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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1999
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-26100
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DISCREET LOGIC INC.
(Exact name of registrant as specified in its charter)
Quebec 98-0150790
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
10 Duke St., Montreal, Quebec, H3C 2L7
Canada (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (514) 393-1616
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title
of
each Name of each exchange
class on which registered
- ----- ---------------------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Class E voting common shares, no par value
Class F non-voting common shares, no par value
Exchangeable non-voting shares, par value $15.08 per share
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The capital stock of the Registrant is not publicly traded.
As of June 28, 1999, the Registrant had outstanding 100 Class A voting
common shares, no par value, 100 Class C non-voting preferred shares, no par
value, 150,000 Class D non-voting preferred shares, no par value, 24,496,905
Class E voting common shares, no par value, 24,496,905 Class F non-voting
common shares and 1,813,604 Exchangeable non-voting shares, par value $15.08
per share.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the following documents are incorporated by reference to
Part IV of this report: (i) the Joint Proxy Statement/Prospectus on Form S-4 of
Autodesk, Inc., a Delaware corporation ("Autodesk"), the former Discreet Logic
Inc., a Quebec Company ("Old Discreet"), 9066-9771 Quebec Inc., a Quebec
company and an indirect wholly owned subsidiary of Autodesk ("Amalgamation
Sub"), and 9066-9854 Quebec Inc., a Quebec company and an indirect wholly owned
subsidiary of Autodesk ("Autodesk Quebec"), filed on September 30, 1998, as
amended on November 13, 1998, November 25, 1998 and February 5, 1999
(Registration No. 333-65075), (ii) the Current Report on Form 8-K of Autodesk
filed on March 16, 1999 (File No. 000-14338) and (iii) the Annual Report on
Form 10-K of Discreet for the fiscal year ended June 30, 1998 filed on
September 28, 1998, as amended on October 29, 1998 and February 4, 1999 (File
No. 000-26100). Old Discreet, Amalgamation Sub and Autodesk Quebec are
predecessor entities of the Registrant. See Part I, Item 1, "Business--
General."
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PART I
FORWARD-LOOKING INFORMATION
The forward-looking statements included in this report, which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties. Actual results could differ materially from those anticipated in
the forward-looking statements included herein as a result of a number of
factors, including but not limited to those discussed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 1. BUSINESS
General
On March 16, 1999, pursuant to the terms of the Second Amended and Restated
Agreement and Plan of Acquisition and Amalgamation dated as of November 18,
1998, as amended on December 18, 1998 and on January 18, 1999 (the "Acquisition
Agreement"), by and among Autodesk, Autodesk Development, B.V., a Netherlands
corporation and an indirect wholly-owned subsidiary of Autodesk ("Dutchco"),
Amalgamation Sub, Autodesk Quebec, Autodesk Canada Inc., an Ontario company and
an indirect wholly-owned subsidiary of Autodesk, ("ACI"), and Old Discreet,
Dutchco acquired all voting shares of Discreet Logic Inc., a Quebec company,
and the successor company to Old Discreet resulting from the Amalgamation (as
defined below) ("Discreet") by way of an amalgamation under the Companies Act
of Quebec of Old Discreet, Amalgamation Sub and Autodesk Quebec (the
"Amalgamation") and certain related transactions described below (together with
the Amalgamation, the "Acquisition"). As a result of the Acquisition, Discreet
became an indirect subsidiary of Autodesk. Shortly prior to the Amalgamation,
substantially all of the assets of ACI were assigned to Autodesk Quebec as part
of a corporate reorganization. Upon the Amalgamation, such assets were assumed
by Discreet.
Pursuant to the Acquisition Agreement, an aggregate of approximately 10
million shares of Autodesk common stock, par value $0.01 per share (the
"Autodesk Common Stock"), and Discreet shares exchangeable for Autodesk Common
Stock ("Exchangeable Shares"), were issued in exchange for all common shares of
Old Discreet, no par value per share (the "Old Discreet Common Shares"), issued
and outstanding immediately prior to the Amalgamation. Each Old Discreet Common
Share outstanding immediately prior to the Amalgamation was converted, through
a series of steps and at the election of its holder, into either
(i) 0.33 shares of Autodesk Common Stock, or (ii) 0.33 Exchangeable Shares. In
addition, Autodesk assumed all Old Discreet stock options outstanding
immediately prior to the Amalgamation granted under Old Discreet's Amended and
Restated 1994 Restricted Stock and Stock Option Plan, Non-Employee Director
Stock Option Plan, and 1997 Special Limited Non-Employee Director Stock Plan as
well as all outstanding purchase rights under Old Discreet's Employee Stock
Purchase Plan, and these options and rights were converted into options and
rights to acquire Autodesk Common Stock with appropriate adjustments to the
number of shares and exercise price thereof based on the 0.33 exchange ratio.
