<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
COMMISSION FILE NUMBER 0-26100
Discreet Logic Inc.
(Exact name of registrant as specified in its charter)
QUEBEC 98-0150790
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
10 DUKE STREET
MONTREAL, QUEBEC, CANADA H3C 2L7
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (514) 393-1616
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
29,553,579 shares of the registrant's Common Shares, without par value, were
outstanding as of May 13, 1998.
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
Form 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
CONTENTS
<TABLE>
<CAPTION>
Item Number Page
- ----------- ----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................
Balance Sheets............................................. 3
Statements of Operations................................... 4
Statements of Cash Flows................................... 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11
Certain Factors That May Affect Future Results............. 17
PART II: OTHER INFORMATION
Item 2. Changes in Securities...................................... 19
Item 6. Exhibits and Reports on Form 8-K........................... 19
Signatures................................................. 20
</TABLE>
2
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-------------- -------------
1997 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................... $ 31,668 $ 35,401
Accounts receivable (less reserves for doubtful accounts)............... 26,893 30,398
Inventory--
Resale............................................................... 10,867 8,661
Demonstration........................................................ 3,054 6,335
Income taxes receivable................................................. 448 -
Other current assets.................................................... 3,889 5,270
-------- --------
76,819 86,065
Property and equipment--less accumulated depreciation and amortization.... 7,728 10,571
Deferred income taxes..................................................... 3,489 2,644
Other assets.............................................................. 2,660 6,801
Assets held for resale.................................................... 5,248 4,229
-------- --------
$ 95,944 $110,310
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses................................... $ 44,086 $ 40,060
Deferred revenue........................................................ 8,103 6,375
Income taxes payable.................................................... 4,734 8,583
Customer deposits....................................................... 1,359 230
-------- --------
58,282 55,248
-------- --------
Deferred income taxes..................................................... 713 2,769
-------- --------
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
29,551,779 at March 31, 1998....................................... 80,402 106,320
Accumulated deficit..................................................... (42,639) (51,748)
Cumulative translation adjustment....................................... (814) (2,279)
-------- --------
Total shareholders' equity........................................ 36,949 52,293
-------- --------
$ 95,944 $110,310
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE THREE EIGHT NINE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1997 1998 1997 1998
------------ -------------- ------------ -------------
<S> <C> <C> <C> <C>
Total revenues......................................... $27,044 $35,712 $67,139 $111,385
Cost of revenues....................................... 11,255 14,191 31,545 45,018
------- ------- ------- --------
Gross profit......................................... 15,789 21,521 35,594 66,367
------- ------- ------- --------
Operating expenses:
Research and development (net of tax credits)........ 2,746 4,032 6,998 11,445
Sales and marketing.................................. 6,534 8,610 17,162 24,450
General and administrative........................... 1,842 2,137 4,547 6,033
Charge for purchased research and development........ - - - 26,800
Litigation and related settlement expenses........... - (405) - (405)
------- ------- ------- --------
Total operating expenses.......................... 11,122 14,374 28,707 68,323
------- ------- ------- --------
Operating income (loss)........................... 4,667 7,147 6,887 (1,956)
Other income (expense), net............................ 46 (205) 940 458
------- ------- ------- --------
Income (loss) before income taxes.................... 4,713 6,942 7,827 (1,498)
Provision for income taxes............................. 1,674 1,739 3,636 7,611
------- ------- ------- --------
Net income (loss).................................... $ 3,039 $ 5,203 $ 4,191 $ (9,109)
======= ======= ======= ========
Earnings (Loss) Per Share:
Basic................................................ $0.11 $0.18 $0.15 $(0.32)
======= ======= ======= ========
Diluted.............................................. $0.11 $0.17 $0.15 $(0.32)
======= ======= ======= ========
Weighted average common shares outstanding:
Basic................................................ 27,995 29,074 27,905 28,853
======= ======= ======= ========
Diluted.............................................. 28,711 30,867 28,542 28,853
======= ======= ======= ========
</TABLE>
4
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
EIGHT MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ 4,191 $ (9,109)
Adjustments to reconcile net income (loss) to cash
provided by operating activities--
Depreciation and amortization.................................... 4,043 6,117
Deferred income taxes............................................ (433) 2,901
Write-off of in-process research and development................. - 26,800
Write-off of assets for restructuring............................ - 109
Compensation expense related to stock options.................... - 451
Changes in assets and liabilities--
Settlement of class action litigation.......................... - (10,800)
Accounts receivable............................................ 1,393 (2,622)
Inventory...................................................... 4,176 963
Income taxes receivable........................................ 3,191 448
Other current assets........................................... (571) (1,234)
Insurance proceeds related to class action litigation.......... - 3,459
Accounts payable and accrued expenses.......................... 4,304 (10,111)
Deferred revenue............................................... 2,920 (1,728)
Income taxes payable........................................... 1,440 3,849
Customer deposits.............................................. (1,727) (1,129)
Due to related parties......................................... (25) -
-------- --------
Net cash provided by operating activities........................ 22,902 8,364
-------- --------
Cash flows from investing activities:
Purchase of property and equipment................................. (4,206) (7,714)
Proceeds from disposal of assets held for resale................... - 818
Cash paid for D-Vision acquisition and related costs............... - (10,342)
-------- --------
Net cash used in investing activities............................ (4,206) (17,238)
-------- --------
Cash flows from financing activities:
Proceeds of issuance of Common Stock............................... - 13,528
Proceeds from option exercises..................................... 640 766
Proceeds from employee stock purchase plan......................... 201 524
-------- --------
Net cash provided by financing activities........................ 841 14,818
-------- --------
Foreign exchange effect on cash.................................... (213) (2,211)
-------- --------
Increase in cash and cash equivalents.............................. 19,324 3,733
Cash and cash equivalents, beginning of period..................... 21,658 31,668
-------- --------
Cash and cash equivalents, end of period........................... $40, 982 $ 35,401
======== ========
Supplemental disclosure of cash flow information:
Interest paid during the period.................................... $ 17 $ 87
-------- --------
Income taxes paid during the period................................ $ 807 $ 2,512
-------- --------
In connection with the acquisition of Lightscape in
December 1997, the following non-cash transaction
occurred:
Fair value of assets acquired...................................... $ - $ 7,615
Liabilities assumed................................................ - (7,615)
-------- --------
Cash paid for acquisition, net of cash acquired...................... $ - $ -
======== ========
In connection with the acquisition of D-Vision in
July 1997, the following non-cash transaction
occurred:
Fair value of assets acquired...................................... $ - $ 27,210
Liabilities assumed................................................ - (5,811)
Cash acquired...................................................... - (408)
Issuance of 555,000 shares of Common Stock......................... - (10,649)
-------- --------
Cash paid for acquisition, net of cash acquired...................... $ - $ 10,342
======== ========
</TABLE>
5
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by Discreet Logic Inc. ("Discreet Logic" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
June 30, 1997. The accompanying condensed consolidated financial statements
reflect all adjustments (consisting solely of normal, recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation of
results for the interim periods presented. The results of operations for the
three and nine month periods ended March 31, 1998 are not necessarily indicative
of the results to be expected for any other interim period or for the full
fiscal year.
