 30, 1998 were cash generated from operations, the decreases in inventory
and in income taxes receivable, and the increase in income taxes payable,
offset by an increase in accounts receivable, decreases in accounts payable
and accrued expenses, deferred revenue, and customer deposits, and the
disbursement of funds used to settle the class action litigation. Accounts
receivable increased during fiscal 1998 as a result of Discreet experiencing a
level of revenues greater than in the fourth fiscal quarter of 1997 and the
timing of those revenues being close to the end of the year. Inventory
decreased
25
<PAGE>
during fiscal 1998, as a result of close monitoring of inventory throughout
the year and the migration of some of Discreet's products to hardware
platforms that cost less than previous generations. Accrued expenses decreased
due to the settlement of the class action litigation and the reduction of the
accrued restructuring reserve. (See Note 19 of Notes to Discreet's
Consolidated Financial Statements). The primary sources of cash in fiscal 1997
were cash generated from operations, reductions in inventory and income taxes
receivable, and increases in accounts payable, accrued expenses, deferred
revenue, income taxes payable, offset by uses of cash including the increase
in accounts receivable and the reduction of customer deposits. The primary
sources of cash in fiscal 1996 were the increases in accrued expenses,
deferred revenue and customer deposits, offset by decreases in cash including
the increases in accounts receivable, inventory, income taxes receivable and
other current assets and the reductions of accounts payable and income taxes
payable.
Discreet's investing activities used cash of $16,526,000, $17,867,000 and
$24,223,000 in the twelve-month period ended June 30, 1998, the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31, 1996,
respectively. The principal uses of cash in fiscal 1998 were the acquisition
of D-Vision and the purchase of computer equipment and software, general
office equipment, leasehold improvements and furniture and fixtures used in
the operation of Discreet's business, offset by the receipt of the proceeds of
sale of the Montreal building and the investment in Essential Communications
Corporation. The principal uses of cash in fiscal 1997 were the acquisition of
Denim, and the purchase of computer equipment and software, general office
equipment, leasehold improvements and furniture and fixtures used in the
operation of Discreet's business. In fiscal 1996, the principal uses of cash
were the acquisition of COSS/IMP, the purchase of the preferred shares of
Essential Communications Corporation, the purchase of land and an office
building in London, England, the purchase of land and an office building in
Montreal, Quebec, and the purchase of computer equipment and software, general
office equipment, leasehold improvements, and furniture and fixtures used in
the operation of Discreet's business.
Financing activities provided cash of $15,188,000, $1,479,000 and
$30,310,000 during the fiscal year ended June 30, 1998, the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31, 1996,
respectively. In all three periods, cash was provided from common stock option
exercises and the issuance of shares under the 1995 Employee Stock Purchase
Plan. In fiscal 1998, Discreet issued 645,000 Discreet Common Shares under a
private placement sale to Intel Corporation for proceeds of approximately
$13,527,000, net of issuance costs. In fiscal 1996, cash was provided
primarily from proceeds from the issuance of approximately 971,000 common
shares in a secondary public offering which was completed in December 1995,
proceeds from the repayment of subscriptions receivable, and proceeds from
common stock option exercises less payment of capital lease obligations.
Discreet incurred $9,502,000, $6,265,000 and $15,871,000 of capital
expenditures during the fiscal year ended June 30, 1998, the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31, 1996,
respectively, consisting primarily of computer equipment, software and general
office equipment and leasehold improvements. In the fiscal year ended July 31,
1996, Discreet purchased an office building and related land in London,
England. Discreet incurred (Pounds)1,034,000 (or approximately $1,663,000),
and (Pounds)715,000 (or approximately $1,114,000) in capital expenditures
during the fiscal years ended June 30, 1997 and July 31, 1996, respectively,
for the refitting of the London property. In fiscal 1996, Discreet also
purchased an office building in Montreal, Quebec. The carrying values of the
Montreal building and the London building were written down to their estimated
fair market values and the buildings were classified as assets held for sale
in fiscal 1996. In September 1997, Discreet sold the Montreal office building
for proceeds of $818,000.
As of June 30, 1998, Discreet did not have any material commitments for
capital expenditures.
During the year, Discreet concluded a financing arrangement in relation to
the Lightscape Acquisition with the Societe de Developpement Industriel du
Quebec, an agency of the Quebec provincial government. This agreement provides
for an interest free (until July 2004) loan in the amount of Cdn $2,800,000
(approximately $1,909,000 at June 30, 1998). The funds were received in July
1998 and are repayable in four annual installments of Cdn $600,000
(approximately $409,000 at June 30, 1998) commencing in July 2004, and a final
installment of Cdn $400,000 (approximately $273,000 at June 30, 1998) in July
2008. The loan is subject to standard covenants for these arrangements,
including covenants that may require early repayment of the loan.
26
<PAGE>
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. At June 30, 1998, Discreet could not
distribute any dividends.
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-K 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 SEC. In
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, statements concerning
anticipated expense levels and such expenses as a percentage of revenues,
statements about the portion of revenues from customers outside North America
and statements regarding the adequacy of cash to meet cash operations and
capital expenditures), as well as statements contained in "Business--
Background," "--Marketing and Sales," "--Research and Development," "--
Proprietary Rights," "--Manufacturing and Suppliers," "--Competition," "--
Employees" and "--Legal Proceedings" 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, the
factors discussed immediately above and below under the heading "--Certain
Factors That May Affect Future Results," and elsewhere in this Form 10-K, as
well as from time to time in Discreet's other filings with the SEC.
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 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'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
27
<PAGE>
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 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.
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The Company's Financial Statements and Schedules, together with the
auditors' reports thereon, appear at pages F-1 through F-28 and S-1 through S-
2, respectively, of this Form 10-K.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
OCCUPATIONS OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the directors and the executive officers of
Discreet, their ages, and the positions currently held by each such person
with Discreet. Discreet Common Shares beneficially owned by each director,
directly or indirectly, as of August 31, 1998, appears under the heading
"Security Ownership of Certain Beneficial Owners and Management."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Richard J. Szalwinski(1)......... 47 President, Chief Executive Officer,
Chairman of the Board of Directors
and Director
Francois Plamondon............... 40 Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
Winston Rodrigues................ 56 Senior Vice President, Advanced
Systems and Operations
Gary G. Tregaskis................ 39 Director
Thomas Cantwell(1)(2)............ 71 Director
Brian P. Drummond(1)(2).......... 67 Director
Perry M. Simon(1)................ 43 Director
Pierre Desjardins(2)............. 56 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
RICHARD J. SZALWINSKI, a founder of Discreet, has served as a Director since
May 1992 and as Chairman of the Board of Directors since March 1994. Mr.
Szalwinski served as acting President and Chief Executive Officer from
February 1996 and assumed that position officially in July 1996. From May 1992
to November 1994 Mr. Szalwinski served as Chief Executive Officer of Discreet
and served as President of Discreet from May 1992 to March 1994. Prior to
founding Discreet, he held several positions at Softimage Inc. from June 1988
to December 1991, most recently as a Director and Vice President of Sales. Mr.
Szalwinski also serves as the Chairman of the Board of Directors of Behaviour
Communications Inc., a public company.
FRANCOIS PLAMONDON joined Discreet in July 1996 and, since August 1996,
served as Executive Vice President, Senior Vice President, Chief Financial
Officer, Treasurer and Secretary of Discreet. Prior to joining Discreet, Mr.
Plamondon was a partner at Ernst & Young, Chartered Accountants, from December
1990 to July 1996.
WINSTON RODRIGUES joined Discreet in October 1997 and currently serves as
Senior Vice President, Advanced Systems and Operations. Prior to joining
Discreet, Mr. Rodrigues was Vice President, Operations at Memotec
Communications Inc., a communications and networking company, from 1995 to
1997. From 1994 to 1995, Mr. Rodrigues was a Vice-President at Circo Craft Co.
Inc., a manufacturer of printed circuit boards; prior to that, he occupied
various positions at IBM Canada Ltd., most recently as a product manager.
GARY G. TREGASKIS has served as a Director of Discreet since July 1992. Mr.
Tregaskis has been an independent consultant to Discreet since December 1995.
Prior to that, Mr. Tregaskis served as Director of Advanced Products of
Discreet from February 1994 to December 1995. He has also served as Director
of Advanced Systems Division of Discreet from July 1992 to February 1994. Mr.
Tregaskis was the principal designer and architect of flame*. Prior to joining
Discreet, Mr. Tregaskis served as the Director of Research and
29
<PAGE>
Development at D.A. Technology, an Australian software development
corporation, from 1985 to June 1992. Mr. Tregaskis also serves as a Director
of Behaviour Communications Inc., a public company.
THOMAS CANTWELL has served as a Director of Discreet since September 1992.
Dr. Cantwell has been an investor and venture capitalist since 1987. He has
served as President of Technical Computer Graphics, a computer distributor and
software development corporation, since November 1987. Dr. Cantwell also
serves as a Director of Supreme Industries, Inc., a public company and as
Chairman of the Board of Directors of Paradigm Entertainment Inc., a privately
held developer of computer and video games.
BRIAN P. DRUMMOND has served as a Director of Discreet since January 1996.
Mr. Drummond has served as President of Brican Investments Ltd., a private
holding company, since March 1979. Mr. Drummond was Vice Chairman and Director
of Richardson Greenshields of Canada Limited, an investment dealer, from 1982
to June 1997. Mr. Drummond also serves as a Director of Atco Ltd. and Canadian
Utilities Limited, both public companies.
PERRY M. SIMON has served as a Director of Discreet since January 1996. Mr.
Simon has been President, of Viacom Television for Viacom Entertainment,
Viacom, Inc., a television and film developer and producer, since September
1993. Prior to that, Mr. Simon held several positions with NBC Entertainment,
from 1985 to 1993, most recently as Executive Vice President-Prime-time
Programs.
PIERRE DESJARDINS has served as a Director of Discreet since January 1997.
Mr. Desjardins has been Chairman, President and Chief Executive Officer of
Total Containment, a manufacturer and distributor of underground systems and
products for the conveyance and containment of fuels, since September 1996.
Prior to that, Mr. Desjardins was President and Chief Executive Officer of
Domtar Inc., a producer of paper, pulp and forest products, from September
1990 to October 1994. Mr. Desjardins also served as President of Labatt
Breweries of Canada from 1988 to September 1990. Mr. Desjardins also serves as
a Director of Canam Manac Group Inc., a public company and Uniselect, Inc., a
public company.
Discreet's executive officers are elected by the Board of Directors on an
annual basis and serve until their successors have been duly elected and
qualified or until their earlier resignation or removal.
Information concerning the directors of the Registrant is hereby
incorporated by reference from the information contained under the heading
"Election of Directors" in the Registrant's definitive proxy statement of the
Registrant's 1998 Annual Meeting of Stockholders.
30
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION AND OTHER INFORMATION CONCERNING DIRECTORS AND OFFICERS
Executive Compensation Summary
The following table sets forth summary information concerning the
compensation paid or earned for services rendered to Discreet in all
capacities during the fiscal years ended July 31, 1996, June 30, 1997 and June
30, 1998 to (i) Discreet's current Chief Executive Officer; and (ii) each of
the four most highly compensated executive officers of Discreet (other than
the Chief Executive Officer) who earned more than $100,000 in salary and bonus
in fiscal year 1998 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION(1)
------------------------- OPTION
NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS AWARDS (#)
- ------------------------------ ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Richard J. Szalwinski................... 1998 $264,562 $ 81,355 75,000
President, Chief Executive Officer, 1997 $192,724 $172,500 450,000
Chairman of the Board of Directors and
Director 1996 $154,557 -- --
Francois Plamondon...................... 1998 $176,875 $ 60,138 50,000
Executive Vice President, 1997 $133,833 $ 50,920 --
Chief Financial Officer, Secretary and
Treasurer 1996 -- -- 300,000
Winston Rodrigues(2).................... 1998 $ 84,923 $ 30,643 65,000
Senior Vice President, Advanced Systems
and Operations 1997 -- -- --
1996 -- -- --
Terrence Higgins(3)..................... 1998 $123,813 -- 40,000
Former Senior Vice President, Products 1997 $ 93,683 $ 25,550 --
1996 $121,549 -- 40,000
Graham Sharp............................ 1998 $176,881(4) -- --
Former Senior Vice President, 1997 $183,337(5) $ 25,000 300,000
Sales and Marketing 1996 $ 98,572(6) -- 10,000
</TABLE>
- --------
(1) 1997 amounts represent salary and bonus actually paid or earned during the
eleven month period ended June 30, 1997.
(2) Mr. Rodrigues joined Discreet in October 1997. This amount includes his
salary for the nine months of fiscal 1998 during which he was employed by
Discreet.
(3) Mr. Higgins' employment with Discreet was terminated on July 2, 1998.
(4) This amount includes $60,000 of sales commissions earned by Mr. Sharp
during fiscal 1998. Mr. Sharp's employment with Discreet was terminated on
July 2, 1998.
(5) This amount includes $68,750 of sales commissions earned by Mr. Sharp
during fiscal 1997.
(6) Mr. Sharp joined Discreet in January 1996. This amount includes his salary
as well as $57,948 of sales commissions paid to Mr. Sharp for the seven
months of fiscal 1996 during which he was employed by Discreet.
31
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 1998 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------
POTENTIAL
REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION -------------------
NAME GRANTED (#) YEAR (1) ($/SHARE) DATE 5% ($) 10% ($)
- ---- ----------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard J. Szalwinski... 75,000 8.32% $15.75 11/20/07 $742,881 $1,882,608
Terrence Higgins(2)..... 40,000 4.44% $24.25 08/11/07 $610,027 $1,545,930
Francois Plamondon(3)... 50,000 5.54% $24.25 08/11/07 $762,534 $1,932,413
Graham Sharp............ -- -- -- -- -- --
Winston Rodrigues(4).... 45,000 4.99% $21.00 10/30/07 $594,305 $1,506,086
20,000 2.22% $22.63 03/02/08 $284,575 $ 721,168
</TABLE>
- --------
(1) Percentages are based upon a total of 901,771 options granted to employees
in the fiscal year ended June 30, 1998.
(2) On July 2, 1998, Mr. Higgins' employment with Discreet was terminated and,
as a result, on that same day, the option to purchase 40,000 Discreet
Common Shares which was granted on August 11, 1997 was cancelled.
(3) On August 5, 1998, Mr. Plamondon was granted an option to purchase 60,000
Discreet Common Shares, at an exercise price per share of $11.00.
(4) On August 5, 1998, Mr. Rodrigues was granted an option to purchase 60,000
Discreet Common Shares, at an exercise price per share of $11.00.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth, for each of the Named Executive Officers,
information with respect to the exercise of stock options during the year
ended June 30, 1998 and the year-end value of unexercised options:
<TABLE>
<CAPTION>
SHARES VALUE OF UNEXERCISED IN-
ACQUIRED ON NUMBER OF UNEXERCISED THE-MONEY OPTIONS AT YEAR-
EXERCISE VALUE OPTIONS AT YEAR-END END(2)
NAME (#) REALIZED ($)(1) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- ---- ----------- --------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Richard J. Szalwinski... -- -- 0/525,000 --/$2,517,165
Terrence Higgins(3)..... -- -- 40,508/ 40,000 $389,285/--
Francois Plamondon...... -- -- 0/350,000 --/$1,837,500
Graham Sharp(4)......... -- -- 5,625/304,375 --/$2,137,500
Winston Rodrigues....... -- -- 0/ 65,000 --/--
</TABLE>
- --------
(1) Amounts disclosed in this column are calculated based on the difference
between the fair market value of Discreet Common Shares on the date of
exercise and the exercise price of the options in accordance with
regulations promulgated under the Securities Exchange Act, and do not
reflect amounts actually received by the Named Executive Officers.
(2) Value is based on the difference between the option exercise price and the
fair market value at June 30, 1998, the fiscal year-end ($11.625 per
share), multiplied by the number of shares underlying the option.
(3) Represents shares and amounts as of June 30, 1998. Mr. Higgins' employment
with Discreet was terminated on July 2, 1998 and, as a result, on that
same day, Mr. Higgins' option to purchase 40,000 Discreet Common Shares
was cancelled. On August 14, 1998, Mr. Higgins exercised options to
purchase 8,008 Discreet Common Shares at an exercise price of $0.0463
pursuant to an option granted on June 14, 1994 and 32,500
32
<PAGE>
Discreet Common Shares at an exercise price of $2.50 pursuant to an option
granted on January 10, 1995. As of September 24, 1998, the number of
unexercised options held by Mr. Higgins and the value of such options were
0 and $0.00 respectively.
(4) Represents shares and amounts as of June 30, 1998. Mr. Sharp's employment
with Discreet was terminated on July 2, 1998 and as a result, on that day
options to purchase an additional 150,000 Discreet Common Shares became
vested. On September 15, 1998, Mr. Sharp exercised options to purchase
30,000 Discreet Common Shares at an exercise price of $4.50 per share
pursuant to an option granted on August 12, 1996. On September 16, 1998,
Mr. Sharp exercised options to purchase 20,000 Discreet Common Shares at
an exercise price of $4.50 per share pursuant to an option granted on
August 12, 1996. On September 23, 1998, Mr. Sharp exercised options to
purchase 70,000 Discreet Common Shares at an exercise price of $4.50 per
share pursuant to an option granted on August 12, 1996. As of September
24, 1998, the number of unexercised options held by Mr. Sharp and the
value of such options were 36,250 and $255,000 respectively. Mr. Sharp's
remaining vested options to purchase 36,250 Discreet Common Shares will
expire if not exercised by September 30, 1998.
EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS
In addition to the employment arrangements described below, Richard J.
Szalwinski and Francois Plamondon have each entered into agreements with
Autodesk pursuant to which such individuals reconfirmed their current
employment arrangements with Discreet and agreed, subject to consummation of
the proposed merger transaction with Autodesk, to a minimum one year term of
Employment with the combined company resulting from such transaction (the
"Combined Company") following the consummation of such transaction and, in the
event their employment relationship with the Combined Company is terminated,
to refrain from competing with the Combined Company and from soliciting
customers and employees of the Combined Company for a specified period after
such termination.
In August 1997, Discreet entered into an agreement with Richard J.
Szalwinski, whereby Mr. Szalwinski agreed to serve as President and Chief
Executive Officer of Discreet. Mr. Szalwinski previously had no employment
agreement with Discreet. Pursuant to such agreement, Mr. Szalwinski's annual
base salary was increased from $200,000 to $230,000, effective March 1, 1997.
In addition, pursuant to such agreement, Mr. Szalwinski is eligible to receive
an annual bonus of up to 75% of his base annual salary, based on Discreet
meeting the consolidated budgets and forecasts approved by the Board of
Directors. In the event that Discreet does not meet such consolidated budgets
and forecasts, the Board of Directors may, at its sole discretion, approve the
payment of a bonus of up to 75% of his base annual salary to Mr. Szalwinski if
the Board of Directors determines that Mr. Szalwinski's performance of his
duties was outstanding and that Discreet's failure to meet such consolidated
budgets and forecasts was not attributable to factors within Mr. Szalwinski's
control. In August 1997, the Board of Directors increased Mr. Szalwinski's
annual base salary to $255,500, effective July 1, 1997. The agreement provides
that Mr. Szalwinski's employment with Discreet may be terminated by Mr.
Szalwinski upon three months written notice to Discreet, in which case
Discreet must pay to Mr. Szalwinski his salary and benefits for the remaining
time period specified in his notice of termination. The agreement further
provides that Discreet may terminate the agreement at any time with or without
cause, upon written notice. In the event Mr. Szalwinski's employment is
terminated by Discreet, without cause, Discreet must pay Mr. Szalwinski a lump
sum amount equal to twenty-four months base annual salary at the time of such
termination. In addition, Mr. Szalwinski was granted an incentive stock option
to purchase 450,000 Discreet Common Shares under the Discreet's Amended and
Restated 1994 Restricted Share and Option Plan (the "1994 Plan") at an
exercise price of $6.03 per share. In the event that Mr. Szalwinski's
employment is terminated without cause, then all options to purchase shares of
Discreet which would have next vested, shall immediately vest upon such
termination. The agreement further provides that in the event of a
Reorganization, as defined in the 1994 Plan, then (i) the option to purchase
the 450,000 Discreet Common Shares granted to Mr. Szalwinski will become
immediately vested or (ii) if the Board of Directors elects, in accordance
with the 1994 Plan, not to accelerate the vesting of the options granted
pursuant to the 1994 Plan, Mr. Szalwinski will receive in substitution for all
of his outstanding options to purchase Discreet Common Shares, whether vested
or not, such securities (excluding options) of Discreet or
33
<PAGE>
of any merged, consolidated or otherwise reorganized corporation or, only in
the event of a merger of Discreet with one of its subsidiaries, options of the
merged company, all of which securities or options shall be of equivalent
value and liquidity.
In June 1996, Discreet entered into an agreement with Francois Plamondon,
whereby Mr. Plamondon became Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of Discreet, effective August 1, 1996. Pursuant to
such agreement, Mr. Plamondon received an annual base salary of Cdn$200,000,
and is eligible to receive an annual bonus of up to Cdn$70,000, based on
Discreet meeting the consolidated budgets and forecasts approved by the Board
of Directors. In the event that Discreet does not meet such consolidated
budgets and forecasts, the Board of Directors may, at its sole discretion,
approve the payment of a bonus of up to Cdn$70,000 to Mr. Plamondon if the
Board of Directors determines that Mr. Plamondon's performance of his duties
was outstanding and that Discreet's failure to meet such consolidated budgets
and forecasts was not attributable to factors within Mr. Plamondon's control.
In August 1997, the Board of Directors increased Mr. Plamondon's annual base
salary from $136,360 (Cdn$200,000 converted as of June 30, 1998) to $170,450
(Cdn$250,000 converted as of June 30, 1998) effective July 1, 1997 and
increased his eligible annual bonus from Cdn$70,000 to 50% of his annual base
salary. The agreement provides that Mr. Plamondon's employment with Discreet
may be terminated by Mr. Plamondon upon three months written notice to
Discreet, in which case Discreet must pay to Mr. Plamondon his salary and
benefits for the remaining time period specified in his notice of termination.
The agreement further provides that Discreet may terminate the agreement at
any time with or without cause, upon written notice. In the event
Mr. Plamondon's employment is terminated by Discreet, without cause, Discreet
must pay Mr. Plamondon a lump sum amount equal to twelve months base annual
salary at the time of such termination. In addition, Mr. Plamondon was granted
an incentive stock option to purchase 300,000 Discreet Common Shares under the
1994 Plan at an exercise price of $5.50 per share (the "Initial Grant"). In
the event that Mr. Plamondon's employment is terminated without cause after
August 1, 1997, then all options to purchase Discreet Common Shares granted
which would have next vested following the effective date of such termination,
will next become immediately vested upon such termination. The agreement
further provides that in the event of a Reorganization, as defined in the 1994
Plan, then (i) all options to purchase Discreet Common Shares granted under
the Initial Grant will become immediately vested or (ii) if the Discreet Board
elects, in accordance with the 1994 Plan, not to accelerate the vesting of the
options granted pursuant to the 1994 Plan, Mr. Plamondon will receive in
substitution for all of his outstanding options to purchase Discreet Common
Shares, whether vested or not, such securities (excluding options) of Discreet
or of any merged, consolidated or otherwise reorganized corporation or, only
in the event of a merger of Discreet with one of its subsidiaries, options of
the merged company, all of which securities or options shall be of equivalent
value and liquidity.
In November 1996, Discreet entered into an agreement with Graham Sharp
related to Mr. Sharp's employment as Discreet's Senior Vice President-Sales &
Marketing, effective July 23, 1996. Pursuant to such agreement, Mr. Sharp
received an annual base salary of $125,000, and was eligible to receive sales
commissions of up to $75,000, based on Discreet meeting the sales and margin
contribution targets approved by the Board of Directors, and, in the event
Discreet exceeds such targets, an annual bonus of $25,000. The Discreet Board
could also, at its sole discretion, approve the payment of an additional bonus
to Mr. Sharp if Discreet exceeded the sales and margin contribution targets.
In addition, in the event Discreet did not meet such sales targets, the Board
of Directors could, at its sole discretion, approve the payment of a bonus to
Mr. Sharp if the Board of Directors determined that Mr. Sharp's performance of
his duties was outstanding and Discreet's failure to meet such targets was not
attributable to factors within Mr. Sharp's control. In August 1997, the Board
of Directors increased Mr. Sharp's annual base salary from $125,000 to
$150,000, effective July 1, 1997 and increased his eligible annual bonus from
$25,000 to up to 50% of his annual base salary. Under this agreement, Mr.
Sharp's eligibility to receive sales commissions remained unchanged. The
agreement provided that Mr. Sharp's employment with Discreet could be
terminated by Mr. Sharp upon three months written notice to Discreet, in which
case Discreet must pay to Mr. Sharp his salary and benefits for the remaining
time period specified in his notice of termination. The agreement further
provided that Discreet could terminate the agreement at any time, with or
without cause, upon written notice. In the event Mr. Sharp's employment was
terminated by Discreet, without cause, Discreet
34
<PAGE>
must pay Mr. Sharp a lump sum amount equal to twelve months of his base annual
salary at the time of such termination. In addition, Mr. Sharp was granted an
incentive stock option to purchase 300,000 Discreet Common Shares under the
Plan at an exercise price of $4.50 per share. In the event that Mr. Sharp's
employment was terminated without cause after July 23, 1997, then all options
to purchase shares of Discreet which would have next vested, immediately
vested upon such termination. The agreement provided that in the event of a
Reorganization, as defined in the 1994 Plan, then (i) the option to purchase
the 300,000 Discreet Common Shares granted to Mr. Sharp would become
immediately vested or (ii) if the Board of Directors elected, in accordance
with the 1994 Plan, not to accelerate the vesting of the options granted
pursuant to the 1994 Plan, Mr. Sharp would receive in substitution for all of
his outstanding options to purchase Discreet Common Shares, whether vested or
not, such securities (excluding options) of Discreet or, only in the event of
a merger of Discreet with one of its subsidiaries, options of the merged
company, all of which securities or options would be of equivalent value and
liquidity. Also, Discreet agreed to reimburse Mr. Sharp's documented out-of-
pocket expenses incurred in connection with his relocation from Montreal. On
July 2, 1998, Mr. Sharp's employment with Discreet was terminated. Pursuant to
the terms of Mr. Sharp's employment agreement, Discreet paid a lump sum amount
equal to twelve months of his base annual salary ($150,000) and agreed to
reimburse Mr. Sharp for his documented out-of-pocket expenses up to $20,000,
incurred in connection with his relocation from Montreal. Such payment was
made on July 24, 1998. Additionally, all options to purchase Discreet Common
Shares, which would have next vested, became immediately vested. Of those
vested options to purchase Discreet Common Shares which totalled 156,250, Mr.
Sharp exercised options to purchase 50,000 Discreet Common Shares in September
of 1998. The remaining options to purchase 106,250 Discreet Common Shares must
be exercised by September 30, 1998 or they will expire.
On July 17, 1998, Discreet entered into a severance agreement with Terrence
Higgins in connection with his termination as an executive officer of
Discreet. Pursuant to such agreement, Discreet agreed to pay Mr. Higgins
severance in the amount of $68,180 (Cdn$100,000 converted as of June 30, 1998)
plus an additional $341 (Cdn$500 converted as of June 30, 1998) as a
reimbursement of related legal expenses. Discreet also agreed to provide Mr.
Higgins with outplacement counselling for six months. In addition, pursuant to
the terms of the 1994 Plan, Mr. Higgins had 90 days from July 2, 1998 to
exercise his vested options to purchase Discreet Common Shares. On August 14,
1998, Mr. Higgins exercised options to purchase 40,508 Discreet Common Shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has established a Compensation Committee consisting
of Messrs. Szalwinski, Cantwell, Drummond and Simon. During this period, Mr.
Szalwinski, Discreet's Chairman and Chief Executive Officer, participated in
deliberations of Discreet's Compensation Committee concerning the compensation
of executive officers other than his own. No executive officer of Discreet
served as a member of the compensation committee of another entity (or other
committee of the Board of Directors performing equivalent functions or, in the
absence of any such committee, the entire Board of Directors), one of whose
executive officers served as a director of Discreet.
COMPENSATION OF DIRECTORS
Employee directors of Discreet do not receive cash compensation for their
service as members of the Board of Directors. Non-Employee Directors (as
defined below) receive an annual fee of $10,000 for services on the Board of
Directors and an additional $2,500 for services on each committee of the Board
of Directors. Non-Employee Directors also receive reimbursement of their
expenses for each Board of Directors or committee meeting attended. Discreet
may from time to time, and at the discretion of the Board of Directors (or the
Compensation Committee), grant stock options to directors in addition to the
options specified in the 1995 Non-Employee Director Stock Option Plan.
35
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF DISCREET
The following table sets forth as of August 31, 1998, with respect to
beneficial ownership of Discreet Common Shares by: (i) the name of each person
who, to the knowledge of Discreet beneficially owned more than 5% of the
Discreet Common Shares outstanding as of such date; (ii) the name of each
director of Discreet; (iii) each Named Executive Officer and (iv) all
directors and executive officers of Discreet as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNER OF OWNERSHIP(1) OF CLASS
------------------------ ----------------- --------
<S> <C> <C>
Richard J. Szalwinski............................ 5,631,896(2) 18.68%
Terrence Higgins................................. 140,427(3) *
Thomas Cantwell.................................. 3,057,467 10.29%
Gary G. Tregaskis................................ 3,123,700(4) 10.52%
Brian P. Drummond................................ 26,666(5) *
Perry M. Simon................................... 26,666(6) *
Francois Plamondon............................... 312,500(7) 1.04%
Graham Sharp..................................... 156,250(8) *
Pierre Desjardins................................ 24,332(9) *
Winston Rodrigues................................ -- *
Putnam Investments Management, Inc............... 1,548,877(10) 5.22%
Pilgrim Baxter & Associates...................... 2,159,500(11) 7.27%
All current executive officers and directors as a
group (8 persons)............................... 12,203,227(12) 39.97%
</TABLE>
- --------
* Less than 1%
(1) Applicable percentage of ownership as of August 31, 1998, is based upon
29,697,358 Discreet Common Shares outstanding. Beneficial ownership is
determined in accordance with the rules of the SEC, and includes voting
and investment power with respect to shares. Discreet Common Shares
subject to options currently exercisable or exercisable within 60 days of
August 31, 1998, are deemed outstanding for computing the percentage
ownership of the person holding such options, but are not deemed
outstanding for computing the percentage of any other person.
(2) Includes 450,000 Discreet Common Shares issuable upon the exercise of
options, which options are exercisable upon the change of control of
Discreet effected by the proposed merger transaction with Autodesk and
5,181,896 shares held of record by BHVR Communications Inc., a holding
corporation controlled by Mr. Szalwinski.
(3) Mr. Higgins' employment with Discreet was terminated on July 2, 1998.
(4) Includes 723,700 Discreet Common Shares held of record by Nearco Trustee
Company (Jersey) Limited re: Gary Tregaskis Settlement, a trust
established for the benefit of Mr. Tregaskis.
(5) Consists of Discreet Common Shares issuable upon the exercise of options,
which options are exercisable within 60 days of August 31, 1998.
(6) Consists of Discreet Common Shares issuable upon the exercise of options,
which options are exercisable within 60 days of August 31, 1998.