The Exchangeable Shares are not publicly traded and Discreet has no business
or other operations independent of Autodesk's. Each Exchangeable Share has
voting and economic rights that are substantially similar to one share of
Autodesk Common Stock. Holders of Exchangeable Shares may not transfer such
Shares. Exchangeable Shares may be exchanged at the election of the holder for
one share of Autodesk Common Stock at any time on or prior to March 16, 2010.
As a result of the Acquisition, Discreet is obligated to file this report
pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Discreet's reporting obligations under the Exchange Act
will terminate with the filing of this report.
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In addition to the information contained in this report, investors
interested in obtaining information about Autodesk and Discreet should refer to
the reports, proxy statements and other information filed by Autodesk with the
Securities Exchange Commission (the "Commission") pursuant to the Exchange Act.
Such reports, proxy statements and other information may be inspected and
copied at the public reference facilities of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
at Seven World Trade Center, 13th Floor, New York, New York 10048, and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Website that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Website is http://www.sec.gov, Autodesk
Common Stock is quoted on the Nasdaq National Market under the symbol "ADSK."
Reports, proxy and information statements and other information concerning
Autodesk and Discreet may be inspected at The Nasdaq Stock Market at 1735 K
Street, N.W., Washington, D.C. 20006.
Business Overview and Recent Developments
Discreet Logic Inc. ("Discreet" or the "Company") develops, assembles,
markets and supports non-linear, on-line digital systems and software for
creating, editing and compositing imagery and special effects for film, video,
HDTV, broadcast and the Web. Discreet's systems and software are utilized by
creative professionals for a variety of applications, including feature films,
television programs, commercials, music and corporate videos, interactive game
production, live broadcasting, as well as Web design. Discreet's systems have
played key roles in the creation of special visual effects for films such as
Armageddon, Titanic, Forrest Gump, Independence Day, The Fifth Element, Batman
& Robin, Contact and Air Force One; television programs and special events such
as ABC's on-air broadcast of the 1998 US congressional elections; Fox's Sunday
Night Football shows as well as their Super Bowl XXXIII broadcast; ABC's "World
News Tonight with Peter Jennings"; music videos by artists including U2, REM,
Rolling Stones and The Beatles; and commercials for clients such as Nike,
Pepsi, AT&T and McDonald's. Discreet has recently been recognized by the
Academy of Motion Picture Arts and Sciences with a Scientific and Engineering
Award for flame* and inferno*. Discreet believes that creative professionals
and designers require tools that simplify their work, enabling them to devote
more time to creative activities and less time to technical tasks.
Discreet offers turnkey systems for high end post production and broadcast
facilities focused towards three markets: special effects, editing and
broadcast production (its "Advanced Systems"). Discreet's Advanced Systems are
comprised of proprietary software utilizing workstations manufactured by
Silicon Graphics, Inc. ("SGI"), scalable disk arrays and other peripherals.
These can be networked together to enable users to manage data more efficiently
and collaborate in an integrated production environment. Discreet's systems
include its inferno*, flame*, and flint* systems (special effects), its fire*
and smoke* systems (editing), and its frost* system (broadcast production).
Discreet's special effects and editing Advanced Systems are used to manipulate
digital media in an on-line, real-time environment, providing instant feedback
to the creative professional. These systems are currently or are currently
being designed to be resolution independent and to allow users to work on
uncompressed images from a variety of media sources in the full range of
resolutions necessary for film, video and HDTV. In the broadcast production
market, Discreet offers its frost* system, a set of modeling, animation and
rendering tools for the creation and manipulation of 3D environments, including
virtual sets, for broadcast companies. Discreet sells its Advanced Systems
worldwide through a direct sales force as well as through high-end,
sophisticated distributors.
Discreet also offers editing and special effects software products, which
serve the new media market place. These products run on the Microsoft Windows
NT and the Apple Macintosh operating systems. The new media market is
characterized by institutional and educational customers, designers, and
prosumers (professional consumer). Discreet's desktop or new media software
(its "New Media Software") products include its edit* software (formerly D-
Vision OnLine) (video editing), its effect* software (formerly Illuminaire
Composition) (special effects), its paint* software (formerly Illuminaire
Paint) (special effects), and its light* software (also known as Lightscape)
(radiosity).
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Discreet's New Media Software is primarily used to create, manipulate, and
finish computer graphics images, interactive and on-line content. effect*
provides 3D video composition, clip animation, and visual effects enabling
artists to combine, enhance and modify video frames or sequences of frames with
a very high level of efficiency and interactivity. paint* is a vector-based,
object-oriented painting and animation system for the manipulation and
enhancement of both multi-frame clips and single-frame graphic images. edit* is
a real-time, non-linear, compressed editing software solution that performs
compositing, keying and visual effects on the desktop. light* is a 3D rendering
solution that uses advanced radiosity techniques to enhance realism and
lighting accuracy in 3D environments created for virtual sets, film and video
effects, interactive games and architectural design projects.
In addition to the new media market noted above, Discreet also offers a
number of other design software products that are geared towards the
Architecture, Engineering, and Construction ("AEC") market; the Mechanical
Computer-Aided Design ("CAD") market; and the Personal Solutions Group ("PSG")
market. AEC software is used to automate every phase of a building's life
cycle-from conceptual design through construction, maintenance, and renovation.