(2) CHANGE OF FISCAL YEAR
On January 9, 1997, the Board of Directors of the Company approved the change
of the Company's fiscal year end from July 31 to June 30. This change was
effective beginning with the Company's second fiscal quarter of 1997. The
condensed consolidated financial statements are presented for the three and nine
month periods ended March 31, 1998 and the three and eight month periods ended
March 31, 1997. The Company prepares consolidated financial statements, re-
measures accounts in foreign currencies to reflect changes in exchange rates,
and examines and adjusts certain reserve accounts at the end of each quarter.
Therefore, it is not practicable to recast prior quarterly results to reflect
the new fiscal period. Consequently, the results for the nine month period ended
March 31, 1998 are not directly comparable to the results of the eight month
period ended March 31, 1997.
6
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) LITIGATION AND RELATED SETTLEMENT EXPENSES
On May 29, 1996, June 13, 1996 and April 29, 1997, certain of Discreet Logic's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against Discreet Logic 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 three month period ended March 31, 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.
(4) RELATED PARTY TRANSACTIONS
In the three month period ended March 31, 1998, the Company purchased
consulting services, in the amount of $62,000, from BHVR Communications Inc.,
and purchased marketing services in the amount of $104,000 from Behaviour Design
Inc., companies controlled by the Company's Chairman and Chief Executive
Officer.
In the nine month period ended March 31, 1998, the Company recorded revenues
from sales made to Behaviour Entertainment Inc. ("Behaviour"), a company
controlled by the Company's Chairman and Chief Executive Officer, in the amount
of $309,000. The Company also purchased marketing services, in the amount of
$250,000, from Behaviour.
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.
(5) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
The new standard simplifies the computation of earnings per share (EPS) and
increases comparability to international standards. Under SFAS No. 128, primary
EPS is replaced by Basic EPS, which excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. The Company is required to
disclose both basic and diluted EPS. All prior period EPS data have been
restated to conform to SFAS No. 128.
7
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following tables present, in thousands (except for EPS amounts) a
reconciliation of Basic EPS to Diluted EPS as required by SFAS No. 128:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
--------------------------- ---------------------------
INCOME SHARES EPS INCOME SHARES EPS
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to common shareholders............ $3,039 27,995 $0.11 $5,203 29,074 $0.18
===== =====
Effect of Dilutive Securities
Impact of exercise of stock options under treasury
stock method...................................... -- 716 -- 1,793
------ ------ ------ ------
Diluted EPS
Income available to common shareholders and
assumed exercises................................. $3,039 28,711 $0.11 $5,203 30,867 $0.17
====== ====== ===== ====== ====== =====
</TABLE>
Options to purchase 176 and 448 shares of common stock were outstanding during
the three month period ended March 31, 1997, and the three month period ended
March 31, 1998, respectively, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
------------------------------ -----------------------------------
INCOME SHARES EPS INCOME SHARES EPS
---------- -------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) available to common shareholders..... $4,191 27,905 $0.15 $(9,109) 28,853 $(0.32)
===== ======
Effect of Dilutive Securities
Impact of exercise of stock options under treasury
stock method...................................... -- 637 -- --
------ ------ ------- ------
Diluted EPS
Income (loss) available to common shareholders and
assumed exercises................................. $4,191 28,542 $0.15 $(9,109) 28,853 $(0.32)
====== ====== ===== ======= ====== ======
</TABLE>
Options to purchase 269 shares of common stock were outstanding during the
eight month period ended March 31, 1997, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. 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.
(6) REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants 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.
8
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) ACQUISITION OF LIGHTSCAPE TECHNOLOGIES, INC.
On December 2, 1997, Discreet Logic entered into an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement") with Lantern Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of Discreet Logic
("Merger Sub"), and Lightscape Technologies, Inc., a Delaware corporation
("Lightscape"). On December 30, 1997, pursuant to the Merger Agreement, and
upon the satisfaction of certain closing conditions, Merger Sub merged (the
"Merger") with and into Lightscape with Lightscape as the surviving
corporation and a wholly-owned subsidiary of Discreet Logic. As a result of the
Merger, Discreet Logic acquired, among other products, the Lightscape TM
product, a software application which integrates radiosity and raytracing with
physically based lighting, including related know-how and goodwill. The
aggregate purchase price for Lightscape includes the assumption of approximately
$5,700,000 of net liabilities (of which approximately $3,400,000 was paid at the
closing), not including costs associated with the transaction, and up to
$6,800,000 in contingent consideration to be paid only if certain revenue
objectives are achieved by Lightscape in calendar 1998 and 1999. The acquisition
has been accounted for as a purchase. A substantial portion of the purchase
price and transaction costs was allocated to purchased in-process research and
development for which Discreet Logic incurred a one-time charge against earnings
in the amount of $5,800,000 ($0.19 per share on a diluted basis), based on an
independent appraisal, in the quarter ended December 31, 1997 and approximately
$1,087,000 was allocated to intangible assets, which include goodwill and
acquired technology, and is being amortized on a straight-line basis over their
estimated useful lives of three to five years. The terms of the transaction were
the result of arms'-length negotiations between the representatives of Discreet
Logic and Lightscape.
The following presents, on an unaudited basis, certain items on the
Company's result of operations, for the eight month period ended March 31, 1997,
and nine month period ended March 31, 1998, as though the acquisition and
related transactions discussed above had occurred at the beginning of those
periods:
<TABLE>
<CAPTION>
EIGHT MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1998
--------------- --------------
<S> <C> <C>
Total Revenues.............. $68,293 $112,104
Operating income (loss)..... $ 2,660 $ (4,085)
Net loss.................... $ (181) $(11,245)
EPS......................... $ (0.01) $ (0.39)
</TABLE>
(8) PRIVATE PLACEMENT OF SHARES TO INTEL CORPORATION
On March 4, 1998, Discreet Logic completed a private placement of 645,000
shares of its common shares, no par value per share (the "Shares"), for proceeds
to the Company of approximately $13,545,000, excluding issuance costs. The
Shares were offered only to Intel Corporation, an "Accredited Investor" as such
term is defined in Rule 501 of Regulation D. In connection with this
transaction, the Company agreed to file, within 90 days after the closing on
March 4, 1998, a registration statement with the Securities and Exchange
Commission covering the resale from time to time of the Shares issued in
connection with this private placement and to use its commercially reasonable
best efforts to cause such registration statement to become effective.