(7) Consists of a total of (i) 162,500 Discreet Common Shares issuable upon
the exercise of options, which options are exercisable within 60 days of
August 31, 1998, and (ii) 150,000 Discreet Common Shares issuable upon
the exercise of options, which options are exercisable upon the change of
control of Discreet effected by the proposed merger transaction with
Autodesk.
(8) Consists of Discreet Common Shares issuable upon the exercise of options,
which options are exercisable within 60 days of August 31, 1998. Mr.
Sharp's employment with Discreet was terminated on July 2, 1998.
If such options are not exercised by September 30, 1998, they will expire.
36
<PAGE>
"--Compensation and Other Information Concerning Discreet Directors and
Officers--Employment Agreements and Severance Arrangements."
(9) Includes 13,332 Discreet Common Shares issuable upon the exercise of
options, which options are exercisable within 60 days of August 31, 1998
and 11,000 Discreet Common Shares beneficially owned by Mr. Desjardins.
(10) Such information is based on a Form 13G dated January 16, 1998 and filed
with the SEC. Putnam Investment Management, Inc.'s address is: One Post
Office Square, Boston, Massachusetts.
(11) Such information is based on a Form 13G/A dated February 12, 1998 and
filed with the SEC. Pilgrim Baxter & Associates' address is: 825
Duportail Road, Wayne, Pennsylvania, 19087.
(12) Includes 679,164 Discreet Common Shares issuable upon the exercise of
options, which options are exercisable within 60 days of August 31, 1998
or upon the change in control of Discreet effected by the Transactions.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1996, Richard Szalwinski, Discreet's President and Chief
Executive Officer extended three loans to Smoke and Mirrors Productions
Limited ("Smoke and Mirrors") in an aggregate amount of (Pounds)1,077,975 (or
approximately $1,678,650 at July 31, 1996). As of June 1997, the loans had
been repaid by Smoke and Mirrors. Each loan was negotiated at arm's length and
bore interest at the Canadian prime borrowing rate as quoted by the Canadian
Imperial Bank of Commerce. Discreet recorded revenue of $2,304,000 during
fiscal 1996 from Smoke and Mirrors. Discreet had a trade account receivable of
$836,000 from Smoke and Mirrors at July 31, 1996, which amount was
subsequently collected in full by Discreet in fiscal 1997.
During fiscal 1996, fiscal 1997 and fiscal 1998, Discreet paid Gary
Tregaskis, a director of Discreet, (Pounds)27,916 (approximately $45,000),
(Pounds)0, and (Pounds)75,000 (approximately $122,000), respectively for
services rendered to Discreet.
Thomas Cantwell, a director of Discreet, is a majority shareholder of
Radium, Inc. ("Radium"). The Corporation recorded revenue of $1,138,000 during
fiscal year 1996 from Radium. At July 31, 1996, the full amount of the sale
had been collected.
BHVR Communications Inc. (BHVR), an entity of which Richard Szalwinski owns
84% of the outstanding voting securities, owns 100% of Behaviour Entertainment
Inc. ("Behaviour"). During fiscal 1996, Discreet recorded revenue of $121,000
from Behaviour and had trade receivables of $113,000 from Behaviour at July
31, 1996, which amount was subsequently collected in full during fiscal 1997.
During fiscal 1997, Discreet did not record revenue from sales, purchase
services or have trade receivables from Behaviour at June 30, 1997. During
fiscal 1998, Discreet purchased marketing services from Behaviour in the
amount of $223,090, recorded revenue from sales of an effect* (option 3)
system, and other hardware to Behaviour in the amount of $320,573 and had net
trade receivables of $97,483 from Behaviour at June 30, 1998.
BHVR owns 100% of TGR Zone Corporation ("TGR Zone"). In July 1997, Discreet
agreed to rent space for its headquarters in Montreal from TGR Zone and a
lease was subsequently executed whereby Discreet agreed to rent approximately
55,000 square feet of space at approximately Cdn $13.00 per square foot per
annum subject to normal escalation clauses. The lease is set to expire in July
2007. As part of this agreement, TGR Zone assumed Discreet's lease commitment
at its previous Montreal location. During fiscal 1998, Discreet made rental
payment to TGR Zone in the amount of $941,151.
Discreet purchased professional consulting services from BHVR in the amount
of $106,244 during fiscal 1998 and had a payable of $106,244 at June 30, 1998.
37
<PAGE>
BHVR indirectly owns approximately 37.5% of Behaviour Design, Inc.
("Behaviour Design"), Discreet purchased marketing services from Behaviour
Design in the amount of $1,383,639 during fiscal 1998 and had a payable of
$1,383,639 to Behaviour Design at June 30, 1998.
BHVR indirectly owns approximately 37.5% of Behaviour Studios, Inc.
("Behaviour Studios"). Discreet recorded revenue from sales of fire* and
inferno* systems of Behaviour Studios in the amount of $1,837,077 during fiscal
1998 and had trade receivables of $1,837,077 from Behaviour Studios at June 30,
1998.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Registrant are filed
as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DISCREET LOGIC INC. AND SUBSIDIARIES
Report of Arthur Andersen & Cie......................................... F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Shareholders' Equity......................... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
(A)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedules of the Registrant are filed
as part of this report:
Report of Arthur Andersen & Cie......................................... S-1
Schedule II--Valuation and Qualifying Accounts.......................... S-2
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
accompanying Consolidated Financial Statements or notes thereto.
(A)(3) INDEX TO EXHIBITS
See attached Index to Exhibits on pages X-1 through X-3 of this Form 10-K.
(B) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated March 9, 1998 was filed on April 30, 1998
pursuant to Item 5 of Form 8-K announcing the mailing, on or about April 20,
1998, of the related Notice of Special Meeting of Shareholders, Notice of
Application and Management Information Circular dated April 15, 1998 relating
to the proposed acquisition by Discreet of MGI.
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.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 28, 1998
By: /s/ Richard J. Szalwinski
-----------------------------------
Richard J. Szalwinski
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard J. Szalwinski and Francois Plamondon,
jointly and severally, his attorney-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to
this Report on Form 10-K and to file same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his substitute or substitutes, may do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard J. Szalwinski President, Chief Executive Officer, September 28, 1998
- --------------------------- Chairman of the Board of Directors
Richard J. Szalwinski (Principal Executive Officer)
/s/ Francois Plamondon Executive Vice President, September 28, 1998
- --------------------------- Chief Financial Officer, Treasurer
Francois Plamondon and Secretary (Principal Financial
and Accounting Officer)
/s/ Thomas Cantwell Director and Authorized September 28, 1998
- --------------------------- U.S. Representative
Thomas Cantwell
/s/ Gary G. Tregaskis Director September 28, 1998
- ---------------------------
Gary G. Tregaskis
Director
- ---------------------------
Brian P. Drummond
/s/ Perry M. Simon Director September 28, 1998
- ---------------------------
Perry M. Simon
Director
- ---------------------------
Pierre Desjardins
</TABLE>
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DISCREET LOGIC INC. AND SUBSIDIARIES
Report of Arthur Andersen & Cie........................................... F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Shareholders' Equity........................... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Discreet Logic Inc.:
We have audited the accompanying consolidated balance sheets of Discreet
Logic Inc. (a Quebec corporation) and subsidiaries at June 30, 1997 and 1998
and the related consolidated statements of operations, shareholders' equity
and cash flows for the year ended July 31, 1996, the eleven-month period ended
June 30, 1997, and the year ended June 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada, which are in substantial agreement with those in the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Discreet Logic Inc. and subsidiaries as at June 30, 1997 and 1998, and the
results of their operations and their cash flows for the year ended July 31,
1996, the eleven-month period ended June 30, 1997, and the year ended June 30,
1998, in accordance with generally accepted accounting principles in the
United States of America.
Arthur Andersen & Cie
Chartered Accountants
General Partnership
Montreal, Canada
July 31, 1998
(except with respect to the
matters discussed in Note 22,
as to which the date
is September 11, 1998.)
F-2
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
------------ ------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................ $ 31,668,128 $ 43,745,982
Accounts receivable (less reserves for
uncollectible accounts of $3,487,000 and
$3,654,000 respectively)........................ 26,893,405 32,102,444
Inventory--
Resale......................................... 10,867,176 7,880,378
Demonstration.................................. 3,053,752 4,776,387
Income taxes receivable.......................... 448,059 --
Other current assets............................. 3,888,689 4,718,671
------------ ------------
76,819,209 93,223,862
Property and equipment--less accumulated
depreciation and amortization..................... 7,728,248 9,576,129
Deferred income taxes.............................. 3,489,537 877,514
Other assets....................................... 2,659,964 6,548,313
Assets held for resale............................. 5,247,741 4,384,160
------------ ------------
$ 95,944,699 $114,609,978
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................. $ 23,687,070 $ 23,265,953
Accrued expenses................................. 20,398,720 12,833,320
Deferred revenue................................. 8,103,294 6,544,620
Customer deposits................................ 1,359,619 288,113
Income taxes payable............................. 4,734,484 9,882,485
------------ ------------
58,283,187 52,814,491
------------ ------------
Deferred income taxes.............................. 713,236 2,228,634
------------ ------------
Commitments and Contingencies (Notes 5, 12, and 15)
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 29,617,504 shares at June 30,
1998........................................... 80,401,669 106,841,218
Accumulated deficit.............................. (42,639,374) (43,250,587)
Cumulative translation adjustment................ (814,019) (4,023,778)
------------ ------------
Total shareholders' equity..................... 36,948,276 59,566,853
------------ ------------
$ 95,944,699 $114,609,978
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
ELEVEN
YEAR ENDED MONTHS ENDED YEAR ENDED
JULY 31, JUNE 30, JUNE 30,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Total revenues....................... $ 83,997,447 $101,923,931 $151,558,128
Cost of revenues..................... 49,333,071 47,571,342 62,033,320
------------ ------------ ------------
Gross profit..................... 34,664,376 54,352,589 89,524,808
------------ ------------ ------------
Operating expenses:
Research and development, net of
tax credits of $711,000, $696,000
and $1,108,000, respectively...... 16,902,432 9,707,890 14,847,019
Sales and marketing................ 26,088,163 23,206,070 34,320,612
General and administrative......... 10,581,670 6,396,024 8,077,175
Write-off of purchased research and
development (Note 15)............. 8,500,000 9,800,000 26,800,000
Gain on sale of investment (Note
16)............................... -- -- (2,500,000)
Costs of terminated agreement (Note
17)............................... -- -- 1,712,860
Restructuring expense (Note 19).... 15,000,000 -- (1,504,472)
Litigation and related settlement
expenses (Note 5)................. 2,506,203 6,500,000 (405,000)
------------ ------------ ------------
Total operating expenses......... 79,578,468 55,609,984 81,348,194
------------ ------------ ------------
Operating income (loss).......... (44,914,092) (1,257,395) 8,176,614
------------ ------------ ------------
Other income (expense):
Interest income.................... 2,258,705 1,233,924 1,118,343
Interest expense................... (229,579) (55,318) (135,625)
Foreign currency exchange gain
(loss)............................ 178,620 (187,843) 1,083,450
------------ ------------ ------------
Total other income (expense)..... 2,207,746 990,763 2,066,168
------------ ------------ ------------
Income (loss) before income taxes.. (42,706,346) (266,632) 10,242,782
Provision for income taxes........... 1,434,835 6,489,343 10,853,995
------------ ------------ ------------
Net loss........................... $(44,141,181) $ (6,755,975) $ (611,213)
============ ============ ============
Net loss per common share............ $ (1.64) $ (0.24) $ (0.02)
============ ============ ============
Weighted average common shares
outstanding......................... 26,836,834 27,947,807 29,029,147
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
RETAINED SHARE CUMULATIVE TOTAL
COMMON EARNINGS SUBSCRIPTIONS TRANSLATION SHAREHOLDERS'
SHARES AMOUNT (DEFICIT) RECEIVABLE ADJUSTMENT EQUITY
---------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1995.. 25,166,860 $ 43,232,545 $ 8,257,782 $(1,645,000) $ 279,126 $ 50,124,453
Issuance of common
shares net of issuance
costs of $1,988,202
and related tax effect
of $775,399........... 970,920 28,157,527 -- -- -- 28,157,527
Exercise of common
stock options......... 1,244,918 1,230,734 -- -- -- 1,230,734
Issuance of shares
through Employee Stock
Purchase Plan......... 16,728 302,108 -- -- -- 302,108
Issuance of shares to
COSS ................. 300,000 6,000,000 -- -- -- 6,000,000
Collection of share
subscriptions
receivable............ -- -- -- 1,645,000 -- 1,645,000
Net loss............... -- -- (44,141,181) -- -- (44,141,181)
Change in cumulative
translation
adjustment............ -- -- -- -- (975,625) (975,625)
---------- ------------ ------------ ----------- ----------- ------------
Balance, July 31, 1996.. 27,699,426 78,922,914 (35,883,399) -- (696,499) 42,343,016
Exercise of common
stock options......... 321,577 1,128,256 -- -- -- 1,128,256
Issuance of shares
through Employee Stock
Purchase Plan......... 96,412 350,499 -- -- -- 350,499
Net loss............... -- -- (6,755,975) -- -- (6,755,975)
Change in cumulative
translation
adjustment............ -- -- -- -- (117,520) (117,520)
---------- ------------ ------------ ----------- ----------- ------------
Balance, June 30, 1997.. 28,117,415 80,401,669 (42,639,374) -- (814,019) 36,948,276
Exercise of common
stock options......... 253,163 1,136,747 -- -- -- 1,136,747
Issuance of shares
through Employee Stock
Purchase Plan......... 46,926 524,165 -- -- -- 524,165
Issuance of shares to
D-Vision (Note 15(b)). 555,000 10,649,063 -- -- -- 10,649,063
Issuance of shares to
Intel, net of issuance
costs of $17,625 (Note
8(d))................. 645,000 13,527,375 -- -- -- 13,527,375
Compensation expense
related to stock
options............... -- 602,199 -- -- -- 602,199
Net loss............... -- -- (611,213) -- -- (611,213)
Change in cumulative
translation
adjustment............ -- -- -- -- (3,209,759) (3,209,759)
---------- ------------ ------------ ----------- ----------- ------------
Balance, June 30, 1998.. 29,617,504 $106,841,218 $(43,250,587) $ -- $(4,023,778) $ 59,566,853
========== ============ ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
ELEVEN MONTHS YEAR ENDED
YEAR ENDED ENDED JUNE 30,
JULY 31, 1996 JUNE 30, 1997 1998
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss......................... $(44,141,181) $ (6,755,975) $ (611,213)
Adjustments to reconcile net loss
to cash provided by operating
activities--
Depreciation and amortization.. 6,276,139 5,882,575 8,154,462
Deferred income taxes.......... (2,072,789) 503,699 3,769,945
Loss on sale of fixed assets... 31,819 -- --
Write-off of purchased research
& development................. 8,500,000 9,800,000 26,800,000
Write-off of assets for
restructuring................. 5,510,237 -- 610,472
Reversal of restructuring
reserve, net.................. -- -- (1,504,472)
Write-off of investment in
Essential Communications
Corporation................... 2,500,000 -- --
Gain on sale of investment in
Essential Communications
Corporation................... -- -- (2,500,000)
Compensation expense related to
stock options................. -- -- 602,199
Changes in assets and
liabilities (net of effect of
acquisitions)--
Settlement of class action
litigation.................. -- -- (10,800,000)
Insurance proceeds related to
class action litigation..... -- -- 3,459,000
Accounts receivable.......... (1,100,199) (10,819,617) (4,326,039)
Inventory.................... (6,088,107) 2,986,146 3,378,732
Income taxes receivable...... (2,718,204) 2,743,232 448,059
Other current assets......... (1,917,776) (248,546) (682,982)
Accounts payable............. (6,183,710) 14,336,101 (3,880,117)
Accrued expenses............. 16,865,069 799,643 (8,328,774)
Deferred revenue............. 961,399 3,333,788 (1,558,674)
Income taxes payable......... (2,578,994) 4,734,484 5,148,001
Customer deposits............ 1,807,254 (1,258,442) (1,071,506)
Due to related parties....... (75,778) (25,535) --
------------ ------------ ------------
Net cash provided by (used
in) operating activities... (24,424,821) 26,011,553 17,107,093
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment....................... (15,870,636) (6,265,405) (9,501,868)
Proceeds from disposal of
property and equipment.......... 212,719 4,885 818,000
Increase in other assets......... (519,841) (2,480,908) --
Cash paid for Denim acquisition
and related costs............... -- (9,125,611) --
Cash paid for D-Vision
acquisition and related costs... -- -- (10,342,000)
Cash paid for COSS/IMP
acquisition and related costs... (5,544,848) -- --
Cash paid for investment in
Essential Communications
Corporation..................... (2,500,000) -- --
Proceeds from sale of investment
in Essential Communications
Corporation..................... -- -- 2,500,000
------------ ------------ ------------
Net cash used in investing
activities................. (24,222,606) (17,867,039) (16,525,868)
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common
shares, net of issuance costs... 27,382,128 -- 13,527,375
Proceeds from the exercise of
stock options................... 1,230,734 1,128,256 1,136,747
Proceeds from the employee stock
purchase plan................... 302,108 350,499 524,165
Payment of capital lease
obligations..................... (249,699) -- --
Proceeds from share subscriptions
receivable...................... 1,645,000 -- --
------------ ------------ ------------
Net cash provided by
financing activities....... 30,310,271 1,478,755 15,188,287
------------ ------------ ------------
Foreign exchange effect on cash... (991,874) 386,808 (3,691,658)
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents................. (19,329,030) 10,010,077 12,077,854
Cash and cash equivalents,
beginning of year................ 40,987,081 21,658,051 31,668,128
------------ ------------ ------------
Cash and cash equivalents, end of
year............................. $ 21,658,051 $ 31,668,128 $ 43,745,982
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ELEVEN MONTHS YEAR
ENDED ENDED ENDED
JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Interest paid during the year...... $ 229,610 $ 16,579 $ 150,243
Income taxes paid during the year.. 8,823,579 1,141,487 2,527,720
Supplemental disclosure of non-cash
financing and investing activities:
Issuance of common shares to COSS.. 6,000,000 -- --
Deferred tax asset recorded in
connection with share issuance
costs............................. 775,399 -- --
In connection with the acquisition
of Lightscape in December 1997, the
following non-cash transaction
occurred:
Fair value of assets acquired...... $ -- $ -- $ 7,614,322
Liabilities assumed................ -- -- (7,614,322)
---------- ---------- ------------
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...... $ -- $ -- $ 27,210,063
Liabilities assumed................ -- -- (5,811,000)
Cash acquired...................... -- -- (408,000)
Issuance of 555,000 shares of
common stock...................... -- -- (10,649,063)
---------- ---------- ------------
Cash paid for acquisition, net of
cash acquired...................... $ -- $ -- $ 10,342,000
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN U.S. DOLLARS)
(1) OPERATIONS
Discreet Logic Inc. ("the Company") was incorporated under Part 1A of the
Quebec Companies Act on September 10, 1991. The Company and its subsidiaries
develop, assemble, market and support non-linear, digital systems and software
for creating, editing and compositing imagery and special effects for film,
video, HDTV, broadcast and the Web. The Company'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.
The Company sells its advanced systems and other products through its direct
sales force, as well as through distributors and resellers. The Company
markets and sells its systems directly in North America and in certain
European and Pacific Rim countries. Sales activities in North America are
conducted from the Company's Montreal headquarters, sales offices in Los
Angeles, New York and Chicago and field representatives based in Boston, San
Francisco and Atlanta. In fiscal 1996, the Company opened sales offices in
India, Hong Kong and Japan. The Company also markets its systems through sales
offices located in the United Kingdom, France, Germany, Singapore and Brazil
and through a network of distributors and resellers in over 80 countries.
The success of the Company is subject to a number of risks and
uncertainties, including, without limitation, the Company's ability to
successfully develop, introduce and gain customer acceptance of existing and
new or enhanced products; the need for the continued development of the market
for the Company's systems; the ability of the Company to expand its current
market to include additional applications and develop new products for related
markets; the risk that as the Company enters new markets, the distribution
channels, technical requirements and levels and basis of competition may be
different from those in the Company's current markets; the presence of
competitors with greater financial, technical, manufacturing, marketing and
distribution resources; the risk that the products and technologies acquired
by the Company through acquisitions will not be successful, achieve market
acceptance or be successfully integrated with the Company's existing products
and business; the risk of quarterly fluctuations in the Company's operating
results; the risk of the Company's reliance on Silicon Graphics, Inc. ("SGI")
for the workstations included in the Company's systems including the impact of
the timing of the development and release of SGI products as well as
unforeseen difficulties associated with adapting the Company's products to
future SGI products; the risk that the Company derives a significant portion
of its revenues from foreign sales; the Company's reliance principally on
unregistered copyrights and trade secrets to protect its intellectual
property; the risk that the Company's direct sales efforts may compete with
those of its indirect channels; the risk of the Company's reliance on SGI as
the sole source for video input/output cards used in the Company's systems;
the Company's dependence on key management and technical employees; market
price fluctuations due to quarter-to-quarter variations in the Company's
operating results, announcements of technological innovations or new products
by the Company or its competitors and the historical fluctuations in market
prices of technology companies generally; and other risks detailed from time
to time in the Company's filings with the Securities and Exchange Commission.
The Company believes that with its current level of working capital together
with funds generated from operations, it has adequate sources of cash to meet
its operational and capital expenditure requirements through fiscal 1999.
F-8
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of the following significant accounting policies, as described below and
elsewhere in the notes to consolidated financial statements. These
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America, and are
presented in United States dollars ("U.S. Dollars").
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results may differ from these
estimates.
(a) 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
consolidated financial statements are presented for the twelve-month period
ended June 30, 1998, the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 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 previous fiscal years' results to reflect the
current fiscal period. Consequently, the results for the twelve-month period
ended June 30, 1998 are not directly comparable with those for the eleven-
month period ended June 30, 1997, or with the twelve-month period ended July
31, 1996.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All subsidiaries are wholly owned as of June 30, 1998.
All significant intercompany accounts and transactions have been eliminated
upon consolidation.
(c) Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, Software Revenue Recognition.
The statement provides specific industry guidance and stipulates that revenue
recognized from software arrangements is to be allocated to each element of
the arrangement based on the relative fair values of the elements, such as
software products, upgrades, enhancements, postcontract customer support,
installation or training. Under SOP 97-2, the determination of fair value is
based on objective evidence that is specific to the vendor. If such evidence
of fair value for each element of the arrangement does not exist, all revenue
from the arrangement is deferred until such time that the evidence of fair
value does exist or until all elements of the arrangement are delivered.
Revenue allocated to software products, specified upgrades and enhancements is
generally recognized upon delivery of the related products, upgrades and
enhancements. Revenue allocated to postcontract customer support is generally
recognized ratably over the term of the support, and revenue allocated to
service elements is generally recognized as the services are performed. SOP
97-2 was adopted by the Company effective January 1, 1998 and has not had a
material effect on revenue recognition.
The Company recognizes revenue from software licenses, and the related
hardware and peripherals, upon shipment of the products. The Company
recognizes revenue from post contract customer support and other related
services ratably, as the obligations are fulfilled, or when the related
services are performed. Post contract
F-9
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
customer support, training, installation, systems integration and rental
services, are performed primarily under separately priced arrangements under
which the Company has recorded revenues of $11,713,000, $13,606,000 and
$14,050,000 for the year ended July 31, 1996, the eleven-month period ended
June 30, 1997, and for the year ended June 30, 1998, respectively.
(d) Net Income (Loss) per Common 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.
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>
YEAR ENDED ELEVEN MONTHS ENDED YEAR ENDED
JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
----------------------- ---------------------- ---------------------
INCOME SHARES EPS INCOME SHARES EPS INCOME SHARES EPS
-------- ------ ------ ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common shareholders.. $(44,141) 26,837 $(1.64) $(6,756) 27,948 $(0.24) $(612) 29,029 $(0.02)
====== ====== ======
Effect of Dilutive
Securities
Impact of exercise of
stock options under
treasury stock
method............... -- -- -- -- -- --
-------- ------ ------- ------ ----- ------
Diluted EPS
Income available to
common shareholders
and assumed
exercises............ $(44,141) 26,837 $(1.64) $(6,756) 27,948 $(0.24) $(612) 29,029 $(0.02)
======== ====== ====== ======= ====== ====== ===== ====== ======
</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. Had the Company not been in a loss position, dilutive outstanding options
of 2,044,265, 945,845 and 1,763,785 for fiscal 1996, 1997, and 1998,
respectively, would have been added to compute diluted EPS.
F-10
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(e) Research and Development Expenses
The Company charges to operations research and development costs as incurred
and presents such expenses net of income tax credits from the Canadian federal
and Quebec provincial governments (see Note 7). Software development costs are
considered for capitalization when technological feasibility is established in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. The Company sells software in a market that is subject to rapid
technological change, new product introductions and changing customer needs.
Accordingly, the Company has not capitalized software development costs due to
its inability to estimate the useful life of software under development.
(f) Translation of Foreign Currencies
The accounts of the Company are translated in accordance with SFAS No. 52,
Foreign Currency Translation. The Company's management has elected to present
these consolidated financial statements in U.S. dollars. The financial
statements of the Company and its subsidiaries are translated from their
functional currency into the reporting currency, the U.S. dollar, utilizing
the current rate method. Accordingly, assets and liabilities are translated at
exchange rates in effect at the end of the year, and revenues and expenses are
translated at the weighted average exchange rate during the year. All
cumulative translation gains or losses from the translation into the Company's
reporting currency are included as a separate component of shareholders'
equity in the consolidated balance sheets.
Foreign currency transaction gains (losses) included in other income
(expense) in the accompanying consolidated statements of operations were
$178,620, $(187,843) and $1,083,450 for the year ended July 31, 1996, the
eleven-month period ended June 30, 1997, and the year ended June 30, 1998,
respectively.
(g) Concentration of Credit Risk
During fiscal 1998, the Company amended and restated its Maximum Liability
Agreement with a leasing company. The agreement provides that the Company is
contingently liable up to a maximum percentage of the remaining principal
payments outstanding related to the purchase of the Company's products by
customers financed by said leasing company. The maximum liability is
contingent on certain factors as defined in the agreement. As at June 30, 1997
and 1998, the Company had accrued $619,000 and $648,000, respectively, the
maximum amount of the contingent liability as a charge to general and
administrative expenses.
The Company has no other significant off-balance sheet concentration of
credit risk such as foreign exchange contracts, option contracts or other
foreign currency hedging arrangements. The Company maintains the majority of
cash balances with three financial institutions and its accounts receivable
credit risk is not concentrated within any geographic area. There were no
accounts receivable from a single customer which exceeded 10 percent of total
accounts receivable as of June 30, 1997 and 1998.
(h) Postemployment and Postretirement Benefits
The Company does not provide postemployment and postretirement benefits.
(i) Cash Equivalents
Cash equivalents are carried at cost, which approximates market value. Cash
equivalents are short-term, highly liquid investments with original maturities
of less than three months. Cash equivalents consist of commercial paper and
money market mutual funds at June 30, 1997 and 1998.
F-11
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(j) Inventory
Inventory consists of hardware purchased for resale and is valued at the
lower of cost (determined on a first-in, first-out basis) or net realizable
value. Demonstration inventory consists of hardware inventory used by the
Company and potential customers for product demonstrations which will be
subsequently sold.
(k) Property and Equipment
The Company provides for depreciation and amortization using the straight-
line and declining-balance methods over the estimated useful lives of the
assets as follows:
<TABLE>
<CAPTION>
ESTIMATED JUNE 30, JUNE 30,
ASSET CLASSIFICATION USEFUL LIFE 1997 1998
-------------------- -------------------- ----------- ------------
<S> <C> <C> <C>
Computer equipment,
video equipment and
software............... 2-5 Years $14,375,443 $ 19,775,508
Leasehold improvements.. Shorter of term of 1,222,478 1,735,401
lease or useful life
Furniture and fixtures.. 5 Years 1,797,891 2,503,772
----------- ------------
17,395,812 24,014,681
Less--Accumulated
depreciation and
amortization........... (9,667,564) (14,438,552)
----------- ------------
$ 7,728,248 $ 9,576,129
=========== ============
</TABLE>
(l) Other Assets
Other assets include acquired technology, goodwill, and other deferred
charges, and are amortized on a straight-line basis over the estimated useful
lives of the assets, which range from three to five years. The Company
evaluates the realizability and the related periods of amortization of these
assets on a regular basis.
Other assets included the following amounts at June 30:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION 1997 1998
-------------------- ----------- -----------
<S> <C> <C>
Acquired technology................................ $ 2,875,665 $ 6,938,137
Goodwill........................................... 2,437,789 3,451,542
Other deferred charges............................. -- 639,840
----------- -----------
5,313,454 11,029,519
Less--Accumulated amortization..................... (2,653,490) (4,481,206)
----------- -----------
$ 2,659,964 $ 6,548,313
=========== ===========
</TABLE>
(m) Recent Accounting Pronouncements
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 reporting and displaying comprehensive
income and its components in a full set of general-purpose financial
statements and is required to be adopted by the Company beginning in its
fiscal year 1999. Additionally, 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,
F-12
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 130 and SFAS 131 on its
financial disclosures.
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.
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.
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.
(3) OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
---------- ----------
<S> <C> <C>
Prepaid expenses..................................... $2,919,782 $2,754,321
Sales tax receivable................................. 787,515 1,147,833
Other receivables.................................... 181,392 816,517
---------- ----------
$3,888,689 $4,718,671
========== ==========
</TABLE>
(4) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
----------- -----------
<S> <C> <C>
Payroll and payroll related....................... $ 2,838,873 $ 4,180,410
Professional fees................................. 733,680 764,869
Commissions....................................... 2,187,178 2,676,242
Sales tax and VAT payable......................... 679,052 1,542,036
Accrued restructuring expenses.................... 4,272,438 825,000
Maximum liability accrual......................... 619,000 647,667
Accrued litigation and settlement expenses........ 8,186,969 --
Acquisition costs................................. -- 1,021,305
Other............................................. 881,530 1,175,791
----------- -----------
$20,398,720 $12,833,320
=========== ===========
</TABLE>
F-13
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) 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 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 point.
(6) DEMAND LINE OF CREDIT, LEASING AND TAX CREDIT FACILITIES
During the year, the Company amended its revolving demand line of credit and
leasing facility with its bank. The new agreement provides for a revolving
demand line of credit under which it can borrow up to Cdn$7,000,000
(approximately $4,773,000 at June 30, 1998). Advances under the line accrue
interest monthly at the Canadian prime rate (6.50% at June 30, 1998) plus
0.25%. Additionally, the agreement provides for a Cdn$600,000 (approximately
$409,000 at June 30, 1998) demand leasing facility, and a Cdn$600,000
(approximately $409,000 at June 30, 1998) demand research and development tax
credit facility. Advances under these facilities accrue interest monthly at
the Canadian prime rate (6.50% at June 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 June 30, 1998, there were no amounts outstanding under
the demand leasing and demand research and development tax credit facilities,
however, the amount available to Discreet under the line of credit was reduced
by the letter of guarantee discussed below.