The Mechanical CAD market is dedicated to providing mechanical engineers,
designers, and drafters with software solutions that are designed to solve
their professional design challenges. The PSG market is dedicated to providing
tools for professionals, occasional users and consumers who draft, diagram and
draw. Prior to the Amalgamation, these were substantially all of ACI's product
offerings.
Discreet's goal is to become a leading supplier of digital tools used to
manipulate still and moving pictures to the high-end professional, post-
production and broadcast markets, the desktop or new media market, and the
consumer markets. To achieve this goal, Discreet plans to further expand and
leverage its technology base, customer relationships and existing reputation,
extend its product line to include other aspects of the content creation
process, and expand its worldwide sales and distribution organization.
Recent Developments
Sale of Subsidiaries
On May 3, 1999, Discreet transferred eight of its direct and indirect
subsidiaries to Autodesk. These subsidiaries included Bandit Communications,
Inc. ("Bandit"), and, as a consequence, Bandit's three subsidiaries Discreet
Logic USA, Inc., Discreet Logic Investment Inc., and Discreet Logic Research,
Inc., Lightscape Technologies, Inc. ("Lightscape") and, as a consequence,
Lightscape's subsidiary Lightscape Graphics, Inc., D-Vision Systems Inc., and
Discreet Logic (Desktop) Inc. Discreet's operations continue to include
activities related to the operations of the aforementioned subsidiaries which
are now owned directly or indirectly by Autodesk, Discreet's ultimate parent
company.
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Products
The following table sets forth the Discreet products, their market, the date
of first shipment by Discreet, and their platform or operating system.
<TABLE>
<CAPTION>
Date of First
Shipment by
Product Market Discreet Platform/Operating System
----------------------------------- -------------------- ------------- -------------------------
<C> <C> <C> <S>
Advanced Systems
inferno*........................... Special effects October 1995 SGI Onyx2/Unix
flame*............................. Special effects January 1993 SGI Octane/Unix
flint*............................. Special effects December 1993 SGI Octane/Unix
effect*............................ Special effects December 1993 SGI O2/Unix
fire*.............................. Editing October 1996 SGI Onyx2/Unix
smoke*............................. Editing October 1997 SGI Octane/Unix
frost* (includes product SGI Onyx2 and SGI
formerly sold as Vapor)........... Broadcast Production October 1995 Octane/Unix
New Media Software
effect* (formerly Illuminaire Microsoft NT and Apple
Composition)...................... Special effects June 1997 Macintosh
paint* (formerly Illuminaire Microsoft NT and Apple
Paint)............................ Special effects June 1997 Macintosh
edit* (formerly D-Vision OnLine)... Editing July 1997 Microsoft NT
light* (also known as Lightscape).. Radiosity December 1997 Microsoft NT
3D Studio MAX...................... Animation April 1996 Microsoft Windows and NT
Design Software
AutoCAD............................ General purpose CAD May 1983 Microsoft Windows and NT
Mechanical Desktop................. MCAD March 1996 Microsoft Windows and NT
</TABLE>
Advanced Systems
Discreet's systems are designed to be intuitive and easy to use. Discreet's
systems provide the speed and operational flexibility demanded by the
professional film and video industries. The systems use a consistent interface
through which operations are controlled via on-screen menus (which users can
organize to fit their preferences) and a pressure-sensitive stylus. Discreet's
systems include a sparks* developers kit, which allows customers to integrate
their own proprietary software or third party software into Discreet's systems'
environments. Discreet's systems also offer comprehensive image input/output
("I/O") functions, allowing image or object data to be captured and exchanged
between workstations in a studio environment in a variety of formats. For sites
with multiple systems, work generated on other platforms can be imported and
placed directly onto Discreet's systems' local disk array for integration into
the current production. In addition, Discreet's image files can be transferred
among local disk arrays. For example, if a user prepares a production on an
effect* system, the user can transfer video or film data to the flame* or
inferno* systems or video data to the fire* system, for finishing with the
client. The flexible systems architecture can result in different system
configurations and enables clients to differentiate themselves from their
competitors by allowing them to customize their systems.
Special Effects Systems
flame*. flame* is an on-line, resolution-independent, non-linear,
uncompressed digital system. The system is used by creative professionals to
create, edit and composite special visual effects in an on-line, real-time
environment. Easily integrated into a suite environment and possessing the
power and features necessary to serve as the core of a fully digital suite,
flame* is designed to allow the operator to create desired effects with near
instantaneous feedback. A complete flame* system includes the flame* software,
an SGI Octane workstation, Discreet Storage and various I/O devices.
