<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[XQUARTERLY]REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1997
OR
[_TRANSITION]REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
Commission file number 0-26100
DISCREET LOGIC INC.
(Exact name of registrant as specified in its charter)
Quebec 98-0150790
(State or other 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 [_]
28,829,919 shares of the registrant's Common Shares, without par value, were
outstanding as of November 10, 1997.
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended September 30, 1997
CONTENTS
<TABLE>
<CAPTION>
Item Number Page
----------- ----
<C> <S> <C>
PART I:FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Balance Sheets: June 30, 1997 and September 30, 1997......... 3
Statements of Operations: Three months ended September 30,
1997
and October 31, 1996........................................ 4
Statements of Cash Flows: Three months ended September 30,
1997
and October 31, 1996........................................ 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 8
Certain Factors That May Affect Future Results............... 16
PART II:OTHER INFORMATION
Item 1. Legal Proceedings............................................ 18
Item 2. Changes in Securities and Use of Proceeds.................... 19
Item 6. Exhibits and Reports on Form 8-K............................. 20
Signatures............................................................... 21
</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, September 30,
1997 1997
---------- -------------
(Unaudited)
(Restated) (Restated)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 31,668 $ 16,522
Cash restricted for settlement of class action
litigation......................................... -- 10,800
Accounts receivable (less reserves for doubtful
accounts).......................................... 26,893 29,416
Inventory--
Resale............................................ 10,867 11,019
Demonstration..................................... 3,054 3,539
Income taxes receivable............................. 448 --
Other current assets................................ 3,889 5,165
-------- --------
76,819 76,461
Property and equipment--less accumulated depreciation
and amortization..................................... 7,728 9,134
Deferred income taxes................................. 3,490 2,467
Other assets.......................................... 10,092 27,753
Assets held for resale................................ 5,248 4,186
-------- --------
$103,377 $120,001
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses............... $44,086 $ 50,712
Deferred revenue.................................... 8,103 9,039
Income taxes payable................................ 4,735 4,945
Customer deposits................................... 1,359 429
-------- --------
58,283 65,125
-------- --------
Deferred income taxes............................... 713 1,060
-------- --------
Shareholders' Equity:
Preferred shares--no par value
Authorized--unlimited number of shares
Issued and outstanding--none
Common shares--no par value
Authorized--unlimited number of shares
Issued and outstanding--28,117,415 shares at June
30, 1997 and
28,822,636 at September 30, 1997................. 81,076 93,283
Accumulated deficit................................. (35,207) (36,299)
Deferred compensation............................... (674) (1,342)
Cumulative translation adjustment................... (814) (1,826)
-------- --------
Total shareholders' equity........................ 44,381 53,816
-------- --------
$103,377 $120,001
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands of U.S. Dollars, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
October 31, September 30,
1996 1997
----------- -------------
(Restated)
<S> <C> <C>
Total revenues........................................ $23,263 $38,405
Cost of revenues...................................... 12,287 17,280
------- -------
Gross profit........................................ 10,976 21,125
------- -------
Operating expenses:
Research and development (net of tax credits)....... 2,678 3,512
Sales and marketing................................. 6,017 7,433
General and administrative.......................... 1,516 3,605
Charge for purchased research and development....... -- 5,269
------- -------
Total operating expenses.......................... 10,211 19,819
------- -------
Operating income ................................. 765 1,306
Other income (expense), net........................... (925) 377
------- -------
Income (loss) before income taxes................... (160) 1,683
Provision for income taxes............................ 652 2,775
------- -------
Net loss............................................ $ (812) $(1,092)
======= =======
Net loss per common share............................. $ (0.03) $ (0.04)
======= =======
Weighted average common shares outstanding............ 27,800 28,659
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands of U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
October 31, September 30,
1996 1997
----------- -------------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (812) $ (1,092)
Adjustments to reconcile net loss to cash provided
by (used in) operating activities--
Depreciation and amortization..................... 1,580 3,718
Deferred income taxes............................. (135) 1,369
Write-off of in-process research and development.. -- 5,269
Write-off of assets for restructuring............. 197 109
Compensation expense related to stock options..... -- 167
Changes in assets and liabilities--
Restricted cash................................. -- (10,800)
Accounts receivable............................. 2,373 (1,704)
Inventory....................................... 5,480 (275)
Income taxes receivable......................... 1,407 448
Other current assets............................ (1,013) (1,276)
Accounts payable and accrued expenses........... (2,724) (2,644)
Insurance proceeds related to class action
litigation..................................... -- 3,459
Deferred revenue................................ 3,235 936
Income taxes payable............................ -- 211
Customer deposits............................... (1,108) (930)
Due to related parties.......................... (26) --
------- --------
Net cash provided by (used in) operating
activities....................................... 8,454 (3,035)
------- --------
Cash flows from investing activities:
Purchase of property and equipment................. (1,707) (2,323)
Proceeds on disposal of assets held for resale..... -- 818
Cash paid for D-Vision acquisition and related
costs............................................. -- (10,342)
------- --------
Net cash used in investing activities............. (1,707) (11,847)
------- --------
Cash flows from financing activities:
Proceeds from option exercises..................... 184 506
Proceeds from employee stock purchase plan......... 201 217
------- --------
Net cash provided by financing activities......... 385 723
------- --------
Foreign exchange effect on cash.................... 834 (987)
------- --------
(Decrease) increase in cash and cash equivalents... 7,966 (15,146)
Unrestricted cash and cash equivalents, beginning
of period......................................... 21,658 31,668
------- --------
Unrestricted cash and cash equivalents, end of
period............................................ $29,624 $ 16,522
======= ========
Supplemental disclosure of cash flow information:
Interest paid during the period.................... $ 7 $ 21
------- --------
Income taxes paid during the period................ $ 454 $ 2,110
------- --------
In connection with the acquisition of D-Vision in
July 1997, the following non-cash transaction
occurred:
Fair value of assets acquired................... $ -- $ 27,210
Liabilities assumed............................. -- (5,811)
Cash acquired................................... -- (408)
Issuance of 555,000 shares of Common Stock...... -- (10,649)
------- --------
Cash paid for acquisition, net of cash acquired...... $ -- $ 10,342
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by Discreet Logic Inc. ("Discreet Logic" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the consolidated financial statements and notes thereto for
the year ended June 30, 1997. The accompanying condensed consolidated
financial statements reflect all adjustments (consisting solely of normal,
recurring adjustments) which are, in the opinion of management, necessary for
a fair presentation of results for the interim periods presented. The results
of operations for the three month period ended September 30, 1997 are not
necessarily indicative of the results to be expected for any other interim
period or for the full fiscal year.