9
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) EXECUTION OF DEFINITIVE AGREEMENT TO ACQUIRE MGI SOFTWARE CORP.
On March 9, 1998, Discreet Logic entered into a definitive agreement to
acquire MGI Software Corp. ("MGI") in a proposed arrangement transaction (the
"Arrangement") Pursuant to the Arrangement, a wholly-owned subsidiary of
Discreet Logic will amalgamate with MGI, with MGI surviving as a wholly-owned
subsidiary of Discreet Logic. Under the terms of the Arrangement, each share of
MGI common stock will be exchanged for 0.162 shares of Discreet Logic common
stock (the "Exchange Ratio"). Outstanding options and rights to purchase MGI's
common stock will become options and rights to purchase common stock of Discreet
Logic, with appropriate adjustments to the number of shares issuable thereunder
and the exercise price thereof based on the Exchange Ratio. In connection with
the transaction, MGI granted Discreet Logic an option, exercisable under certain
conditions, to purchase shares up to approximately 20% of MGI's outstanding
shares. The transaction has been approved by the boards of directors of Discreet
Logic and MGI, but is still subject to various customary conditions, including
the approval by shareholders of MGI. Should the Arrangement be approved, the
Company currently expects, but is not bound, to account for this transaction
under the pooling of interests method of accounting.
Discreet Logic and MGI estimate they will incur Arrangement related costs
of approximately $3 million, including investment advisory fees, regulatory
filing costs, legal and accounting expenses, and other transaction costs. In
addition, it is expected that as a result of the Arrangement, the combined
company will incur consolidation and integration expenses that are not currently
reasonably estimable.
(10) SUBSEQUENT EVENT
In May 1998, Essential Communications Corporation, a company in which
Discreet Logic holds an investment of preferred shares, was sold. As a result
of this sale, the Company expects to receive 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. The Company expects to receive the proceeds of sale upon the
delivery of its preferred shares in its fourth quarter of fiscal 1998, at which
time the Company will realize a non-recurring gain of approximately $2,500,000.
10
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Discreet Logic Inc. ("Discreet Logic" or the "Company") develops,
assembles, markets and supports non-linear, digital systems and software for
creating, editing and compositing imagery and special effects for film, video,
and HDTV. The Company's systems and software are utilized by creative
professionals for a variety of applications, including feature films, television
programs, commercials, music videos, interactive game production and live
broadcasting.
YEAR 2000
The Company 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. The Company 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. It is
expected that some customers may experience some difficulties related to non
Discreet Logic products, which may affect the performance of Discreet Logic
products and, therefore, lead to an unusually high number of calls to the
Company's technical support department. The Company 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.
RECENT DEVELOPMENTS
PRIVATE PLACEMENT OF SHARES TO INTEL
On March 4, 1998, Discreet Logic completed a private placement of 645,000
shares of its common shares, no par value per share (the "Shares"), for proceeds
to the Company of approximately $13,545,000, excluding issuance costs.
EXECUTION OF DEFINITIVE AGREEMENT TO ACQUIRE MGI SOFTWARE CORP.
On March 9, 1998, Discreet Logic entered into a definitive agreement to
acquire MGI Software Corp. ("MGI") in a proposed arrangement transaction (the
"Arrangement") Pursuant to the Arrangement, a wholly-owned subsidiary of
Discreet Logic will amalgamate with MGI, with MGI surviving as a wholly-owned
subsidiary of Discreet Logic. Under the terms of the Arrangement, each share of
MGI common stock will be exchanged for 0.162 shares of Discreet Logic common
stock (the "Exchange Ratio"). Outstanding options and rights to purchase MGI's
common stock will become options and rights to purchase common stock of Discreet
Logic, with appropriate adjustments to the number of shares issuable thereunder
and the exercise price thereof based on the Exchange Ratio. In connection with
the transaction, MGI granted Discreet Logic an option, exercisable under certain
conditions, to purchase shares up to approximately 20% of MGI's outstanding
shares. The transaction has been approved by the boards of directors of Discreet
Logic and MGI, but is still subject to various customary conditions, including
the approval by shareholders of MGI. Should the Arrangement be approved, the
Company currently expects, but is not bound, to account for this transaction
under the pooling of interests method of accounting.
Discreet Logic and MGI estimate they will incur Arrangement related costs
of approximately $3 million, including investment advisory fees, regulatory
filing costs, legal and accounting expenses, and other transaction
11
<PAGE>
costs. In addition, it is expected that as a result of the Arrangement, the
combined company will incur consolidation and integration expenses that are not
currently reasonably estimable.
RESTRUCTURING
During the fiscal year ended July 31, 1996, excluding a restructuring charge
of $15,000,000 and its related tax effects, the Company incurred a net loss of
approximately $31,000,000 on revenues of approximately $83,997,000. In response
to the financial results and other developments facing the business, the Company
developed a restructuring plan during the fourth fiscal quarter of 1996. While
the Company began implementation of its restructuring plan in the fourth fiscal
quarter of 1996 and had substantially completed the implementation of the plan
at the end of fiscal 1997, the Company still has approximately $3,252,000 in
restructuring reserves primarily for the estimated cost of terminating leases,
resolving outstanding severance issues, and the legal and taxation winding down
of several subsidiaries.
CHANGE OF FISCAL YEAR
On January 9, 1997, the Board of Directors of the Company approved the change
of the Company's fiscal year end from July 31 to June 30. This change was
effective beginning with the Company's second fiscal quarter of 1997. The
condensed consolidated financial statements are presented for the three and nine
month periods ended March 31, 1998 and the three and eight month periods ended
March 31, 1997. The Company prepares consolidated financial statements,
remeasures accounts in foreign currencies to reflect changes in exchange rates
and examines and adjusts certain reserve accounts at the end of each quarter.
Therefore, it is not practicable to recast the prior fiscal period's results to
reflect the new fiscal period. Consequently, the results for the nine month
period ended March 31, 1998 are not directly comparable to the results of the
eight month period ended March 31, 1997.
RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues represented
by certain line items in the statements of operations:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS EIGHT MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1997 1998 1997 1998
--------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenues....................................... 100% 100% 100% 100%
Cost of revenues..................................... 42 40 47 40
---- ---- ---- ----
Gross profit....................................... 58 60 53 60
---- ---- ---- ----
Operating expenses:
Research and development........................... 10 11 10 10
Sales and marketing................................ 24 24 26 22
General and administrative......................... 7 6 7 5
Charge for purchased research and development...... - - - 24
Litigation and related settlement expenses... - (1) - -
---- ---- ---- ----
Total operating expenses........................ 41 40 43 61
---- ---- ---- ----
Operating income (loss)............................ 17 20 10 (1)
Other income (expense), net.......................... - (1) 1 -
---- ---- ---- ----
Income (loss) before income taxes.................. 17 19 11 (1)
Provision for income taxes........................... 6 5 5 7
---- ---- ---- ----
Net income (loss).................................. 11% 14% 6% (8)%
==== ==== ==== ====
</TABLE>
12
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 AND NINE MONTHS ENDED MARCH 31, 1998
AND EIGHT MONTHS ENDED MARCH 31, 1997
As discussed above, it is not practicable to recast prior quarterly results to
reflect new fiscal periodic reporting resulting from the Company's previously
announced change in fiscal year end. Therefore, the results for the nine month
period ended March 31, 1998 are not directly comparable to the results of the
eight month period ended March 31, 1997.
Total Revenues. The Company's revenues consist of product revenues
(including licensing of its software, sales of the Company's proprietary
hardware, and resale of third party hardware) and, to a lesser extent, revenues
from maintenance and other services (including consulting and training).
Beginning in the three months ended March 31, 1998, the Company has recognized
revenue in accordance with Statement of Position 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 6 of Notes to
Condensed Consolidated Financial Statements.
Total revenues were $35,712,000 and $27,044,000 for the three month periods
ended March 31, 1998, and 1997, respectively, and $111,385,000 and $67,139,000
for the nine and eight month periods ended March 31, 1998, and 1997,
respectively. The increase in total revenues in the three month period ended
March 31, 1998, when compared to the three month period ended March 31, 1997,
was primarily due to an increase in revenues generated by the Company's Special
Effects and Editing product lines (including the release and commercial shipment
of new products). These increases were partially offset by a decrease in
revenues from the Company's Broadcast Production product line. The increase in
total revenues in the nine month period ended March 31, 1998, when compared to
the eight month period ended March 31, 1997, was primarily due to the above
factors as well as the additional month in the fiscal 1998 period.
Revenues from customers outside of North America were $21,370,000 (60% of
total revenues) and $17,413,000 (64% of total revenues) for the three month
periods ended March 31, 1998, and 1997, respectively, and $61,335,000 (55% of
total revenues) and $39,193,000 (58% of total revenues) for the nine month
period ended March 31, 1998, and the eight month period ended March 31, 1997,
respectively. Revenues from customers outside North America increased in the
three months ended March 31, 1998 when compared to the three months ended March
31, 1997 due to the increased penetration of the Company's products in the
Asian and other foreign markets. These increases were partially offset
by a decrease in revenues in the European market. Revenues from customers
outside North America increased in the nine months ended March 31, 1998 when
compared to the eight months ended March 31, 1997 due to the increased
penetration of the Company's products in all of the Company's foreign markets as
well as the additional month in the fiscal 1998 period. The Company expects that
revenues from customers outside of North America will continue to account for a
substantial portion of its revenues and should, as a percentage of total
revenues, remain approximately the same as current levels.
Cost of Revenues. Cost of revenues consists primarily of the cost of
hardware sold (mainly workstations manufactured by Silicon Graphics, Inc.
("SGI")), cost of hardware service contracts, cost of integration and hardware
assembly, cost of service personnel and the facilities, computing, benefits and
other administrative costs allocated to such personnel and the provision for
inventory reserves. Cost of revenues was $14,191,000 (40% of total revenues) and
$11,255,000 (42% of total revenues) for the three month periods ended March 31,
1998, and 1997, respectively, and $45,018,000 (40% of total revenues) and
$31,545,000 (47% of total revenues) for the nine month period ended March 31,
1998, and the eight month period ended March 31, 1997, respectively. The
decrease in cost of revenues, as a percentage of total revenues, in both the
three and nine month periods ended March 31, 1998 when compared to the three and
eight month periods ended March 31, 1997, respectively, was primarily due to:
(1) an increase in sales to the Company's indirect channel partners, whose
purchases from Discreet Logic are
13
<PAGE>
predominantly software only and software and storage media bundles since these
indirect channel partners are themselves hardware resellers; (2) porting certain
of the Company's software products to recently available, lower priced
workstations, resulting in a lower cost to the Company for the hardware
component of system sales; and (3) the increased penetration of the Company's
products in the Asian market where customers typically purchase from the Company
only software or software and storage media bundles. The decrease in cost of
revenues, as a percentage of total revenues, in the nine months ended March 31,
1998 when compared to the eight months ended March 31, 1997 is also attributable
to lower margins realized on systems sold in the three month period ended
October 31, 1996 under an aggressive sales program, including product discounts,
designed to reduce the inventory on hand at the end of the fourth fiscal quarter
of 1996. The Company expects that cost of revenues, as a percentage of total
revenues, should increase from its current level. However, cost of revenues
remains difficult to predict and is subject to fluctuations due to a number of
factors including product and product configuration mix and the proportion of
direct and indirect sales.
Research and Development. Research and development expenses consist
primarily of the cost of research and development personnel and the facilities,
depreciation on research and development equipment, amortization of acquired
technologies, computing, benefits and other administrative costs allocated to
such personnel, and consulting fees. Expenditures for research and development,
after deducting Canadian federal and provincial tax credits, were $4,032,000
(11% of total revenues) and $2,746,000 (10% of total revenues) for the three
month periods ended March 31, 1998, and 1997, respectively, and $11,445,000 (10%
of total revenues) and $6,998,000 (10% of total revenues) for the nine month
period ended March 31, 1998, and the eight month period ended March 31, 1997,
respectively. The increase in research and development expenses in the three
months ended March 31, 1998 when compared to the three months ended March 31,
1997 was primarily due to: (1) an increase in the number of software engineers
(including the engineers joining the Company as a result of the Denim, D-Vision
and Lightscape Acquisitions) to develop and enhance the Company's existing and
newly acquired products and to develop new products; and (2) an increase in
depreciation charges on the additional research and development equipment
required for the additional personnel. The increase in research and development
expenses in the nine months ended March 31, 1998 when compared to the eight
months ended March 31, 1997 was primarily due to the above factors as well as
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. The Company has
not capitalized any software development costs to date. Certain research and
development expenditures are incurred substantially in advance of related
revenue and in some cases do not generate revenues. The Company expects that
research and development expenses will increase from current levels. Should
revenues increase, the Company expects that research and development expenses,
as a percentage of total revenues, should remain approximately the same as their
current levels.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related benefits, facilities and administrative costs
allocated to the Company's sales and marketing personnel, tradeshow expenses,
and dealer commissions. Sales and marketing expenses were $8,610,000 (24% of
total revenues) and $6,534,000 (24% of total revenues) for the three month
periods ended March 31, 1998, and 1997, respectively, and $24,450,000 (22% of
total revenues) and $17,162,000 (26% of total revenues) for the nine month
period ended March 31, 1998, and the eight month period ended March 31, 1997,
respectively. The increase in sales and marketing expenses, in the three months
ended March 31, 1998 when compared to the three months ended March 31, 1997 was
primarily due to: (1) the continued expansion of the Company's direct and
indirect sales organization, including the operating costs of domestic sales
offices and foreign subsidiaries, and (2) an increase in tradeshow activities.