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inferno*. inferno* is an on-line, non-linear, resolution-independent,
uncompressed digital system providing all the features of flame* with film
tools, and increased image resolution and color control for digital film and
HDTV work. The system also features tools for grain management, wire and
scratch removal and colour calibration. A complete inferno* system includes the
inferno* software, an SGI Onyx2 workstation, Discreet Storage and various I/O
devices.
flint*. flint* is a resolution-independent, non-linear, uncompressed digital
system used by creative professionals to create, edit and composite special
visual effects. flint* provides 3D video composition, clip animation, and
visual effects enabling artists to combine, enhance and modify video frames or
sequences of frames with a high level of efficiency and interactivity. A
complete flint* system includes the flint* software, an SGI Octane workstation,
Discreet Storage (formerly stone*) and various I/O devices.
effect*. effect* is a resolution-independent, non-linear, uncompressed
digital system used by creative professionals to create, edit and composite
special visual effects. effect* provides 3D video composition, clip animation,
and visual effects enabling artists to combine, enhance and modify video frames
or sequences of frames with a high level of efficiency and interactivity. A
complete effect* system includes the effect* software, an SGI O2 workstation,
Discreet Storage and various I/O devices.
Editing Systems
fire*. fire* is an uncompressed, on-line, non-linear, digital video editing
system with special effects capabilities. fire* includes a sophisticated
toolset and a gestural, picture-based editing interface, which Discreet
believes specifically address the new and expanding requirements needed for on-
line finishing. Discreet recently released a resolution independent (including
HDTV resolution) fire* system. A complete fire* system includes the fire*
software, an SGI Onyx2 workstation, Discreet Storage and various I/O devices.
smoke*. smoke*, like fire*, is an uncompressed, on-line, non-linear, digital
video editing system with more limited special effects capabilities. smoke*
uses the same gestural, picture-based editing interface as fire*. The primary
difference in the two systems is the greater speed of interactivity and
processing of fire* as well as greater special effects capabilities than those
of smoke*. A complete smoke* system includes the smoke* software, an SGI Octane
workstation, Discreet Storage and various I/O devices.
Broadcast Production Systems
frost*. frost* is a computer-based set of modeling, animation and rendering
tools for the creation and manipulation of 3D graphics, including virtual sets,
for broadcast. Virtual sets are computer generated locales typically used for
news, sports and entertainment programming. frost* is designed to operate on
the SGI Onyx2 or SGI Octane workstation and allows the user to work completely
in real-time or through a combination of real-time and post-produced
components.
System Components
The Workstation
inferno*, fire*, and frost* run on SGI Onyx2 workstations, typically
configured with four or eight processors. flame*, flint*, smoke* and frost* run
on the SGI Octane workstation. effect* and frost* run on the SGI O2
workstation. The SGI hardware platforms are scaleable and upgradeable (within
the same machine) to fit the price and performance criteria of the customer.
Each system can be connected to other Discreet systems and to numerous third
party software, systems and devices.
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Storage
Discreet offers Discreet Storage (formerly stone*), a disk-based storage
system for use with its video and high-performance film and HDTV applications,
which is targeted at the production, post-production and broadcast markets.
Discreet Storage, is designed to allow real-time playback of uncompressed video
frames in any order, efficiently store any mix of resolutions and ensure image
integrity by remaining operational in the event of disk or power supply
failure. A disk array is comprised of a number of disks working co-operatively
to handle high speed data flows. flame*, inferno*, fire*, smoke*, flint*, and
frost* must be used with Discreet Storage.
Networking
Discreet offers Discreet Networking (formerly wire*), a high-performance
transport system for digital film and video for use with multiple Discreet
Storage disk arrays. Discreet Networking builds on Discreet's disk technology
and is designed, if the network provides sufficient bandwidth, to provide real-
time CCIR-601 instant access to images located on a disk anywhere within a
post-production facility. Discreet Networking can be configured as a
centralized or distributed network, or both.
I/O
Third party video tape recorders can be controlled with flame*, inferno*,
fire*, flint*, effect* and smoke*'s stylus and tablet. I/O edits can be
implemented sequentially using the EDL capabilities of the flame*, inferno*,
fire* and smoke* systems. Other third party devices, such as film scanners and
recorders, can also be used with Discreet systems for HDTV and film transfers.
New Media Software
Discreet also offers software-only solutions which run on the Windows NT and
the Apple Macintosh platforms. These software solutions are part of Discreet's
strategy to expand the range of creative professionals served by Discreet and
to extend its product line to include other aspects of the content creation
process. Discreet's New Media Software is primarily used to create, manipulate,
and finish computer graphics images, interactive and on-line content.
Special Effects Software
effect*. Discreet offers two versions of its effect* software: effect* on
the SGI O2 workstation (see above) and effect* on the Apple Macintosh and
Microsoft Windows NT operating systems (formerly Illuminaire Composition).
effect* is a resolution-independent, non-linear, uncompressed digital system
used by creative professionals to create, edit and composite special visual
effects. effect* provides 3D video composition, clip animation, and visual
effects enabling artists to combine, enhance and modify video frames or
sequences of frames with a very high level of efficiency and interactivity.
Discreet acquired the Illuminaire product line as part of Discreet's
acquisition of substantially all of the assets of Denim Software L.L.C.