Restatement of Financial Statements
In connection with the proposed merger of the Company and Autodesk, Inc., a
Form S-4 (registration no. 333-65075) was filed with The Securities and
Exchange Commission ("SEC"). Subsequent to the SEC's letter to the American
Institute of Certified Public Accountants ("AICPA") dated September 9, 1998
regarding the SEC's views on in-process research and development, the Company
has increased the allocation of the purchase price to "Goodwill" and has
decreased the allocation to the "Write-off of purchased research and
development" for its acquisitions of Denim Software in fiscal 1997 and D-
Vision Systems in the three-month period ended September 30, 1997.
The revised allocation of the aggregate purchase price is as follows:
<TABLE>
<CAPTION>
As reported As restated
----------- -----------
<S> <C> <C>
In-process research and development.................... $30,800,000 $ 7,532,000
Acquired technology.................................... 4,564,000 4,564,000
Goodwill............................................... 1,232,000 24,500,000
Fair value of tangible assets acquired................. 2,799,000 2,799,000
----------- -----------
$39,395,000 $39,395,000
=========== ===========
</TABLE>
The effect of these adjustments on previously reported consolidated
financial statements for the three-month period ended September 30, 1997 is as
follows:
<TABLE>
<CAPTION>
As reported As restated
------------ -----------
<S> <C> <C>
General and administrative.......................... $ 1,884,000 $ 3,605,000
Charge for purchased research and development....... $ 21,000,000 $ 5,269,000
Operating income (loss)............................. $(12,704,000) $ 1,306,000
Net loss............................................ $(15,102,000) $(1,092,000)
Net loss per share.................................. $ (0.53) $ (0.04)
</TABLE>
(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 month
periods ended September 30, 1997 and October 31, 1996. The Company prepares
consolidated financial statements, re-measures accounts in foreign currencies
to reflect changes in exchange rates, and examines and adjusts certain reserve
6
<PAGE>
accounts at the end of each quarter. Therefore, it is not practicable to
recast prior quarterly results to reflect the new fiscal period. Consequently,
the results for the three month period ended September 30, 1997 are not
directly comparable to the results of the three month period ended October 31,
1996.
(3) Litigation and Related Settlement Expenses
On May 29, 1996, a lawsuit entitled Sandra Esner and Jerry Krim, On Behalf
of Themselves and All Others Similarly Situated, vs. [ . . . ]Discreet Logic
Inc., et al., case No. 978584, was filed in the Superior Court of the State of
California, City and County of San Francisco. Named as defendants are the
Company, certain of the Company's former and existing directors, officers, and
affiliates, and certain underwriters and financial analysts. The plaintiffs
purport to represent a class of all persons who purchased the Company's common
stock between September 13, 1995, and May 1, 1996. The complaint alleges
violations of California law through material misrepresentations and
omissions, among other things. The Company believes that the allegations in
the complaint are without merit and has defended the lawsuit vigorously.
On June 13, 1996, a lawsuit entitled Bruce Friedberg, On Behalf of Himself
and All Others Similarly Situated, vs. Discreet Logic Inc., et al., Civ. No.
96-11232-EFH, was filed in the United States District Court, District of
Massachusetts. Named as defendants are the Company and certain of the
Company's former and existing directors and officers. The plaintiff purports
to represent a class of all persons who purchased the Company's common stock
between November 14, 1995, and February 13, 1996. On October 11, 1996, the
plaintiff filed an amended complaint which asserts substantially the same
factual allegations as the first complaint and proposes the identical class
period. The complaint alleges violations of the United States Federal
Securities law through material misrepresentations and omissions. The Company
believes that the allegations in the complaint are without merit and has
defended the lawsuit vigorously.
On April 29, 1997, a lawsuit entitled Anton Paparella, Sandra Esner and
Geoffrey L. Sherwood, On Behalf of Themselves and All Others Similarly
Situated vs. Discreet Logic Inc., et al., case No. C-97-1570, was filed in the
United States District Court, Northern District of California. Named as
defendants are the Company and certain of Company's former and existing
officers, directors and affiliates, and certain underwriters. The complaint
asserts, in all material respects, the same factual allegations and proposes
the same class period as the above-described California state court complaint
filed in May 1996, except asserts claims under federal securities law instead
of state law. The Company believes that the allegations in the California
federal complaint are without merit and has defended the lawsuit vigorously.