During the year, the Company's Japanese subsidiary entered into 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 the period (approximately 2.1% at June 30, 1998)
and are secured by a letter of
F-14
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
guarantee, in the amount of $3,000,000, issued by the Company in favor of the
subsidiary's bank. As of June 30, 1998, the subsidiary had borrowed
(Yen)376,824,000 (approximately $2,725,000 at June 30, 1998).
(7) CANADIAN FEDERAL AND PROVINCIAL INCOME TAX CREDITS
The Company is entitled to research and development incentives in the form
of income tax credits from the Canadian federal government ("Federal") and
from the Province of Quebec ("Provincial"). Federal income tax credits are
received on qualified Canadian research and development expenditures and
equipment purchases. Provincial income tax credits are received on qualified
research and development salaries in the Province of Quebec. The Federal and
Provincial income tax credits are earned at 20% of qualified research and
development expenditures. Additionally, the Federal credit may be limited to a
credit against income taxes payable.
The Company recorded $711,000, $696,000 and $1,108,000 of income tax credits
as a reduction of research and development expenses for the year ended July
31, 1996, the eleven-month period ended June 30, 1997, and the year ended June
30, 1998, respectively. These income tax credits represent credits earned
based on qualifying research and development expenditures. In addition, the
Company recorded, $513,000, $196,000 and $374,000 of income tax credits as a
reduction in the carrying value of property and equipment for the year ended
July 31, 1996, the eleven-month period ended June 30, 1997, and the year ended
June 30, 1998, respectively. These income tax credits represent credits earned
based on qualifying property and equipment purchases.
(8) SHAREHOLDERS' EQUITY
(a) Secondary Offering
In December 1995, the Company completed a secondary offering of 970,920
common shares at $30.25 per share, resulting in proceeds of approximately
$28,158,000 net of issuance costs and their related tax effects.
(b) Preferred Shares
The Board of Directors is authorized to issue preferred shares, in one or
more series, and to fix the rights, dividend rates, conversion rights, voting
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, and the number of shares constituting any series or the
designations of such series, without further vote or action by the
shareholders.
(c) Share Subscriptions Receivable
In fiscal 1995, a share subscriptions receivable, in the amount of $148,148,
from the then and current Chairman of the Board of Directors and the former
president of the Company was reduced through the shares being repurchased or
repaid. On November 11, 1994, the former President and Chief Executive Officer
of the Company issued to the Company a $1,645,000 note in connection with the
exercise of nonqualified stock options which is included in share
subscriptions receivable at July 31, 1995. During the 1996 fiscal year, the
note was repaid in full together with interest in the amount of $134,000.
(d) Private Placement of Shares to Intel Corporation
On March 4, 1998, Discreet completed a private placement of 645,000 common
shares, no par value per share, for proceeds to the Company of approximately
$13,527,000, net of issuance costs.
(e) Dividends
The Company has never declared or paid cash dividends and does not
anticipate paying any cash dividends
F-15
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on its capital stock in the foreseeable future. In the event cash dividends
are declared or paid, the Company anticipates that they would be declared and
paid in U.S. dollars. Part 1A of the Quebec Companies Act prohibits the
Company 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. At June 30, 1998, the Company could not distribute any
dividends.
(f) Capital Structure
In February 1997, the FASB also issued SFAS No. 129, Disclosure of
Information About Capital Structure. This statement is effective for financial
statements for periods ended after December 15, 1997. SFAS No. 129 establishes
standards for disclosing information about an entity's capital structure. The
implementation of this statement has not had a material impact on the
consolidated financial statements.
(9) STOCK OPTION AND STOCK PURCHASE PLANS
The Company applies the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock issued to Employees, in accounting for its stock-based
compensation plans. During the year ended June 30, 1997, the Company adopted
only the disclosure requirements of Statement of Financial Accounting
Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation. SFAS
No. 123 establishes financial accounting and reporting standards based on a
fair value concept for stock-based employee compensation plans. This statement
requires an employer that continues to apply the accounting provisions of APB
25 to disclose pro forma amounts reflecting the difference between
compensation costs, including tax effects, that would have been recognized in
the income statement, if the fair value based method had been used.
The table below presents pro forma net loss and EPS, had compensation cost
for the Company's stock-based employee compensation plans been determined
using the provisions of SFAS No. 123.
<TABLE>
<CAPTION>
1996 1997 1998
------------ ----------- -------------
<S> <C> <C> <C>
Net loss:
As Reported..................... $(44,141,181) $(6,755,975) $ (611,213)
Pro forma....................... $(46,118,158) $(8,414,957) $ (5,671,932)
Net loss per share:
As Reported..................... $ (1.64) $ (0.24) $ (0.02)
Pro forma....................... $ (1.72) $ (0.30) $ (0.20)
</TABLE>
The fair value of each graded vesting option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1996, 1997 and 1998: risk free
interest rates between 5.2% and 6.3%; expected dividend yields of 0%; expected
term after vest date of approximately .5 years; and expected volatility of
100%.
Because the fair value based method of accounting has not been applied to
options granted prior to August 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
(a) Restricted Stock and Stock Option Plan
On June 14, 1994, the Company's Board of Directors approved the
establishment of the 1994 Restricted Stock and Stock Option Plan (the "1994
Plan") for the Company's officers, employees, consultants and directors. Under
the 1994 Plan, the Compensation Committee of the Board of Directors (the
"Compensation Committee") may grant stock options for a maximum of 5,000,000
common shares. Under the terms of the 1994
F-16
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Plan, the purchase price, which approximates fair market value, and vesting
schedule applicable to each option grant is determined by the Compensation
Committee.
On August 12, 1996, the Company's Board of Directors authorized the
repricing of 106,600 stock options previously granted under the 1994 Plan. The
repricing provided for the exercise price of the 106,600 options to be reduced
to $6.375 per share, representing the fair value per common share on the date
of repricing. Prior to the repricing, such options had exercise prices ranging
from $19.25 to $28.50 per share. In exchange for the repriced options, the
159,900 stock options remaining from these grants were forfeited.
On November 20, 1997, the shareholders approved 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 under this
plan.
(b) 1995 Nonemployee Director Stock Option Plan
On March 27, 1995, the Company's Board of Directors adopted, and in April
1995, the shareholders approved, the 1995 Non-Employee Director Stock Option
Plan (the "Director Plan"). Under the Director Plan, the Compensation
Committee may grant options to purchase up to 200,000 common shares to
nonemployee directors of the Company. The Director Plan authorizes the grant
(a) to each person who becomes a member of the Board of Directors and who is
not an employee, officer or direct and indirect owner of 5% or more of the
common shares of the Company (a "Non-Employee Director"), on the date such
person is first elected to the Board of Directors without further action by
the Compensation Committee, of an option to purchase 20,000 common shares and
(b) to each person receiving an option pursuant to clause (a) who is a Non-
Employee Director on the fifth anniversary of the date such person was first
elected to the Board of Directors, during the term of the Director Plan, of an
option to purchase 15,000 common shares, provided that such person has
continuously served as a Non-Employee Director during such 5-year period. The
exercise price will be the fair market value at the date of grant and the
options will expire 10 years from the date of grant. All options vest in three
equal annual installments, with the first vesting on the date of grant. As of
June 30, 1998, 60,000 options were granted and outstanding at fair market
value under the Director Plan.
(c) 1995 Employee Stock Purchase Plan
On March 27, 1995, the Company's Board of Directors adopted, and in April
1995, the shareholders approved, the 1995 Employee Stock Purchase Plan,
whereby the Company has reserved and may issue to employees up to an aggregate
of 300,000 common shares in semiannual offerings over a ten year period.
Common shares are sold at 85% of fair market value. As of June 30, 1998,
160,066 shares had been issued under the plan.
(d) Non-Qualified Stock Option Outside the Plan
On November 4, 1994, the Company granted, outside the 1994 Plan, a
nonqualified stock option for the purchase of 1,012,308 common shares, at a
price of $1.63 per share, which approximated fair market value at date of
grant, to the former President and Chief Executive Officer of the Company.
This option was exercised on November 4, 1994 through the issuance of a
$1,645,000 note. (See Note 8(c)).
(e) 1997 Special Limited Non-Employee Director Stock Option Plan
On February 10, 1997, the Company's Board of Directors adopted the 1997
Special Limited Non-Employee Director Stock Option Plan (the "1997 Plan").
Under the 1997 Plan, options to purchase 10,000 of the
F-17
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's common shares were granted to each of two of the Company's non-
employee directors at the Fair Market Value (as defined in the 1997 Plan) of
the shares on the date of the grant, February 10, 1997. The total number of
common shares originally available for grant under the 1997 Plan was 20,000.
The options granted pursuant to the 1997 Plan expire 10 years from the date of
grant and vest in three equal annual installments. As of June 30, 1998, 20,000
options were granted and outstanding under the 1997 Plan.
(f) Stock Option Activity
The following is a summary of all stock option activity:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning Outstanding... 3,403,740 $ 2.97 2,744,646 $7.77 2,505,913 $ 5.64
Options Granted......... 973,000 16.53 1,689,638 5.41 901,771 19.03
Options Exercised....... (1,244,918) 1.27 (321,577) 3.51 (253,163) 4.49
Options Canceled........ (387,176) 10.67 (1,606,794) 9.63 (133,951) 10.31
---------- ---------- ---------
Ending Outstanding...... 2,744,646 7.77 2,505,913 5.64 3,020,570 9.53
========== ========== =========
Exercisable............. 513,714 $ 6.01 389,832 $4.71 469,122 $ 5.10
========== ========== =========
Weighted Average Fair
Value of Options
Granted During the
Year................... $10.43 $3.19 $13.87
The following table provides further detail on the options granted during
fiscal 1996, 1997, and 1998 in relation to their respective fair values as
calculated above:
<CAPTION>
1996 1997 1998
-------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Exercise price equal to
fair value............. 531,562 $13.17 1,487,238 $5.23 84,000 $19.88
Exercise price greater
than fair value........ 45,000 23.72 147,400 6.48 386,000 24.25
Exercise price less than
fair value............. 396,438 20.22 55,000 7.38 431,771 14.21
---------- ------ ---------- ----- --------- ------
973,000 $16.53 1,689,638 $5.41 901,771 $19.03
========== ====== ========== ===== ========= ======
</TABLE>
The following table summarizes the options outstanding and exercisable as at
June 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.05-$2.88......... 252,238 6.29 $ 1.39 229,246 $ 1.28
$4.50-$4.63......... 655,636 8.12 $ 4.50 56,002 $ 4.50
$5.50-$6.03......... 893,600 8.53 $ 5.85 27,750 $ 6.03
$6.38-$8.94......... 413,596 8.02 $ 7.35 103,687 $ 6.69
$15.75-$24.25....... 805,500 9.14 $21.36 52,437 $18.82
--------- ---- ------ ------- ------
$0.05-$24.25........ 3,020,570 8.34 $ 9.53 469,122 $ 5.10
</TABLE>
F-18
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) RELATED PARTY TRANSACTIONS
(a) Sales to Related Parties
During fiscal 1998, the Company recorded revenue from system sales made to
Behaviour Entertainment Inc. and Behaviour Studios, Inc., companies controlled
by the Company's Chairman and Chief Executive Officer, in the amounts of
$320,573 and $1,837,077, respectively. At June 30, 1998, approximately
$445,000 remained outstanding and is included in other current assets. During
fiscal 1996, Discreet recorded revenue from system sales of $121,000 to
Behavior Entertainment Inc.
During fiscal 1996, the Company recorded revenue of $2,304,000, from a
company with which the Company's Chairman and Chief Executive Officer is
affiliated. At July 31, 1996, the Company had a trade accounts receivable of
$836,000 from such company. The balance was collected in six monthly
installments of $139,000. The Company also recorded revenue of $1,138,000
during fiscal 1996, from a company with which a member of the Company's board
of directors is affiliated. The sale was collected in full during fiscal 1996.
In accordance with the Company's policy, these sales were on terms no less
favorable to the Company than provided by the Company to unrelated third
parties.
(b) Purchases from Related Parties
During fiscal 1998, the Company purchased consulting services, in the amount
of $106,244, from BHVR Communications Inc., purchased marketing services in
the amount of $1,383,639 from Behaviour Design Inc., and purchased marketing
services in the amount of $223,090 from Behaviour Entertainment Inc. These
related parties are companies controlled by the Company's Chairman and Chief
Executive Officer.
During fiscal 1998, the Company made rental payments in the amount of
$941,151 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 commitments related to the lease on this
building are disclosed in Note 12.
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.
F-19
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) INCOME TAXES
The Company applies the provisions of SFAS No. 109, Accounting for Income
Taxes. Under the provisions of SFAS No. 109, the Company recognizes a current
tax liability or asset for current taxes payable or refundable and a deferred
tax liability or asset for the estimated future tax effects of temporary
differences between the carrying value of assets and liabilities for financial
reporting and their tax basis and carryforwards to the extent they are
realizable.
The components of the deferred tax assets and the deferred tax liabilities
are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
----------- ----------
<S> <C> <C>
Deferred tax assets--
Foreign tax loss carryforwards..................... $ 5,150,000 $5,499,216
Litigation and related settlement expenses......... 1,650,000 --
Restructuring expenses............................. 1,400,000 278,009
Initial and secondary public offering issuance
costs............................................. 1,254,730 686,776
Other temporary differences........................ 834,807 2,005,176
----------- ----------
10,289,537 8,469,177
Less: Valuation allowance.......................... 6,800,000 7,591,663
----------- ----------
$ 3,489,537 $ 877,514
=========== ==========
Deferred tax liabilities--
Difference between book and tax basis of property
and equipment..................................... $ 544,745 $1,250,871
Federal research and development tax credits....... 168,491 330,568
Other temporary differences........................ -- 647,195
----------- ----------
$ 713,236 $2,228,634
=========== ==========
</TABLE>
The Company provides deferred taxes for research and development tax credits
earned in the current year, which are included in taxable income in the
subsequent year. In accordance with Canadian tax laws, stock issuance costs
are deductible over a five year period.
The following table presents income (loss) before income taxes for the
entities incorporated in the following jurisdictions:
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Canada......................... $ (2,470,805) $ 6,110,923 $ 19,215,124
United States.................. (12,587,746) 1,486,294 5,369,073
United Kingdom................. (5,191,695) (320,982) 3,261,899
European and Other............. (22,456,100) (7,542,867) (17,603,314)
------------- ----------- ------------
$(42,706,346) $ (266,632) $ 10,242,782
============= =========== ============
</TABLE>
F-20
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The income tax provision is composed of the following:
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Current--
Federal........................ $ 2,060,380 $3,641,996 $ 1,131,398
Provincial..................... 375,087 930,323 248,972
Foreign........................ 1,072,157 1,979,000 5,703,680
----------- ---------- -----------
3,507,624 6,551,319 7,084,050
----------- ---------- -----------
Deferred--
Federal........................ (1,373,684) 229,580 2,683,103
Provincial..................... (228,379) 190,996 394,825
Foreign........................ (470,726) (482,552) 692,017
----------- ---------- -----------
(2,072,789) (61,976) 3,769,945
----------- ---------- -----------
Total provision.............. $ 1,434,835 $6,489,343 $10,853,995
=========== ========== ===========
</TABLE>
The reconciliation between the Canadian federal statutory income tax rate
and the effective tax rate is as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Provision (benefit) at the
Canadian federal statutory
rate........................... (38.0)% (38.0)% 38.0 %
Foreign taxes................... 17.2 122.1 5.5
Effect of not benefitting
foreign subsidiaries' tax
losses......................... 16.0 320.2 15.5
Effect of basis differences not
benefitted..................... 3.0 2,323.1 94.0
Provincial taxes, net of federal
tax abatements................. 0.2 72.3 3.0
Canadian federal incentives for
manufacturers and small
business....................... 0.2 0.0 0.0
Utilization of net operating
losses not previously
benefitted..................... -- (361.2) (47.3)
Other items..................... 4.8 (4.7) (2.7)
----- ------- -----
Tax provision................. 3.4 % 2,433.8 % 106.0 %
===== ======= =====
</TABLE>
The Company has $13,841,000 of cumulative foreign net operating loss
carryforwards which may be available to reduce future income tax liabilities
in those jurisdictions. The loss carryforwards will expire beginning June 30,
2001.
The Company has recorded a valuation allowance against certain deferred tax
assets including the tax benefit of certain foreign net operating loss
carryforwards as the tax benefits do not meet the recognition criteria set
forth in SFAS 109 due to the uncertainty of realizability.
These net operating loss carryforwards are subject to review and adjustment
by the respective tax authorities and may be limited in certain cases upon a
significant ownership change of the corporation, as defined.
F-21
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES
(a) Lease commitments
The Company has operating lease commitments for certain facilities and
equipment which expire, at various dates, through June 2007. The following
schedule outlines the future minimum rental payments under these leases at
June 30, 1998:
<TABLE>
<S> <C>
Year ended June 30,
1999........................................................ $ 2,243,871
2000........................................................ 1,837,957
2001........................................................ 1,279,230
2002........................................................ 1,130,401
2003 and thereafter......................................... 5,016,812
-----------
Total minimum lease payments................................ $11,508,271
===========
</TABLE>
The above commitments include leases for locations which the Company plans
to close under the restructuring plan (see Note 19).
Rental expenses related to the operating leases were approximately
$1,348,000, $1,600,000 and $1,985,000 for the year ended July 31, 1996, the
eleven-month period ended June 30, 1997, and the year ended June 30, 1998,
respectively. Included in the minimum lease payment commitment is
approximately CDN $12,471,452 (approximately $8,503,036 at June 30, 1998)
representing future payment due to a related party from which the Company
leases office space in Montreal.
(b) Letters of Guarantee
The Company has provided letters of guarantee in the amount of $328,753 and
$3,000,000 as of June 30, 1997 and 1998, respectively.
(13) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
The Company operates in one industry segment primarily digital image
processing solution systems for creating, editing and compositing special
visual effects for film and video, including training and other services
incidental to these products.
Revenues by geographic destination and as a percentage of total revenues are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS YEAR ENDED
GEOGRAPHIC AREA JULY 31, ENDED JUNE 30,
BY DESTINATION 1996 JUNE 30, 1997 1998
--------------- ----------- ------------- ------------
<S> <C> <C> <C>
North America....................... $36,286,073 $ 43,752,904 $ 70,866,936
Europe.............................. 35,774,418 36,839,458 45,385,523
Pacific Rim......................... 8,717,015 15,396,131 26,745,421
Other............................... 3,219,941 5,935,438 8,560,248
----------- ------------ ------------
$83,997,447 $101,923,931 $151,558,128
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
ELEVEN MONTHS
GEOGRAPHIC AREA YEAR ENDED ENDED YEAR ENDED
BY DESTINATION JULY 31, 1996 JUNE 30, 1997 JUNE 30, 1998
--------------- ------------- ------------- -------------
<S> <C> <C> <C>
North America.................... 43.2% 42.9% 46.8%
Europe........................... 42.6 36.1 29.9
Pacific Rim...................... 10.4 15.2 17.6
Other............................ 3.8 5.8 5.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
F-22
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenues, net income and identifiable assets for the Company's Canadian,
U.S., U.K., German, French and other operations are as follows:
Intercompany transfers between geographic areas are at prices that
approximate arm's length transactions. Expenses incurred in one geographic
area that benefit other areas have been allocated based upon services
utilized.
<TABLE>
<CAPTION>
CANADA U.S. U.K. FRANCE GERMANY OTHER ELIMINATIONS CONSOLIDATED
------------ ------------ ----------- ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996--
Revenues......... $ 8,339,345 $ 33,090,335 $17,309,369 $ 7,696,297 $12,307,428 $ 5,254,673 $ -- $ 83,997,447
Transfers between
geographic
locations....... 20,211,614 29,090,504 -- -- -- 9,007,939 (58,310,057) --
------------ ------------ ----------- ----------- ----------- ------------ ------------- ------------
Total revenues.. $ 28,550,959 $ 62,180,839 $17,309,369 $ 7,696,297 $12,307,428 $ 14,262,612 $ (58,310,057) $ 83,997,447
============ ============ =========== =========== =========== ============ ============= ============
Net loss........ $ (1,398,871) $(11,532,447) $(5,210,577) $(2,409,595) $ (797,282) $(19,528,169) $ (3,264,240) $(44,141,181)
============ ============ =========== =========== =========== ============ ============= ============
Identifiable
assets......... $103,117,776 $ 48,995,740 $20,411,397 $ 6,583,316 $ 5,937,355 $ 21,037,113 $(125,934,955) $ 80,147,742
============ ============ =========== =========== =========== ============ ============= ============
1997--
Revenues......... $ 5,872,359 $ 42,135,249 $16,596,218 $10,298,958 $12,388,084 $ 14,633,063 $ -- $101,923,931
Transfers between
geographic
locations....... 28,279,123 16,531,229 3,293,329 1,539,298 -- 5,483,484 (55,126,463) --
------------ ------------ ----------- ----------- ----------- ------------ ------------- ------------
Total revenues.. $ 34,151,482 $ 58,666,478 $19,889,547 $11,838,256 $12,388,084 $ 20,116,547 $ (55,126,463) $101,923,931
============ ============ =========== =========== =========== ============ ============= ============
Net income
(loss)......... $ 1,199,545 $ 707,540 $ (504,001) $ 841,043 $ 274,412 $ (9,046,246) $ (228,268) $ (6,755,975)
============ ============ =========== =========== =========== ============ ============= ============
Identifiable
assets......... $148,151,830 $ 48,967,084 $21,762,860 $ 8,196,759 $ 6,107,907 $ 25,332,305 $(162,574,046) $ 95,944,699
============ ============ =========== =========== =========== ============ ============= ============
1998--
Revenues......... $ 10,174,057 $ 65,461,287 $20,434,970 $14,640,546 $14,132,721 $ 26,714,547 $ -- $151,558,128
Transfers between
geographic
locations....... 61,579,951 17,481,159 1,604,708 1,390,882 419,736 5,532,861 (88,009,297) --
------------ ------------ ----------- ----------- ----------- ------------ ------------- ------------
Total revenues.. $ 71,754,008 $ 82,942,446 $22,039,678 $16,031,428 $14,552,457 $ 32,247,408 $ (88,009,297) $151,558,128
============ ============ =========== =========== =========== ============ ============= ============
Net income
(loss)......... $ 14,756,827 $ 2,561,673 $ 3,079,881 $ 1,037,665 $ 895,885 $ 228,907 $ (23,172,051) $ (611,213)
============ ============ =========== =========== =========== ============ ============= ============
Identifiable
assets......... $137,435,570 $ 29,185,579 $11,211,994 $ 6,984,229 $ 6,911,638 $ 45,739,574 $(122,858,606) $114,609,978
============ ============ =========== =========== =========== ============ ============= ============
</TABLE>
"Other" includes the revenues, net income(loss) and identifiable assets of
the Company's Asian and less significant European subsidiaries.
Export sales from Canada were $5,788,925, $3,708,757 and $4,334,962 for the
fiscal year ended July 31, 1996, the eleven-month period ended June 30, 1997,
and the fiscal year ended June 30, 1998, respectively.
(14) DEPENDENCE ON KEY SUPPLIERS
The Company is dependent on Silicon Graphics, Inc. to manufacture and supply
a large proportion of the workstations and certain peripherals used in the
Company's systems. The Company purchases electronic tablets manufactured by
Wacom Technology Corporation ("Wacom") and believes that while alternative
suppliers are available, there can be no assurance that alternative electronic
tablets would be functionally equivalent or be available on a timely manner or
on similar terms.
F-23
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) ACQUISITIONS
(a) Denim Software
On June 12, 1997, the Company, through its wholly-owned subsidiary 3380491
Canada Inc. ("Acquisition Sub"), acquired substantially all of the assets and
assumed certain liabilities of Denim Software L.L.C., a Delaware limited
liability company ("Denim"), pursuant to the terms of an Asset Purchase
Agreement dated as of June 12, 1997 among Acquisition Sub, Denim, Sam Khulusi,
Frank Khulusi, Westco Denim Investments Group, Ltd., a California limited
partnership, and Frank Khulusi Family Limited Partnership, a California
limited partnership. The purchased assets consist primarily of Denim software
products, including ILLUMINAIRE Paint, ILLUMINAIRE Composition and ILLUMINAIRE
Studio and related know-how and goodwill.
The aggregate purchase price for the assets was comprised of (i)
approximately $9,126,000 in cash, (ii) the assumption of certain enumerated
liabilities in an amount equal to no more than approximately $2,209,000 in the
aggregate, and (iii) the assumption of certain on-going obligations under
certain existing contracts of Denim. At closing, cash consideration, of
approximately $9,126,000 and certain liabilities, of approximately $655,000,
were paid. The cash used by the Company to fund the acquisition was derived
primarily from operations. The transaction has been accounted for using the
purchase method. The Company incurred a one-time charge of $9,800,000 based on
an independent appraisal, or $0.35 per share, for in-process research and
development that had not yet reached technical feasibility and had no
alternative use, purchased and expensed in the eleven-month period ended June
30, 1997. Goodwill, in the amount of $315,000, has been recorded and is
included in other assets in the consolidated balance sheet. The terms of the
transaction were the result of arms-length negotiations between the
representatives of Discreet and Denim.
(b) D-Vision Systems
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
and PRO software products for non-linear video and digital media editing
solutions including related know-how and goodwill. The purchase price was paid
in a combination of 555,000 newly issued Discreet Logic common shares and
approximately $10,750,000 in cash. In addition, approximately $4,000,000 of
the cash consideration is being held in escrow until September 30, 1999,
subject to (i) earlier release from escrow of up to $1,900,000 on September
30, 1998 and (ii) the resolution of any indemnification claims made by the
Company pursuant to the Stock Purchase Agreement. The cash used by the Company
to fund the acquisition was derived primarily from cash flow from operations.
The D-Vision Acquisition was accounted for as a purchase. A substantial
portion of the purchase price, net liabilities of D-Vision and transaction
costs was allocated to purchased in-process research and development that had
not yet reached technical feasibility and had not alternative use for which
the Company incurred a one-time charge against earnings in the amount of
$21,000,000 ($0.72 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.
(c) Lightscape Technologies, Inc.
On December 2, 1997, Discreet 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
F-24
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 30, 1997, pursuant to the Merger Agreement, and upon the satisfaction
of certain closing conditions, Merger Sub merged (the "Lightscape Merger")
with and into Lightscape with Lightscape as the surviving corporation and a
wholly-owned subsidiary of Discreet. As a result of the Lightscape Merger,
Discreet Logic acquired, among other products, the Lightscape 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 that had not yet reached technical feasibility and
had no alternative use for which Discreet Logic incurred a one-time charge
against earnings in the amount of $5,800,000 ($0.20 per share), 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 arm's-length negotiations between the
representatives of Discreet and Lightscape.
(D) PROFORMA INFORMATION
The following presents, on an unaudited basis, certain items of the
Company's result of operations, for the fiscal years ended June 30, 1997 and
1998, as though the acquisitions discussed above had occurred on August 1,
1996:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Revenues........................................ $108,151,000 $152,277,000
Operating income (loss)......................... $(13,911,000) $ 6,048,000
Net loss........................................ $(18,944,000) $ (2,747,000)
</TABLE>
(16) GAIN ON SALE OF INVESTMENT
In May 1998, Essential Communications Corporation, a company in which
Discreet held a minority interest investment of preferred shares, was sold. As
a result of this sale, the Company received proceeds of $2,500,000 in exchange
for its preferred shares. Previously, in fiscal 1996, the Company had taken a
charge to operations due to the uncertainty regarding the realizability of
this investment. Upon receipt of the proceeds, the Company realized a gain of
approximately $2,500,000.
(17) COST OF TERMINATED AGREEMENT WITH MGI
In its fourth quarter of fiscal 1998, the Company announced a mutual
termination of its Arrangement Agreement entered into on March 9, 1998 with
MGI Software Corp. ("MGI"). Both the Company and MGI determined that, in light
of current conditions which could result in significant delays in the
realization of previously discussed anticipated benefits and synergies of the
merger, it was in the best interests of both companies to terminate the
agreement and remain independent companies. The Company incurred approximately
$1,713,000 of costs, expensed in fiscal 1998, related to this terminated
agreement.
(18) PURCHASE OF LAND AND FACILITIES
In August 1995, the Company purchased land and an office building in London,
England for approximately (Pounds)1,148,000 (or approximately $1,916,000 at
June 30, 1998). Additionally, in December 1995, the Company purchased land and
a building in Montreal for Cdn$1,730,000 (or approximately $1,250,000 at June
30, 1997).
F-25
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During fiscal 1996, the carrying value of the London and Montreal buildings
were written down to their estimated fair market values and these buildings
were classified as assets held for resale. In September 1997, the Company sold
its Montreal land and office building for a price not materially different
from its carrying value.
(19) RESTRUCTURING
During the fiscal year ended July 31, 1996, the Company recorded a pre-tax
restructuring charge of $15 million to cover the direct costs of restructuring
the Company's operations and to bring operating expenses in line with the
Company's current revenue level. The focus of the Company's restructuring plan
was to solidify its senior management team, reduce operating expenses through
workforce reductions and office closings, consolidate research and development
activities in Montreal, discontinue certain product lines, and restructure its
sales force to emphasize indirect sales channels. 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 major aspects of the restructuring plan and remaining amounts
in accrued liabilities are discussed below.
The restructuring entailed the closing and moving of several offices in
North America and Europe. It also included the termination of approximately
110 positions across all departments and around the world.
The components of the restructuring charge are as follows:
<TABLE>
<S> <C>
Asset write down.............................................. $ 6,190,000
Lease terminations and leasehold improvements reserve......... 4,600,000
Severance..................................................... 2,800,000
Professional services and other............................... 1,410,000
-----------
$15,000,000
===========
</TABLE>
The primary component of the asset write down is an amount of $2.2 million
for goodwill and acquired technology. The other components of the write down
are primarily fixed assets which have no future use.
In the fourth quarter of fiscal 1998, the Company reversed approximately
$2,333,000 of excess reserves, related primarily to the estimated cost of
terminating leases, no longer considered necessary to complete the
restructuring plan.
The charges against the restructuring reserve include the following amounts:
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31, ELEVEN MONTHS ENDED
1996 JUNE 30, 1997 YEAR ENDED JUNE 30, 1998
---------- ------------------- --------------------------------
CHARGES CHARGES CHARGES REVERSED TOTAL
<S> <C> <C> <C> <C> <C>
Asset write down........ $4,421,000 $1,269,000 $ 359,000 $ 141,000 $ 500,000
Lease terminations and
leasehold improvements
reserve................ 1,072,000 865,000 366,000 1,947,000 2,313,000
Severance............... 582,000 1,768,000 205,000 245,000 450,000
Professional services
and other.............. 291,000 460,000 234,000 -- 234,000
---------- ---------- ---------- ---------- ----------
$6,366,000 $4,362,000 $1,164,000 $2,333,000 $3,497,000
========== ========== ========== ========== ==========
</TABLE>
F-26
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following reflects the remaining accrued restructuring expense as of
June 30, 1997 and 1998, by major component:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
---------- --------
<S> <C> <C>
Asset write down...................................... $ 500,000 --
Lease terminations and leasehold improvements reserve. 2,663,000 350,000
Severance............................................. 450,000 --
Professional services and other....................... 659,000 425,000
---------- --------
$4,272,000 $775,000
========== ========
</TABLE>
During the fourth fiscal quarter of 1998, the Company accrued an additional
$829,000 charge, which is included as a component of the restructuring expense
in 1998, for the closure of its U.K. research and development facility, and
the related termination of 17 employees.