("Denim") in June 1997 (the "Denim Acquisition").
paint* (formerly Illuminaire Paint). paint* is an Apple Macintosh and
Microsoft Windows NT-based paint software for effects, interactive content and
graphic design creation. paint* is resolution-independent, vector-based,
object-oriented painting, rotoscoping, and animation system for the
manipulation and enhancement of both multi-frame clips and single-frame graphic
images. Discreet acquired the Illuminaire product line as part of the Denim
Acquisition.
Editing Software
edit* (formerly D-Vision OnLine). edit* is a real-time non-linear,
compressed editing software solution which performs compositing, keying and
visual effects on the desktop and runs on the Microsoft Windows NT operating
system. Discreet acquired edit* as part of the acquisition of all the
outstanding shares of capital stock of D-Vision Systems, Inc. ("D-Vision") in
July 1997 (the "D-Vision Acquisition").
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Radiosity Software
light* (also known as Lightscape). light* is a 3D rendering solution that
uses advanced radiosity techniques to significantly enhance realism and
lighting accuracy in 3D environments created for virtual sets, film and video
effects, interactive games and architectural design projects. light* runs on
the Microsoft Windows NT operating system. Discreet acquired light* as part of
the acquisition of all the outstanding shares of capital stock of Lightscape
Technologies, Inc. in December 1997 (the "Lightscape Acquisition").
Animation Software
3D Studio MAX. 3D Studio MAX R2 software, which began shipping in the third
quarter ended October 31, 1997, is a 3D modeling and animation software package
specifically written to take advantage of advanced features offered by the
Windows NT operating system. With a real-time interface, multiple-processor
support, and 3D graphics acceleration capabilities, 3D Studio MAX delivers
workstation-class performance and functionality to PCs.
The intuitive interface eliminates many of the commonly accepted boundaries
between modeling, rendering, and animation, and offers instant feedback; users
can see the results of their actions in real time, as they are applied. Shaded
views with real-time feedback allow users to visualize natural, real-world
environments in which they can directly manipulate objects, regardless of scene
complexity. Because 3D Studio MAX software maintains a data history of geometry
creation and modification, users can return to and change any step, at any
time, without having to redo prior work. 3D Studio MAX is also the only
environment that can run Character Studio(R), a powerful character-animation
and skinning plug-in software product offered by the ultimate parent company,
Autodesk, Inc.
Design Software
AutoCAD. AutoCAD software is a general-purpose CAD tool used independently
and in conjunction with specific applications designed to work with AutoCAD in
fields ranging from architecture and mechanical design to plant design and
mapping. Professionals utilize AutoCAD for design, modeling, drafting, mapping,
rendering, and management tasks. AutoCAD runs on Microsoft Windows 95, Windows
98, and Windows NT for Intel. AutoCAD has historically represented a
significant percentage of Autodesk's total revenues.
The most recent version, AutoCAD 2000 was introduced in March 1999. Built
for speed and efficiency, AutoCAD 2000 includes enhancements in areas that most
influence productivity, including: precision drawing tools such as AutoSnap,
data-sharing features like raster image and reference file clipping,
photorealistic rendering, solid fills, and TrueType fonts.
AutoCAD software's open-system architecture allows users to adapt AutoCAD to
unique professional requirements with any of more than 5,000 independently
developed add-on applications. Many of these applications are based on
ObjectARX technology, a new generation of C++-based application programming
interfaces ("APIs"). ObjectARX-based applications utilize AutoCAD software's
object-oriented capabilities.
Mechanical Desktop. Mechanical Desktop software is an integrated software
application that unites advanced 2D and 3D mechanical design capabilities for
PCs. Mechanical Desktop contains integrated modules for fully parametric
feature-based solid modeling, surface modeling, and assembly modeling; 2D
design/drafting and bi-directional associative drafting; as well as a built-in
Autodesk IGES Translator, which enables users to accurately exchange IGES
(Initial Graphics Exchange Specification) data with other systems. Mechanical
Desktop Release 3.0, which was released in August 1998, includes numerous
performance enhancements. Individual Face Drafting, Parting Line Definition,
Part Splitting, Face Splitting, 3D Helical Sweep, 3D Lofting, Feature
Suppression, Global Design Variables, Sketch Editing, new Balloon, Bill of
Material, and Part List Functionality and Drafting Standards Support, are among
the advanced features included in the latest release of Mechanical Desktop
software.
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Customers
Discreet's Advanced Systems are sold primarily to film and video production,
post-production, and broadcast companies. Discreet's New Media Software
products are sold in these markets as well as to institutional and educational
customers, designers, and professional consumers. Discreet's Design Software
products are sold primarily through resellers to engineers, designers,
drafters, and architects.
In fiscal years 1997, 1998, and 1999, revenues from services provided on
behalf of Autodesk accounted for approximately 44%, 38%, and 31% of total
revenues. No customer accounted for 10% or more of the Company's total revenues
in the two-month period ended March 31, 1999.