On August 12, 1997, the Company announced that it had reached an agreement-
in-principle to settle all three of the shareholder class action litigations.
The parties to the class action litigations have executed a settlement
agreement which is now awaiting final court approval. The proposed $10,800,000
settlement requires the Company to contribute approximately $7,400,000 from
its own funds, with the remainder provided by insurance. The settlement is
subject to final court approval. There can be no assurance that the settlement
will be finally approved and that the Company will not have to continue its
defense of the lawsuits. Should the proposed settlement not be finally
approved for any reason, the Company intends to defend the lawsuits
vigorously.
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, should the proposed settlement be
finally approved. At September 30, 1997, the Company had on its balance sheet
cash restricted for the above-mentioned settlement, in the amount of
$10,800,000. The corresponding obligation is included in accounts payable and
accrued expenses.
7
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Discreet Logic Inc. ("Discreet Logic" or the "Company") develops, assembles,
markets and supports non-linear, digital systems and software for creating,
editing and compositing imagery and special effects for film, video, and HDTV.
The Company's systems and software are utilized by creative professionals for
a variety of applications, including feature films, television programs,
commercials, music videos, interactive game production and live broadcasting.
Recent Developments
Restatement of Financial Statements
In connection with the proposed merger of the Company and Autodesk, Inc., a
Form S-4 (registration no. 333-65075) was filed with The Securities and
Exchange Commission ("SEC"). Subsequent to the SEC's letter to the American
Institute of Certified Public Accountants ("AICPA") dated September 9, 1998
regarding the SEC's views on in-process research and development, the Company
has increased the allocation of the purchase price to "Goodwill" and has
decreased the allocation to the "Write-off of purchased research and
development" for its acquisitions of Denim Software in fiscal 1997 and D-
Vision Systems in the three-month period ended September 30, 1997.
The revised allocation of the aggregate purchase price is as follows:
<TABLE>
<CAPTION>
As reported As restated
----------- -----------
<S> <C> <C>
In-process research and development.................... $30,800,000 $ 7,532,000
Acquired technology.................................... 4,564,000 4,564,000
Goodwill............................................... 1,232,000 24,500,000
Fair value of tangible assets acquired................. 2,799,000 2,799,000
----------- -----------
$39,395,000 $39,395,000
=========== ===========
</TABLE>
The effect of these adjustments on previously reported consolidated
financial statements for the three-month period ended September 30, 1997 is as
follows:
<TABLE>
<CAPTION>
As reported As restated
------------ -----------
<S> <C> <C>
General and administrative.......................... $ 1,884,000 $ 3,605,000
Charge for purchased research and development....... $ 21,000,000 $ 5,269,000
Operating income (loss)............................. $(12,704,000) $ 1,306,000
Net loss............................................ $(15,102,000) $(1,092,000)
Net loss per share.................................. $ (0.53) $ (0.04)
</TABLE>
Litigation Settlement
On May 29, 1996, June 13, 1996 and April 29, 1997 certain of the Company's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against the Company and certain of its
officers and directors, among others. The three lawsuits were filed in the
Superior Court of the State of California, the United States District Court,
District of Massachusetts and the United States District Court, Northern
District of California, respectively. On August 12, 1997 the Company announced
that it had reached an agreement-in-principle to settle all three of the
shareholder class action litigations. The parties to the class action
litigations have executed a settlement agreement which is now awaiting final
court approval. The proposed $10.8 million
8
<PAGE>
settlement requires the Company to contribute approximately $7.4 million from
its own funds, with the remainder provided by insurance. The settlement is
subject to final court approval. There can be no assurance that the settlement
will be finally approved and that the Company will not have to continue its
defense of the lawsuits. Should the proposed settlement not be finally
approved for any reason, the Company intends to defend the lawsuits
vigorously.
Recent Acquisitions
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 "Denim Acquisition"). The purchased assets
consisted 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 cash flow from operations. The transaction was accounted for as
a purchase. The Company incurred a one-time charge of $2,263,000, or $0.08 per
share, as restated, for in-process research and development, purchased and
expensed in its fourth fiscal quarter ended June 30, 1997, based on an
appraisal. The terms of the transaction and the consideration received by
Denim were the result of arms-length negotiations between the representatives
of the Company and Denim. Denim developed Apple Macintosh OS and Microsoft
Windows NT-based paint and compositing software for producing effects,
interactive content and graphics design.
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 portion of the
purchase price, net liabilities of D-Vision and transaction costs was
allocated to purchased in-process research and development for which the
Company incurred a one-time charge against earnings in the amount of
$5,269,000 ($0.18 per share), as restated, based on an 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.
In-process Research and Development
Overview--The Acquisition of D-Vision Systems, Inc.
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relates to the
completion of all planning, designing and testing activities that are
necessary
9
<PAGE>
to establish that the products can be produced to meet their design
requirements, including functions, features and technical performance
requirements. Generally, if the R&D projects and technologies are not
completed as planned, they will neither satisfy the technical requirements of
a changing market nor be cost effective.
As of the acquisition date, D-Vision Systems, Inc. ("D-Vision"), had
initiated research and development efforts related to the product features and
functionality that will reside in the advancement of its WindowsNT with other
operating systems to develop an advanced, cross-platform editing/effects
product capable of performing complete video editing functions for a broad
array of customers.