The components of the charge are as follows:
<TABLE>
<S> <C>
Asset write down................................................. $444,000
Severance........................................................ 198,000
Professional services and other.................................. 187,000
--------
$829,000
========
</TABLE>
As at June 30, 1998, the closure was substantially complete and the Company
still had $50,000 of restructuring reserves primarily for the estimated legal
and tax costs dissolution of the subsidiary. All other amounts were paid as of
June 30, 1998.
(20) CHANGE IN YEAR END COMPARATIVE RESULTS
Selected unaudited estimated results for the eleven-month period ended June
30, 1996 were approximately as follows:
<TABLE>
<S> <C>
Revenues..................................................... $ 73,000,000
Gross profit................................................. 31,176,000
Provision for income taxes................................... 1,435,000
Net loss..................................................... (43,310,000)
</TABLE>
(21) 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 $1,909,000 at June 30, 1998) in relation with the Lightscape
acquisition. 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.
F-27
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The loan is payable in four annual installments of Cdn$600,000
(approximately $409,000 at June 30, 1998) commencing in July 2004 and a final
installment of Cdn$400,000 (approximately $273,000 at June 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 6.50% at June 30, 1998)
plus 1.5%. In the situation where 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.
(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 $2,054,000
at June 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 $244,000 at June 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 classified
as a liability in accrued expenses at June 30, 1998.
(22) SUBSEQUENT EVENTS
On August 20, 1998, the Company announced that it has entered into a
definitive agreement providing for the acquisition of the Company by Autodesk,
Inc. ("Autodesk"). The combination is intended to create the premier total
solutions provider of digital content design, creation, and manipulation tools
for the creation of moving images. Under the terms of the agreement, Autodesk
will issue 0.525 shares of common stock for each outstanding share of Discreet
Logic stock and the transaction is intended to be accounted for as a pooling
of interests. Subject to several conditions, including regulatory approvals
and 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.
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 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 with
Autodesk. The complaint asks the court to enjoin the consummation of the
Transactions 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.
F-28
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS ON SCHEDULE
To Discreet Logic Inc.:
We have audited in accordance with generally accepted auditing standards in
Canada, which are in substantial agreement with those in the United States of
America, the consolidated financial statements of Discreet Logic Inc. and
subsidiaries as of June 30, 1997 and June 30, 1998 and the year ended July 31,
1996, the eleven-month period ended June 30, 1997, and the year ended June 30,
1998, included in this 10-K. Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedule
listed in Item 16 is the responsibility of the Company's management and is
presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/S/ ARTHUR ANDERSEN & CIE
Chartered Accountants
General Partnership
Montreal, Canada
July 31, 1998
(except with respect to the matters discussed
in Note 22, as to which the date is September 11, 1998.)
S-1
<PAGE>
SCHEDULE II
DISCREET LOGIC INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED
BALANCE AT ADDITION TO BALANCE AT
BEGINNING DUE TO COSTS AND TRANSLATION END OF
DESCRIPTION OF PERIOD ACQUISITION EXPENSES WRITE-OFFS ADJUSTMENTS PERIOD
----------- ---------- ----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
July 31, 1996......... 431,000 -- 3,307,000 89,000 -- 3,649,000
June 30, 1997......... 3,649,000 -- -- 48,000 114,000 3,487,000
June 30, 1998......... 3,487,000 309,000 -- 88,000 54,000 3,654,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING OF COSTS AND AGAINST RESERVE END OF
PERIOD EXPENSES RESERVE REVERSALS PERIOD
------------ ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
RESTRUCTURING RESERVE
July 31, 1996......... 15,000,000 -- 6,365,516 -- 8,634,484
June 30, 1997......... 8,634,484 -- 4,361,781 -- 4,272,703
June 30, 1998......... 4,272,703 829,000 1,943,088 2,333,615 825,000
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
2.1 Asset Purchase Agreement dated as of June 12, 1997 among
3380491 Canada Inc., Denim Software L.L.C., Sam Khulusi,
Frank Khulusi, Westco Denim Investments Group, Ltd., a
California limited partnership, and Frank Khulusi Family
Limited Partnership, a California limited partnership
(filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K dated June 12, 1997 and incorporated herein by
reference).
2.2 Stock Purchase Agreement dated as July 10, 1997 among the
Company, D-Vision Systems, Inc. ("D-Vision"), its former
stockholders and certain other individuals (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K
dated July 15, 1997 (the "D-Vision 8-K") and incorporated
herein by reference).
2.3 Registration Rights Agreement dated as of July 15, 1997
among the Company, D-Vision and its former stockholders
(filed as Exhibit 2.2 to the D-Vision 8-K and incorporated
herein by reference).
2.4 Escrow Agreement dated as of July 15, 1997 among the
Company, D-Vision, its former stockholders and certain
other individuals (filed as Exhibit 2.3 to the D-Vision 8-
K and incorporated herein by reference).
*2.5 Amended and Restated Agreement and Plan of Acquisition and
Amalgamation by and among Autodesk, Inc., Autodesk
Development B.V. 9066-9771 Quebec Inc., Autodesk Canada
Inc., 9066-9854 Quebec Inc. and Discreet Logic Inc. dated
as of September 23, 1998.
3.1 Articles of Incorporation, as amended (filed as Exhibit
4.2 to the Company's Registration Statement on Form S-8
(file No. 33-97400) (the "Registration Statement on Form
S-8") and incorporated herein by reference).
3.2 By-laws (filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-8 and incorporated herein
by reference).
4.1 Specimen Stock Certificate representing the Common Shares
(filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-8 and incorporated herein by
reference).
4.2 Common Shares Purchase Agreement by and between Discreet
Logic Inc. and Intel Corporation made and entered into as
of March 4, 1998 (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated March 4, 1998 and
incorporated herein by reference).
4.3 Investor Rights Agreement by and among Discreet Logic Inc.
and Intel Corporation made and entered into as of March 4,
1998 (filed as Exhibit 4.2 to the Company's Current Report
on Form 8-K dated March 4, 1998 and incorporated herein by
reference).
10.1 Employee Agreement, dated November 4, 1994, by and between
the Company and David N. Macrae (filed as Exhibit 10.1 to
the Company's Registration Statement on Form F-1, as
amended (file No. 33-90776) (the "Registration Statement
on Form F-1") and incorporated herein by reference).
10.2 Memorandum of Agreement dated November 4, 1994, by and
between the Company and David N. Macrae (filed as Exhibit
10.2 to the Company's Registration Statement on
Form F-1 and incorporated herein by reference).
10.3 Employment Agreement, dated February 25, 1994, by and
between the Company and Gary G. Tregaskis (filed as
Exhibit 10.3 to the Company's Registration Statement on
Form F-1 and incorporated herein by reference).
10.4 Employment Agreement, dated June 20, 1996, by and between
the Company and Francois Plamondon (filed as Exhibit 10.4
to the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1996 and incorporated herein by
reference).
</TABLE>
X-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
10.5 Contract of Transaction, dated March 27, 1995, by and
between the Company and certain subsidiaries and Robert J.
Schiller (filed as Exhibit 10.4 to the Company's
Registration Statement on Form F-1 and incorporated herein
by reference).
10.6 Share Cancellation Agreement, dated March 27, 1995, by and
between the Company and Robert J. Schiller (filed as
Exhibit 10.6 to the Company's Registration Statement on
Form F-1 and incorporated herein by reference).
10.7 Memorandum of Agreement, dated March 9, 1994, by and
between the Company and 9002-1585 Quebec Inc. (filed as
Exhibit 10.7 to the Company's Registration Statement on
Form F-1 and incorporated herein by reference).
10.8 Silicon Graphics, Inc. Value-Added Reseller Agreement,
dated May 9, 1994, by and between the Company and Silicon
Graphics, Inc. (filed as Exhibit 10.8 to the Company's
Registration Statement on Form F-1 and incorporated herein
by reference).
10.9 Silicon Graphics, Inc. Value-Added Reseller Agreement
Extension, dated October 4, 1995, by and between the
Company and Silicon Graphics, Inc. (filed as Exhibit 10.8
to the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1995 and incorporated herein by
reference).
10.10 Silicon Graphics, Inc. Value-Added Reseller Agreement
Extension, dated October 16, 1996, by and between the
Company and Silicon Graphics, Inc. (filed as Exhibit 10.10
to the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1996 and incorporated herein by
reference).
10.11 Silicon Graphics, Inc. Value-Added Reseller Agreement
Extension dated July 8, 1997, by and between the Company
and Silicon Graphics, Inc. (filed as Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997 and incorporated herein by reference).
10.12 Credit and Leasing Facility Agreement, dated May 17, 1994,
by and between the Company and Banque Nationale de Paris
(Canada) (filed as Exhibit 10.10 to the Company's
Registration Statement on Form F-1 and incorporated herein
by reference).
10.13 Amendment to Credit and Leasing Facility, dated May 17,
1995, by and between the Company and Banque Nationale de
Paris (Canada) (filed as Exhibit 10.10(a) to the Company's
Registration Statement on Form F-1 and incorporated herein
by reference).
10.14 Security Agreement, dated July 8, 1994, by and between
Discreet Logic-USA Inc. and Banque Nationale de Paris
(filed as Exhibit 10.11 to the Company's Registration
Statement on Form F-1 and incorporated herein by
reference).
10.15 Guaranty Agreement, dated July 8, 1994, by and between
Discreet Logic-USA Inc. and Banque Nationale de Paris
(filed as Exhibit 10.12 to the Company's Registration
Statement on Form F-1 and incorporated herein by
reference).
10.16 Letter Agreement of Amendment, dated July 22, 1997, by and
between Discreet Logic Inc. and Banque Nationale de Paris
(Canada) (filed as Exhibit 10.16 to the Company's
transition report for the transition period from August 1,
1996 to June 30, 1997 and is incorporated by reference).
10.17 Lease Agreement, dated March 1, 1994, by and between the
Company and Peck Building Reg'd as amended through
December 1994 (filed as Exhibit 10.13 to the Company's
Registration Statement on Form F-1 and incorporated herein
by reference).
</TABLE>
X-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
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10.18 Lease Agreement, dated December 1994, by and between the
Company and Rizika Realty Trust (filed as Exhibit 10.14 to
the Company's Registration Statement on Form F-1 and
incorporated herein by reference).
10.19 Land Transfer Agreement, dated August 25, 1995, by and
between the Company and Safeland PLC (filed as Exhibit
10.15 to the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1995 and incorporated herein by
reference).
10.20 Amended and Restated 1994 Restricted Stock and Stock
Option Plan (filed as Exhibit 10.15 to the Company's
Registration Statement on Form F-1 and incorporated herein
by reference).
10.21 1995 Employee Stock Purchase Plan (filed as Exhibit 4.6 to
the Company's Registration Statement on Form S-8 and
incorporated herein by reference).
10.22 1995 Non-Employee Director Stock Option Plan (filed as
Exhibit 10.17 to the Company's Registration Statement on
Form F-1 and incorporated herein by reference).
10.23 1997 Special Limited Non-Employee Director Stock Option
Plan (filed as an exhibit to the Company's transition
report for the transition period from August 1, 1996 to
June 30, 1997 and is incorporated by reference).
10.24 Asset Purchase Agreement by and between the Brughetti
Corporation and Discreet Logic (Barbados) Inc. dated as of
May 17, 1995 (filed as Exhibit 10.18 to the Company's
Registration Statement on Form F-1 and incorporated herein
by reference).
10.25 Share Purchase Agreement by and between Discreet Logic
GmbH and the several sellers named therein dated as of
October 24, 1995 (filed as Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the fiscal year ended July
31, 1995 and incorporated herein by reference).
10.26 Asset Purchase Agreement by and between IMP Innovative
Medientechnik-und Planungs--GmbH and Discreet Logic
(Barbados) Inc. dated as of October 24, 1995 (filed as
Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1995 and incorporated
herein by reference).
10.27 Subscription and Stock Restriction Agreement by and among
Discreet Logic GmbH, the Company and the several
stockholders named therein dated as of October 24, 1995
(filed as Exhibit 10.22 to the Company's Annual Report on
Form 10-K for the fiscal year ended July 31, 1995 and
incorporated herein by reference).
10.28 Silicon Graphics, Inc. Value-Added Reseller Agreement
Extension dated March 26, 1998, by and between the Company
and Silicon Graphics, Inc. (filed as an Exhibit to the
Company's Quarterly report for the Quarter ended March 31,
1998 and is incorporated herein by reference).
*10.29 Silicon Graphics, Inc. Value-Added Reseller Agreement
Extension dated July 15, 1998, by and between the Company
and Silicon Graphics, Inc.
*10.30 Silicon Graphics, Inc. Value-Added Reseller Agreement
Extension dated September 16, 1998, by and between the
Company and Silicon Graphics, Inc.
*21.1 Subsidiaries of the Company.
*23.1 Consent of Arthur Andersen & Cie.
*24.1 Power of Attorney (included on the signature page of this
Form 10-K).
*27 Financial Data Schedule.
</TABLE>
X-3
<PAGE>
Exhibit 2.5
AMENDED AND RESTATED
AGREEMENT AND PLAN OF ACQUISITION AND AMALGAMATION
BY AND AMONG
AUTODESK, INC.,
AUTODESK DEVELOPMENT B.V.,
9066-9771 QUEBEC INC.,
AUTODESK CANADA INC.,
9066-9854 QUEBEC INC.
AND
DISCREET LOGIC INC.
DATED AS OF SEPTEMBER 23, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ARTICLE I The Transactions................................................. A-2
1.1 The Transactions.................................................... A-2
1.2 Effective Time...................................................... A-2
1.3 Share Conversions, Etc.............................................. A-2
1.4 Accounting Consequences............................................. A-2
1.5 Material Adverse Effect............................................. A-2
1.6 Adjustments to Exchange Ratio....................................... A-3
1.7 Cancellation........................................................ A-3
1.8 Share Certificates of Amalgamation Sub and Giants Quebec............ A-3
1.9 Execution of Amalgamation Agreement................................. A-3
1.10 Tax Treatment....................................................... A-3
1.11 Existing Agreement Terminated....................................... A-3
ARTICLE II Representations And Warranties Of The Company................... A-3
2.1 Organization and Qualification; Subsidiaries........................ A-4
2.2 Articles of Incorporation and By-Laws............................... A-4
2.3 Capitalization...................................................... A-4
2.4 Authority........................................................... A-5
2.5 No Conflict; Required Filings and Consents.......................... A-5
2.6 Compliance; Permits................................................. A-6
2.7 SEC Filings; Financial Statements................................... A-6
2.8 Absence of Certain Changes or Events................................ A-7
2.9 Absence of Litigation............................................... A-7
2.10 Employee Benefit Plans; Employment Agreements....................... A-7
2.11 Labor Matters....................................................... A-9
2.12 Registration Statement; Joint Proxy Statement....................... A-9
2.13 Restrictions on Business Activities................................. A-10
2.14 Title to Property................................................... A-10
2.15 Taxes............................................................... A-10
2.16 Environmental Matters............................................... A-12
2.17 Brokers............................................................. A-12
2.18 Intellectual Property............................................... A-12
2.19 Interested Party Transactions....................................... A-13
2.20 Insurance........................................................... A-13
2.21 Vote Required....................................................... A-14
2.22 Pooling Matters..................................................... A-14
2.23 Opinion of Financial Advisor........................................ A-14
ARTICLE III Representations And Warranties Of The Parent Group............. A-14
3.1 Organization and Qualification...................................... A-14
3.2 Authority .......................................................... A-14
3.3 No Conflict; Required Filings and Consents.......................... A-15
3.4 Certificate of Incorporation and By-Laws............................ A-15
3.5 Capitalization...................................................... A-15
3.6 Compliance; Permits................................................. A-16
3.7 SEC Filings; Financial Statements................................... A-16
3.8 Absence of Certain Changes or Events................................ A-16
3.9 Board Approval...................................................... A-17
3.10 Registration Statement; Joint Proxy Statement/Prospectus............ A-17
3.11 Brokers............................................................. A-17
</TABLE>
i
<PAGE>
<TABLE>
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<S> <C>
3.12 Opinion of Financial Advisor........................................ A-17
3.13 Pooling Matters..................................................... A-18
3.14 Absence of Litigation............................................... A-18
3.15 Restrictions on Business Activities................................. A-18
3.16 Taxes............................................................... A-18
3.17 Intellectual Property............................................... A-19
3.18 Insurance........................................................... A-19
3.19 Vote Required....................................................... A-19
ARTICLE IV Conduct Of Business Pending The Amalgamation.................... A-20
4.1 Conduct of Business by the Company Pending the Amalgamation......... A-20
4.2 No Solicitation..................................................... A-21
4.3 Covenants of Parent................................................. A-23
ARTICLE V Additional Agreements............................................ A-23
5.1 Joint Proxy Statement/Prospectus; Registration Statement............ A-23
5.2 Shareholders' Meetings.............................................. A-23
5.3 Access to Information; Confidentiality.............................. A-24
5.4 Consents; Approvals................................................. A-24
5.5 Stock Options; Employee Benefits; Retention of Employees............ A-24
5.6 Company Employee Stock Purchase Plan................................ A-25
5.7 Agreements of Affiliates............................................ A-26
5.8 Voting Agreements................................................... A-26
5.9 Indemnification and Insurance....................................... A-26
5.10 Notification of Certain Matters..................................... A-27
5.11 Further Action...................................................... A-27
5.12 Public Announcements................................................ A-27
5.13 Listing of Parent Common Shares..................................... A-27
5.14 Conveyance Taxes.................................................... A-28
5.15 Pooling Letters..................................................... A-28
5.16 Pooling Accounting Treatment........................................ A-28
5.17 Ancillary Documents/Reservation of Shares........................... A-28
5.18 Listing of Class B Shares, Class E Shares and Class F Shares........ A-29
5.19 Tax Elections....................................................... A-29
5.20 Board Candidate..................................................... A-29
5.21 Issuance of Class D Shares.......................................... A-29
ARTICLE VI Conditions To The Transactions.................................. A-29
6.1 Conditions to Obligation of Each Party to Effect the Transactions... A-29
6.2 Additional Conditions to Obligations of Parent Group Members........ A-31
6.3 Additional Conditions to Obligation of the Company.................. A-31
ARTICLE VII Termination.................................................... A-31
7.1 Termination......................................................... A-32
7.2 Effect of Termination............................................... A-33
7.3 Fees and Expenses................................................... A-33
ARTICLE VIII General Provisions............................................ A-34
8.1 Effectiveness of Representations, Warranties and Agreements......... A-34
8.2 Notices............................................................. A-34
8.3 Certain Definitions................................................. A-35
8.4 Amendment........................................................... A-36
</TABLE>
ii
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<TABLE>
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<S> <C>
8.5 Waiver.............................................................. A-36
8.6 Headings............................................................ A-36
8.7 Severability........................................................ A-36
8.8 Entire Agreement.................................................... A-36
8.9 Assignment; Amalgamation Sub/Dutchco................................ A-36
8.10 Parties in Interest................................................. A-37
8.11 Failure or Indulgence Not Waiver; Remedies Cumulative............... A-37
8.12 Governing Law....................................................... A-37
8.13 Choice of Language.................................................. A-37
8.14 Counterparts........................................................ A-37
8.15 Guarantee........................................................... A-37
</TABLE>
EXHIBITS:
Exhibit A:Form of Amalgamation Agreement
Exhibit B-1:Form of Parent Affiliate Agreement
Exhibit B-2:Form of Company Affiliate Agreement
Exhibit C-1:Form of Parent Voting Agreement
Exhibit C-2:Form of Company Voting Agreement
Exhibit D:Form of Support Agreement
Exhibit E:Form of Voting and Exchange Trust Agreement
Exhibit F:Form of Certificate of Designation
iii
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF ACQUISITION AND AMALGAMATION
This Amended and Restated Agreement and Plan of Acquisition and
Amalgamation, dated as of September 23, 1998 (the "AGREEMENT"), is entered
into by and among Autodesk, Inc., a Delaware corporation ("PARENT"), Autodesk
Development B.V., a Netherlands corporation and indirect wholly owned
subsidiary of Parent ("DUTCHCO"), 9066-9771 Quebec Inc., a Quebec company and
a wholly owned subsidiary of Dutchco ("AMALGAMATION SUB"), Autodesk Canada
Inc., an Ontario company and wholly owned subsidiary of Parent ("ACI"), 9066-
9854 Quebec Inc., a Quebec company and indirect wholly owned subsidiary of
Parent ("GIANTS QUEBEC"), and Discreet Logic Inc., a Quebec company (the
"Company").
Witnesseth:
Whereas, the Boards of Directors of Parent, Dutchco and the Company have
each determined that it is advisable and in the best interests of their
respective stockholders for Dutchco to acquire shares in the share capital of
the Company upon the terms and subject to the conditions set forth herein;
Whereas, in furtherance of such acquisition, Parent, Dutchco, Amalgamation
Sub, Giants Quebec, ACI and the Company entered into an Agreement and Plan of
Acquisition and Arrangement dated as of August 20, 1998 (the "EXISTING
AGREEMENT");
Whereas, the Boards of Directors of Parent, Dutchco, Amalgamation Sub,
Giants Quebec, ACI and the Company now desire to amend and restate the
Existing Agreement and have each approved the execution and delivery of this
Agreement in order to provide for a business combination involving the
amalgamation (the "AMALGAMATION") of Amalgamation Sub, Giants Quebec (to which
ACI will assign, prior to the Amalgamation, substantially all its assets) and
the Company whereupon each outstanding common share in the Company's share
capital (the "COMPANY COMMON SHARES") shall be converted into one Class B
Share of the continuing corporation resulting from the Amalgamation (the
"CONTINUING CORPORATION");
Whereas, Articles of Amalgamation (the "ARTICLES") will be filed pursuant to
Section 123.118 of the Companies Act (Quebec) (the "QUEBEC ACT"), pursuant to
the terms hereof and the Amalgamation Agreement (the "AMALGAMATION AGREEMENT")
in the form annexed hereto as Exhibit A;
Whereas, immediately following the Amalgamation, the Class B Shares of the
Continuing Corporation automatically will be, based on the prior election of
the holder, either (i) redeemed by the Continuing Corporation for 0.525 (the
"EXCHANGE RATIO") exchangeable shares in the share capital of the Continuing
Corporation (the "EXCHANGEABLE SHARES"), subject to proration in certain
instances, or (ii) converted into units comprised of one Class E Share and one
Class F Share of the Continuing Corporation ("UNITS"), which units will be
acquired by Dutchco in exchange for 0.525 shares of common stock, par value
$0.01 per share, of Parent ("PARENT COMMON SHARES"), in either case without
further action on the part of the holder;
Whereas, the Exchangeable Shares are exchangeable by the holders for Parent
Common Shares on a one-for-one basis at any time on or before a date eleven
(11) years after the Effective Time (as defined herein), and
Whereas, for accounting purposes, it is intended that the Transactions (as
defined in Section 1.1 hereof) shall be accounted for as a taxable pooling of
interests under United States generally accepted accounting principles ("US
GAAP");
Now, Therefore, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Dutchco, ACI, Giants Quebec, Amalgamation Sub (collectively, the
"PARENT GROUP") and the Company hereby agree as follows:
A-1
<PAGE>
ARTICLE I
The Transactions
1.1 The Transactions.
(a) Effective Time. Subject to and upon the terms and conditions of the
Ancillary Documents (as defined in Section 5.17), this Agreement, the Articles
and the Quebec Act, (i) at the Effective Time (as defined in Section 1.2
hereof), Amalgamation Sub and Giants Quebec shall be amalgamated with the
Company (provided, however, that the Company shall not be required to
amalgamate with Amalgamation Sub unless Giants Quebec simultaneously
amalgamates with Amalgamation Sub, and Giants Quebec shall not be required to
amalgamate with Amalgamation Sub unless the Company simultaneously amalgamates
with Amalgamation Sub) and (ii) immediately following the Effective Time, the
Class B Shares of the Continuing Corporation automatically shall, based on the
prior election of the holder, either (x) be redeemed by the Continuing
Corporation for Exchangeable Shares of the Continuing Corporation or (y) be
converted into Units which Units shall be acquired by Dutchco in exchange for
shares of Parent Common Stock, in either case without further action on the
part of the holder (such redemptions, conversions and share acquisitions set
forth in clause (ii), together with the Amalgamation, are collectively
referred to herein as the "TRANSACTIONS"). Prior to the Effective Time, ACI
will assign and transfer all of its assets and liabilities to Giants Quebec.
(b) Closing. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
7.1 hereof, and subject to the satisfaction or waiver of the conditions set
forth in Article VI hereof, the consummation of the Transactions will take
place as promptly as practicable after satisfaction or waiver of the
conditions set forth in Article VI hereof, at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California, unless another
date, time or place is agreed to in writing by the parties hereto. At the
closing, the parties hereto shall deliver the documents contemplated hereby
together with such other customary documents as may be reasonably requested by
the parties.
1.2 Effective Time. As promptly as practicable after the satisfaction or
waiver of the conditions set forth in Article VI, the parties hereto shall
cause the Amalgamation to be consummated by filing the Articles together with
the documents contemplated by Section 123.14 of the Quebec Act, with the
Inspector General of Financial Institutions of the Province of Quebec, in such
form as required by, and executed in accordance with the relevant provisions
of, the Quebec Act (the time specified in such filing being the "EFFECTIVE
TIME").
1.3 Share Conversions, Etc. Immediately following the Class B Conversion
Time (as defined in Appendix A to the Amalgamation Agreement), Dutchco and
Parent shall cause the Continuing Corporation to provide notice of its
intention to exercise its right to redeem the Class E Shares and Class F
Shares of the Continuing Corporation (as specified in Appendix A to the
Amalgamation Agreement). At or prior to the Class E Redemption Time and the
Class F Redemption Time, Dutchco shall, and Parent shall cause Dutchco to,
exercise the Class E Redemption Call Right and the Class F Redemption Call
Right (as each is defined in Appendix A to the Amalgamation Agreement).
1.4 Accounting Consequences. It is intended by the parties hereto that the
Transactions shall qualify for accounting treatment as a pooling of interests
under US GAAP.
1.5 Material Adverse Effect. When used in connection with the Company, or
Parent, as the case may be, the term "MATERIAL ADVERSE EFFECT" means any
change or effect that, individually or when taken together with all other such
changes or effects that have occurred prior to the date of determination of
the occurrence of the Material Adverse Effect, is or is reasonably likely to
be materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of the Company and its
subsidiaries or Parent and its subsidiaries, as the case may be, in each case
taken as a whole; provided, however, that none of the following shall be
deemed to constitute a Material Adverse Effect with respect to either party:
(a) any change in the market price or trading volume of the Company Common
Shares or Parent Common Shares, as appropriate; (b) any adverse effect on the
bookings, revenues or earnings of such party, or any delay in or reduction or
cancellation of such party's product orders, following the execution of the
Existing Agreement or this Agreement which is
A-2
<PAGE>
reasonably attributable to the announcement of the execution of the Existing
Agreement or this Agreement and the transactions contemplated hereby; (c) any
change arising out of conditions affecting the economy or industry of such
party in general; (d) the failure, in and of itself, to meet analysts'
expectations (it being understood that the underlying causes of such failure
shall not be excluded from the definition of Material Adverse Effect except as
otherwise provided in this definition); or (e) employee attrition which is (i)
reasonably attributable to the announcement of the execution of the Existing
Agreement or this Agreement and the transactions contemplated hereby, or (ii)
directly attributable to any action directly required of the Company by Parent
under Section 4.1, or any omission of the Company directly resulting from
Parent's failure to consent to actions requested to be taken by the Company
under Section 4.1.
1.6 Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect fully the effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities convertible into Parent
Common Shares or Company Common Shares), reorganization, recapitalization or
other like change with respect to Parent Common Shares or Company Common
Shares occurring after the date hereof and prior to the Effective Time.
1.7 Cancellation. Immediately prior to the Effective Time, each Company
Common Share owned by Parent, Dutchco, Amalgamation Sub or any direct or
indirect wholly owned subsidiary of the Company or Parent shall be purchased
for cancellation by the Company for nominal consideration.
1.8 Share Certificates of Amalgamation Sub and Giants Quebec. Each share
certificate of Amalgamation Sub evidencing ownership of any common shares of
Amalgamation Sub shall continue to evidence ownership of Class A Shares in the
share capital of the Continuing Corporation, and each share certificate of
Giants Quebec evidencing ownership of any common shares of Giants Quebec shall
continue to evidence ownership of Class C Shares in the share capital of the
Continuing Corporation. Any reference herein to classes of shares in the share
capital of the Continuing Corporation shall mean the classes of shares set out
in Appendix A to the Amalgamation Agreement.
1.9 Execution of Amalgamation Agreement. Concurrently herewith, Amalgamation
Sub, Autodesk Quebec and the Company shall execute and deliver the
Amalgamation Agreement.
1.10 Tax Treatment. It is intended that the Transactions shall generally
constitute (i) a taxable exchange for United States federal income tax
purposes (not qualifying under Sections 368 or 351 of the United States
Internal Revenue Code of 1986, as amended (the "Code")) to holders of Company
Common Shares who are otherwise subject to taxation in the United States on
the sale or exchange of Company Common Shares, and (ii) a non-taxable exchange
for Canadian federal income tax purposes for owners of Company Common Shares
who are residents of Canada for Canadian federal income tax purposes who elect
to receive Exchangeable Shares (but only to the extent they actually receive
Exchangeable Shares and only to the extent that they file appropriate
elections with the relevant tax authorities), which election the parties
hereto intend shall be permitted only to the extent that the aggregate
percentage of Company Common Shares exchanged for Exchangeable Shares pursuant
to all such elections shall not exceed 19.99 percent of the Company Common
Shares outstanding immediately prior to the Effective Time.
1.11 Existing Agreement Terminated. This Agreement amends and restates in
its entirety the Existing Agreement. Accordingly, upon the execution and
delivery hereof by the parties, the Existing Agreement shall be terminated in
all respects and be of no further force or effect (except in respect of rights
which have arisen prior to the date hereof).
ARTICLE II
Representations And Warranties Of The Company
The term "KNOWLEDGE" as used in connection with the Company shall mean the
Company's actual knowledge after reasonable inquiry of officers, directors and
other employees of the Company charged with
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senior administrative or operational responsibility of such matters. The
Company hereby represents and warrants to each member of the Parent Group as
of the date of the Existing Agreement (except for representations and
warranties which reflect technical changes to the Existing Agreement resulting
from the change in structure of the business combination to an Amalgamation,
which are made as of the date hereof), subject to the written disclosure
schedule supplied by the Company to Parent dated as of the date of the
Existing Agreement and certified by a duly authorized officer of the Company
(the "COMPANY DISCLOSURE SCHEDULE"), that:
2.1 Organization and Qualification; Subsidiaries. The Company and, except as
set forth on Schedule 2.1 of the Company Disclosure Schedule, each of its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization and has the requisite corporate power and authority and is in
possession of all material franchises, grants, authorizations, licenses,
permits, easements, consents, certificates, approvals and orders
(collectively, "APPROVALS") necessary to own, lease and operate the properties
it purports to own, operate or lease and to carry on its business as it is now
being conducted, except where the failure to be so organized, existing and in
good standing or to have such power, authority and Approvals would not have a
Material Adverse Effect. The Company and each of its subsidiaries is duly
qualified or licensed as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing that would not have a Material
Adverse Effect. A true and complete list of all of the Company's subsidiaries,
together with the jurisdiction of incorporation or organization of each
subsidiary and the percentage of each subsidiary's outstanding capital stock
owned by the Company or another subsidiary, is set forth in Schedule 2.1 of
the Company Disclosure Schedule. Except as set forth in Schedule 2.1 of the
Company Disclosure Schedule, the Company does not directly or indirectly own
any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for, any equity or similar interest in, any
corporation, partnership, joint venture or other business association or
entity.