Marketing and Sales
Marketing Strategy. Discreet markets its Advanced Systems products primarily
to production and post-production companies in the film, video, and broadcast
industries. Discreet's principal marketing strategy has been to create
awareness of its systems and software through appearances at major
international computer graphics and broadcasting tradeshows, such as NAB, ACM
SIGGRAPH (U.S.), International Broadcasters Convention ("IBC") (Europe),
INTERBEE (Japan) and Montreaux (Europe). Discreet has supported this marketing
strategy with direct-mail advertising and advertisements in trade publications.
In addition, Discreet believes that the high quality of computer images
generated using its products results in significant industry awareness. With
permission from its customers, Discreet creates promotional materials utilizing
content created using Discreet's products.
Discreet markets its New Media Software products primarily through direct
mail advertising, advertising in trade publications, seminars and roadshows, as
well as at both international and local tradeshows. In addition, Discreet
provides co-operative advertising funding to a number of its distributors who
locally advertise its products. As Discreet broadens the markets for these
products, Discreet intends to expand its marketing efforts accordingly.
Discreet sells its Design Software products through two primary channels.
The first one is through distributors and resellers (value-added resellers or
"VARs") who distribute Discreet's products to end users. The second one is the
Premier account channel in which Discreet sells directly to the end user under
a volume license agreement. These end users have to meet certain volume
commitment criteria annually in order to qualify under this program. Authorized
resellers play a supporting role in these sales and provide all the post sale
support.
Sales and Distribution. In North America, sales activities are conducted
from Discreet's Montreal headquarters, sales offices in Markham, Burnaby, Los
Angeles, Chicago and New York and field representatives based in Boston, San
Francisco, and Atlanta. In markets outside of North America, sales activities
are conducted from sales offices located in the United Kingdom, Spain, France,
Germany, Japan, Singapore, India, Hong Kong, and Brazil. Discreet's
headquarters and each of its sales offices have sales and demonstration
capabilities. Distributors and resellers may sell Advanced Systems products,
New Media Software products, or both. Generally, customers purchasing
Discreet's products and/or peripherals from the distributors will also purchase
the workstation hardware from the distributors. Discreet currently has
distribution relationships with over 340 distributors and resellers in over 80
countries. As of April 30, 1999, Discreet employed 66 Advanced Systems, 24 New
Media Software, and 20 Design Software sales, sales support and demonstration
personnel worldwide.
Discreet's Advanced Systems products are sold through its direct sales
organization in its primary markets. In the United States, Discreet maintains a
direct sales presence in its primary markets including New York, Chicago and
Los Angeles. Outside of the United States, Discreet maintains a direct sales
presence in its primary markets, including London, Paris, Munich, Singapore and
Tokyo. In geographic areas generally not
9
<PAGE>
served by Discreet's direct sales organization, Discreet's Advanced Systems
products are sold through high-end distributors and resellers, who are managed
by Discreet's sales managers. Discreet's strategy of marketing its products
directly to customers and indirectly through distributors may result in
distribution channel conflicts as Discreet's direct sales efforts may compete
with those of its indirect channels. Some of these distributors or resellers
may receive a finder's fee for customer system purchases from Discreet's direct
sales organization.
Discreet's New Media and other design software products are sold through
distributors and resellers.
Reseller Arrangements. Discreet is a master value added reseller ("VAR") of
SGI workstations. There are significant risks associated with this reliance on
SGI and Discreet may be impacted by the timing of the development and release
of products by SGI. In addition, Discreet has faced and may in the future face
unforeseen difficulties associated with adapting Discreet's products to future
SGI products. In May 1994, Discreet entered into a Value-Added Reseller
Agreement with SGI. The agreement grants to Discreet a non-exclusive right to
purchase and license certain hardware products from SGI, including the SGI
Onyx2, Octane, and O2 workstations for remarketing by Discreet in the United
States. Although the agreement contains no minimum purchase requirements, the
volume of systems purchased from SGI affects the percentage discount received
by Discreet. The agreement is subject to annual renewal in May of each year and
may be terminated by SGI for cause. The agreement with SGI has been extended
through July 31, 1999 and Discreet has no reason to believe that SGI will not
renew such agreement. Discreet also acts as a reseller and systems integrator
of certain peripheral devices used in Discreet's systems, including audio and
video I/O cards and electronic tablets. Discreet receives discounts for the
purchase price of these products. See "--Manufacturing and Suppliers."
Backlog. Discreet has no significant backlog and does not believe that its
backlog at any particular point in time is indicative of future sales levels.
Systems Integration, Service and Support
Discreet provides its customers with a variety of systems integration,
support and training services including on-site and telephone support, and in-
house and on-site training in the use of Discreet's products. These services
are generally provided under separately priced arrangements with Discreet's
customers. In some markets, these services are provided by Discreet's
distributors who are compensated for such services directly by the customer.
Discreet maintains a staff of persons dedicated to training its distributors in
the performance of these services. Discreet believes that its focus on customer
service provides it with important information about the evolving needs of its
customers.