With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of D-Vision prior to
the close of the acquisition. Following are, as of the acquisition date, the
estimated completion percentage, estimated technology life and projected
introduction date:
<TABLE>
<CAPTION>
Percent Technology Introduction
D-Vision In-Process Technology Completed Life Date
------------------------------ --------- ------------ ------------
<S> <C> <C> <C>
Next generation D-Vision technology...... 26% 4 to 5 years April 1999
</TABLE>
A brief description of the acquired in-process project is set forth below:
Next generation D-Vision technology
The substantial technological improvements under development at the time of
the acquisition included the introduction of advanced user interface concepts
and structures to the combined product that support both the editing and
effects paradigms and building advanced product features. Examples of the
advanced product features being built included: remote editing capabilities
with live interaction between remote users; a text or script-based interface
designed to allow the user to customize the application by typing common
statements or words; and text command interpretation that will read film or
program scripts and provide computer-generated "virtual" clips allowing users
to visualize a scene even before the first field shot begins.
Cost to Complete
Discreet anticipated incurring costs of approximately $2.6 million over the
24 months following the acquisition to complete the R & D projects.
Valuation analysis
Revenue
The value of the acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product sales. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net
cash flows from the projects and discounting the net cash flows to their
present value. The revenue projection used to value the in-process research
and development was based on estimates of relevant market sizes and growth
factors, expected trends in technology and the nature and expected timing of
new product introductions by the Company and its competitors. Future revenue
estimates were generated from the next generation D-Vision product family.
Aggregate revenue for D-Vision products was estimated to be approximately $11
million for the period from January 1, 1997 to December 31, 1997, increasing
to approximately $48 million by 2002 (representing a compound annual growth
rate of 21%) and stabilizing at a 5 percent growth rate in 2002 and for the
remainder of the estimation period.
The estimated revenues for the in-process technologies assumed compound
annual growth rates of 45% in the four years following introduction, assuming
the successful completion and market acceptance of the major R&D programs. The
estimated revenues for the in-process projects were expected to peak within
five years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market. Revenues for developed
technology were estimated for 1997 through 2002, and were expected to decline
gradually as new products are expected to enter the marketplace.
10
<PAGE>
Management's analysis also considered anticipated product release dates for
a next-generation version of the Company's D-Vision product scheduled for
release in April 1999, as well as the release date for a significantly
enhanced version of D-Vision's existing product currently scheduled for
release in April 1999. The overall technology life was estimated to be
approximately five years for both the Company's next generation D-Vision
product and the significantly enhanced version of its D-Vision's existing
product.
Operating Expenses
Operating expenses used in the valuation analysis of D-Vision included (i)
cost of sales, (ii) selling, general and administrative expenses, and (iii)
research and development expenses. Operating expenses were estimated based on
historical results and anticipated cost savings. Due to general economies of
scale, improved infrastructure, and greater management breadth, estimated
operating expense as a percentage of revenues were expected to decrease after
the acquisitions.
Cost of sales. Cost of sales, expressed as a percentage of revenue, for the
developed and in-process technologies identified in the valuation was
estimated to range from 10 to 45.2 percent for 1997 through 2002. The cost of
sales was forecast by management for 1997 and 1998. Cost of sales as a
percentage of revenue were stabilized for 2003 based on fiscal 2002 data.
Selling, General and Administrative. Selling, general and administrative
expenses, expressed as a percentage of revenue for the developed and in-
process technologies identified in the valuation, ranged from 52.2 percent in
1997 to 30.0 percent in 2002. Selling, general and administrative expenses
were forecast by management for 1997 through 2002. Thereafter, selling,
general and administrative expenses, expressed as a percentage of revenue,
were estimated to stabilize at 25.0 percent of revenue. Long-term margins were
expected to decline due to increased competitive pressures within the maturing
industry.
Research and Development. Research and development ("R&D") expenses consist
of the costs associated with activities undertaken to develop new software and
to correct errors or to keep products updated with current information. The
R&D expense was estimated to be 6.5 percent of revenues throughout the
forecast period.
Effective income tax rate. The effective income tax rate utilized in the
analysis of the in-process technology was 32 percent throughout the valuation
period. The 32 percent reflects the Company's estimated combined federal and
state statutory income tax rate, exclusive of nonrecurring charges, and its
estimated income tax rate, as provided by management, in future years.
Discount rate. The discount rate selected for developed and in-process
technology was 20 and 25 percent, respectively. In the selection of the
appropriate discount rate, consideration was given to the Weighted Average
Cost of Capital ("WACC"), which was determined, in part, by using the Capital
Asset Pricing Model (CAPM). The discount rate utilized for the in-process
technology was higher than Discreet's WACC due to the risk of realizing cash
flows from products that had yet to reach technological feasibility.
Allocation of value
The fair values of the assets acquired from D-Vision were allocated between:
Intellectual property--in-process research and development and developed
technology; and Other intangible assets--assembled work force and
goodwill/other intangibles. The results of the allocation of values between
the assets are as follows:
<TABLE>
<CAPTION>
Asset Fair Market Value
----- -----------------
(Restated)
<S> <C>
Intellectual Property:
In-Process Research and Development...................... $ 5,269,000
Acquired Technology...................................... $ 3,100,000
Other Intangible Assets:
Assembled Work Force..................................... $ 200,000
Goodwill/Other Intangibles............................... $16,448,000
</TABLE>
11
<PAGE>
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. During the
second half of fiscal 1996, the Company identified a number of difficulties
and developments facing its business, including: (1) softening of market
demand in its core high-end visual effects market segment, (2) delays by the
Company in introducing new products aimed at new market segments, (3)
inventory build-up in anticipation of continued high sales in its core market
segment and high growth in its new market segments, (4) expense and headcount
build-up in anticipation of continued high sales in its core market segment
and high growth in new market segments, (5) the disruption caused by platform
changes by the Company's key supplier, and (6) greater use of third party
financing by customers. In addition, during the second half of fiscal 1996,
several of the Company's senior executives resigned to pursue other
opportunities.