The increase in sales and marketing expenses, in the nine months ended March
31, 1998 when compared to the eight months ended March 31, 1997 was primarily
due to the above factors as well as the additional month in the fiscal 1998
period. The decrease in sales and marketing expenses, as a percentage of total
revenues, in the nine months ended March 31, 1998 when compared to the eight
months ended March 31, 1997 is explained in part by the growth of sales to the
indirect channel partners which require a reduced level of expenditures than
direct sales to end-users. The Company expects that sales and marketing expenses
will increase from their current levels. Should
14
<PAGE>
revenues increase, the Company expects that sales and marketing expenses, as a
percentage of total revenues, should remain approximately the same as their
current levels.
General and Administrative. General and administrative expenses include the
costs of finance and accounting, human resources, facilities, corporate
information systems, legal and other administrative functions of the Company and
reserves for doubtful accounts receivable. General and administrative expenses
were $2,137,000 (6% of total revenues) and $1,842,000 (7% of total revenues) for
the three month periods ended March 31, 1998, and 1997, respectively, and
$6,033,000 (5% of total revenues) and $4,547,000 (7% of total revenues) for the
nine month period ended March 31, 1998, and the eight month period ended March
31, 1997, respectively. The increase in general and administrative expenses in
the three months ended March 31, 1998 when compared to the three months ended
March 31, 1997 is explained by an increase in personnel. The increase in general
and administrative expenses in the nine months ended March 31, 1998 when
compared to the eight months ended March 31, 1997 is explained by the above
factor as well as the additional month in the fiscal 1998 period. The Company
expects that general and administrative expenses will increase from their
current levels. Should revenues increase, the Company expects that general and
administrative expenses, as a percentage of total revenues, should remain
approximately the same as their current levels.
Charge for Purchased Research and Development. In connection with the
Lightscape Acquisition, the Company expensed $5,800,000 of in-process research
and development in the three month period ended December 31, 1997. In connection
with the D-Vision Acquisition, the Company expensed $21,000,000 of in-process
research and development in the three month period ended September 30, 1997.
Other Income (Expense). Other Income (Expense) primarily consists of foreign
currency gains and losses and interest income and expense. Foreign currency
translation resulted in losses of $385,000 and $445,000 for the three month
periods ended March 31, 1998, and 1997, respectively, and losses of $ 77,000 and
gains of $13,000 for the nine month period ended March 31, 1998, and the eight
month period ended March 31, 1997, respectively. These gains and losses are
primarily the result of the Company and each subsidiary translating intercompany
balances denominated in a currency other than its own functional currency. These
balances are remeasured into the functional currency of each company every
reporting period. This remeasurement results in either unrealized gains or
losses depending on the exchange rate fluctuation between the functional
currency of each company and the currency in which the monetary asset or
liability is denominated.
Provision for Income Taxes. The Company's provision for income taxes was
$1,739,000 and $1,674,000 for the three month periods ended March 31, 1998, and
1997, respectively, and $7,611,000 and $3,636,000 for the nine month period
ended March 31, 1998, and the eight month period ended March 31, 1997,
respectively. The provision for all periods is based upon the Canadian federal
statutory rate of 38% and reflects the impact of various tax credits and foreign
taxes. The effective tax rate for the three month period ended March 31, 1998
differed from the statutory rate primarily as a result of the realization of the
benefit for some prior year tax losses for which no benefit was previously
recorded. The effective tax rate for the nine month period ended March 31, 1998
differed from the statutory rate primarily as a result of the Company 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 tax
provision for the eight month period ended March 31, 1997 differed from the
statutory rate primarily as a result of the Company not recording a benefit
related to losses where the realization of the benefit was uncertain. The
Company has foreign net operating loss carry forwards which may be available to
reduce future income tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through cash flow from
operations, borrowings under its demand line of credit, capital leases, the
private and public sales of equity securities, and the receipt of research
15
<PAGE>
and development tax credits from the Canadian federal government and the
Province of Quebec. As of March 31, 1998, the Company had cash of approximately
$35,401,000. In August 1997, the Company amended its revolving demand line of
credit with a bank under which the Company may borrow up to CDN$7,000,000 (or
approximately $4,940,000 at March 31, 1998). Advances under the line accrue
interest monthly at the Canadian prime rate (6.5% at March 31, 1998) plus 0.25%.
Additionally, the Company has a CDN$600,000 (approximately $423,000 at March 31,
1998) demand leasing facility, and a CDN$600,000 (approximately $423,000 at
March 31, 1998) demand research and development tax credit facility. Advances
under these facilities accrue interest monthly at the Canadian prime rate (6.5%
at March 31, 1998) plus 1%. The line and facilities are secured by essentially
all of the Company's North American assets. As additional security, the Company
has assigned to the bank its insurance on these assets. The Company is required
to maintain certain financial ratios, including minimum levels of working
capital, debt service coverage and equity to assets ratios. As of March 31,
1998, no amounts were outstanding under the demand line of credit, the demand
leasing, or the demand research and development tax credit facilities.
The Company's operating activities provided cash of $8,364,000 and $22,902,000
for the nine month period ended March 31, 1998 and the eight month period ended
March 31, 1997, respectively. The principal uses of cash for the nine months
ended March 31, 1998 were the disbursement of funds used to settle the class
action litigations and the decrease in accounts payable and accrued expenses
resulting from the Company paying many of the liabilities assumed in connection
with the D-Vision and Lightscape acquisitions. These uses of cash were offset
primarily by cash provided by net income before non-cash charges, including the
charges for purchased in-process research and development, the receipt of
insurance proceeds related to the settlement of the class action litigations and
the increase in income taxes payable. Net cash provided by operations in the
eight month period ended March 31, 1997 was composed primarily of cash provided
by net income before non-cash charges, decreases in accounts receivable,
inventory, and income taxes receivable, and increases in accounts payable and
accrued expenses, deferred revenue, income taxes payable, and customer deposits.