Discreet supports its customers in North and South America from Discreet's
Montreal and other North American offices, and through its distributors.
Customers in Europe and the Pacific Rim are supported from the offices of
Discreet's European and Asian subsidiaries and by distributors.
Research and Development
Discreet's research and product development efforts are focused on the
continued enhancement of its Advanced Systems and its New Media Software
products and the development of new products. Discreet employs a modular
development approach which it believes allows it to bring innovative technology
to market more rapidly than traditional analog or proprietary hardware-based
digital solutions and enables it to take advantage of advances in general
purpose workstation technology as they become available. Discreet intends to
continue to enhance and upgrade these products on a regular basis.
The markets for Discreet's systems and software are characterized by
evolving industry standards, changing technologies and frequent new product
introductions. Discreet believes that its future success will depend in part on
its ability to enhance its existing systems and software and to develop and
introduce new
10
<PAGE>
products and features which meet changing customer requirements and emerging
industry standards on a timely basis. In addition, as a master VAR of SGI
workstations, Discreet obtains certain advance access to SGI technology, which
facilitates its efforts to develop compatible systems and to modify and improve
existing products. If Discreet were unable to obtain such advance access, it
could have an adverse impact on Discreet's business and results of operations.
On March 4, 1998, Discreet entered into a Strategic Development Agreement
with Intel Corporation to develop a new high-end special effects product.
Discreet plans to develop new visual effects software for demanding real-time
compositing and image processing functions. The software will be designed to
run on multi-processor workstations based on the IA-64 processors and is
expected to deliver powerful performance capabilities for the visual effects
industry. Intel will provide access to IA-64 technology, aid in optimization of
the software, and design components of Merced processor-based workstations to
run the software optimally.
Proprietary Rights
Discreet's success is dependent upon its proprietary technology. Discreet
relies principally on unregistered copyrights and trade secrets to protect its
intellectual property. Discreet generally seeks to enter into confidentiality
agreements with its employees and license agreements with its distributors and
to limit access to and distribution of its systems, software, documentation,
and other proprietary information. Prior to July 1996, substantially all of
Discreet's systems were sold without written license agreements. If Discreet
were to engage in litigation with respect to such licenses in order to protect
its intellectual property rights to the licensed systems, Discreet's business,
financial condition, and results of operations might be seriously harmed as a
result of litigation expenses and any judgement unfavorable to Discreet.
Discreet licenses its New Media Software products under "shrink-wrap" licenses
(i.e., licenses included as part of the product packaging). Shrink-wrap
licenses are not negotiated with or signed by individual licensees, and purport
to take effect upon the opening of the product package. Certain provisions of
such licenses, including provisions protecting against unauthorized use,
copying, transfer, and disclosure of the licensed program, may be unenforceable
under the laws of many jurisdictions.
Discreet uses both software and hardware keys with respect to its systems
and software but otherwise does not copy-protect its systems and software. It
may be possible for unauthorized third parties to copy Discreet's products or
to reverse engineer or obtain and use information that Discreet regards as
proprietary. Discreet's competitors may independently develop technologies that
are substantially equivalent or superior to Discreet's technologies. In
addition, the laws of certain countries in which Discreet's products are or may
be distributed do not protect Discreet's products and intellectual property
rights to the same extent as the laws of Canada or the United States. As the
number of software products in the industry increases and the functionality of
these products further overlaps, Discreet believes that software products
generally may increasingly become the subject of claims that such software
products infringe the rights of others.
Any claims against Discreet, whether they are with or without merit, may be
time-consuming, result in costly litigation and diversion of technical and
management personnel or require Discreet to develop non-infringing technology.
If a claim is successful, Discreet may be required to obtain a license or
royalty agreement under the intellectual property rights of those parties
claiming the infringement. If Discreet is unable to obtain such license or
royalty agreement, Discreet may be unable to market and sell its products.
Limitations on Discreet's ability to market and sell its products and delays
and costs associated with monetary damages and redesigns in compliance with an
adverse judgment or settlement could harm Discreet's business, financial
condition and results of operation.
Manufacturing and Suppliers
Discreet has historically relied on third-party vendors to manufacture and
supply all of the hardware components used in Discreet's systems. Manufacturing
at Discreet consists of assembly (including disk array assembly), testing, and
value added systems integration.
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Discreet's flame*, effect*, inferno*, flint*, fire*, smoke* and frost*
software currently run on workstations manufactured by SGI. There are
significant risks associated with this reliance on SGI and Discreet may be
impacted by the timing of the development and release of products by SGI. In
addition, there may be unforeseen difficulties associated with adapting
Discreet's products to future SGI products. Discreet is an authorized master
VAR of workstations manufactured by SGI. Discreet's agreement with SGI is
subject to annual renewal in May of each year and termination by SGI for cause.