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. The focus of the Company's restructuring plan was to solidify
its senior management team; reduce operating expenses through a 28% reduction
of its workforce and the closure of its Cambridge, Massachusetts, Connecticut,
London and Innsbruck offices; consolidate software research and development
activities in Montreal; discontinue the AIR, PURE, SLICE and DIPLOMAT product
lines; and restructure its sales force to emphasize indirect sales channels.
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
$3,894,000 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 month
periods ended September 30, 1997 and October 31, 1996. The Company prepares
consolidated financial statements, remeasures accounts in foreign currencies
to reflect changes in exchange rates and examines and adjusts certain reserve
accounts at the end of each quarter. Therefore, it is not practicable to
recast the prior fiscal period's results to reflect the new fiscal period.
Consequently, the results for the three month period ended September 30, 1997
are not directly comparable to the results of the three month period ended
October 31, 1996.
12
<PAGE>
Results of Operations
The following table sets forth the percentages of total revenues represented
by certain line items in the statement of operations:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
October 31, September 30,
1996 1997
----------- -------------
(Restated)
<S> <C> <C>
Total revenues........................................ 100% 100%
Cost of revenues...................................... 53 45
--- ---
Gross profit...................................... 47 55
--- ---
Operating expenses:
Research and development............................ 12 9
Sales and marketing................................. 26 20
General and administrative.......................... 6 9
Charge for purchased research and development....... -- 14
--- ---
Total operating expenses.......................... 44 52
--- ---
Operating income.................................... 3 3
Other income (expense), net........................... (4) 1
--- ---
Income (loss) before income taxes................... (1) 4
Provision for income taxes............................ 3 7
--- ---
Net loss.......................................... (4)% (3)%
=== ===
</TABLE>
Three Months Ended September 30, 1997 and October 31, 1996
Total Revenues. The Company's revenues consist of product revenues
(including licensing of its software, sales of the Company's proprietary
hardware, and resale of third party hardware) and, to a lesser extent,
revenues from maintenance and other services (including consulting and
training). For all periods presented, the Company has recognized revenue in
accordance with Statement of Position 91-1, entitled "Software Revenue
Recognition," issued by the American Institute of Certified Public
Accountants. In accordance with this statement, in cases where the Company has
delivered hardware and/or software to customers and has insignificant or
noncritical vendor obligations related to these deliveries, the revenue
attributable to such obligations has been deferred until such obligations have
been fulfilled.
Total revenues were $38,405,000 and $23,263,000 for the three month periods
ended September 30, 1997 and October 31, 1996, respectively. The increase in
total revenues was primarily a result of an increase in worldwide revenues
generated by the Company's Special Effects (including the first full quarter
of ILLUMINAIRE shipments) and Editing (including initial shipments of OnLINE)
product lines. This was partially offset by a decrease in revenues from the
Company's Broadcast Production product line.
Revenues from customers outside of North America were $18,264,000 (48% of
total revenues) and $11,554,000 (50% of total revenues) for the three month
periods ended September 30, 1997 and October 31, 1996, respectively. Revenues
from customers outside North America increased due to the growing penetration
of the Company's products in the Asian and European markets. The Company
expects that revenues from customers outside of North America will continue to
account for a substantial portion of its revenues and should increase as a
percentage of total revenues.
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
13
<PAGE>
allocated to such personnel and the provision for inventory reserves. Cost of
revenues was $17,280,000 (45% of total revenues) and $12,287,000 (53% of total
revenues) for the three month periods ended September 30, 1997 and October 31,
1996, respectively. The decrease in cost of revenues, as a percentage of total
revenues, was due to: (1) the growing penetration of the Company's products in
the Asian market where customers typically purchase only software or software
and storage media bundles; (2) an increase in software-only sales, including
sales of the newly acquired OnLINE and ILLUMINAIRE products; and (3) 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, will remain approximately the same.
Research and Development. Research and development expenses consist
primarily of the cost of research and development personnel and the
facilities, depreciation on research and development equipment, amortization
of acquired technologies, computing, benefits and other administrative costs
allocated to such personnel, and consulting fees. Expenditures for research
and development, after deducting Canadian federal and provincial tax credits,
were $3,512,000 (9% of total revenues) and $2,678,000 (12% of total revenues)
for the three month periods ended September 30, 1997 and October 31, 1996,
respectively. The increase in research and development expenses is explained
primarily by: (1) an increase in the number of software engineers (including
the engineers joining the Company as a result of the Denim and D-Vision
Acquisitions) to develop and enhance the Company's existing products and to
develop new products; (2) an increase in depreciation charges on the
additional research and development equipment required for the additional
personnel; and (3) an increase in the amortization of acquired technologies.