The Company's investing activities used cash of $17,238,000 in the nine month
period ended March 31, 1998 primarily for the acquisition of D-Vision Systems,
Inc. and the purchase of research and development equipment and related
software. During the nine month period ended March 31, 1998, the Company
received proceeds from the sale of its Montreal land and office building which
were previously included on the balance sheet as assets held for resale. The
proceeds of sale were not materially different from the carrying value of these
assets. The Company's investing activities used cash of $4,206,000 in the eight
month period ended March 31, 1997, primarily for renovations to the office
building in London, England and the purchase of computer equipment and software
used in the operations of the Company's business, primarily in the research and
development area.
Financing activities provided cash of $14,818,000 and $841,000 in the nine
month period ended March 31, 1998 and eight month period ended March 31, 1997,
respectively. The nine month 1998 period included the receipt of proceeds of
issuance of common stock, net of issuance costs, to Intel Corporation under a
private placement completed in March 1998. See Note 8 of Notes to Condensed
Consolidated Financial Statements. Other sources of cash in the periods ended
March 31, 1998 and 1997, respectively, included proceeds from common stock
option exercises and the issuance of shares under the Employee Stock Purchase
Plan.
As of March 31, 1998, the Company did not have any material commitments for
capital expenditures.
The Company's ability to meet its future liquidity requirements is dependent
upon its ability to operate profitably, and/or to obtain additional financing.
Should the Company need to secure additional financing to meet its future
liquidity requirements, there can be no assurance that the Company will be able
to secure such financing, or that such financing, if available, will be on terms
favorable to the Company. Subject to the factors discussed below in Certain
Factors That May Affect Future Results, the Company believes that, with its
current levels of working capital together with funds generated from operations,
it has adequate sources of cash to meet its operations and capital expenditure
requirements through calendar 1998.
16
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information provided by the Company from time to time including statements in
this Form 10-Q which are not historical facts, are so-called forward-looking
statements, and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and releases of the Securities and
Exchange Commission. In particular, statements contained in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
are not historical facts (including, but not limited to, statements regarding
the Company's anticipated cost of revenues, statements regarding the anticipated
adequacy of cash to meet operations, statements concerning anticipated expense
levels and such expenses as a percentage of revenues, statements about the
anticipated portion of revenues from customers outside North America, and the
proposed acquisition of MGI) may constitute forward-looking statements. The
Company's actual future results may differ significantly from those stated in
any forward-looking statements. Factors that may cause such differences include,
but are not limited to, the factors discussed below, other risks discussed in
this section and elsewhere in this Form 10-Q, and the other risks discussed in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1997, as well as, from time to time, in the Company's other filings with the
Securities and Exchange Commission.
The Company's future results are subject to substantial risks and
uncertainties. The Company's future financial performance will depend in part on
the successful development, introduction and customer acceptance of its existing
and new or enhanced products. In addition, in order for the Company to achieve
sustained growth, the market for the Company's systems and software must
continue to develop and the Company must expand this market to include
additional applications within the film and video industries and develop or
acquire new products for use in related markets. There can be no assurance that
the Company will be successful in marketing its existing or any new or enhanced
products. In addition, as the Company enters new markets, distribution channels,
technical requirements and levels and bases of competition may be different from
those in the Company's current markets and there can be no assurance that the
Company will be able to compete favorably. The markets in which the Company
competes are characterized by intense competition and many of the Company's
current and prospective competitors have significantly greater financial,
technical, manufacturing and marketing resources than the Company. These
companies may introduce additional products that are competitive with those of
the Company, and there can be no assurance that the Company's products would
compete effectively with such products. Furthermore, competitive pressures or
other factors, including the Company's entry into new markets, may result in
significant price erosion that could have a material adverse effect on the
Company's business and results of operations. The Company has recently completed
the purchase of certain products and technology through acquisitions and
proposes to acquire new products and technology through its merger with MGI.
There can be no assurance that the products and technologies acquired from these
companies will be successful or will achieve market acceptance, or that the
merger with MGI will be successful, or that the Company will not incur
disruptions and unexpected expenses in integrating the operations of the
acquired businesses with those of the Company.
The Company's flame*, inferno*, fire*, smoke* and frost* systems currently
include workstations manufactured by SGI. There are significant risks associated
with this reliance on SGI and the Company may be impacted by the timing of the
development and release of products by SGI, as was the case during fiscal 1996.
In addition, there may be unforeseen difficulties associated with adapting the
Company's products to future SGI products. The Company derives a significant
portion of its total revenues from foreign sales. Foreign sales are subject to
significant risks, including unexpected legal, tax and exchange rate changes
(including the recent currency volatility in Asia) and other barriers. In
addition, foreign customers may have longer payment cycles and the protection of
intellectual property in foreign countries may be more difficult to enforce. The
Company currently relies principally on unregistered copyrights and trade
secrets to protect its intellectual property. Any invalidation of the Company's
intellectual property rights or lengthy and expensive defense of those rights
could have a material adverse effect on the Company. The Company receives
letters from third parties, from time to time, inquiring about the Company's
products and discussing intellectual property matters, which the Company reviews
to determine the appropriate response, if any. There can be no assurance that
third-party claims alleging infringements will not be asserted against the
Company in the future. For example, the Company received a letter from Avid
Technology, Inc.
17
<PAGE>
("Avid") stating its belief that certain of the Company's acquired D-Vision
products practice inventions claimed in a patent on a media editing system. The
Company has responded to Avid's letter stating the Company's belief that the
Company is not infringing any valid claim of Avid's patent. To the Company's
knowledge, Avid has not initiated any suit, action or other proceeding alleging
any infringement by the Company of such patent. The Company currently markets
its systems through its direct sales organization and through distributors. This
marketing strategy may result in distribution channel conflicts as the Company's
direct sales efforts may compete with those of its indirect channels. The
Company currently relies on SGI as the sole source for video input/output cards
used in the Company's systems. The Company's edit* (formerly named D-VISION and
OnLINE) software requires a videographic card manufactured solely by Truevision,
Inc. An interruption in the supply or increase in the price of either one of
these components could have a material adverse effect on the Company's business
and results of operations. To date, the Company has depended to a significant
extent upon a number of key management and technical employees and the Company's
ability to manage its operations will require it to continue to recruit and
retain senior management personnel and to motivate and effectively manage its
employee base. The loss of the services of one or more of these key employees
could have a material adverse effect on the Company's business and results of
operations. There can be no assurance that these factors will not have a
material adverse effect on the Company's future international sales and
consequently, on the Company's business and results of operations.