2.2 Articles of Incorporation and By-Laws. The Company has heretofore
furnished to Parent a complete and correct copy of its Articles of
Incorporation and By-Laws, as amended to date, and has made available to
Parent the equivalent organizational documents of each of its subsidiaries.
Such Articles of Incorporation, By-Laws and equivalent organizational
documents of each of its subsidiaries are in full force and effect. Except as
set forth on Schedule 2.2 of the Company Disclosure Schedule, neither the
Company nor any of its subsidiaries is in violation of any of the provisions
of its Articles of Incorporation or By-Laws or equivalent organizational
documents.
2.3 Capitalization. The authorized share capital of the Company consists of
an unlimited number of Company Common Shares and an unlimited number of
preferred shares, no par value (the "COMPANY PREFERRED SHARES"). As of August
10, 1998, (i) 29,653,313 Company Common Shares were issued and outstanding,
all of which are validly issued, fully paid and nonassessable, (ii) no Company
Common Shares were held by subsidiaries of the Company, (iii) 5,012,924
Company Common Shares were reserved for future issuance pursuant to option
grants under the Company's Amended and Restated 1994 Restricted Stock and
Stock Option Plan, of which options to purchase 3,505,716 Company Common
Shares are outstanding, (iv) 111,779 Company Common Shares were reserved for
future issuance under the Company's 1995 Employee Stock Purchase Plan, (v)
200,000 Company Common Shares were reserved for future issuance pursuant to
option grants under the Company's 1995 Non-Employee Director Stock Option
Plan, of which options to purchase 140,000 Company Common Shares are
outstanding, (vi) 20,000 Company Common Shares were reserved for future
issuance pursuant to option grants under the Company's 1997 Special Limited
Non-Employee Director Stock Plan, of which options to purchase 20,000 Company
Common Shares are outstanding, and (vii) no Company Preferred Shares were
issued or outstanding. Except as set forth in Schedule 2.3 of the Company
Disclosure Schedule, no material change in such capitalization has occurred
between August 10, 1998 and the date hereof, except for the issuance of shares
under the exercise of options, warrants or other rights outstanding prior to
August 10, 1998. Except as set forth in this Section 2.3 or Section 2.10
hereof or in Schedule 2.3 or Schedule 2.10 of the Company Disclosure Schedule,
there are no options, warrants or other rights, agreements, arrangements or
commitments of any character relating to the issued or unissued capital stock
of the Company or any of its subsidiaries
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obligating the Company or any of its subsidiaries to issue or sell any shares
of share capital of, or other equity interests in, the Company or any of its
subsidiaries. All Company Common Shares subject to issuance as aforesaid, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, shall be duly authorized, validly issued, fully paid
and nonassessable. Except as set forth in Schedule 2.3 of the Company
Disclosure Schedule, there are no obligations, contingent or otherwise, of the
Company or any of its subsidiaries (A) to repurchase, redeem or otherwise
acquire any shares of the share capital of the Company or the capital stock of
any subsidiary or (B) except for the provision of operational expenses to
subsidiaries in the ordinary course of business consistent with past practice,
to provide funds or to make any investment (in the form of a loan, capital
contribution or otherwise) in any such subsidiary or any other entity other
than guarantees of bank and capital or other lease obligations of subsidiaries
entered into in the ordinary course of business. All of the outstanding shares
of capital stock of each of the Company's subsidiaries are duly authorized,
validly issued, fully paid and nonassessable, and all such shares are owned by
the Company or another subsidiary free and clear of all security interests,
liens, claims, pledges, agreements, limitations in the Company's voting
rights, charges or other encumbrances of any nature whatsoever which would
have a Material Adverse Effect.
2.4 Authority. The Company has all necessary corporate power and authority
to execute and deliver this Agreement and the Amalgamation Agreement and to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Amalgamation Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby and
thereby have been duly and validly authorized by all necessary corporate
action and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or the Amalgamation Agreement or to
consummate the Transactions, other than the approval and adoption of this
Agreement and confirmation of by-law No. 1998-1 approving the Amalgamation by
the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding Company Common Shares who are permitted to, and who, vote at the
Company Shareholders' Meeting (as defined in Section 2.12 hereof) in
accordance with the Quebec Act. The Board of Directors of the Company has
determined that it is advisable and in the best interests of the Company's
shareholders for the Company to enter into a business combination with Parent
upon the terms and subject to the conditions of this Agreement and to
recommend that the shareholders of the Company approve same. This Agreement
and the Amalgamation Agreement have each been duly and validly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery of each such agreement by each member of the Parent Group, as
applicable, each such agreement constitutes a legal, valid and binding
obligation of the Company.
2.5 No Conflict; Required Filings and Consents.
(a) Schedule 2.5(a) of the Company Disclosure Schedule sets forth all
agreements necessary to the current operation of the business of the Company,
excluding (i) employment agreements, standard end user license agreements and
standard distribution agreements; (ii) purchase orders, procurement contracts
and other similar agreements entered into in the ordinary course of business;
(iii) agreements which call for the payment or receipt of less than $200,000
over a three-year period; (iv) agreements disclosed in Schedule 2.18 of the
Company Disclosure Schedule; or (v) agreements filed with the United States
Securities and Exchange Commission ("SEC") pursuant to the requirements under
Item 601(b) of Regulation S-K.
(b) The execution and delivery of this Agreement and the Amalgamation
Agreement by the Company do not, and the performance of this Agreement and the
Amalgamation Agreement by the Company will not, (i) conflict with or violate
the Articles of Incorporation or By-Laws or equivalent organizational
documents of the Company or any of its subsidiaries, (ii) conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to the
Company or any of its subsidiaries or by which its or any of their respective
properties is bound or affected, or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default), or impair the Company's or any of its subsidiaries'
rights or, to the Company's knowledge, alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of any agreement (each, a "COVERED AGREEMENT")
disclosed in Schedule 2.5(a) and Schedule 2.18 of the Company Disclosure
Schedule or filed as a "material contract" with the SEC pursuant to the
requirements of the Securities Exchange Act of 1934, as amended, and
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the SEC's rules thereunder (collectively, the "EXCHANGE ACT"), or result in
the creation of a lien or encumbrance on any of the properties or assets of
the Company or any of its subsidiaries pursuant to any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or its or any of
their respective properties is bound or affected, except in the case of (ii)
and (iii) for any such conflicts, violations, breaches, defaults,
terminations, cancellations or accelerations which would not have a Material
Adverse Effect.
(c) The execution and delivery of this Agreement and the Amalgamation
Agreement by the Company do not, and the performance of the transactions
contemplated hereby and thereby will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, domestic or foreign, to be made or
obtained by the Company, except (i) for applicable requirements, if any, of
the Securities Act of 1933, as amended, and the SEC's rules thereunder (the
"SECURITIES ACT"), the Exchange Act, state securities laws ("BLUE SKY LAWS"),
the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR ACT"), the Securities Act
(Quebec) (the "QSA") and other relevant Canadian securities statutes, filing
with Industry Canada under the Investment Canada Act (Canada), filing under
the Competition Act (Canada) and the filing and recordation of appropriate
documents as required by the Quebec Act in connection with the Transactions
and (ii) where the failure to obtain such consents, approvals, authorizations
or permits, or to make such filings or notifications, would not prevent or
materially delay consummation of the Transactions, or otherwise prevent or
materially delay the Company from performing its obligations under this
Agreement and the Amalgamation Agreement, or would not otherwise have a
Material Adverse Effect.
2.6 Compliance; Permits.
(a) Neither the Company nor any of its subsidiaries is in conflict with, or in
default or violation of, (i) any law, rule, regulation, order, judgment or
decree applicable to the Company or any of its subsidiaries or by which its or
any of their respective properties is bound or affected or (ii) any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
its or any of their respective properties is bound or affected, except for any
such conflicts, defaults or violations which would not have a Material Adverse
Effect.
(b) Except as disclosed in Schedule 2.6(b) of the Company Disclosure Schedule,
the Company and its subsidiaries, but only to the extent material to the
operation of the business of the Company and the subsidiaries, as a whole,
hold all permits, licenses, easements, variances, exemptions, consents,
certificates, orders and approvals from governmental authorities that are
material to the operation of the business of the Company as operated on the
date hereof (collectively, the "COMPANY PERMITS"). The Company and its
subsidiaries, but only to the extent material to the operation of the business
of the Company and the subsidiaries, as a whole, are in compliance with the
terms of the Company Permits, except where the failure to so comply would not
have a Material Adverse Effect.
2.7 SEC Filings; Financial Statements.
(a) The Company has filed all forms, reports and documents required to be
filed by the Company with the SEC since July 6, 1995 and has made available to
Parent (i) its Transition Report on Form 10-K for the eleven-month period
ended June 30, 1997, (ii) its Quarterly Reports on Form 10-Q for the three-
month periods ended September 30, 1997, December 31, 1997 and March 31, 1998,
respectively, (iii) all proxy statements relating to the Company's meetings of
stockholders (whether annual or special) held since July 6, 1995, (iv) all
other reports or Registration Statements (other than Reports on Form 10-Q not
referred to in clause (ii) above and Reports on Form 3, 4 or 5 or registration
statements on Form S-8) filed by the Company with the SEC since July 6, 1995,
and (v) all amendments and supplements to all such reports and registration
statements filed by the Company with the SEC (collectively, the "COMPANY SEC
REPORTS"). The Company SEC Reports (i) were prepared in accordance with the
requirements of the Securities Act or the Exchange Act, as the case may be, in
all material respects, and (ii) did not at the time they were filed (or if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such amending or superseding filing) contain any untrue statement
of a material fact or omit
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to state a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. As of the date hereof, none of the Company's
subsidiaries is required to file any forms, reports or other documents with
the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Company SEC Reports was prepared
in accordance with US GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated therein or in the notes thereto
or, in the case of unaudited financial statements, as permitted by Form 10-Q
of the SEC) and each fairly presented in all material respects the
consolidated financial position of the Company and its subsidiaries as at the
respective dates thereof and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount. The
unaudited financial statements of the Company for its fiscal year ended June
30, 1998 included in Schedule 2.7(b) of the Company Disclosure Schedule (the
"COMPANY FINANCIAL STATEMENTS") reflect in all material respects the financial
position of the Company as of June 30, 1998 and were prepared in accordance
with US GAAP, except for the absence of a statement of shareholders' equity, a
statement of cash flow, and in each case, the absence of notes thereto and of
any subsequent events or similar such notations that may require a change in
the financial statements.
(c) The Company has hereto furnished to Parent a complete and correct copy of
any amendments or modifications which have not yet been filed with the SEC but
which are required to be filed, to agreements, documents or other instruments
which previously had been filed by the Company with the SEC pursuant to the
Securities Act or the Exchange Act.
(d) The Company is not a "reporting issuer" or its equivalent for the purposes
of the QSA or any other Canadian provincial securities legislation.
2.8 Absence of Certain Changes or Events. Except as set forth in Schedule
2.8 of the Company Disclosure Schedule and in the Company SEC Reports, since
June 30, 1998, the Company has conducted its business in the ordinary course
and since such date and through the date hereof, there has not occurred any
Material Adverse Effect. In addition, since such date there has not been (i)
any amendment or change in the Articles of Incorporation or By-Laws of the
Company, (ii) any damage to, destruction or loss of any assets of the Company
(whether or not covered by insurance) that could have a Material Adverse
Effect, (iii) any revaluation by the Company of any of its assets resulting in
or reasonably likely to have a Material Adverse Effect, including, without
limitation, writing down the value of capitalized software or inventory or
writing off notes or accounts receivable other than in the ordinary course of
business, (iii) except as disclosed in Schedule 2.8 of the Company Disclosure
Schedule, any other action or event that would have required the consent of
Parent pursuant to Section 4.1 hereof had such action or event occurred after
the date of this Agreement and that would be reasonably likely to have a
Material Adverse Effect.
2.9 Absence of Litigation. Except as set forth in Schedule 2.9 of the
Company Disclosure Schedule or the Company SEC Reports, there are no claims,
actions, suits, proceedings or investigations pending or, to the knowledge of
the Company, threatened against the Company or any of its subsidiaries, or any
properties of the Company or any of its subsidiaries or the Company
Intellectual Property Rights (as defined in Section 2.18), before any court,
tribunal, arbitrator or administrative, governmental or regulatory authority
or body, domestic or foreign, that is reasonably likely to have a Material
Adverse Effect.
2.10 Employee Benefit Plans; Employment Agreements.
(a) The Company has made available to Parent all employee benefit plans (as
defined in Section 3(3) of the United States Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), regardless of whether ERISA is
applicable thereto, all other bonus, stock option, stock purchase, incentive,
deferred compensation, supplemental retirement, severance or termination pay,
or medical, life or other insurance, supplemental unemployment benefits,
profit-sharing, pension or retirement plans, agreements or arrangements and
other similar material fringe or employee benefit plans, programs or
arrangements (including those sponsored by the federal or any provincial
government of Canada, collectively "GOVERNMENT SPONSORED or MANDATED
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PLANS") and any current or former employment or executive compensation or
severance agreements, written or otherwise, for the benefit of, or relating
to, any employee of the Company, any trade or business (whether or not
incorporated) which is a member of a controlled group including the Company or
which is under common control with the Company (an "ERISA AFFILIATE") within
the meaning of Section 414 of the Code, or any subsidiary of the Company, as
well as each plan with respect to which the Company or an ERISA Affiliate
could incur liability if such plan has been or were terminated (together, the
"EMPLOYEE PLANS"), and a copy of each such written Employee Plan has been made
available to Parent.
(b) (i) Except as set forth in Schedule 2.10(b) of the Company Disclosure
Schedule, none of the Employee Plans promises or provides retiree medical or
other retiree welfare benefits to any person and none of the Employee Plans is
a "MULTIEMPLOYER PLAN" as such term is defined in Section 3(37) of ERISA; (ii)
there has been no transaction or failure to act with respect to any Employee
Plan, which could result in any material liability of the Company or any of
its subsidiaries; (iii) all Employee Plans are in compliance in all material
respects with the requirements prescribed by any and all statutes, orders, or
governmental rules and regulations currently in effect with respect thereto,
and the Company and each of its subsidiaries have performed all material
obligations required to be performed by them under, are not in any material
respect in default under or in violation of, and have no knowledge of any
material default or violation by any other party to, any of the Employee
Plans; (iv) each Employee Plan intended to qualify under Section 401(a) of the
Code and each trust intended to qualify under Section 501(a) of the Code is
the subject of a favorable determination letter from the United States
Internal Revenue Service (the "IRS"), and so far as the Company is aware
nothing has occurred which may reasonably be expected to impair such
determination; (v) all contributions required to be made to any Employee Plan,
under the terms of the Employee Plan or any collective bargaining agreement,
have been made on or before their due dates and a reasonable amount has been
accrued for contributions to each Employee Plan for the current plan years;
(vi) with respect to each Employee Plan subject to Title IV of ERISA, no
"REPORTABLE EVENT" within the meaning of Section 4043 of ERISA (excluding any
such event for which the thirty (30) day notice requirement has been waived
under the regulations to Section 4043 of ERISA) nor any event described in
Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) neither the
Company nor any ERISA Affiliate has incurred, nor reasonably expects to incur,
any liability under Title IV of ERISA (other than liability for premium
payments to the United States Pension Benefit Guaranty Corporation arising in
the ordinary course).
(c) Each Employee Plan that is required or intended to be qualified under
applicable law or registered or approved by a governmental agency or authority
has been so qualified, registered or approved by the appropriate governmental
agency or authority if required to obtain such qualification, registration or
approval, and, to the Company's knowledge, nothing has occurred since the date
of the last qualification, registration or approval to adversely affect, or
cause, the appropriate governmental agency or authority to revoke such
qualification, registration or approval.
(d) All contributions (including premiums) required by law or contract to have
been made or approved by the Company under or with respect to the Employee
Plans have been paid or accrued by the Company, except as would not have a
Material Adverse Effect. Without limiting the foregoing, there are no material
unfunded liabilities under any Employee Plan.
(e) There are no pending or, to the Company's knowledge, threatened
investigations, litigation or other enforcement actions against the Company
with respect to any of the Employee Plans.
(f) There are no actions, suits or claims pending or, to the knowledge of the
Company, threatened by former or present employees of the Company (or their
beneficiaries) with respect to the Employee Plans or the assets or fiduciaries
thereof (other than routine claims for benefits).
(g) Except as set forth in Schedule 2.10(g) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries maintains any 401(k)
or other type of pension plan subject to Section 401(a) of the Code in the
United States.
(h) No condition or event has occurred with respect to the Employee Plans
which has or could reasonably be expected to result in a material liability to
the Company.
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(i) Schedule 2.10(i) of the Company Disclosure Schedule sets forth, as of
August 10, 1998, a true and complete list of each current or former employee,
officer or director of the Company or any of its subsidiaries who holds any
option to purchase Company Common Shares as of the date hereof, together with
the number of Company Common Shares subject to such option, the date of grant
of such option, the extent to which such option is vested, the option price of
such option (to the extent determined as of the date hereof), whether such
option is intended to qualify as an incentive stock option within the meaning
of Section 422(b) of the Code (an "ISO"), and the expiration date of such
option. Schedule 2.10(i) of the Company Disclosure Schedule also sets forth
the total number of such ISOs and such nonqualified options.
(j) The Company has made available to Parent and Dutchco (i) copies of all
employment agreements with executive officers of the Company; (ii) copies of
all agreements with consultants who are individuals obligating the Company to
make annual cash payments in an amount exceeding US $100,000; (iii) a schedule
listing all officers of the Company who have executed a non-competition
agreement with the Company; (iv) copies of all severance agreements, programs
and policies of the Company, if any, with or relating to its employees; (v)
copies of all plans, programs, agreements and other arrangements of the
Company with or relating to its employees which contain change in control
provisions; and (vi) the form of standard employment agreement of the Company
for its non-executive employees.
2.11 Labor Matters. (i) There are no actions or proceedings pending or, to
the knowledge of the Company, threatened between the Company or any of its
subsidiaries and any of their respective employees, which have or may have a
Material Adverse Effect; (ii) neither the Company nor any of its subsidiaries
is a party to any collective bargaining agreement or other labor union
contract applicable to persons employed by the Company or any of its
subsidiaries nor does the Company or any of its subsidiaries know of any
activities or proceedings of any labor union to organize any such employees;
and (iii) neither the Company nor any of its subsidiaries has any knowledge of
any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or
with respect to any employees of the Company or any of its subsidiaries.
2.12 Registration Statement; Joint Proxy Statement. None of the information
to be supplied by the Company in writing for inclusion or incorporation by
reference in (i) the registration statement on Form S-4 (the "FORM S-4") to be
filed with the SEC by Parent in connection with the (A) sale of Parent Common
Shares by Dutchco to holders of Units in exchange for such Units, and (B)
issuance of Exchangeable Shares by the Continuing Corporation, (ii) the proxy
statement relating to the general special meeting of the Company's
shareholders (the "COMPANY SHAREHOLDERS' MEETING") and the proxy statement
relating to the special meeting of Parent's stockholders (the "PARENT
STOCKHOLDERS' MEETING") to be held in connection with the Transactions
(collectively, the "JOINT PROXY STATEMENT" and, together with the Form S-4,
the "JOINT PROXY STATEMENT/PROSPECTUS"), and (iii) any other document to be
filed with the SEC or any regulatory agency by any member of the Parent Group
or the Company in connection with the transactions contemplated by this
Agreement (the "OTHER FILINGS") will, (A) at the respective times such
documents are filed with the SEC or other regulatory agency, (B) in the case
of the Joint Proxy Statement/Prospectus, at the date it or any amendments or
supplements thereto are mailed to stockholders, at the time of the Company
Shareholders' Meeting and at the Effective Time and (C) in the case of the
Form S-4, when it becomes effective under the Securities Act, at the Effective
Time and on the date of any post-effective amendment thereto, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Joint Proxy Statement (as it relates to the Company
Shareholders' Meeting) will comply as to form in all material respects with
the applicable provisions of the Quebec Act and the Exchange Act. If at any
time prior to the Effective Time any event relating to the Company or any of
its respective affiliates, officers or directors should be discovered by the
Company which should be set forth in an amendment to the Form S-4 or a
supplement to the Joint Proxy Statement, the Company shall promptly inform
Parent. Notwithstanding the foregoing, the Company makes no representation or
warranty with respect to any information supplied by any member of the Parent
Group which is contained in any of the foregoing documents. No requirements of
any Canadian provincial securities legislation govern the contents or mailing
of the Joint Proxy Statement nor the holding of the Company Shareholders'
Meeting.
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2.13 Restrictions on Business Activities. Except for this Agreement, there
is no material agreement, judgment, injunction, order or decree binding upon
the Company or any of its subsidiaries which has or could reasonably be
expected to have the effect of prohibiting or impairing any material business
practice of the Company or any of its subsidiaries, the acquisition of
property by the Company or any of its subsidiaries or the conduct of business
by the Company or any of its subsidiaries as currently conducted.
2.14 Title to Property. Schedule 2.14 of the Company Disclosure Schedule
sets forth a true and complete list of all real property (i) owned by the
Company or any of its subsidiaries or (ii) leased by the Company or any of its
subsidiaries requiring annual lease payments of more than US $100,000
("MATERIAL LEASES"), and the aggregate monthly rental or other fee payable
under such Material Lease. The Company and each of its subsidiaries have good
and valid title to all of their properties and assets free and clear of all
liens, charges and encumbrances except (i) liens for Taxes not yet due and
payable, (ii) such liens or other imperfections of title, if any, as do not
materially detract from the value of or interfere with the present use of the
property affected thereby, (iii) liens securing debt which is reflected on the
balance sheet of the Company at June 30, 1998 included in the Company
Financial Statements, or (iv) liens which would not have a Material Adverse
Effect; and all Material Leases are in good standing, valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing material default or event of default as to the Company or
its subsidiaries (or event which with notice or lapse of time, or both, would
constitute a material default and in respect of which the Company or such
subsidiary has not taken adequate steps to prevent such a default from
occurring) except where the lack of such good standing, validity and
effectiveness or the existence of such default or event of default would not
have a Material Adverse Effect. All the facilities of the Company and its
subsidiaries used in the operation of their businesses, except such as may be
under construction, are in good operating condition and repair, except where
the failure of such plants, structures and equipment to be in such good
operating condition and repair would not, individually or in the aggregate,
have a Material Adverse Effect.
2.15 Taxes.
(a) For purposes of this Agreement, "TAX" or "TAXES" shall mean taxes, fees,
levies, duties, tariffs, imposts, premiums and governmental impositions or
charges of any kind in the nature of (or similar to) taxes, payable to any
federal, state, provincial, local or foreign taxing authority, including
(without limitation) (i) income, capital, business, franchise, profits, gross
receipts, ad valorem, goods and services, customs, net worth, value added,
sales, use, service, real or personal property, special assessments, capital
stock, license, payroll, withholding, employment, social security, workers'
compensation, unemployment insurance or compensation, utility, severance,
production, excise, stamp, occupation, premiums, environmental, recapture,
windfall profits, transfer and gains taxes, fees, levies, duties, tariffs,
imposts, premiums and governmental impositions and (ii) interest, penalties,
additional taxes and additions to tax imposed with respect thereto; and "TAX
RETURNS" shall mean returns, reports, declarations, and information statements
with respect to Taxes required to be filed with Revenue Canada, Ministere du
Revenu du Quebec ("REVENUE QUEBEC"), the Internal Revenue Service ("IRS") or
any other taxing authority, domestic or foreign, including, without
limitation, consolidated, combined and unitary tax returns.
(b) Except as disclosed in Schedule 2.15(b) of the Company Disclosure
Schedule, the Company and its subsidiaries have filed or caused to be filed
all Tax Returns required to be filed by them, except to the extent the failure
to file such Tax Returns would not have a Material Adverse Effect, and the
Company and its subsidiaries have paid and discharged or caused to be paid and
discharged all Taxes due in connection with or with respect to the filing of
all Tax Returns and have paid all other Taxes as are due, and there are no
other Taxes that would be due if asserted by a taxing authority, except such
Taxes as are being contested in good faith by appropriate proceedings (to the
extent that any such proceedings are required) and with respect to which the
Company is maintaining reserves to the extent currently required in all
material respects adequate for their payment except to the extent the failure
to maintain such reserves or pay such Taxes would not have a Material Adverse
Effect. Except as disclosed in Schedule 2.15(b) of the Company Disclosure
Schedule, none of Revenue Canada, Revenue Quebec, the IRS or any other taxing
authority or agency is now asserting or, to the Company's knowledge,
threatening to assert against the Company or any of its subsidiaries any
deficiency or claim for additional Taxes other than additional Taxes with
respect to which the Company is maintaining reserves in all
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material respects adequate for their payment, and, to the Company's knowledge,
there are no requests for information currently outstanding that could affect
the Taxes of the Company or any of its subsidiaries. Except as disclosed in
Schedule 2.15(b) of the Company Disclosure Schedule, neither the Company nor
any of its subsidiaries is currently being audited or examined by any taxing
authority, nor has the Company received any written notice that any Tax Return
will undergo any audit or examination or that such an audit or examination is
threatened. Except as disclosed in Schedule 2.15(b) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries has, except as would
not have a Material Adverse Effect, granted any waiver of any statute of
limitations with respect to, or any extension of a period for the assessment
of, any Tax. The accruals and reserves for Taxes reflected in the Company
Financial Statements are in all material respects adequate to cover all Taxes
accruable through the date thereof (including interest and penalties, if any,
thereon and Taxes being contested) in accordance with generally accepted
accounting principles. No liability for Taxes has been incurred (or prior to
the Effective Time will be incurred) since such date other than in the
ordinary course of business except (i) as would not have a Material Adverse
Effect or (ii) attributable to the transactions contemplated hereby. Except as
disclosed in Schedule 2.15(b) of the Company Disclosure Schedule, neither the
Company nor any of its subsidiaries is required to include in income (i) items
in respect of any change in accounting principles or (ii) any installment sale
gain, where the inclusion in income would result in a tax liability materially
in excess of the reserves therefor.
(c) The Company on behalf of itself and all its subsidiaries hereby represents
that, other than as disclosed on Schedule 2.15(c) of the Company Disclosure
Schedule, and other than with respect to items the inaccuracy of which would
not have a Material Adverse Effect: (i) neither the Company nor any of its
subsidiaries is a party to any agreement, contract or arrangement that may
result, separately or in the aggregate, in the payment of any "EXCESS
PARACHUTE PAYMENT" within the meaning of Section 280G of the Code, determined
without regard to Section 280G(b)(4) of the Code and (ii) neither the Company
nor any of its subsidiaries has participated in or cooperated with a boycott
under Section 999 of the Code.
(d) Except as disclosed in Schedule 2.15(d) of the Company Disclosure
Schedule, no power of attorney has been granted by the Company or any of its
subsidiaries with respect to any matter relating to Taxes which is currently
in force.
(e) Except as disclosed in Schedule 2.15(e) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries is a party to any
agreement or arrangement (written or oral) providing for the allocation or
sharing of Taxes.
(f) Except as disclosed in Schedule 2.15(f) of the Company Disclosure
Schedule, the Company and each of its subsidiaries have reported and withheld
from each payment made to any of their respective past or present employees,
officers, directors or non-residents of Canada the amount of all Taxes and
other material deductions required to be withheld therefrom and have paid the
same to the proper tax or other receiving officers within the time required
under any applicable legislation except where failure to do so would not have
a Material Adverse Effect.
(g) Except as disclosed in Schedule 2.15(g) of the Company Disclosure
Schedule, the Company has remitted to the appropriate tax authority when
required by law to do so all amounts collected by it on account of all Taxes
under Part IX of the Excise Tax Act and retail sales tax except where failure
to do so would not have a Material Adverse Effect.
(h) Except as would not have a Material Adverse Effect on the Company, the
Company has not deducted any material amounts in computing its income in a
taxation year which may be included in a subsequent taxation year under
Section 78 of the Income Tax Act (Canada).
(i) Except as disclosed in Schedule 2.15(i) of the Company Disclosure
Schedule, the Company has not requested or received a ruling from any taxing
authority or signed a closing or other agreement with any taxable authority
which could have a Material Adverse Effect.
(j) Except as would not have a Material Adverse Effect on the Company, to the
Company's knowledge, no circumstances exist which would make the Company or
any subsidiary subject to the application of any of sections 79 to 80.04 of
the Income Tax Act (Canada). Neither the Company nor any of its subsidiaries
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have acquired property or services from, or disposed of property or provided
services to, a person with whom it does not deal at arm's length (within the
meaning of the Income Tax Act (Canada)) for an amount that is other than the
fair market value of such property or services, or has been deemed to have
done so for purposes of the Income Tax Act (Canada).
2.16 Environmental Matters. Except in all cases as have not had and could
not reasonably be expected to have a Material Adverse Effect, to the knowledge
of the Company, the Company and each of its subsidiaries: (i) have obtained
all applicable permits, licenses and other authorization which are required
under federal, state, provincial or local laws relating to pollution or
protection of the environment, including laws relating to emissions,
discharges, releases or threatened releases of pollutants, contaminants or
hazardous or toxic materials or wastes into ambient air, surface water, ground
water or land or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants or hazardous or toxic materials or wastes by the
Company or its subsidiaries (or their respective agents); (ii) are in
compliance with all terms and conditions of such required permits, licenses
and authorization, and also are in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in such laws or contained in any
regulation, code, plan, order, decree, judgment, notice or demand letter
issued, entered, promulgated or approved thereunder; and (iii) are not aware
of nor have received notice of any event, condition, circumstance, activity,
practice, incident, action or plan which is reasonably likely to interfere
with or prevent continued compliance with or which would give rise to any
common law or statutory liability, or otherwise form the basis of any claim,
action, suit or proceeding, based on or resulting from the Company's or any of
its subsidiary's (or any of their respective agent's) manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge or release into the environment, of any pollutant,
contaminant or hazardous or toxic material or waste.
2.17 Brokers. No broker, finder or investment banker (other than Volpe Brown
Whelan & Company, LLC) is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company. The Company has
heretofore furnished to Parent a complete and correct copy of all agreements
between the Company and Volpe Brown Whelan & Company, LLC pursuant to which
such firm would be entitled to any payment relating to the transactions
contemplated hereunder.