Research and development costs are expensed as incurred. Software development
costs are considered for capitalization once technical feasibility has been
established. The Company has not capitalized any software development costs to
date. Certain research and development expenditures are incurred substantially
in advance of related revenue and in some cases do not generate revenues. The
Company expects that research and development expenses will increase from
their current levels and increase slightly as a percentage of total revenues.
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 $7,433,000
(20% of total revenues) and $6,017,000 (26% of total revenues) for the three
month periods ended September 30, 1997 and October 31, 1996, respectively. The
increase in sales and marketing expenses is explained primarily by the
continued expansion of the Company's direct and indirect sales organization,
including the operating costs of domestic sales offices and foreign
subsidiaries, and an increase in tradeshow activities. The Company expects
that sales and marketing expenses will increase from their current levels and
increase slightly as a percentage of total revenues.
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,
amortization of goodwill, and reserves for doubtful accounts receivable.
General and administrative expenses were $3,605,000 (9% of total revenues), as
restated, and $1,516,000 (6% of total revenues) for the three month periods
ended September 30, 1997 and October 31, 1996, respectively. The increase in
general and administrative expenses is explained primarily by an increase in
personnel and the amortization of goodwill associated with the Denim and D-
Vision acquisitions. 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.
Charge for Purchased Research and Development. In connection with the D-
Vision Acquisition, the Company expensed $5,269,000 (14% of total revenues),
as restated, of in-process research and development in the three month period
ended September 30, 1997.
Other Income (Expense). Other Income (Expense) primarily consists of foreign
currency gains and losses and interest income and expense. Foreign currency
translation gains were $128,000 during the three month period
14
<PAGE>
ended September 30, 1997 as compared to losses of approximately $1,135,000
during the three month period ended October 31, 1996. These gains and losses
are primarily the result of the Company and each subsidiary translating
intercompany balances denominated in a currency other than its own functional
currency. These balances are remeasured into the functional currency of each
company every reporting period. This remeasurement results in either
unrealized gains or losses depending on the exchange rate fluctuation between
the functional currency of each company and the currency in which the monetary
asset or liability is denominated.
Provision for Income Taxes. The Company's provision for income taxes was
$2,775,000 and $652,000 for the three month periods ended September 30, 1997
and October 31, 1996, respectively. The provision for both 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 the three month
period ended September 30, 1997 differed from the statutory rate primarily as
a result of the Company recording a charge 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 this charge, the amortization
of goodwill for which no tax benefit was recorded, 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 three month period ended
October 31, 1996 differed from the statutory rate primarily as a result of the
Company not recording a benefit related to losses where the realization of the
benefit was uncertain. The Company has available 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 (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 Province of Quebec. As of
September 30, 1997, the Company had cash of approximately $27,322,000, which
includes $10,800,000 of cash that was restricted for the settlement of the
class action litigations and was being held in escrow at the balance sheet
date. 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 $5,072,000 at September 30, 1997). Advances under the line
accrue interest monthly at the Canadian prime rate (4.75% at September 30,
1997) plus 0.25%. Additionally, the Company has a CDN$600,000 (approximately
$435,000 at September 30, 1997) demand leasing facility, and a CDN$600,000
(approximately $435,000 at September 30, 1997) demand research and development
tax credit facility. Advances under these facilities accrue interest monthly
at the Canadian prime rate (4.75% at September 30, 1997) plus 1%. The line and
facilities are secured by essentially all of the Company's North American
assets. As additional security, the Company has assigned to the bank its
insurance on these assets. The Company is required to maintain certain
financial ratios, including minimum levels of working capital, debt service
coverage and equity to assets ratios. As of September 30, 1997, no amounts
were outstanding under the demand line of credit, the demand leasing, or the
demand research and development tax credit facilities.
The Company's operating activities, including research and development tax
credits, used cash of $3,035,000 and provided cash of $8,454,000 for the three
month periods ended September 30, 1997 and October 31, 1996, respectively. The
principal sources of cash for the three months ended September 30, 1997 were
cash generated from operations, the receipt of insurance proceeds related to
the settlement of the class action litigations, the decrease in income taxes
receivable, the increase in deferred revenue, and the increase in income taxes
payable. These sources of cash were offset by the transfer of cash to a
restricted escrow account to be used to settle the class action litigations,
the increases in accounts receivable, inventory and other current assets, and
the decreases in accounts payable and accrued expenses, and customer deposits.
Accounts payable and accrued expenses used cash of $2,644,000 as a result of
the Company paying most of the liabilities assumed in connection with the D-
Vision Acquisition. Accounts receivable increased due to a significant
increase in revenues experienced in September 1997 as compared to October
1996. Net cash provided by operations in the three
15
<PAGE>
month period ended October 31, 1996 was composed primarily of decreases in
accounts receivable, inventory, income taxes receivable, and the increase in
deferred revenue.
The Company's investing activities used cash of $11,847,000 in the three
month period ended September 30, 1997 primarily for the acquisition of D-
Vision Systems, Inc. and the purchase of research and development equipment
and related software. Upon the acquisition of D-Vision, many of the
liabilities assumed were paid at closing. During the three month period ended
September 30, 1997, the Company received proceeds from the sale of its
Montreal land and office building which were previously included on the
balance sheet as assets held for resale. The proceeds of sale were not
materially different from the carrying value of these assets. The Company's
investing activities used cash of $1,707,000 in the three month period ended
October 31, 1996, primarily for renovations to the office building in London,
England and the purchase of computer equipment and software used in the
operations of the Company's business, primarily in the research and
development area.