The market price of the Company's common shares could be subject to
significant fluctuations in response to quarter-to-quarter variations in the
Company's operating results, announcements of technological innovations or new
products by the Company, its competitors or suppliers and other events or
factors. In addition, the stock market in recent years has experienced extreme
price and volume fluctuations that have particularly affected the market prices
of many technology companies and that have often been unrelated or
disproportionate to the operational performance of these companies. These
fluctuations, as well as general economic and market conditions may materially
and adversely affect the market price of the Company's common shares.
The Company believes that its operating results could vary significantly from
quarter to quarter. A limited number of systems sales may account for a
substantial percentage of the Company's quarterly revenue because of the high
average sales price of such systems and the timing of purchase orders.
Historically, the Company has generally experienced greater revenues during the
period following the completion of the annual conference of the National
Association of Broadcasters ("NAB"), which is typically held in April. The
Company's expense levels are based, in part, on its expectations of future
revenues. Therefore, if revenue levels are below expectations, particularly
following NAB, the Company's operating results are likely to be adversely
affected. In addition, the timing of revenue is influenced by a number of other
factors, including: the timing of individual orders and shipments, other
industry trade shows, competition, seasonal customer buying patterns, changes to
customer buying patterns in response to platform changes and changes in product
development and sales and marketing expenditures. Because the Company's
operating expenses are based on anticipated revenue levels and a high percentage
of the Company's expenses are relatively fixed in the short term, variations in
the timing of recognition of revenue could cause significant fluctuations in
operating results from quarter to quarter and may result in unanticipated
quarterly earnings shortfalls or losses. There can be no assurance that the
Company will be successful in maintaining or improving its profitability or
avoiding losses in any future period. The Company believes that quarter-to-
quarter comparisons of its financial results are not necessarily meaningful and
should not be relied upon as an indication of future performance.
18
<PAGE>
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) Recent Sales of Unregistered Securities
On March 4, 1998, Discreet Logic Inc. (the "Company") completed a private
placement of 645,000 shares of its common shares, no par value per share (the
"Shares"), for proceeds to the Company of approximately $13,545,000, excluding
issuance costs. The Company claims that the offer and sale of the Shares were
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Rule 506 of Regulation D in reliance upon information available to the
Company as of March 4, 1998. The Shares were offered only to Intel Corporation,
an "Accredited Investor" as such term is defined in Rule 501 of Regulation D. In
connection with this transaction, the Company agreed to file, within 90 days
after the closing on March 4, 1998, a registration statement with the Securities
and Exchange Commission covering the resale from time to time of the Shares
issued in connection with this private placement and to use its commercially
reasonable best efforts to cause such registration statement to become
effective.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
Exhibit 10.1........... Extension of Value Added Reseller Agreement
between the Company and Silicon Graphics Inc.
Exhibit 27.1........... Financial Data Schedule
Exhibit 27.2........... Restated Financial Data Schedule
Exhibit 27.3........... Restated Financial Data Schedule
Exhibit 27.4........... Restated Financial Data Schedule
Exhibit 27.5........... Restated Financial Data Schedule
Exhibit 27.6........... Restated Financial Data Schedule
Exhibit 27.7........... Restated Financial Data Schedule
(b) REPORTS ON FORM 8-K.
A Current Report on Form 8-K dated December 30, 1997 was filed on January 14,
1998. The Current Report on Form 8-K was filed pursuant to Item 2 of Form 8-K
(Acquisition or Disposition of Assets) announcing the completion of the merger
of Lantern Acquisition Corp. ("Merger Sub"), a Delaware corporation and
wholly-owned subsidiary of Discreet Logic with and into Lightscape Technologies,
Inc. ("Lightscape"), a Delaware corporation, with Lightscape the surviving
corporation and a wholly-owned subsidiary of Discreet Logic, pursuant to the
Agreement and Plan of Merger and Reorganization dated as of December 2, 1997 by
and among Discreet Logic, Merger Sub and Lightscape. A Current Report on Form 8-
K/A dated December 30, 1997 was filed on March 16, 1998 containing the financial
statements required by Item 7 of Form 8-K.
A Current Report on Form 8-K dated March 4, 1998 was filed on March 30, 1998.
The Current Report on Form 8-K was filed pursuant to Item 5 of form 8-K (Other
Events) announcing the completion of a private placement of common shares to
Intel Corporation. This Current Report on Form 8-K also announced the execution
of a definitive agreement to acquire MGI Software Corp. Further disclosure
related to this agreement was filed on a subsequent Current Report on form 8-K
discussed below.
A Current Report on Form 8-K dated March 9, 1998 was filed on April 30, 1998.
The Current Report on Form 8-K was filed on a voluntary basis pursuant to Item 5
of form 8-K (Other Events) announcing the execution of a definitive agreement to
acquire MGI Software Corp. ("MGI") in a proposed arrangement transaction.
19
<PAGE>
DISCREET LOGIC INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Discreet Logic Inc.
By: /s/ Francois Plamondon
FRANCOIS PLAMONDON
Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
May 15, 1998
20
<PAGE>
SILICONGRAPHICS
[LOGO] Computer Systems
[LETTERHEAD APPEARS HERE]
March 26, 1998
Mr. Richard Szalwinski
Chairman and CEO
DISCREET LOGIC
5505, boul. St.-Laurent, bureau 5200
Montreal (Quebec) Canada H2T 156
RE: EXTENSION OF VALUE ADDED RESELLER AGREEMENT TERMS AND CONDITIONS;
AGREEMENT NO. 12-11-441
Dear Mr. Szalwinski:
This letter shall serve to extend the Value Added Reseller Agreement
("Agreement"), and the Amendment thereto, between Silcon Graphics, Inc. ("SGI")
and Discreet Logic Inc. ("Discreet"). This extension shall be effective as of
April 1, 1998 and continue until and including June 30, 1998, at which time the
Agreement shall expire, unless the parties mutually agree in writing to extend
the terms of the Agreement, or enter into a new agreement.
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.
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. I may be reached by telephone at (650) 933-2328.
Very truly yours, Acknowledged and agreed.