2.18 Intellectual Property.
(a) Except as set forth in Schedule 2.18 of the Company Disclosure Schedule,
the Company owns, or is licensed or otherwise possesses legally enforceable
rights to use sell (except as to Third Party Intellectual Property Rights, as
defined below) and license all trademarks, trade names, service marks,
copyrights and any applications therefor, technology, trade secrets, know-how,
computer software programs or applications (in both source code and object
code form), tangible or intangible proprietary information or material, and,
to the knowledge of the Company, all patents, that are necessary to, required
for or used in the business of the Company as currently conducted (the
"COMPANY INTELLECTUAL PROPERTY RIGHTS") the absence of which would be
reasonably likely to have a Material Adverse Effect. Schedule 2.18 of the
Company Disclosure Schedule lists all current patents, registered and material
unregistered trademarks and service marks, registered copyrights, material
trade names and any applications therefor owned by the Company, and specifies
the jurisdictions in which each such Company Intellectual Property Right has
been issued or registered or in which an application for such issuance and
registration has been filed, including the respective registration or
application numbers and the names of all registered owners, together with a
list of all of the Company's currently marketed software products and an
indication as to which, if any, of such software products have been registered
for copyright protection with the United States or Canadian Copyright Office
and any other foreign offices and by whom such items have been registered.
Schedule 2.18 of the Company Disclosure Schedule also includes and
specifically identifies all third-party patents, trademarks or copyrights
(including software) (the "THIRD PARTY INTELLECTUAL PROPERTY RIGHTS"), that
are incorporated in, are, or form a part of, any Company product and which are
material to the Company's business. The listing of Third Party Intellectual
Property Rights shall include the following information: the type of the
agreement by which such Third Party Intellectual Property Rights have been
procured by the Company, the names of the parties and the material terms of
such agreement(s). Schedule 2.18
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of the Company Disclosure Schedule lists (i) any requests the Company has
received to make any registration of a copyright, patent or trademark,
including the identity of the requester and the item requested to be so
registered, and the jurisdiction for which such request has been made; and
(ii) except for object code license agreements for the Company's products
executed in the ordinary course of business that are not material to the
Company's business, all material licenses, sublicenses and other agreements as
to which the Company is a party and pursuant to which any person is authorized
to use, or which otherwise relate to, any Company Intellectual Property Right.
(b) The Company is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations hereunder, in
violation in any material respect of any license, sublicense or agreement
described in Schedule 2.18 of the Company Disclosure Schedule. Neither the
execution and delivery of this Agreement by the Company, nor the performance
by the Company of its obligations hereunder will cause the forfeiture or
termination or give rise to a right of forfeiture or termination of any
Company Intellectual Property Right or Third Party Intellectual Property Right
set forth in Schedule 2.18 of the Company Disclosure Schedule, nor impair the
ability of the Company, its subsidiaries, the Continuing Corporation or Parent
to use, sell or license any Company Intellectual Property Right or Third Party
Intellectual Property Right set forth in Schedule 2.18 of the Company
Disclosure Schedule. Except as set forth in Schedule 2.18 of the Company
Disclosure Schedule, no claims with respect to the Company Intellectual
Property Rights (or Third Party Intellectual Property Rights to the extent
arising out of any use, reproduction or distribution of such Third Party
Intellectual Property Rights by or through the Company) are currently pending,
or, to the knowledge of the Company, are threatened by any person, nor, to the
knowledge of the Company, are there any valid grounds for any such claims (i)
to the effect that the manufacture, sale, licensing or use of any product as
now used, sold or licensed or proposed for use, sale or license by the Company
infringes on any copyright, patent, trademark, service mark or trade secret;
(ii) against the use by the Company of any trademarks, trade names, trade
secrets, copyrights used in the Company's business as currently conducted by
the Company; (iii) challenging the ownership, validity or effectiveness of any
of the Company Intellectual Property Rights or (iv) challenging the Company's
license or legally enforceable right to use of the Third Party Intellectual
Property Rights. All registered trademarks, maskworks, and copyrights held by
the Company, are valid and subsisting. Except as set forth in Schedule 2.18 of
the Company Disclosure Schedule, to the knowledge of the Company, all patents
held by the Company are valid and subsisting. Except as set forth in Schedule
2.18 of the Company Disclosure Schedule, to the Company's knowledge, there is
no material unauthorized use, infringement or misappropriation of any of the
Company Intellectual Property by any third party, including any employee or
former employee of the Company or any of its subsidiaries. Except as set forth
in Schedule 2.18 of the Company Disclosure Schedule, neither the Company nor
any of its subsidiaries (i) has been sued or charged in writing as a defendant
in any claim, suit, action or proceeding which involves a claim or
infringement of trade secrets, any patents, trademarks, service marks,
maskworks or copyrights and which has not been finally terminated prior to the
date hereof, or been informed or notified by any third party that the Company
may be engaged in such infringement, or (ii) has knowledge of any infringement
liability with respect to, or infringement by, the Company or any of its
subsidiaries of any trade secret, patent, trademark, service mark, maskwork or
copyright of another.
(c) The Company has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all Company Intellectual Property Rights (other than those which,
by operation of law, have been disclosed or made public). Except as set forth
in Schedule 2.18 of the Company Disclosure Schedule, each employee and
consultant of the Company has executed a confidentiality and invention
agreement substantially in the respective forms previously delivered to
Parent.
2.19 Interested Party Transactions. Except as set forth in the Company SEC
Reports or as set forth in Schedule 2.19 of the Company Disclosure Schedule,
since the date of the Company's proxy statement dated October 24, 1997, no
event has occurred that would be required to be reported as a Certain
Relationship or Related Transaction pursuant to Item 404 of Regulation S-K
promulgated by the SEC or that is a related party transaction for the purposes
of Quebec Securities Commission Policy Statement Q-27. The Transactions will
not constitute a "going private transaction" for the purposes of such Policy.
2.20 Insurance. To the Company's knowledge, except as set forth in Schedule
2.20 of the Company Disclosure Schedule, there is no material claim by the
Company or any of its subsidiaries pending under any of
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such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums payable
on or prior to the date hereof under all such policies and bonds have been
paid and the Company and its subsidiaries are otherwise in compliance in all
material respects with the terms of such policies and bonds (or other policies
and bonds providing substantially similar insurance coverage). The Company has
no knowledge of any threatened termination of, or material premium increase
with respect to, any of such policies.
2.21 Vote Required. The affirmative vote of the holders of at least sixty-
six and two-thirds percent (66 2/3%) of the Company Common Shares voting on
such matter is the only vote of the holders of any class or series of the
Company's share capital necessary to approve the Amalgamation and confirm By-
law No. 1998-1 in accordance with the Quebec Act.
2.22 Pooling Matters. Neither the Company nor, to the Company's knowledge,
any of its affiliates has, based upon consultation with its independent
auditors, taken or agreed to take any action that (without giving effect to
any action taken or agreed to be taken by Parent or any of its affiliates)
would affect the ability of Parent to account for the business combination to
be effected by the Transactions as a pooling-of-interests.
2.23 Opinion of Financial Advisor. The Company has received an oral opinion
from its financial advisor, Volpe Brown Whelan & Company, LLC (subsequently
confirmed in writing), to the effect that, as of the date of the Existing
Agreement, the consideration to be received by the shareholders of the Company
pursuant to the Transactions is fair to such shareholders from a financial
point of view.
ARTICLE III
Representations And Warranties Of The Parent Group
The term "KNOWLEDGE" as used in connection with Parent, shall mean Parent's
actual knowledge after reasonable inquiry of officers, directors and other
employees of Parent charged with senior administrative or operational
responsibility of such matters. Each member of the Parent Group hereby
represents and warrants to the Company as of the date of the Existing
Agreement (except for representations and warranties which reflect technical
changes to the Existing Agreement resulting from the change in structure of
the business combination to an Amalgamation which are made as of the date
hereof), subject to the written disclosure schedule supplied by the Parent
Group to the Company dated as of the date hereof and certified by a duly
authorized officer of Parent (the "PARENT DISCLOSURE SCHEDULE"), that:
3.1 Organization and Qualification. Parent and each of its subsidiaries is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization and has the
requisite corporate power and authority and is in possession of all Approvals
necessary to own, lease and operate the properties it purports to own, operate
or lease and to carry on its business as it is now being conducted, except
where the failure to be so organized, existing and in good standing or to have
such power, authority and Approvals would not have a Material Adverse Effect.
Parent and each of its subsidiaries is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each jurisdiction
where the character of its properties owned, leased or operated by it or the
nature of its activities makes such qualification or licensing necessary,
except for such failures to be so duly qualified or licensed and in good
standing that would not have a Material Adverse Effect.
3.2 Authority. Each member of the Parent Group has all necessary corporate
power and authority to execute and deliver this Agreement and the Ancillary
Documents (as defined in Section 5.17) (to the extent they are parties
thereto) and to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the Ancillary Documents by each member of the Parent Group
(to the extent they are parties thereto) and the consummation by each member
of the Parent Group of the transactions contemplated hereby and thereby have
been duly and validly authorized by all necessary corporate action on the part
of each member of the Parent Group, and no other corporate proceedings on the
part of any such member are necessary to authorize this Agreement or the
Ancillary Documents or to consummate the transactions so contemplated (other
than the approval of the Parent Stock Issuance (as defined in Section 3.9
hereof) by the requisite vote of the stockholders of Parent, to the extent
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necessary). The Boards of Directors of Parent and Dutchco have determined that
it is advisable and in the best interest of Parent's stockholders and
Dutchco's stockholder for Parent and Dutchco to enter into a business
combination with the Company upon the terms and subject to the conditions of
this Agreement and the Amalgamation Agreement and to recommend that the
stockholders of Parent approve the Parent Stock Issuance. This Agreement and
the Amalgamation Agreement have each been duly and validly executed and
delivered by each member of the Parent Group (to the extent they are parties
thereto) and, assuming the due authorization, execution and delivery by the
Company, each such agreement constitutes a legal, valid and binding obligation
of each member of the Parent Group. Each of the Ancillary Documents not yet
executed and delivered as of the date hereof shall constitute a legal, valid
and binding obligation of each member of the Parent Group (to the extent they
are parties thereto) upon execution and delivery of each such document.
3.3 No Conflict; Required Filings and Consents.
(a) Except as set forth in Schedule 3.3(a) of the Parent Disclosure Schedule,
the execution and delivery of this Agreement and the Ancillary Documents by
each member of the Parent Group (to the extent they are parties thereto) do
not (or in the case of Ancillary Documents not yet executed and delivered,
will not), and the performance of this Agreement and the Ancillary Documents
by each member of the Parent Group will not, (i) conflict with or violate the
Certificate of Incorporation or By-Laws (or similar charter documents, as the
case may be) of any member of the Parent Group, (ii) conflict with or violate
any law, rule, regulation, order, judgment or decree applicable to Parent or
any of its subsidiaries or by which its or their respective properties are
bound or affected, or (iii) result in any breach of or constitute a default
(or an event which with notice or lapse of time or both would become a
default) under, or impair Parent's or any of its subsidiaries' rights or alter
the rights or obligations of any third party under, or to the knowledge of
Parent, give to others any rights of termination, amendment, acceleration or
cancellation of, any material contract or result in the creation of a lien or
encumbrance on any of the properties or assets of Parent or any of its
subsidiaries pursuant to any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Parent or any of its subsidiaries is a party or by which
Parent or any of its subsidiaries or its or any of their respective properties
are bound or affected, except in the case of (ii) and (iii) any such case for
any such breaches, defaults or other occurrences that would not have a
Material Adverse Effect.
(b) The execution and delivery of this Agreement and the Ancillary Documents
by each member of the Parent Group (to the extent they are parties thereto)
does not (or in the case of Ancillary Documents not yet executed and
delivered, will not), and the performance of the transactions contemplated
hereby and thereby will not, require any material consent, approval,
authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, domestic or foreign, except (i) for
applicable requirements, if any, of the Securities Act, the Exchange Act, the
Blue Sky Laws, the pre-merger notification requirements of the HSR Act,
relevant Canadian securities statutes, filing with Industry Canada under the
Investment Canada Act (Canada), filing under the Competition Act (Canada) and
the filing and recordation of appropriate merger or other documents as
required by the Quebec Act and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or materially delay consummation of the
Transactions, or otherwise prevent or materially delay any member of the
Parent Group from performing its respective obligations under this Agreement
and the Ancillary Documents, and would not otherwise have a Material Adverse
Effect.
3.4 Certificate of Incorporation and By-Laws. Parent has heretofore
furnished to the Company a complete and correct copy of its Certificate of
Incorporation and the By-Laws, as amended to date. Such Certificate of
Incorporation and By-Laws are in full force and effect. Neither Parent,
Dutchco nor Amalgamation Sub is in violation of any of the provisions of its
respective Certificate of Incorporation or By-Laws (or similar charter
documents, as the case may be).
3.5 Capitalization. As of July 31, 1998, the authorized capital stock of
Parent consisted of (i) 250,000,000 shares of Parent Common Stock of which:
46,347,747 shares were issued and outstanding, no shares were held in
treasury, 12,832,135 shares were reserved for issuance pursuant to outstanding
options under Parent's stock option plans, 2,000,000 shares were reserved for
future issuance under Parent's employee purchase plan; and 2,000,000 shares of
Preferred Stock, US $0.01 par value ("PARENT PREFERRED STOCK"), none of which
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were issued and outstanding. No material change in such capitalization has
occurred between July 31, 1998 and the date hereof. The authorized capital
stock of Amalgamation Sub consists of an unlimited number of common shares, no
par value, one share of which, as of the date hereof, is issued and
outstanding. All of the outstanding shares of Parent's, Dutchco's, Giants
Quebec's and Amalgamation Sub's respective capital stock have been duly
authorized and validly issued and are fully paid and nonassessable. All of the
Parent Common Shares, Exchangeable Shares, Class B Shares (as each is defined
in the Amalgamation Agreement) and Units to be issued in connection with the
transactions contemplated hereby have been authorized by all necessary
corporate action and, when issued in accordance with the terms of this
Agreement and the provisions of such shares (as set out in Appendix A to the
Amalgamation Agreement), will be validly issued, fully paid and nonassessable.
3.6 Compliance; Permits.
(a) Neither Parent nor any of its subsidiaries is in conflict with, or in
default or violation of, (i) any law, rule, regulation, order, judgment or
decree applicable to Parent or any of its subsidiaries or by which its or any
of their respective properties is bound or affected or (ii) any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Parent or any of its subsidiaries is a
party or by which Parent or any of its subsidiaries or is or any of their
respective properties is bound or affected, except for any such conflicts,
defaults or violations which would not have a Material Adverse Effect.
(b) Parent and its subsidiaries hold all permits, licenses, easements,
variances, exemptions, consents, certificates, orders and approvals from
governmental or other regulatory authorities which are material to the
operation of the business of the Company and its subsidiaries taken as a whole
as it is now being conducted (collectively, the "PARENT PERMITS"). Parent and
its subsidiaries are in compliance with the terms of the Parent Permits,
except where the failure to so comply would not have a Material Adverse
Effect.
3.7 SEC Filings; Financial Statements.
(a) Parent has filed all forms, reports and documents required to be filed
with the SEC since February 1, 1995, and has heretofore delivered to the
Company, in the form filed with the SEC, (i) its Annual Reports on Form 10-K
for the fiscal years ended January 31, 1998, 1997 and 1996, and its quarterly
report on Form 10-Q for the fiscal quarter ended April 30, 1998, (ii) all
proxy statements relating to Parent's meetings of stockholders (whether annual
or special) held since January 31, 1996, (iii) all other reports or
registration statements (other than Reports on Form 10-Q not referred to in
clause (ii) above, Reports on Form 3, 4 or 5 filed on behalf of affiliates of
the Parent and Registration Statements on Form S-8) filed by Parent with the
SEC since January 31, 1996 and (iv) all amendments and supplements to all such
reports and registration statements filed by Parent with the SEC
(collectively, the "PARENT SEC REPORTS"). The Parent SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and (ii) did not at the time they were filed
(or if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. None of Parent's
subsidiaries is required to file any forms, reports or other documents with
the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports has been
prepared in accordance with US GAAP applied on a consistent basis throughout
the periods involved (except as may be indicated in the notes thereto) and
each fairly presents the consolidated financial position of Parent and its
subsidiaries as at the respective dates thereof and the consolidated results
of its operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be
material in amount.
(c) Parent has heretofore furnished to the Company a complete and correct copy
of any amendments or modifications, which have not yet been filed with the SEC
but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Parent with the SEC pursuant to
the Securities Act or the Exchange Act.
3.8 Absence of Certain Changes or Events. Except as set forth in Schedule
3.8 of the Parent Disclosure Schedule and in the Parent SEC Reports, since
January 31, 1998, Parent has conducted its business in the
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ordinary course and since such date and through the date hereof, there has not
occurred any Material Adverse Effect with respect to Parent. In addition,
since such date there has not been (i) any damage to, destruction or loss of
any assets of Parent (whether or not covered by insurance) that could have a
Material Adverse Effect with respect to Parent, (ii) any revaluation by Parent
of any of its assets reasonably likely to have a Material Adverse Effect with
respect to Parent, including, without limitation, writing down the value of
capitalized software or inventory or writing off notes or accounts receivable
other than in the ordinary course of business or (iii) other events outside of
the ordinary course of business and inconsistent with past practices that
would be reasonably likely to have a Material Adverse Effect with respect to
Parent.
3.9 Board Approval. The Board of Directors of Parent has, as of the date of
this Agreement, determined to recommend that the stockholders of Parent
approve the issuance of Parent Common Stock in connection with the
Transactions (including any subsequent issuance of Parent Common Stock in
connection with the exchange of Exchangeable Shares) (the "PARENT STOCK
ISSUANCE").
3.10 Registration Statement; Joint Proxy Statement/Prospectus.
(a) Subject to the accuracy of the representations of the Company in Section
2.12 hereof, (i) the Form S-4 pursuant to which the Parent Common Shares,
Exchangeable Shares, Units and Class B Shares to be issued in connection with
the Transactions will be registered with the SEC, (ii) the Joint Proxy
Statement, and (iii) the Other Filings will (A) at the respective times such
documents are filed with the SEC or other regulatory agency, (B) in the case
of the Joint Proxy Statement, at the date it or any amendments or supplements
thereto are mailed to stockholders, at the time of the Parent Stockholders'
Meeting and at the Effective Time and (C) in the case of the Form S-4, if any,
when it becomes effective under the Securities Act, at the Effective Time and
on the date of any post-effective amendment thereto, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Joint Proxy Statement will comply as
to form in all material respects with the applicable provisions of the
Delaware General Corporation Law and the Exchange Act as it relates to the
Parent Stockholders' Meeting, and the Form S-4, as it relates the issuance of
the Parent Common Shares, Exchangeable Shares, Units and Class B Shares to be
issued in connection with the Transactions, will comply as to form in all
material respects with the requirements of the Securities Act. If at any time
prior to the Effective Date any event relating to Parent, Dutchco,
Amalgamation Sub or any of their respective affiliates, officers or directors
should be discovered by Parent, Dutchco or Amalgamation Sub which should be
set forth in an amendment to the Form S-4 or a supplement to the Joint Proxy
Statement, Parent, Dutchco or Amalgamation Sub will promptly inform the
Company. Notwithstanding the foregoing, Parent makes no representation or
warranty with respect to any information supplied by the Company which is
contained in, or furnished in connection with the preparation of, any of the
foregoing.
(b) As of the date hereof and at the Effective Time, except for obligations or
liabilities incurred in connection with its incorporation or organization and
the transactions contemplated by this Agreement and the Amalgamation Agreement
and except for this Agreement and the Amalgamation Agreement and any other
agreements or arrangements contemplated by this Agreement, Amalgamation Sub
has not and will not have incurred, directly or indirectly, through any
subsidiary or affiliate, any obligations or liabilities or engaged in any
business activities of any type or kind whatsoever or entered into any
agreements or arrangements with any person.
3.11 Brokers. No broker, finder or investment banker (other than Piper
Jaffray, Inc. and Goldman, Sachs & Co.) is entitled to any brokerage, finder's
or other fee or commission in connection with the transactions contemplated by
this Agreement and the Amalgamation Agreement based upon arrangements made by
or on behalf of Parent, Dutchco or Amalgamation Sub. Parent has heretofore
furnished to Company a complete and correct copy of all agreements between any
member of the Parent Group and Piper Jaffray, Inc. and Goldman, Sachs & Co.
pursuant to which such firms would be entitled to any payment relating to the
transactions contemplated hereunder.
3.12 Opinion of Financial Advisor. Parent has received an oral opinion from
its financial advisor, Piper Jaffray, Inc. (subsequently confirmed in
writing), to the effect that, as of the date of the Existing Agreement, the
Exchange Ratio is fair from a financial point of view to Parent.
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3.13 Pooling Matters. Neither Parent nor any of its affiliates has, to its
knowledge and based upon consultation with its independent auditors, taken or
agreed to take any action that (without giving effect to any action taken or
agreed to be taken by the Company or any of its affiliates) would affect the
ability of Parent to account for the business combination to be effected by
the Transactions as a pooling-of-interests.
3.14 Absence of Litigation. Except as set forth in Schedule 3.14 of the
Parent Disclosure Schedule or the Parent SEC Reports, there are no claims,
actions, suits, proceedings or investigations pending or, to the knowledge of
the Parent, threatened against the Parent or any of its subsidiaries, or any
properties or rights of the Parent or any of its subsidiaries, before any
court, arbitrator or administrative, governmental or regulatory authority or
body, domestic or foreign, that could have a Material Adverse Effect.
3.15 Restrictions on Business Activities. Except for this Agreement and the
Ancillary Documents or as otherwise set forth in the Parent Disclosure
Schedule or the Parent SEC Reports, there is no material agreement, judgment,
injunction, order or decree binding upon the Company or any of its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or impairing any material business practice of Parent or any of
its subsidiaries, the acquisition of property by Parent or any of its
subsidiaries or the conduct of business by Parent or any of its subsidiaries
as currently conducted by Parent.
3.16 Taxes.
(a) Except as disclosed in Schedule 3.16 of the Parent Disclosure Schedule,
Parent and its subsidiaries have filed or caused to be filed all Tax Returns
required to be filed by them, except to the extent that the failure to file
such Tax Returns would not have a Material Adverse Effect, and Parent and its
subsidiaries have paid and discharged or caused or to be paid and discharged
all Taxes due in connection with or with respect to the filing of all Tax
Returns and have paid all other Taxes as are due, and there are no other Taxes
that would be due if asserted by a taxing authority, except such as are being
contested in good faith by appropriate proceedings (to the extent that any
such proceedings are required) and with respect to which Parent is maintaining
reserves to the extent currently required in all material respects adequate
for their payment except to the extent the failure to do so would not have a
Material Adverse Effect. Except as disclosed in Schedule 3.16 of the Parent
Disclosure Schedule, none of Revenue Canada, Revenue Quebec, the IRS or any
other taxation authority or agency is now asserting or, to the best of
Parent's knowledge, threatening to assert against Parent or any of its
subsidiaries any deficiency or claim for additional Taxes other than
additional Taxes with respect to which Parent is maintaining reserves in all
material respects adequate for their payment, and there are no requests for
information currently outstanding that could affect the Taxes of Parent or any
of its subsidiaries. Except as disclosed in Schedule 3.16 of the Parent
Disclosure Schedule, neither Parent nor any of its subsidiaries is currently
being audited or examined by any taxation authority, nor has Parent received
any written notice that any Tax Return will undergo any audit or examination
or that such an audit or examination is threatened. Except as disclosed in
Schedule 3.16 of the Parent Disclosure Schedule, neither Parent nor any of its
subsidiaries has, except as would not have a Material Adverse Effect, granted
any waiver of any statute of limitations with respect to, or any extension of
a period for the assessment of, any Tax. The accruals and reserves for Taxes
reflected in the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports are in all
material respects adequate to cover all Taxes accruable through the date
thereof (including interest and penalties, if any, thereon and Taxes being
contested) in accordance with generally accepted accounting principles. No
liability for taxes has been incurred (or prior to the Effective Time will be
incurred) since such date other than in the ordinary course of business except
as (i) would not have a Material Adverse Effect, or (ii) is attributable to
the transactions contemplated herein.
(b) Except as disclosed in Schedule 3.16 of the Parent Disclosure Schedule,
Parent and each of its subsidiaries have reported and withheld from each
payment made to any of their respective past or present employees, officers,
directors or non-residents of the United States the amount of all Taxes and
other material deductions required to be withheld therefrom and have paid the
same to the proper tax or other receiving officers within the time required
under any applicable legislation except where failure to do so would not have
a Material Adverse Effect.
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(c) Except as disclosed in Schedule 3.16 of the Parent Disclosure Schedule,
Parent has not requested or received a ruling from any taxation authority or
signed a closing or other agreement with any taxation authority which could
have a Material Adverse Effect.
3.17 Intellectual Property.
(a) Parent and its subsidiaries own, or are licensed or otherwise possess
legally enforceable rights to use, sell and license all trademarks,
tradenames, service marks, copyrights and any applications therefor necessary
to, used in or required for their respective businesses as currently conducted
(the "PARENT INTELLECTUAL PROPERTY RIGHTS"), the absence of which would be
reasonably likely to have a Material Adverse Effect on Parent.
(b) Parent is not, nor will it be as a result of the execution and delivery of
this Agreement or the Ancillary Documents or the performance of its
obligations hereunder or thereunder, in violation in any material respect of
any license, sublicense or agreement of which Parent or any of Parent's
subsidiaries is a party. The execution and delivery of this Agreement and the
Ancillary Documents or the performance of its obligations hereunder or
thereunder will not cause the forfeiture or termination or give rise to a
right of forfeiture or termination of any material Parent Intellectual
Property Right, or impair the ability of Parent or its subsidiaries to use,
sell or license any Parent Intellectual Property Right or portion thereof.
Except as set forth in Schedule 3.17 of the Parent Disclosure Schedule, no
claims with respect to Parent Intellectual Property Rights are currently
pending, or, to the knowledge of Parent, are threatened by any person, nor, to
the knowledge of the Parent, are there any valid grounds for any such claims
(i) to the effect that the manufacture, sale, licensing or use of any product
as now used, sold or licensed or proposed for use, sale or license by Parent
infringes on any copyright, patent, trademark, service mark or trade secret;
(ii) against the use by Parent of any trademarks, trade names, trade secrets,
copyrights used in Parent's business as currently conducted by Parent; (iii)
challenging the ownership, validity or effectiveness of any of Parent
Intellectual Property Rights or (iv) to the knowledge of Parent, against the
use by Parent of any patents. All registered trademarks, maskworks and
copyrights are valid and subsisting. Except as set forth in Schedule 3.17 of
the Parent Disclosure Schedule, to the knowledge of Parent, all patents held
by Parent are valid and subsisting. Except as set forth in Schedule 3.17 of
the Parent Disclosure Schedule, to Parent's knowledge, there is no material
unauthorized use, infringement or misappropriation of any of Parent
Intellectual Property Right by any third party, including any employee or
former employee of Parent or any of its subsidiaries. Except as set forth in
Schedule 3.17 of the Parent Disclosure Schedule, neither Parent nor any of its
subsidiaries (i) has been sued or charged in writing as a defendant in any
claim, suit, action or proceeding which involves a claim or infringement of
trade secrets, any patents, trademarks, service marks, maskworks or copyrights
and which has not been finally terminated prior to the date hereof, or been
informed or notified by any third party that Parent may be engaged in such
infringement, or (ii) has knowledge of any infringement liability with respect
to, or infringement by, Parent or any of its subsidiaries of any trade secret,
patent, trademark, service mark, maskwork or copyright of another.
(c) Each employee and consultant of Parent has executed a confidentiality and
invention agreement substantially in the respective forms previously delivered
to the Company.
(d) Parent has taken reasonable and practicable steps designed to safeguard
and maintain the secrecy and confidentiality of, and its proprietary rights
in, all Parent Intellectual Property Rights (other than those which, by
operation of law, have been disclosed or made public).
3.18 Insurance. To Parent's knowledge, except as is set forth in Schedule
3.18 of the Parent Disclosure Schedule, there is no material claim by Parent
or any of its subsidiaries pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums payable on or prior to the date hereof
under all such policies and bonds have been paid and Parent and its
subsidiaries are otherwise in compliance in all material respects with the
terms of such policies and bonds (or other policies and bonds providing
substantially similar insurance coverage). Parent has no knowledge of any
threatened termination of, or material premium increase with respect to, any
of such policies.
3.19 Vote Required. The affirmative vote of the holders of a majority of the
shares present and entitled to vote at a stockholder meeting duly convened for
the purpose of considering the Parent Stock Issuance is the
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only vote of the holders of any class or series of Parent's capital stock
necessary to approve the Transactions in accordance with the Delaware General
Corporation Law, the Certificate of Incorporation of Parent and the By-Laws of
Parent.