Financing activities provided cash of $723,000 and $385,000 in the three
month periods ended September 30, 1997 and October 31, 1996, respectively,
from proceeds from common stock option exercises and the issuance of shares
under the Employee Stock Purchase Plan.
As of September 30, 1997, the Company did not have any material commitments
for capital expenditures. However, in August 1997, the Company entered into an
agreement-in-principle to settle the three outstanding class action lawsuits
against it. The parties to the class action litigations have executed a
settlement agreement which is now awaiting final court approval. This
settlement, should it be finally approved, requires the Company to disburse
approximately $7,400,000 from its own funds.
The Company's ability to meet its future liquidity requirements is dependent
upon its ability to operate profitably, or in the absence thereof, to obtain
additional financing. The Company underwent a restructuring intended to
decrease operating expenses, however, there can be no assurance that the
Company will not have to take further restructurings or be profitable in the
future. Should the Company need to secure additional financing to meet its
future liquidity requirements, there can be no assurance that the Company will
be able to secure such financing, or that such financing, if available, will
be on terms favorable to the Company. Subject to the factors discussed below
in Certain Factors That May Affect Future Results, the Company believes that,
with its current levels of working capital together with funds generated from
operations, it has adequate sources of cash to meet its operations and capital
expenditure requirements through fiscal 1998.
Certain Factors That May Affect Future Results
Information provided by the Company from time to time including statements
in this Form 10-Q which are not historical facts, are so-called forward-
looking statements, and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 and releases of the
Securities and Exchange Commission. In particular, statements contained in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are not historical facts (including, but not limited to,
statements regarding the Company's anticipated cost of revenues, statements
regarding the anticipated adequacy of cash to meet operations, statements
concerning anticipated expense levels and such expenses as a percentage of
revenues, statements about the anticipated portion of revenues from customers
outside North America, and the implementation of the restructuring plan), and
in the "Legal Proceedings" section which are not historical facts 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, including without limitation the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1996.
16
<PAGE>
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 market in which the Company competes is 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 two acquisitions. There can be no assurance
that the products and technologies acquired from these companies will be
successful or will achieve market acceptance, or that the Company will not
incur disruptions and unexpected expenses in integrating the operations of the
two acquired businesses with those of the Company.
The Company's FLAME, FLINT, INFERNO, FIRE, VAPOUR AND FROST systems
currently include workstations manufactured by SGI. There are significant
risks associated with this reliance on SGI and the Company may be impacted by
the timing of the development and release of products by SGI, as was the case
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 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 recently
received a letter from Avid Technology, Inc. ("Avid") stating its belief that
certain of the Company's recently acquired D-Vision products practice
inventions claimed in a patent on a media editing system. The Company has
responded to Avid's letter stating the Company's belief that the Company is
not infringing any valid claim of Avid's patent. To the Company's knowledge,
Avid has not initiated any suit, action or other proceeding alleging any
infringement by the Company of such patent. The Company currently markets its
systems through its direct sales organization and through distributors. This
marketing strategy may result in distribution channel conflicts as the
Company's direct sales efforts may compete with those of its indirect
channels. The Company currently relies on SGI as the sole source for video
input/output cards used in the Company's systems. The Company's 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.
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. The three lawsuits were filed in the Superior Court of
the State of California, the United
17
<PAGE>
States District Court, District of Massachusetts and the United States
District Court, Northern District of California, respectively. On August 12,
1997 the Company announced that it had reached an agreement-in- principle to
settle all of the shareholder class action lawsuits. The parties to the class
action litigations have executed a settlement agreement which is now awaiting
final court approval. The proposed $10.8 million settlement requires the
Company to contribute approximately $7.4 million from its own funds, with the
remainder provided by insurance. The settlement is subject to final court
approval. There can be no assurance that the settlement will be finally
approved and that the Company will not have to continue its defense of the
lawsuits. Should the proposed settlement not be finally approved for any
reason, the Company intends to defend the lawsuits vigorously.
The market price of the Company's common shares could be subject to
significant fluctuations in response to quarter-to-quarter variations in the
Company's operating results, announcements of technological innovations or new
products by the Company, its competitors or suppliers and other events or
factors. In addition, the stock market in recent years has experienced extreme
price and volume fluctuations that have particularly affected the market
prices of many technology companies and that have often been unrelated or
disproportionate to the operational performance of these companies. These
fluctuations, as well as general economic and market conditions, may
materially and adversely affect the market price of the Company's common
shares.
The Company believes that its operating results could vary significantly
from quarter to quarter. A limited number of systems sales may account for a
substantial percentage of the Company's quarterly revenue because of the high
average sales price of such systems and the timing of purchase orders.