/s/ Erna Arnesen By: /s/ Richard Szalwinski
-------------------------
Erna Arnesen Name: Richard Szalwinski
Vice-President, Global Channel Development -------------------------
(415) 933-5910 Title: Chairman and CEO
-------------------------
Date: 31 Mar 1998
-------------------------
cc: April Tan (SGI)
Jacquelyn L. Rider (SGI)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> JAN-01-1998 JUL-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1998
<CASH> 35,401 35,401
<SECURITIES> 0 0
<RECEIVABLES> 34,086 34,086
<ALLOWANCES> (3,688) (3,688)
<INVENTORY> 14,996 14,996
<CURRENT-ASSETS> 86,065 86,065
<PP&E> 29,682 29,682
<DEPRECIATION> (14,882) (14,882)
<TOTAL-ASSETS> 110,310 110,310
<CURRENT-LIABILITIES> 55,248 55,248
<BONDS> 0 0
106,320 106,320
0 0
<COMMON> 0 0
<OTHER-SE> (54,027) (54,027)
<TOTAL-LIABILITY-AND-EQUITY> 110,310 110,310
<SALES> 35,712 111,385
<TOTAL-REVENUES> 35,712 111,385
<CGS> 14,191 45,018
<TOTAL-COSTS> 14,191 45,018
<OTHER-EXPENSES> 14,374 68,323
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 6,942 (1,498)
<INCOME-TAX> 1,739 7,611
<INCOME-CONTINUING> 5,203 (9,109)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,203 (9,109)
<EPS-PRIMARY> 0.18 (0.32)
<EPS-DILUTED> 0.17 (0.32)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 21,658,051
<SECURITIES> 0
<RECEIVABLES> 16,073,788
<ALLOWANCES> 3,649,000
<INVENTORY> 15,829,486
<CURRENT-ASSETS> 61,792,759
<PP&E> 21,182,909
<DEPRECIATION> (8,221,484)
<TOTAL-ASSETS> 80,147,742
<CURRENT-LIABILITIES> 36,363,148
<BONDS> 0
0
0
<COMMON> 78,922,914
<OTHER-SE> (35,883,399)
<TOTAL-LIABILITY-AND-EQUITY> 80,147,742
<SALES> 83,997,447
<TOTAL-REVENUES> 83,997,447
<CGS> 49,333,071
<TOTAL-COSTS> 49,333,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,307,000
<INTEREST-EXPENSE> 229,579
<INCOME-PRETAX> (42,706,346)
<INCOME-TAX> 1,434,835
<INCOME-CONTINUING> (44,141,181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,141,181)
<EPS-PRIMARY> (1.64)
<EPS-DILUTED> (1.64)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 2-MOS 5-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> NOV-01-1996 AUG-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 36,267 36,267
<SECURITIES> 0 0
<RECEIVABLES> 17,119 17,119
<ALLOWANCES> 3,659 3,659
<INVENTORY> 7,489 7,489
<CURRENT-ASSETS> 61,482 61,482
<PP&E> 24,281 24,281
<DEPRECIATION> 10,282 10,282
<TOTAL-ASSETS> 81,894 81,894
<CURRENT-LIABILITIES> 36,037 36,037
<BONDS> 0 0
0 0
0 0
<COMMON> 79,763 79,763
<OTHER-SE> (34,730) (34,730)
<TOTAL-LIABILITY-AND-EQUITY> 81,894 81,894
<SALES> 16,833 40,096
<TOTAL-REVENUES> 16,833 40,096
<CGS> 8,003 20,290
<TOTAL-COSTS> 8,003 20,290
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8 54
<INCOME-PRETAX> 3,275 3,115
<INCOME-TAX> 1,310 1,962
<INCOME-CONTINUING> 1,965 1,153
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,965 1,153
<EPS-PRIMARY> 0.07 0.04
<EPS-DILUTED> 0.07 0.04
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 8-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> JAN-01-1997 AUG-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1997
<CASH> 40,982 40,982
<SECURITIES> 0 0
<RECEIVABLES> 18,409 18,409
<ALLOWANCES> 3,729 3,729
<INVENTORY> 12,437 12,437
<CURRENT-ASSETS> 72,124 72,124
<PP&E> 24,588 24,588
<DEPRECIATION> 11,172 11,172
<TOTAL-ASSETS> 91,852 91,852
<CURRENT-LIABILITIES> 43,030 43,030
<BONDS> 0 0
0 0
0 0
<COMMON> 79,925 79,925
<OTHER-SE> (32,814) (32,814)
<TOTAL-LIABILITY-AND-EQUITY> 91,852 91,852
<SALES> 27,044 67,139
<TOTAL-REVENUES> 27,044 67,139
<CGS> 11,255 31,545
<TOTAL-COSTS> 11,255 31,545
<OTHER-EXPENSES> 11,122 28,707
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 4,713 7,827
<INCOME-TAX> 1,674 3,636
<INCOME-CONTINUING> 3,039 4,191
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,039 4,191
<EPS-PRIMARY> 0.11 0.15
<EPS-DILUTED> 0.11 0.15
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED 6/30/97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 31,668
<SECURITIES> 0
<RECEIVABLES> 30,380
<ALLOWANCES> 3,487
<INVENTORY> 13,921
<CURRENT-ASSETS> 76,819
<PP&E> 22,531
<DEPRECIATION> 10,565
<TOTAL-ASSETS> 95,945
<CURRENT-LIABILITIES> 58,283
<BONDS> 0
0
0
<COMMON> 80,402
<OTHER-SE> (43,453)
<TOTAL-LIABILITY-AND-EQUITY> 95,945
<SALES> 101,924
<TOTAL-REVENUES> 101,924
<CGS> 47,571
<TOTAL-COSTS> 47,571
<OTHER-EXPENSES> 55,610
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> (267)
<INCOME-TAX> 6,489
<INCOME-CONTINUING> (6,756)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,756)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 27,322
<SECURITIES> 0
<RECEIVABLES> 33,256
<ALLOWANCES> 3,840
<INVENTORY> 14,558
<CURRENT-ASSETS> 76,461
<PP&E> 25,357
<DEPRECIATION> 12,037
<TOTAL-ASSETS> 98,558
<CURRENT-LIABILITIES> 65,125
<BONDS> 0
0
0
<COMMON> 91,941
<OTHER-SE> (59,568)
<TOTAL-LIABILITY-AND-EQUITY> 98,558
<SALES> 38,405
<TOTAL-REVENUES> 38,405
<CGS> 17,280
<TOTAL-COSTS> 17,280
<OTHER-EXPENSES> 33,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> (12,327)
<INCOME-TAX> 2,775
<INCOME-CONTINUING> (15,102)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,102)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 29,624
<SECURITIES> 0
<RECEIVABLES> 17,327
<ALLOWANCES> (3,626)
<INVENTORY> 11,182
<CURRENT-ASSETS> 60,760
<PP&E> 23,087
<DEPRECIATION> (9,527)
<TOTAL-ASSETS> 80,380
<CURRENT-LIABILITIES> 35,471
<BONDS> 0
0
0
<COMMON> 79,308
<OTHER-SE> (36,696)
<TOTAL-LIABILITY-AND-EQUITY> 80,380
<SALES> 23,263
<TOTAL-REVENUES> 23,263
<CGS> 12,287
<TOTAL-COSTS> 12,287
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> (160)
<INCOME-TAX> 652
<INCOME-CONTINUING> (812)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (812)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