ARTICLE IV
Conduct of Business Pending the Amalgamation
4.1 Conduct of Business by the Company Pending the Amalgamation. During the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, and except as set forth
in Schedule 4.1 of the Company Disclosure Schedule, the Company covenants and
agrees, unless Dutchco shall otherwise agree in writing, to conduct its
business and cause the businesses of its subsidiaries to be conducted only in,
and the Company and its subsidiaries shall not take any action except in, the
ordinary course of business or in accordance with the provisions of this
Agreement and in a manner consistent with past practice; and the Company shall
use commercially reasonable efforts to preserve substantially intact the
business organization of the Company and its subsidiaries, to keep available
the services of the present officers, employees and consultants of the Company
and its subsidiaries, to take all commercially reasonable action necessary to
prevent the loss, cancellation, abandonment, forfeiture or expiration of any
Company Intellectual Property and to preserve the present relationships of the
Company and its subsidiaries with customers, suppliers and other persons with
which the Company or any of its subsidiaries has significant business
relations, except in each case where the failure to do so could not reasonably
be expected to have a Material Adverse Effect; provided, however, that the
provisions of this Section 4.1 shall not prevent the Company from taking
action to cause the Exchangeable Shares, the Class B Shares, Class E Shares
and Class F Shares to be listed, posted or quoted for trading on the Nasdaq
National Market and/or a prescribed Canadian stock exchange. By way of
amplification and not limitation, except as contemplated by this Agreement,
neither the Company nor any of its subsidiaries shall, during the period from
the date of this Agreement and continuing until the earlier of the termination
of this Agreement or the Effective Time, directly or indirectly do, or agree
to do, any of the following without the prior written consent of Dutchco,
which shall not be unreasonably withheld:
(a) amend or otherwise change the Company's Articles of Incorporation or By-
Laws;
(b) except as disclosed in Schedule 4.1(b) of the Company Disclosure Schedule,
issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale,
pledge, disposition or encumbrance of, any shares of any class of the
Company's share capital, or any options, warrants, convertible securities or
other rights of any kind to acquire any shares of the Company's share capital,
or any other ownership interest (including, without limitation, any phantom
interest) of the Company, any of its subsidiaries or affiliates (except for
the issuance of Company Common Shares issuable pursuant to employee stock
options under the Company Stock Option Plans (as defined in Section 5.5),
pursuant to rights to purchase such shares under the Company Stock Purchase
Plan (as defined in Section 5.6), which options or rights, as the case may be,
are outstanding on the date hereof) or as permitted under Section 4.2;
(c) except as set forth in Schedule 4.1(c) of the Company Disclosure Schedule,
sell, pledge, dispose of or encumber any material assets of the Company or any
of its subsidiaries (except for (i) sales of assets in the ordinary course of
business and in a manner consistent with past practice and (ii) dispositions
of obsolete or worthless assets);
(d) amend or change the period (or permit any acceleration, amendment or
change) of exercisability of options or restricted stock granted under the
Employee Plans (including the Company Stock Option Plans) or authorize cash
payments in exchange for any options granted under any of such plans except
with regard to options set forth in Schedule 4.1(d) of the Company Disclosure
Schedule;
(e) (i) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
any of its capital stock, except that a wholly owned subsidiary of the Company
may declare and pay a dividend to its parent, (ii) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
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for shares of its capital stock or (iii) amend the terms of, repurchase,
redeem or otherwise acquire, or permit any subsidiary to repurchase, redeem or
otherwise acquire, any of its securities or any securities of its
subsidiaries, or propose to do any of the foregoing;
(f) except as set forth in Schedule 4.1(f) of the Company Disclosure Schedule,
sell, transfer, license, sublicense or otherwise dispose of any Company
Intellectual Property, or amend or modify any existing agreements with respect
to any Company Intellectual Property or Third Party Intellectual Property
Rights, other than nonexclusive object and source code licenses in the
ordinary course of business consistent with past practice or industry
standards for such licensing or distribution;
(g) (i) acquire (by merger, consolidation, or acquisition of stock or assets)
any corporation, partnership or other business organization or division
thereof or otherwise acquire any material amount of assets; (ii) incur any
material indebtedness for borrowed money or issue any debt securities or
assume, guarantee (other than guarantees of bank debt of the Company's
subsidiaries entered into in the ordinary course of business), endorse or
otherwise as an accommodation become responsible for, the obligations of any
person, or make any loans or advances, except in the ordinary course of
business consistent with past practice; (iii) authorize any capital
expenditures or purchase of fixed assets which are, in the aggregate, in
excess of US $6,000,000 for the Company and its subsidiaries taken as a whole;
or (iv) enter into or amend any contract, agreement, commitment or arrangement
to effect any of the matters prohibited by this Section 4.1(g);
(h) except as set forth in Schedule 4.1(h) of the Company Disclosure Schedule,
increase the compensation payable or to become payable to its officers or
employees, except for increases in salary or wages of officers or employees of
the Company or its subsidiaries in accordance with past practices, or grant
any severance or termination pay to, or enter into any employment or severance
agreement with, any director, officer or other employee of the Company or any
of its subsidiaries, or establish, adopt, enter into or amend any Employee
Plan, except as may be required by applicable law;
(i) take any action to change material Tax or accounting policies or
procedures (including, without limitation, procedures with respect to revenue
recognition, capitalization of software development costs, payments of
accounts payable and collection of accounts receivable) other than as may be
required by law or US GAAP;
(j) make any material Tax election inconsistent with past practices or settle
or compromise any material federal, state, local or foreign Tax liability or
agree to an extension of a statute of limitations except to the extent the
amount of any such settlement has been reserved for on the Company Balance
Sheet;
(k) pay, discharge or satisfy any material claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction of liabilities reflected or
reserved against in the Company Financial Statements or incurred in the
ordinary course of business and consistent with past practice;
(l) except as may be required by law and except as disclosed on Schedule
4.1(l) of the Company Disclosure Schedule, take any action to terminate or
amend any of its Employee Plans;
(m) modify, amend or terminate any Covered Agreement (as defined in Section
2.5(b)), other than in the ordinary course of business consistent with past
practice;
(n) take or allow to be taken or fail to take any act or omission which would
jeopardize the treatment of the Transactions as a pooling-of-interests for
accounting purposes under US GAAP; or
(o) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (n) above, or any action which would make
any of the representations or warranties of the Company contained in this
Agreement untrue or incorrect in any material respect or prevent the Company
from performing or cause the Company not to perform its covenants hereunder or
result in any of the conditions to the Transactions set forth herein not being
satisfied.
4.2 No Solicitation.
(a) From and after the date hereof until the earlier of the Effective Time or
the termination of this Agreement in accordance with Article VII hereof, the
Company shall not, directly or indirectly, through any
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officer, director, employee, representative or agent of the Company or any of
its subsidiaries, take any action to initiate, solicit or encourage (including
by way of furnishing any person any non-public information, except as
permitted in Section 4.2(e)) or, subject to the terms of the immediately
following sentence, participate in any discussions or negotiations with any
persons who are considering or who have made any inquiries or proposals
regarding any merger, amalgamation, take-over bid, sale of substantial assets,
sale of shares of capital stock (including without limitation by way of a
tender offer) or similar transactions involving the Company or any
subsidiaries of the Company (any of the foregoing inquiries or proposals being
referred to herein as an "ACQUISITION PROPOSAL"). Notwithstanding anything to
the contrary contained in this Section 4.2(a) or in any other provision of
this Agreement, the Company may, to the extent the Board of Directors of the
Company determines, in good faith, after consultation with outside legal
counsel, that the Board's fiduciary duties under applicable law require it to
do so, participate in discussions or negotiations with, and, subject to the
requirements of paragraph (d), below, furnish information to any person,
entity or group after such person, entity or group has delivered to the
Company, an unsolicited bona fide Acquisition Proposal which the Board of
Directors of the Company in its good faith reasonable judgment determines,
after consultation with its independent financial advisors, would result in a
transaction more favorable to the shareholders of the Company than the
transactions contemplated by this Agreement (a "SUPERIOR PROPOSAL"). In
addition, notwithstanding any other provision of this Agreement, in connection
with a possible Acquisition Proposal, the Company may refer any third party to
this Section 4.2 or make a copy of this Section 4.2 available to a third
party. In the event the Company receives a Superior Proposal, nothing
contained in this Agreement (but subject to the terms of this Section 4.2)
will prevent the Board of Directors of the Company from accepting, approving
or recommending such Superior Proposal to its shareholders, if the Board
determines, in good faith, after consultation with outside legal counsel, that
such action is required by its fiduciary duties under applicable law; in such
case, the Board of Directors of the Company may withdraw, modify or refrain
from making its recommendation set forth in Section 5.1(a), and, to the extent
it does so, the Company may refrain from soliciting proxies and taking such
other action necessary to secure the vote of its shareholders as may be
required by Section 5.2; provided, however, that the Company shall not accept,
approve or recommend to its shareholders, or enter into any agreement
concerning, a Superior Proposal for a period of not less than three business
days after Parent's receipt of a copy of the Superior Proposal (or a
reasonably detailed written description of the significant terms and
conditions thereof, if such proposal is not in writing).
(b) Notwithstanding Section 4.2(a) above, nothing contained in this Agreement
shall prohibit the Company from complying with Rules 14d-9 and 14e-2 under the
Exchange Act; provided, however, that, in complying with Rules 14d-9 and 14e-
2, the Company will not make or authorize any recommendation of any
Acquisition Proposal unless such proposal constitutes a Superior Proposal.
(c) The Company shall immediately (and no later than 24 hours) notify Parent
and Dutchco after receipt of any written Acquisition Proposal or any request
for non-public information relating to the Company or any of its subsidiaries
in connection with an Acquisition Proposal or for access to the properties,
books or records of the Company or any subsidiary by any person or entity that
informs the Board of Directors of the Company or such subsidiary that it is
considering making, or has made, an Acquisition Proposal. Such notice to
Parent and Dutchco shall be made orally and in writing and shall indicate in
reasonable detail the terms and conditions of such proposal, inquiry or
contact.
(d) If the Board of Directors of the Company receives a request for material
nonpublic information by a party who makes a bona fide Acquisition Proposal
and the Board of Directors of the Company determines that such proposal is a
Superior Proposal, then, and only in such case, the Company may, subject to
the execution of a confidentiality agreement substantially similar to that
then in effect between the Company and Parent, provide such party with access
to information regarding the Company, which access shall be no more extensive
than that provided to Parent.
(e) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any parties (other than Parent,
Dutchco and Amalgamation Sub) conducted heretofore with respect to any of the
foregoing. The Company agrees not to release any third party from any
confidentiality or standstill agreement with respect to any of the foregoing
to which the Company is a party.
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(f) The Company shall ensure that the officers, directors, employees and
agents of the Company and its subsidiaries and any investment bankers or other
agents, advisors or representatives retained by the Company are aware of the
restrictions described in this Section, and shall be responsible for any
breach of this Section 4.2 by such bankers, officers, directors, employees,
agents, advisors or representatives.
4.3 Covenants of Parent. During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement or the
Effective Time, Parent agrees as to itself and its material subsidiaries
(except to the extent that the Company shall otherwise consent in writing,
which consent shall not unreasonably be withheld), to carry on its and such
subsidiaries' business in the ordinary course, to pay its debts and Taxes when
due subject to good faith disputes over such debts or Taxes and to pay or
perform other obligations when due, except to the extent failure to do any of
the foregoing would not have a Material Adverse Effect.
ARTICLE V
Additional Agreements
5.1 Joint Proxy Statement/Prospectus; Registration Statement. As promptly as
practicable after the execution of this Agreement, Parent and Company shall
prepare and file with the SEC a preliminary proxy statement which shall
constitute the Joint Proxy Statement/Prospectus, together with any other
documents required by the Securities Act or the Exchange Act, in connection
with the Transactions. The Joint Proxy Statement/Prospectus shall constitute
(i) the proxy statement of the Company with respect to the Company
Shareholders' Meeting, (ii) the proxy statement of Parent with respect to the
Parent Stockholders' Meeting and, (iii) the prospectus to be contained in the
Form S-4 with respect to the issuance by (A) Dutchco of the Parent Common
Shares and (B) the Continuing Corporation of the Exchangeable Shares, Units
and Class B Shares in connection with the Transactions. As promptly as
practicable after comments (if any) are received from the SEC thereon and
after the furnishing by Parent and the Company of all information required to
be contained therein, Parent and Company shall cause the Joint Proxy
Statement/Prospectus to be mailed to each of the Company's Shareholders and
each of Parent's Stockholders. The Joint Proxy Statement/Prospectus shall (i)
include the unanimous recommendation of the non-interested Board of Directors
of the Company in favor of the Transactions, except that the Board of
Directors of the Company may withdraw, modify or refrain from making such
recommendation to the extent that the Board determines, in good faith, after
consultation with outside legal counsel, that compliance with the Board's
fiduciary duties under applicable law would require it to do so, and (ii) the
unanimous recommendation of the Board of Directors of Parent in favor of the
Parent Stock Issuance, except that the Board of Directors of Parent may
withdraw, modify or refrain from making such recommendation to the extent that
the Board determines, in good faith, after consultation with outside legal
counsel, that compliance with the Board's fiduciary duties under applicable
law would require it to do so. Parent shall file a registration statement on
Form S-3 (the "FORM S-3") in order to register the Parent Common Shares to be
issued from time to time after the Effective Time upon exchange of the
Exchangeable Shares and shall use its reasonable best efforts to maintain the
effectiveness of such registration for such period as such Exchangeable Shares
remain outstanding, and Parent and the Company shall use all reasonable
efforts to cause the Form S-3 to become effective prior to the Effective Time.
Notwithstanding anything herein to the contrary, Parent shall be under no
obligation to file the Form S-3 if it shall have determined on the advice of
its counsel that the shares of Parent Common Stock to be issued upon exchange
of the Exchangeable Shares after the Effective Time will be exempt from the
registration requirements of Section 5 of the Securities Act by virtue of
Section 3(a)(9) thereof.
5.2 Shareholders' Meetings. The Company shall take all commercially
reasonable action necessary in accordance with applicable law, its Articles of
Incorporation and By-Laws to hold the Company Shareholders' Meeting as soon as
practicable (but in no event more than 40 days) after the date on which the
Form S-4 becomes effective. Parent will take all commercially reasonable
action necessary in accordance with the Delaware General Corporation Law and
its Certificate of Incorporation and By-Laws to convene the Parent
Stockholders' Meeting to be held as soon as practicable (but in no event more
than 40 days) after the date on which the Form S-4
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becomes effective. Parent will consult with Company and will use its
commercially reasonable efforts to hold the Parent Shareholders' Meeting on
the same day as the Company Stockholders' Meeting. Subject to the terms of
this Agreement, each of Parent and the Company will use its commercially
reasonable efforts to solicit from its stockholders proxies in favor of the
approval of this Agreement and the transactions contemplated hereby and the
approval of the Parent Stock Issuance, as the case may be, and will take all
other action necessary or advisable to secure the vote or consent of their
respective stockholders required by the rules of the National Association of
Securities Dealers, Inc. and applicable law to obtain such approvals.
5.3 Access to Information; Confidentiality. Upon reasonable notice and
subject to restrictions contained in confidentiality agreements to which such
party is subject, the Company, Parent and Dutchco shall each (and shall cause
each of their subsidiaries to) afford to the officers, employees, accountants,
counsel and other representatives of the other, reasonable access during
normal business hours, during the period prior to the Effective Time, to all
its properties, books, contracts, commitments and records and, during such
period, the Company and Parent each shall (and shall cause each of their
subsidiaries to) furnish promptly to the other all information concerning its
business, properties and personnel as such other party may reasonably request,
and each shall make available to the other the appropriate individuals
(including attorneys, accountants and other professionals) for discussion of
the other's business, properties and personnel as either party may reasonably
request. Each party shall keep such information confidential in accordance
with the terms of the existing confidentiality agreement dated July 10, 1998
(the "CONFIDENTIALITY AGREEMENT") between Parent and the Company.
5.4 Consents; Approvals. The Company, Parent and Dutchco shall each use best
efforts to obtain all consents, waivers, approvals, authorizations or orders
(including, without limitation, all United States, Canadian federal and
provincial and foreign governmental and regulatory rulings and approvals), and
the Company and Parent shall promptly make all filings (including, without
limitation, all filings with United States, Canadian federal and provincial
and foreign governmental or regulatory agencies) required in connection with
the authorization, execution and delivery of this Agreement and the Ancillary
Documents by the Company and each member of the Parent Group (to the extent
they are parties thereto) and the consummation by them of the transactions
contemplated hereby and thereby. The Company and Parent (with respect to
themselves and their respective subsidiaries) shall furnish all information
required to be included in the Joint Proxy Statement and the Form S-4, or for
any application or other filing to be made pursuant to the rules and
regulations of any United States, Canadian federal or provincial or foreign
governmental body in connection with the Transactions.
5.5 Stock Options; Employee Benefits; Retention of Employees.
(a) At the Effective Time, the Company's obligations with respect to each
outstanding option to purchase Company Common Shares (each a "COMPANY OPTION")
under the Company's Amended and Restated 1994 Restricted Stock and Stock
Option Plan, 1995 Non-Employee Director Stock Option Plan, 1995 Employee Stock
Purchase Plan and 1997 Special Limited Non-Employee Director Stock Plan and
outside of any such formal plan (individually, a "COMPANY STOCK OPTION PLAN,"
and, collectively, the "COMPANY STOCK OPTION PLANS"), whether vested or
unvested, will be assumed by Parent and, on such assumption, the rights to
acquire Company Common Shares under the Company Stock Option Plans shall be
exchanged for rights to acquire Parent Common Shares under such plans. Each
Company Option so assumed by Parent under this Agreement shall continue to
have, and be subject to, the same terms and conditions set forth in the
applicable Company Stock Option Plan and agreement pursuant to which such
Company Option was issued as in effect immediately prior to the Effective
Time, except that (i) such Company Option will be deemed to constitute an
option to purchase that number of Parent Common Shares equal to the product of
the number of Company Common Shares that the holder of such option would have
been entitled to receive had such holder exercised such options immediately
prior to the Effective Time (not taking into account whether such option was
in fact exercisable) multiplied by the Exchange Ratio, rounded down to the
nearest whole number of Parent Common Shares, and (ii) the per share exercise
price for the Parent Common Shares issuable upon exercise of such assumed
Company Option will be equal to the quotient determined by dividing the
exercise price per Company Common Shares at which such Company Option was
exercisable immediately prior to the Effective Time by the Exchange Ratio, and
rounding the resulting exercise price up to the nearest whole cent.
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(b) It is the intention of the parties that the Company Options assumed by
Parent qualify following the Effective Time as incentive stock options as
defined in the Code ("ISOS"), to the extent the Company Options qualified as
ISOs prior to the Effective Time.
(c) The Company shall ensure that any required consents of holders of such
options or rights to such assumptions are obtained prior to the Effective
Time.
(d) As soon as practicable after the Effective Time, Parent shall deliver to
each holder of an outstanding Company Option, an appropriate notice setting
forth such holder's rights pursuant thereto and such Company Option shall
continue in effect on the same terms and conditions (including further anti-
dilution provisions, and subject to the adjustments required by this Section
5.5 after giving effect to the Transactions). Parent shall comply with the
terms of all such Company Options. Parent shall take all corporate action
necessary to reserve for issuance a sufficient number of Parent Common Shares
for delivery pursuant to the terms set forth in this Section 5.5.
(e) As of the Effective Time, the employees of the Company (the "COMPANY
EMPLOYEES") shall be entitled (to the extent permitted by applicable law and
subject to the provisions of this Agreement) to participate in each of
Parent's employee benefit and incentive compensation and perquisite plans and
arrangements (the "PARENT EMPLOYEE PLANS") in which similarly situated
employees of Parent participate, to the same extent as similarly situated
employees of Parent. For purposes of determining eligibility to participate in
the Parent Employee Plans, eligibility to participate in the Parent Employee
Plans, eligibility for benefit forms and subsidies and the vesting of benefits
under such plans (including, but not limited to, any severance, 401(k),
vacation and sick pay plan) and for purposes of accrual of benefits under any
severance, sick leave, vacation and other similar Parent Employee Benefit
Plans (except with respect to Parent's sabbatical program), Parent shall give
effect to years of service (and for purposes of qualified and nonqualified
pension plans, prior earnings) with the Company or its subsidiaries, as the
case may be, as if they were employees of the Parent. Such service shall also
be given effect for purposes of satisfying any waiting period, evidence of
insurability requirements, or the application of any preexisting condition
limitation. The Company Employees shall be given credit for amounts paid under
a corresponding Company Employee Plan during the same period for purposes of
applying deductibles, copayments and out-of-pocket maximums as though such
amounts had been paid in accordance with the terms and conditions of the
Parent Employee Plan. With regard to any employees who are redeployed as a
result of the transactions contemplated hereby, such redeployment shall be
made in accordance with the Redeployment Schedule attached at Schedule 5.6(f)
of the Parent Disclosure Schedule, subject to any general changes in the
policies of Parent.
(f) Parent shall assume and honor the obligations of the Company and its
subsidiaries under all employment, severance, consulting and other
compensation contracts, commitments or agreements disclosed in the Company
Disclosure Schedule, each as amended to the date hereof or as contemplated
hereby. Parent hereby acknowledges that the Transactions will constitute a
"Change in Control" for purposes of all of the Company Employee Plans.
(g) The Company will use its best efforts to assist Parent in identifying and
ensuring the retention by Parent and/or the Continuing Corporation of those
technical and non-technical employees who are necessary to carrying out the
operations of the Company as presently conducted and proposed to be conducted.
The parties acknowledge and agree, consistent with the provisions of this
Agreement, that the failure of Parent and/or the Continuing Corporation to
retain such employees despite the Company's best efforts shall not entitle
Parent to terminate this Agreement.
5.6 Company Employee Stock Purchase Plan.
(a) At the Effective Time, each outstanding purchase right (each an "ASSUMED
PURCHASE RIGHT" and, collectively, the "ASSUMED PURCHASE RIGHTS") under the
Company's 1995 Employee Stock Purchase Plan (the
"COMPANY STOCK PURCHASE PLAN") shall be deemed to constitute a purchase right
to acquire, on the same terms and conditions as were applicable under the
Company Stock Purchase Plan immediately prior to the Effective Time, a number
of Parent Common Shares determined as provided in the Company Stock Purchase
Plan, except that the per share purchase price of such Parent Common Shares
under each such Assumed Purchase Right will
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be the lower of (i) the quotient determined by dividing (x) 85% of the closing
price of a Discreet Common Share as reported on the Nasdaq National Market on
the first day of the offering period in effect as of the Effective Time (the
"CURRENT OFFERING PERIOD") by (y) the Exchange Ratio and (ii) 85% of the
closing price of a share of Autodesk Common Stock as reported on the Nasdaq
National Market on the last day of the Current Offering Period. As soon as
practicable after consummation of the Transactions, Autodesk shall deliver to
the participants in the Company Stock Purchase Plan appropriate notice setting
forth such participants' rights pursuant thereto and that the Assumed Purchase
Rights shall continue in effect on the terms and conditions provided in this
Section 5.6.
(b) Parent shall file and cause to become effective not later than the
Effective Time a registration statement under the Securities Act with respect
to the assumption by Parent of the Company Options referred to in Section 5.5
and the Assumed Purchase Rights referred to in this Section 5.6 and with
respect to the issuance of Parent Common Shares upon exercise of those Company
Options and Assumed Purchase Rights and to keep such registration statement
effective throughout the term of such Company Options and Assumed Purchase
Rights.
(c) Employees of the Company as of the Effective Time shall be permitted to
participate in Parent's Employee Stock Purchase Plan commencing on the first
enrollment date following the Effective Time, subject to compliance with the
eligibility provisions of such plan (with employees receiving credit, for
purposes of such eligibility provisions, for service with the Company).
5.7 Agreements of Affiliates. The Company shall promptly deliver to Parent a
letter (the "AFFILIATE LETTER") identifying all persons who are, or may be
deemed to be, at the time of the Company Stockholders' Meeting, "AFFILIATES"
of the Company for purposes of Rule 145 under the Securities Act. The Company
shall use its best efforts to cause each person who is identified as an
"AFFILIATE" in the Affiliate Letter to deliver to Parent, and Parent shall use
its best efforts to receive from its own affiliates, as promptly as
practicable, but in no event later than the date on which the Joint Proxy
Statement/Prospectus is mailed to stockholders, a written agreement (an
"AFFILIATE AGREEMENT") in substantially the form of Exhibit B-1 hereto (in the
case of affiliates of Parent) and Exhibit B-2 hereto (in the case of
affiliates of the Company).
5.8 Voting Agreements. Concurrently with the date upon which the Joint Proxy
Statement/Prospectus is mailed to the holders of Company Common Shares and
Parent Common Shares, all executive officers and certain directors of both the
Company and Parent shall each execute and deliver a Voting Agreement in
substantially the form of Exhibit C-1 hereto (in the case of officers and
directors of Parent) and Exhibit C-2 hereto (in the case of officers and
directors of the Company), and all such agreements shall be in full force and
effect.
5.9 Indemnification and Insurance.
(a) From and after the Effective Time, (i) the Continuing Corporation and
Parent will fulfill and honor in all respects the obligations of the Company
and its subsidiaries pursuant to the indemnification provisions in the
Company's Articles of Incorporation and By-Laws existing as in effect on the
date hereof with respect to the Company's directors and officers (including
without limitation advancement of legal and other expenses to the extent
provided for in such Articles of Incorporation and By-Laws), and (ii) in the
event any of the Company's directors or officers is or becomes involved in any
capacity in any action, proceeding or investigation in connection with any
matter relating to this Agreement or the Amalgamation Agreement or the
transactions contemplated hereby or thereby occurring on or prior to the
Effective Time, Parent shall, or shall cause the Continuing Corporation to,
pay as incurred such reasonable legal and other expenses (including the cost
of any investigation and preparation) incurred in connection therewith,
subject to an undertaking to repay such amounts as required by applicable law.
(b) From and after the Effective Time, the Continuing Corporation and Parent
shall, to the fullest extent permitted under applicable law or under the
Continuing Corporation's and Parent's, as the case may be, By-Laws, indemnify
and hold harmless, each present director, officer, employee, fiduciary and
agent of the Company or any of its subsidiaries (collectively, the
"INDEMNIFIED PARTIES") against any costs or expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities and amounts paid
in settlement in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or
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investigative, arising out of or pertaining to any action or omission
occurring at or prior to the Effective Time (including, without limitation,
the transactions contemplated by this Agreement and the Amalgamation
Agreement), and to pay as incurred such legal and other expenses (including
the cost of any investigation and preparation) incurred in connection
therewith, subject to an undertaking to repay such amounts as required by
applicable law. The Indemnified Parties as a group may retain only one law
firm to represent them with respect to any single action unless there is,
under applicable standards of professional conduct, a conflict of interest
between the positions of any two or more Indemnified Parties. Any counsel
retained by the Indemnified Parties shall be reasonably satisfactory to Parent
and Parent shall not be liable for any settlement effected without its written
consent (which consent shall not be unreasonably withheld).
(c) The provisions of this Section 5.9 are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party, his or her heirs and
representatives and may not be amended, altered or repealed without the prior
written consent of the affected Indemnified Party.
(d) For a period of five years after the Effective Time, Parent and Dutchco
will, or will cause the Continuing Corporation to, provide officers' and
directors' liability insurance in respect of acts or omissions occurring on or
prior to the Effective Time covering each such person currently covered by the
Company's officers' and directors' liability insurance policy on terms
substantially similar to those of such policy in effect on the date hereof.
5.10 Notification of Certain Matters. The Company shall give prompt notice
to Parent and Dutchco, and Parent and Dutchco shall give prompt notice to the
Company, of (i) the occurrence, or non-occurrence, of any event the
occurrence, or non-occurrence, of which would be likely to cause, or does
cause, any representation or warranty contained in this Agreement to be untrue
or inaccurate or (ii) any failure of the Company, or any member of the Parent
Group as the case may be, materially to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement; provided further that failure
to provide such notice shall not be treated as a breach for purposes of
Section 7.1(g) unless failure to give such notice results in material
prejudice to Parent.
5.11 Further Action. Upon the terms and subject to the conditions hereof,
each of the parties hereto shall use all reasonable efforts to take, or cause
to be taken, all actions and to do, or cause to be done, all other things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement and the
Amalgamation Agreement, to obtain in a timely manner all necessary waivers,
consents and approvals and to effect all necessary registrations and filings,
and to otherwise satisfy or cause to be satisfied all conditions precedent to
its obligations under this Agreement. Each member of the Parent Group and the
Company shall use its best efforts to cause the Transactions to fail to
qualify, will take any actions (that do not materially adversely affect such
party) to cause the Transactions to fail to qualify, and will not (both before
and after consummation of the Transactions) take any actions which cause such
Transactions to qualify, as a reorganization under the provisions of Section
368 of the Code or a transaction described in Section 351 of the Code.
5.12 Public Announcements. Parent (on behalf of each member of the Parent
Group) and the Company shall consult with each other before issuing any press
release or otherwise making any public statements with respect to the
Transactions or this Agreement and shall not issue any such press release or
make any such public statement without the prior consent of the other party,
which shall not be unreasonably withheld; provided, however, that a party may,
without the prior consent of the other party, issue such press release or make
such public statement as may upon the advice of counsel be required by law,
the National Association of Securities Dealers, Inc. or the Nasdaq National
Market or any other regulatory body to which such party is subject if it has
used all reasonable efforts to consult with the other party as to the timing
and content of such release or statement.
5.13 Listing of Parent Common Shares. Parent shall cause the shares of
Parent Common Stock to be issued in connection with the Transactions
(including shares of Parent Common Stock delivered by Dutchco as a
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result of rights attaching to the Exchangeable Shares) to be approved for
listing on the Nasdaq National Market, subject to official notice of issuance,
prior to the Effective Time.
5.14 Conveyance Taxes. Parent, Dutchco and the Company shall cooperate in
the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp Taxes, any
transfer, recording, registration and other fees, and any similar Taxes which
become payable in connection with the transactions contemplated hereby that
are required or permitted to be filed on or before the Effective Time.
5.15 Pooling Letters.
(a) The Company shall use its best efforts to cause to be delivered to Parent
a letter of Arthur Andersen & Cie, addressed to the Company, dated as of a
date within two business days prior to the Effective Time, setting forth that
the Company will qualify as a combining company in a pooling-of-interests
transaction under Opinion 16 of the Accounting Principles Board and applicable
SEC rules and regulations (the "ARTHUR ANDERSEN POOLING LETTER").
(b) Parent shall use its best efforts to cause to be delivered to the Company
a letter of Ernst & Young LLP, addressed to Parent, dated as of a date within
two business days prior to the Effective Time, setting forth the concurrence
of Ernst & Young LLP with the conclusion of Parent's management that the
Transactions will qualify as a pooling-of-interests transaction under Opinion
16 of the Accounting Principles Board and applicable SEC rules and regulations
if consummated in accordance with the terms of this Agreement and the
Ancillary Documents (the "ERNST & YOUNG POOLING LETTER").
5.16 Pooling Accounting Treatment. Each of Parent and the Company agrees not
to take any action that would adversely affect the ability of Parent to treat
the Transactions as a pooling of interests under US GAAP.
5.17 Ancillary Documents/Reservation of Shares.
(a) Provided all other conditions of this Agreement have been satisfied or
waived, the Company, Giants Quebec and Amalgamation Sub shall, as promptly as
practicable thereafter, jointly file Articles to give effect to the
Amalgamation, such Articles to contain share conditions for the Continuing
Corporation substantially in the form of those contained in Appendix A to the
Amalgamation Agreement.
(b) Immediately after the Effective Time:
(i) Parent, Dutchco and the Continuing Corporation shall execute and
deliver a Support Agreement between Parent, Dutchco and the Continuing
Corporation containing the terms and conditions set forth in Exhibit D
hereto (the "SUPPORT AGREEMENT"), together with such other terms and
conditions as may be agreed to by the parties hereto acting reasonably;
(ii) Parent, Dutchco, the Continuing Corporation and a Canadian trust
company to be selected by Parent shall execute and deliver a Voting and
Exchange Trust Agreement containing the terms and conditions set forth
in Exhibit E hereto (the "VOTING AND EXCHANGE TRUST AGREEMENT"),
together with such other terms and conditions as may be agreed to by
the parties hereto acting reasonably; and
(iii) Parent shall file with the Secretary of State of the State of
Delaware a Certificate of Designation which shall be in substantially
the form set forth in Exhibit F hereto.
On and after the Effective Time, Parent and Dutchco shall duly and timely
perform all of their respective obligations expressed in this Agreement, the
Support Agreement and the Voting and Exchange Trust Agreement and the
Amalgamation Agreement, subject to the respective terms thereof. The
Amalgamation Agreement and the other documents referred to in this Section
5.17(b) are referred to herein as the "ANCILLARY DOCUMENTS."
(c) On or prior to the Effective Time, Parent will reserve for issuance such
number of Parent Common Shares as shall be necessary to give effect to the
exchanges, conversions and assumptions of options
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contemplated hereby. On or prior to the Effective Time, Parent and Dutchco
shall enter into a stock purchase agreement pursuant to which Dutchco will
purchase from Parent the Parent Common Shares to be delivered pursuant hereto
and in connection with the Transactions to holders of Company Common Shares at
the Effective Time or immediately thereafter and from time to time thereafter
upon exercise of the Exchangeable Shares.
5.18 Listing of Class B Shares, Class E Shares and Class F Shares. Unless
otherwise agreed to by the parties, the Company, Dutchco and Parent shall
cause the Class B Shares, Class E Shares and Class F Shares to be approved for
listing on the Nasdaq National Market or any other prescribed stock exchange
for the purposes of Section 115 of the Income Tax Act (Canada), effective as
of the time such Class B Shares, Class E Shares, Class F Shares are issued
pursuant to the Transactions.
5.19 Tax Elections.
(a) The Company understands that there may be elections under Sections 338(a)
and (g) of the Code for the Company and/or the Continuing Corporation.