Historically, the Company has generally experienced greater revenues during
the period following the completion of the annual conference of the National
Association of Broadcasters ("NAB"), which is typically held in April. The
Company's expense levels are based, in part, on its expectations of future
revenues. Therefore, if revenue levels are below expectations, particularly
following NAB, the Company's operating results are likely to be adversely
affected as was the case for the three month periods ended April 30, 1996 and
July 31, 1996. In addition, the timing of revenue is influenced by a number of
other factors, including: the timing of individual orders and shipments, other
industry trade shows, competition, seasonal customer buying patterns, changes
to customer buying patterns in response to platform changes and changes in
product development and sales and marketing expenditures. Because the
Company's operating expenses are based on anticipated revenue levels and a
high percentage of the Company's expenses are relatively fixed in the short
term, variations in the timing of recognition of revenue could cause
significant fluctuations in operating results from quarter to quarter and may
result in unanticipated quarterly earnings shortfalls or losses. There can be
no assurance that the Company will be successful in maintaining or improving
its profitability or avoiding losses in any future period. The Company
believes that quarter-to-quarter comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of
future performance.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On May 29, 1996, a lawsuit entitled Sandra Esner and Jerry Krim, On Behalf
of Themselves and All Others Similarly Situated, vs. [ . . . ]Discreet Logic
Inc., et al., case No. 978584, was filed in the Superior Court of the State of
California, City and County of San Francisco. Named as defendants are the
Company, certain of the Company's former and existing directors, officers, and
affiliates, and certain underwriters and financial analysts. The plaintiffs
purport to represent a class of all persons who purchased the Company's common
stock between September 13, 1995, and May 1, 1996. The complaint alleges
violations of California law through material misrepresentations and
omissions, among other things. The Company believes that the allegations in
the complaint are without merit and has defended the lawsuit vigorously.
On June 13, 1996, a lawsuit entitled Bruce Friedberg, On Behalf of Himself
and All Others Similarly Situated, vs. Discreet Logic Inc., et al., Civ. No.
96-11232-EFH, was filed in the United States District Court,
18
<PAGE>
District of Massachusetts. Named as defendants are the Company and certain of
the Company's former and existing directors and officers. The plaintiff
purports to represent a class of all persons who purchased the Company's
common stock between November 14, 1995, and February 13, 1996. On October 11,
1996, the plaintiff filed an amended complaint which asserts substantially the
same factual allegations as the first complaint and proposes the identical
class period. The complaint alleges violations of the United States Federal
Securities law through material misrepresentations and omissions. The Company
believes that the allegations in the complaint are without merit and has
defended the lawsuit vigorously.
On April 29, 1997, a lawsuit entitled Anton Paparella, Sandra Esner and
Geoffrey L. Sherwood, On Behalf of Themselves and All Others Similarly
Situated vs. Discreet Logic Inc., et al., case No. C-97-1570, was filed in the
United States District Court, Northern District of California. Named as
defendants are the Company and certain of Company's former and existing
officers, directors and affiliates, and certain underwriters. The complaint
asserts, in all material respects, the same factual allegations and proposes
the same class period as the above-described California state court complaint
filed in May 1996, except asserts claims under federal securities law instead
of state law. The Company believes that the allegations in the California
federal complaint are without merit and has defended the lawsuit vigorously.
On August 12, 1997, the Company announced that it had reached an agreement-
in-principle to settle all three of the shareholder class action litigations.
The parties to the class action litigations have executed a settlement
agreement which is now awaiting final court approval. The proposed $10,800,000
settlement requires the Company to contribute approximately $7,400,000 from
its own funds, with the remainder provided by insurance. The settlement is
subject to final court approval. There can be no assurance that the settlement
will be finally approved and that the Company will not have to continue its
defense of the lawsuits. Should the proposed settlement not be finally
approved for any reason, the Company intends to defend the lawsuits
vigorously.
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, should the proposed settlement be
finally approved. At September 30, 1997, the Company had, on its balance
sheet, cash restricted for the above-mentioned settlement, in the amount of
$10,800,000. A corresponding obligation is included in accounts payable and
accrued expenses.
Item 2. Changes in Securities and Use of Proceeds.
(c) Changes in Securities
On July 15, 1997 the Company completed a private placement of 555,000 of its
common shares, no par value, (the "Shares") to the holders of the outstanding
capital stock of D-Vision in exchange for all of the outstanding shares of the
capital stock of D-Vision. This private placement was made to effect the
acquisition of D-Vision by the Company. No underwriters were involved in this
sale of securities. The sales were made in reliance on an exemption from the
registration provision of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Rule 506 of Regulation D under the Securities
Act, in reliance upon information available to the Company as of July 15,
1997, including certain representations and warranties of the purchasers of
the Shares. The Shares were offered only to "accredited investors" (as such
term is defined in Regulation D). On August 29, 1997, the Company filed a
registration statement on Form S-3 (File No. 333-34739) with the Securities
and Exchange Commission covering the resale of the Shares, which registration
statement became effective on September 16, 1997.
Items 3.--5. Not applicable.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<C> <S>
Exhibit 27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
A Current Report on Form 8-K dated July 15, 1997 was filed on July 30, 1997.
The Current Report on Form 8-K was filed pursuant to Item 2 of Form 8-K
announcing the completion by Discreet Logic of the acquisition of all of the
outstanding shares of the capital stock of D-Vision Systems, Inc. pursuant to
the terms of a Stock Purchase Agreement dated as of July 10, 1997, among the
Company, D-Vision, the former stockholders of D-Vision and certain other
individuals. A Current Report on Form 8-K/A dated July 15, 1997 was filed on
September 29, 1997 containing the financial statements required by Item 7 of
Form 8-K.
20
<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
February 4, 1999
21
<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>
<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> 120,001
<CURRENT-LIABILITIES> 65,125
<BONDS> 0
0
0
<COMMON> 93,283
<OTHER-SE> (39,467)
<TOTAL-LIABILITY-AND-EQUITY> 120,001
<SALES> 38,405
<TOTAL-REVENUES> 38,405
<CGS> 17,280
<TOTAL-COSTS> 17,280
<OTHER-EXPENSES> 19,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 1,683
<INCOME-TAX> 2,775
<INCOME-CONTINUING> (1,092)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,092)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