(b) Eligible holders of Class B Shares who receive Exchangeable Shares on the
redemption of their Class B Shares shall be entitled to make an income tax
election pursuant to section 85 of the Income Tax Act (Canada) (and the
analogous provision of provincial income tax law) with respect to the transfer
of their Class B Shares to the Continuing Corporation by providing two signed
copies of the necessary election forms to the Continuing Corporation within
ninety (90) days following the Effective Time, duly completed with the details
of the number of shares transferred and the applicable agreed amounts for the
purposes of such elections. Thereafter, subject to the election forms
complying with the provisions of the Income Tax Act (Canada) (or applicable
provincial income tax law), the Parent and/or Dutchco will cause the forms to
be signed by the Continuing Corporation and returned to such holders of Class
B Shares (within 60 days after the receipt thereof) for filing with Revenue
Canada, Customs, Excise and Taxation (or the applicable provincial taxing
authority). With the exception of execution or causing execution of the
election by the Continuing Corporation, compliance with the requirements for a
valid election shall be the sole responsibility of the holder making the
election. For purposes of this provision an eligible holder is a holder who is
a Canadian resident for purposes of the Income Tax Act (Canada) other than a
person who is exempt from tax under the Income Tax Act (Canada) or which is a
partnership that owns such shares if one or more of its members would be
entitled to make such election if such member held such shares directly.
5.20 Board Candidate. Provided that a qualified person having relevant
expertise in the area of the Company's core business groups is identified by
Parent, Parent shall recommend such person to the Nominating Committee of
Parent's Board of Directors.
5.21 Issuance of Class D Shares. Immediately following the Transactions,
Parent and Dutchco shall cause the Continuing Corporation to issue the Class D
Shares (as defined in the Amalgamation Agreement) solely in exchange for
services.
ARTICLE VI
Conditions To The Transactions
6.1 Conditions to Obligation of Each Party to Effect the Transactions. The
respective obligations of each party to effect the Transactions shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Effectiveness of the Registration Statements. The Form S-4 shall have been
declared effective by the SEC under the Securities Act and shall cover the
Parent Common Shares, Exchangeable Shares, Units and Class B Shares issued at
or immediately after the Effective Time. The Form S-3 shall have been declared
effective by the SEC under the Securities Act and shall cover the Parent
Common Shares to be issued upon the exchange of Exchangeable Shares, if no
exemption from registration under the Securities Act is available for
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such shares. No stop order suspending the effectiveness of the Form S-4 or
Form S-3, if any, shall have been issued by the SEC and no proceedings for
that purpose and no similar proceeding in respect of the Joint Proxy
Statement/Prospectus shall have been initiated or threatened by the SEC or any
provincial securities regulatory authority in Canada;
(b) Shareholder Approval. This Agreement and the Amalgamation shall have been
approved and adopted by the affirmative requisite vote of the shareholders of
the Company, and the Parent Stock Issuance shall have been approved and
adopted by the affirmative requisite vote of the stockholders of Parent;
(c) HSR Act. The waiting period applicable to the consummation of the
Transactions under the HSR Act shall have expired or been terminated;
(d) QSC, Etc. The Company, Parent and Dutchco each shall have filed all
notices and information (if any) required under (i) the Investment Canada Act
(Canada) and shall have received a notice (if required) from the responsible
Minister under the Investment Canada Act (Canada) that he is satisfied or
deemed to be satisfied that the transactions contemplated by this Agreement
and the Ancillary Documents are likely to be of net benefit to Canada, and
(ii) Part IX of the Competition Act (Canada) and the applicable waiting period
shall have expired. Parent and Company shall have obtained from the Quebec
Securities Commission and other relevant securities commissions and
authorities such orders or exemptions as may be required in order to permit
the resale at any time by holders of Parent Common Shares received from time
to time pursuant hereto on the Nasdaq National Market;
(e) No Injunctions or Restraints; Illegality. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"INJUNCTION") preventing the consummation of the Transactions shall be in
effect, nor shall any proceeding brought by any administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending; and there shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Transactions, which makes the
consummation of the Transactions illegal. If an injunction shall have been
issued, each party agrees to use its reasonable diligent efforts to have such
Injunction lifted;
(f) Nasdaq Listing. The Parent Common Shares issued or issuable in the
Transactions and any additional shares issued as a result of the exercise of
rights attaching to the Exchangeable Shares, Class B Shares and Units shall
have been approved for listing, subject to notice of issuance, on the Nasdaq
National Market;
(g) Tax Opinions. Parent and Dutchco and the Company shall each have received
substantially identical written opinions from their counsel, Aird & Berlis and
Stikeman, Elliott, respectively, in form and substance reasonably satisfactory
to them, to the effect that, provided that (i) the adjusted cost base to a
holder of Class B Shares that are redeemed by the Continuing Corporation for
Exchangeable Shares in connection with the Transactions exceeds the aggregate
of (A) the fair market value of the rights to be received by such holder under
the Voting and Exchange Trust Agreement in respect of such holder's
Exchangeable Shares and (B) any cash received by such holder in lieu of a
fraction of an Exchangeable Share, and (ii) the holder files the appropriate
elections with the relevant tax authorities within the required time such that
the holder's proceeds of disposition do not exceed the adjusted cost base to
the holder of such Class B Shares, such holder will not realize a capital gain
or a capital loss for purposes of the Income Tax Act (Canada) on the
Amalgamation or the redemption of the Class B Shares;
(h) Public Corporation. Upon the Amalgamation, the Continuing Corporation will
be a "public corporation" under the Income Tax Act (Canada);
(i) Affiliate Agreements. Parent and Dutchco shall have received from each
person who is identified in the Affiliate Letter as an "affiliate" of the
Company an Affiliate Agreement as set forth in Section 5.7, and each such
Affiliate Agreement shall be in full force and effect. The Company shall have
received from each person who Parent in good faith determines is an affiliate
of Parent, an Affiliate Agreement as set forth in Section 5.7, and each such
Affiliate Agreement shall be in full force and effect; and
(j) Pooling Letters. Each of the Company and Parent shall have received the
Arthur Andersen Pooling Letter and the Ernst & Young Pooling Letter,
respectively.
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6.2 Additional Conditions to Obligations of Parent Group Members. The
obligations of each member of the Parent Group to effect the Transactions are
also subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of the
Company contained in this Agreement shall be true and correct in all respects
on and as of the Effective Time, except (i) for changes contemplated by this
Agreement, (ii) for those representations and warranties which address matters
only as of a particular date (which shall remain true and correct as of such
date) or (iii) where the failure to be true and correct would not have and
could not reasonably be expected to have a Material Adverse Effect on the
Company, with the same force and effect as if made on and as of the Effective
Time, and Parent and Dutchco shall have received a certificate to such effect
signed on behalf of the Company by the President and Chief Financial Officer
of the Company;
(b) Agreements and Covenants. The Company shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time, and Parent and Dutchco shall have received a certificate to such effect
signed on behalf of the Company by the President and Chief Financial Officer
of the Company;
(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all material filings
required to be made, by the Company for the authorization, execution and
delivery of this Agreement and the Amalgamation Agreement and the consummation
by it of the transactions contemplated hereby and thereby shall have been
obtained and made by the Company; and
(d) Governmental Actions. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint provision, materially
limiting or restricting Parent's conduct or operation of the business of the
Company and its subsidiaries following the consummation of the Transactions
shall be in effect, nor shall any investigation or other inquiry that is
reasonably likely to result in any of the foregoing, nor shall any proceeding
brought by an administrative agency or commission or other governmental
entity, domestic or foreign, seeking the foregoing be pending or threatened.
6.3 Additional Conditions to Obligation of the Company. The obligation of
the Company to effect the Transactions is also subject to the following
conditions:
(a) Representations and Warranties. The representations and warranties of the
Parent Group contained in this Agreement shall be true and correct in all
respects on and as of the Effective Time, except (i) for changes contemplated
by this Agreement, (ii) for those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as
of such date) or (iii) where the failure to be true and correct would not have
and could not reasonably be expected to have a Material Adverse Effect on the
Company, with the same force and effect as if made on and as of the Effective
Time, and the Company shall have received a certificate to such effect signed
by the President and Chief Executive Officer of Parent and of Dutchco;
(b) Agreements and Covenants. Each member of the Parent Group shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement and the Ancillary Documents (to the
extent they are parties thereto) to be performed or complied with by it on or
prior to the Effective Time, and the Company shall have received a certificate
to such effect signed by the President and Chief Financial Officer of Parent
and of Dutchco; and
(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required to
be made, by any member of the Parent Group for the authorization, execution
and delivery of this Agreement and the Ancillary Documents and the
consummation by them of the transactions contemplated hereby and thereby shall
have been obtained and made by such Parent Group member.
A-31
<PAGE>
ARTICLE VII
Termination
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, notwithstanding approval thereof by the shareholders of the
Company:
(a) by mutual written consent duly authorized by the Boards of Directors of
Parent, Dutchco and the Company; or
(b) by either Parent, Dutchco or the Company if the Transactions shall not
have been consummated by December 31, 1998 or such later date as may be agreed
upon in writing by the parties hereto (the "FINAL DATE"); provided, however,
that the Final Date shall be extended on a day-for-day basis (i) for each day
that the SEC fails to indicate that it has no further comments with regard to
the Joint Proxy Statement beginning 40 days after the filing of such document
with the SEC, and (ii) for each day that any necessary waiting period under or
compliance with the HSR Act is not completed beginning 45 days after the
original filing of the required notice under the HSR Act by the last party to
make such filing; and provided, further, that, the right to terminate this
Agreement and the Amalgamation Agreement under this Section 7.1(b) shall not
be available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Transactions
to be consummated on or before such date); or
(c) by either Parent, Dutchco or the Company if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued a non-appealable final order, decree or ruling or
taken any other action, in each case having the effect of permanently
restraining, enjoining or otherwise prohibiting the Transactions (provided,
however, that no party which has not complied with its obligations under
Section 5.4 may terminate this Agreement pursuant to this Section 7.1(c)); or
(d) by either Parent, Dutchco or the Company, if, at either the Company
Shareholders' Meeting or the Parent Stockholders' Meeting (including any
adjournment or postponement thereof), the requisite affirmative vote of
stockholders shall not have been obtained (provided, however, that no party
which has not complied with its obligations under Section 5.1 or 5.2 may
terminate this Agreement pursuant to this Section 7.1(d)); or
(e) by Parent or Dutchco, if (i) the Board of Directors of the Company shall
withdraw, modify or change its recommendation of the Transactions referred to
in Section 5.1 in a manner adverse to Parent or Dutchco or shall have resolved
to do so; or (ii) the Board of Directors of the Company shall have recommended
to its stockholders, or publicly announced a "NEUTRAL" position with respect
to, an Acquisition Proposal (as defined in Section 4.2(a)), or shall have
failed to reject as inadequate, or shall have failed to reaffirm its
recommendation of this Agreement and the Transactions within ten business days
after the public announcement or commencement of such Acquisition Proposal; or
(f) by the Company, if the Board of Directors of the Parent or Dutchco shall
withdraw, modify or change its recommendation in favor of the Parent Stock
Issuance, or shall have resolved to do so; or
(g) by (i) the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of any member of the Parent Group set forth
in this Agreement or the Amalgamation Agreement or if any representation or
warranty of the Parent Group shall have become untrue, such that the
conditions set forth in Section 6.3(a) or 6.3(b) would not be satisfied, or
(ii) Parent or Dutchco, upon a breach of any representation, warranty,
covenant or agreement on the part of the Company set forth in this Agreement
or if any representation or warranty of the Company shall have become untrue,
such that the conditions set forth in Section 6.2(a) or 6.2(b) would not be
satisfied (in either case, a "TERMINATING BREACH"), provided, however, that if
such Terminating Breach is curable prior to the expiration of 30 days from its
occurrence (but in no event later than December 31, 1998) by a Parent Group
member or the Company, as the case may be, through the exercise of its
reasonable best efforts and for so long as Parent, Dutchco and/or Amalgamation
Sub or the Company, as the case may be, continues to exercise such reasonable
best efforts, neither the Company nor Parent and/or Amalgamation Sub,
respectively, may terminate this Agreement under this Section 7.1(g) until the
earlier of December 31, 1998 or the expiration of such 30-day period without
such Terminating Breach having been cured; or
A-32
<PAGE>
(h) by either Parent, Dutchco or the Company, if the Board of Directors of the
Company shall have recommended, resolved to accept, or accepted, a Superior
Proposal.
7.2 Effect of Termination. In the event of the termination of this Agreement
pursuant to Section 7.1, this Agreement shall forthwith become void and there
shall be no liability on the part of any party hereto or any of its
affiliates, directors, officers or stockholders except (i) as set forth in
Section 7.3 and the last sentence of Section 8.1 hereof, and (ii) nothing
herein shall relieve any party from liability for any willful breach hereof.
7.3 Fees and Expenses.
(a) Except as set forth in this Section 7.3, all fees and expenses incurred in
connection with this Agreement and the Transactions shall be paid by the party
incurring such expenses, whether or not the Transactions are consummated.
(b) Payments by Company to Dutchco.
(i) If there shall have occurred any of the following events:
(A) The Board of Directors of the Company shall have withheld,
withdrawn or modified in a manner adverse to Parent its
recommendation in favor of adoption and approval of this Agreement
and approval of the Transactions as permitted by Section 5.1, and at
or prior to the time of such action by the Company there shall not
have occurred a Material Adverse Effect on Parent, and there shall
have occurred a Superior Proposal which shall have been publicly
disclosed and not withdrawn;
(B) The Board of Directors of the Company shall have recommended a
Superior Proposal (other than Dutchco's) to the shareholders of the
Company;
(C) The Company shall have failed to convene the Company
Shareholder's Meeting by December 24, 1998 and there is an
Acquisition Proposal outstanding at such time; or
(D) The vote of the shareholders of Company approving and adopting
this Agreement and approving the consummation of the Amalgamation
shall not have been obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of shareholders duly
convened therefor or any adjournment thereof (a "COMPANY NEGATIVE
VOTE"), and prior to such Company Negative Vote there shall have
occurred an Acquisition Proposal with respect to the Company which
shall have been publicly disclosed and not withdrawn;
then the Company shall pay to Dutchco (1) an amount equal to all out-of-pocket
fees and expenses reasonably incurred by Parent and Dutchco in connection with
this Agreement up to a maximum of US $2,000,000 within one business day
following the earlier to occur of (x) termination of this Agreement pursuant
to Section 7.1(b), Section 7.1(e) or Section 7.1(h), and (y) a Company
Negative Vote, plus (2) if any Acquisition Proposal is consummated within 9
months after the time for such payment under clause (1), an amount equal to US
$15,000,000 less any amounts paid under the preceding clause (1) within one
business day following demand therefor after such consummation.
(ii) If no payment shall have been required pursuant to Section
7.3(b)(i) and the Board of Directors of the Company shall have
withheld, withdrawn or modified in a manner adverse to Parent its
recommendation in favor of adoption and approval of this Agreement and
approval of the Transactions as permitted by Section 5.1, and at or
prior to the time of such action by the Company there shall not have
occurred a Material Adverse Effect on Parent and there shall not be a
Superior Proposal at that time outstanding, then the Company shall pay
to Dutchco US $6,000,000 following the earlier to occur of (x)
termination of this Agreement pursuant to Section 7.1(e) or (y) a
Company Negative Vote.
(iii) If no payment shall have been required pursuant to clauses
7.3(b)(i) or 7.3(b)(ii) and (A) there shall be a Company Negative Vote
and at or prior to the time of such Company Negative Vote, there shall
not have occurred a Material Adverse Effect with respect to Parent, or
(B) this Agreement is terminated by Dutchco pursuant to Section 7.1(g),
then Company shall pay to Dutchco an amount
A-33
<PAGE>
equal to all out-of-pocket fees and expenses reasonably incurred by
Parent and Dutchco in connection with this Agreement and the
Transactions up to a maximum of US $2,000,000 within one business day
following the earlier to occur of (A) termination of this Agreement
pursuant to Section 7.1(g), or (B) a Company Negative Vote.
(c) Payments by Dutchco to the Company.
(i) If the Board of Directors of Parent shall have withheld,
withdrawn or adversely modified its recommendation in favor of the
Parent Stock Issuance as permitted by Section 5.1, and at or prior to
the time of such action by Parent there shall not have occurred a
Material Adverse Effect on the Company, then Dutchco shall pay US
$6,000,000 within one business day following the earlier of (A)
termination of this Agreement pursuant to Section 7.1(f) or (B) a
Parent Negative Vote (as defined below).
(ii) If (A) the vote of the stockholders of Parent approving the
Parent Stock Issuance shall not have been obtained by reason of the
failure to obtain the required vote upon a vote taken at a meeting of
stockholders duly convened therefor or any adjournment thereof (a
"PARENT NEGATIVE VOTE") and at or prior to the time of such Parent
Negative Vote, there shall not have occurred a Material Adverse Effect
with respect to the Company, (B) this Agreement is terminated by the
Company pursuant to Section 7.1(g), or (C) Parent shall have failed to
convene the Parent Stockholder's Meeting by December 24, 1998, then
Dutchco shall pay to the Company an amount equal to all out-of-pocket
fees and expenses reasonably incurred by Company in connection with
this Agreement and the Transactions up to a maximum of US $2,000,000
within one business day following the earlier to occur of (A)
termination of this Agreement pursuant to Section 7.1(d) or Section
7.1(g), or (B) a Parent Negative Vote.
(d) Payment of the amounts described in Section 7.3(b) and (c) above shall not
be in lieu of damages incurred by a party for breach of this Agreement.
(e) Any fees or expenses incurred by Parent shall be borne by Dutchco to the
extent agreed by Parent and Dutchco.
ARTICLE VIII
General Provisions
8.1 Effectiveness of Representations, Warranties and Agreements. Except as
otherwise provided in this Section 8.1, the representations, warranties and
agreements of each party hereto shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any other party
hereto, any person controlling any such party or any of their officers or
directors, whether prior to or after the execution of this Agreement. The
representations, warranties and agreements in this Agreement shall terminate
upon consummation of the Transactions or upon the termination of this
Agreement pursuant to Section 7.1, as the case may be, except that any
agreement contemplated by this Agreement which, by its terms, does not
terminate until a later date and the agreements set forth in Sections 5.5,
5.6, 5.9, the ultimate paragraph of Section 5.17(b) and Sections 5.17(c), 5.18
and 5.19 shall survive the consummation of the Transactions indefinitely and
those set forth in Section 7.3 and the final sentence of Section 5.3 shall
survive termination indefinitely. The Confidentiality Agreement(s) shall
survive termination of this Agreement as provided therein.
8.2 Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered, if delivered personally, three days after being sent
by registered or certified mail (postage prepaid, return receipt requested),
one day after dispatch by recognized overnight courier (provided delivery is
confirmed by the courier), and upon transmission by telecopy, confirmed
received, to the parties at the following addresses (or at such other address
for a party as shall be specified by like changes of address shall be
effective upon receipt) or sent by electronic transmission, with confirmation
received, to the telecopy number specified below:
A-34
<PAGE>
(a) If to Parent, Dutchco, Giants Quebec, ACI or Amalgamation Sub:
Autodesk, Inc.
20400 Stevens Creek Boulevard
Cupertino, CA 95401-2217
Fax No.: (408) 517-1886
Attention: Marcia K. Sterling
Vice President Business Development, General Counsel and
Secretary
With a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Fax No.: (650) 493-6811
Attention: Mark A. Bertelsen
and
Aird & Berlis
BCE Place
Suite 1800, Box 754
181 Bay Street
Toronto, Ontario M5J 2T9
Fax No.: (416) 863-1515
Attention: Jay A. Lefton
(b) If to the Company:
Discreet Logic Inc.
10 Duke Street
Montreal, Quebec Canada H3C 2L7
Fax No.: (514) 393-3996
Attention: Francois Plamondon
Executive Vice President, Chief Financial Officer, Treasurer
and Secretary
With a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Fax No.: (617) 248-7100
Attention: Mark J. Macenka
and to:
Stikeman, Elliott
1155 Rene Levesque Boulevard West
Suite 4000
Montreal, Quebec H3B 3V2
Fax No.: (514) 397-3222
Attention: Christine Desaulniers
8.3 Certain Definitions. For purposes of this Agreement, the term:
(a) "AFFILIATES" means a person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common
control with, the first-mentioned person; including, without limitation,
any partnership or joint venture in which the Company (either alone, or
through or together with any other subsidiary) has, directly or indirectly,
an interest of 10 percent or more;
A-35
<PAGE>
(b) "BUSINESS DAY" means any day other than a Saturday, Sunday or a day
when banks are not open for business in either of San Francisco, California
and Montreal, Quebec;
(c) "CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON
CONTROL WITH") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the
management or policies of a person, whether through the ownership of stock,
as trustee or executor, by contract or credit arrangement or otherwise;
(d) "PERSON" means an individual, corporation, partnership, association,
trust, unincorporated organization, other entity or group (as defined in
Section 13(d)(3) of the Exchange Act); and
(e) "SUBSIDIARY" or "SUBSIDIARIES" of the Company, the Continuing
Corporation, Parent or any other person means any corporation, partnership,
joint venture or other legal entity of which the Company, the Continuing
Corporation, Parent or such other person, as the case may be (either alone
or through or together with any other subsidiary), owns, directly or
indirectly, more than 50% of the stock or other equity interests the
holders of which are generally entitled to vote for the election of the
board of directors or other governing body of such corporation or other
legal entity.
8.4 Amendment. This Agreement may be amended by the parties hereto by action
taken by or on behalf of their respective Boards of Directors at any time
prior to the Effective Time; provided, however, that, after approval of the
Transactions by the shareholders of the Company, no amendment may be made
which by law requires further approval by such shareholders without such
further approval. This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.
8.5 Waiver. At any time prior to the Effective Time, any party hereto may
with respect to any other party hereto (a) extend the time for the performance
of any of the obligations or other acts, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if
set forth in an instrument in writing signed by the party or parties to be
bound thereby.
8.6 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
8.7 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any
manner adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner to the end that transactions contemplated hereby are fulfilled to the
extent possible.
8.8 Entire Agreement. This Agreement, together with the Amalgamation
Agreement and the Confidentiality Agreement, constitutes the entire agreement
and supersedes all prior agreements and undertakings (other than the
Amalgamation Agreement and the Confidentiality Agreement), both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof and, except as otherwise expressly provided herein, are not intended to
confer upon any other person any rights or remedies hereunder.
8.9 Assignment; Amalgamation Sub/Dutchco.
(a) This Agreement shall not be assigned by operation of law or otherwise,
except that any member of the Parent Group may assign all or any of its
respective rights hereunder to any subsidiary of Parent provided that no such
assignment shall relieve the assigning party of its obligations hereunder. The
Company agrees that prior to the Effective Time, it may amend the Amalgamation
Agreement to provide for the amalgamation of one or more of Parent's Canadian
subsidiaries with the Company; provided, however, that, such amalgamation does
not, in any respect adversely affect the ability of the parties to complete
the transaction contemplated hereby or,
A-36
<PAGE>
affect the economic terms of the transactions contemplated hereby to the
holders of the Company Common Shares, including, without limitation, the tax
treatment to holders who elect to receive Exchangeable Shares.
(b) Parent undertakes to the Company that Parent shall cause Dutchco to
perform in a due and timely manner all of its obligations hereunder and to be
performed by it under the Ancillary Documents and in connection with the
implementation of the Transactions and that Parent shall cause Dutchco to
refrain from taking or omitting to take any action which would have an adverse
economic effect on the implementation of the Transactions as contemplated
herein.
8.10 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, other than Section 5.8 (which is intended to be for the benefit of
the Indemnified Parties and may be enforced by such Indemnified Parties).
8.11 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or
delay on the part of any party hereto in the exercise of any right hereunder
shall impair such right or be construed to be a waiver of, or acquiescence in,
any breach of any representation, warranty or agreement herein, nor shall any
single or partial exercise of any such right preclude other or further
exercise thereof or of any other right. All rights and remedies existing under
this Agreement are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
8.12 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS EXECUTED AND FULLY PERFORMED WITHIN THE STATE OF CALIFORNIA, EXCEPT
TO THE EXTENT MANDATORILY GOVERNED BY QUEBEC LAW.
8.13 Choice of Language. The parties hereto confirm that it is their wish
that this Agreement, as well as all other documents related hereto, including
legal notices, have been and shall be drawn up in the English language only.
Les parties si-dessous confirment leur desir que cet accord ainsi que tous les
documents, y compris tous avis qui s'y rattachent, soient rediges en langue
Anglaise.
8.14 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
8.15 Guarantee. Parent and Dutchco hereby unconditionally and irrevocably
guarantee the full and punctual performance of the Continuing Corporation's
obligations hereunder and pursuant to the Amalgamation Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-37
<PAGE>
In Witness Whereof, Parent, Dutchco, Amalgamation Sub, Giants Quebec, ACI and
the Company have caused this Agreement to be executed as of the date first
written above by their respective officers thereunto duly authorized.
"Parent"
Autodesk, Inc.
/s/ Carol A. Bartz
By:__________________________________
Carol A. Bartz
Chief Executive Officer
"Dutchco"
Autodesk Development B.V.
/s/ Michael E. Sutton
By:__________________________________
Michael E. Sutton
Directeur
"Amalgamation Sub"
9066-9771 Quebec Inc.
/s/ Marcia K. Sterling
By:__________________________________
Marcia K. Sterling
Secretary
"ACI"
Autodesk Canada Inc.
/s/ Carol A. Bartz
By:__________________________________
Carol A. Bartz
President
A-38
<PAGE>
"Giants Quebec"
9066-9854 Quebec Inc.
/s/ Marcia K. Sterling
By:__________________________________
Marcia K. Sterling
Secretary
"Company"
Discreet Logic Inc.
/s/ Francois Plamondon
By:__________________________________
Francois Plamondon
Executive Vice President and
Chief Financial Officer
A-39
<PAGE>
[LETTERHEAD OF SILICON GRAPHICS APPEARS HERE]
EXHIBIT 10.29
July 15, 1998
Mr. Richard Szalwinski
Chairman and CEO
Discreet Logic
5505, boul. St-Laurent, bureau 5200
Montreal (Quebec) Canada H2T 1S6
Re: Extension of Value Added Reseller Agreement terms and conditions;
Agreement No. 12-11-441
Dear Mr. Szalwinski:
This letter shall serve to extend discount and payment terms of the Value Added
Reseller Agreement ("Agreement"), and the Amendment thereto, between Silicon
Graphics, Inc. ("SGI") and Discreet Logic Inc. ("Discreet"). This extension
shall be effective as of July 1, 1998 and continue until and including September
30, 1998.
All other terms and conditions in the above referenced Agreement and Amendment
shall apply to purchases made by Discreet during the term of this extension.
During the term of this extension, SGI shall present to Discreet a new contract
proposal for Discreet review and execution.
Please indicate your acceptance of the above referenced extension by signing
where noted below. If you have any questions, please do not hesitate to contact
me.
Very truly yours, Acknowledged and agreed
/s/ Erna Arnesen
Erna Arnesen By: /s/ Richard Szalwinski
Vice President Global Channels -----------------------------------
(650) 933-5910 Name: Richard Szalwinski
---------------------------------
Title: Chairman and CEO
--------------------------------
cc: April Tan (SGI) Date: July 21, 1998
Jacquelyn L. Rider (SGI) ---------------------------------
<PAGE>
EXHIBIT 10.30
[LETTERHEAD OF SILICON GRAPHICS COMPUTER SYSTEMS APPEARS HERE]
September 16, 1998
Ms. Rosemary Correia
Discreet Logic, Inc.
10 Duke Street
Montreal, Quebec, Canada
H3C2L7
Re: Extension of Value Added Reseller Agreement terms and conditions;
Agreement No. 12-11-441
Dear Ms. Correia:
This letter shall serve to extend discount and payment terms of the Value Added
Reseller Agreement ("Agreement"), and the Amendment thereto, between Silicon
Graphics, Inc. ("SGI") and Discreet Logic Inc. ("Discreet"). This extension
shall be effective as of October 1, 1998 and continue until and including
December 31, 1998.
All other terms and conditions in the above referenced Agreement and Amendment
shall apply to purchases made by Discreet during the term of this extension.
During the term of this extension, SGI shall present to Discreet a new contract
proposal for Discreet review and execution.
Please indicate your acceptance of the above referenced extension by signing
where noted below. If you have any questions, please do not hesitate to contact
me.
Very truly yours, Acknowledged and agreed.
/s/ Erna Arnesen
Erna Arnesen By: /s/ Winston Rodrigues
Vice President, Global Channels --------------------------------
(650)933-5910 Name: Winston Rodrigues
------------------------------
Title: Senior V.P. Advanced Systems
-----------------------------
cc: April Tan (SGI) Date: 98/09/18
Jacquelyn L. Rider (SGI) ------------------------------
<PAGE>
EXHIBIT 21.1
DISCREET LOGIC INC.
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
STATE OR JURISDICTION
NAME OF INCORPORATION
- ---- ---------------------------
<S> <C>
3380491 Canada Inc.................................. Canada
Bandit Communications, Inc.......................... Delaware
Discreet Logic Asia Pte Ltd......................... Republic of Singapore
Discreet Logic Desktop Inc.......................... Delaware
Discreet Logic (Desktop) Inc........................ Barbados
Discreet Logic Europe S.A........................... Grand Duchy of Luxembourg
Discreet Logic France S.A.R.L....................... France
Discreet Logic International Ltd.................... Ireland
Discreet Logic Investment Corp...................... Delaware
Discreet Logic GmbH................................. Austria
Discreet Logic GmbH................................. Federal Republic of Germany
Discreet Logic KK................................... Japan
Discreet Logic Research Limited..................... United Kingdom
Discreet Logic (UK) Limited......................... United Kingdom
Discreet Logic--USA, Inc............................ Delaware
Discreet Logic--USA Research, Inc................... Delaware
D-Vision Systems Inc................................ Illinois
Lightscape Technologies Inc......................... Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
As independent chartered accountants, we hereby consent to the incorporation
of our report dated July 31, 1998 (except with respect to the matters
discussed in Note 22, as to which the date is September 11, 1998) as to which
the date of Consent is September 24, 1998, included in this Form 10-K, into
Discreet Logic Inc.'s previously filed Registration Statement on Form S-8,
File No. 39-97400 and on Form S-3, File No. 333-34739.
/S/ ARTHUR ANDERSEN & CIE
Chartered Accountants
General Partnership
Montreal, Canada
September 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED 6/30/98 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 43,746
<SECURITIES> 0
<RECEIVABLES> 35,756
<ALLOWANCES> 3,654
<INVENTORY> 12,657
<CURRENT-ASSETS> 93,224
<PP&E> 28,934
<DEPRECIATION> 14,973
<TOTAL-ASSETS> 114,610
<CURRENT-LIABILITIES> 52,814
<BONDS> 0
0
0
<COMMON> 106,841
<OTHER-SE> (47,274)
<TOTAL-LIABILITY-AND-EQUITY> 114,610
<SALES> 151,558
<TOTAL-REVENUES> 151,558
<CGS> 63,033
<TOTAL-COSTS> 62,033
<OTHER-EXPENSES> 81,348
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136
<INCOME-PRETAX> 10,242
<INCOME-TAX> 10,854
<INCOME-CONTINUING> (612)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (612)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