The agreement with SGI has been extended through July 31, 1999 and Discreet has
no reason to believe that SGI will not renew such agreement. In addition,
although Discreet has no reason to believe that it will be unable to obtain
sufficient quantities of SGI workstations on a timely basis or that its status
as a master VAR will be changed, Discreet may not continue to be able to
procure such workstations in sufficient quantities on a timely basis or that
SGI will continue to recognize Discreet as a master VAR. The success of
Discreet also depends, in part, on the continued market acceptance of SGI
workstations, in general, and by the professional film and video industries, in
particular. Although Discreet intends to continue to evaluate new hardware
platforms and may adapt its products as technological advances and market
demands dictate, and although Discreet has now entered the market for content
creation software which runs on the Apple Macintosh and Windows NT operating
systems, Discreet believes that it will continue to derive substantially all of
its revenue for the foreseeable future from the sale and maintenance of systems
designed to include SGI workstations. As a result, financial, market and other
developments adversely affecting SGI or the sales of workstations, the
introduction or acquisition by SGI of products which are competitive with those
of Discreet, or the unanticipated timing or pricing of SGI products that could
cause customers to defer the decision to buy or determine not to buy Discreet's
then available products or systems, could have an adverse effect upon
Discreet's business and results of operations. As a master VAR, Discreet also
obtains certain advance access to SGI technology in order to develop compatible
systems and to modify and improve existing products. If Discreet were unable to
obtain such advance access, it could have an adverse impact on Discreet's
business and results of operations.
Discreet is dependent on SGI as Discreet's sole source for video I/O cards
used in Discreet's systems. Discreet also purchases electronic tablets
manufactured by Wacom Technology Corporation and believes that, while
alternative suppliers are available, alternative electronic tablets may not be
functionally equivalent or be available on a timely basis or on similar terms.
Discreet generally purchases sole source or other components pursuant to
purchase orders placed from time to time in the ordinary course of business and
has no written agreements or guaranteed supply arrangements with its sole
source suppliers. Discreet has experienced quality control problems and supply
shortages for sole source components in the past and Discreet may experience
significant quality control problems or supply shortages for these components
in the future. Discreet does not maintain an extensive inventory of these
components, and an interruption in supply could have a material adverse effect
on Discreet's business and results of operations. Because of Discreet's
reliance on these vendors, Discreet may also be subject to increases in
component costs, which could adversely affect Discreet's business and results
of operations.
Competition
The market in which Discreet competes is characterized by intense
competition. In the high-end of the special effects market, Discreet's flame*
system competes with Quantel Limited's ("Quantel") Henry product. In certain
applications in the non-real-time segment of the market, Discreet's effect* on
the SGI O2 workstation competes with Avid Technology, Inc.'s ("Avid") Illusion
product. Discreet's inferno* system competes with Quantel's Domino product.
Discreet's fire* and smoke* systems competes with Quantel's Editbox product and
Sony Corporation's ("Sony") range of proprietary editing equipment. In
addition, the products gained from the Denim Acquisition and the D-Vision
Acquisition compete with Adobe Systems Incorporated's ("Adobe") special effects
products and Avid's and Media 100 Inc.'s ("Media 100") range of editing
products. Discreet's other design software products compete with companies such
as Bentley Systems, Inc.; Computervision Corporation (a subsidiary of
Parametric Technology Corporation); CADAM Systems Company, Inc.; Diehl
Graphsoft, Inc.; EaglePoint Software; International Microcomputer Software,
Inc.; Intergraph Corporation; Nemetschek Systems, Inc.; Visio Corporation;
Visionary Design Systems; Hewlett-
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<PAGE>
Packard Corporation; Parametric Technology Corporation; Structural Dynamics
Research Corporation; Unigraphics; Dassault Systemes ("Dassault"); SolidWorks
Corporation (a subsidiary of Dassault); Baystate Technologies, Inc.; think3;
Macromedia, Inc.; Silicon Graphics, Inc.; Micrografx Inc.; and others. Many of
Discreet's current and prospective competitors, including Quantel, Avid, Sony,
and Adobe, have greater financial, technical, manufacturing and marketing
resources than Discreet. Moreover, these companies may introduce additional
products that are competitive with those of Discreet, and Discreet's products
may not compete effectively with such products. In addition, as personal
computers become more powerful, software suppliers may be able to introduce
products for personal computers that would be competitive with Discreet's
products in terms of performance and price for professional users.
Discreet believes that its ability to compete depends on elements both
within and outside its control, including the success and timing of new product
development and introduction by Discreet and its competitors, product
performance and price, distribution and customer support. Discreet may not be
able to compete successfully with respect to these factors. Although Discreet
believes that it has certain technological and other advantages over its
competitors, maintaining such advantages will require continued investment by
Discreet in research and development, sales and marketing and customer service
and support. Discreet may not have sufficient resources to make such
investments or Discreet may not be able to make the technological advances
necessary to maintain such competitive advantages. In addition, as Discreet
enters new markets, distribution channels, technical requirements, and levels
and bases of competition may be different from those in Discreet's current
markets. As a result, Discreet may not be able to compete favorably in these
markets. Furthermore, competitive pressures or other factors, including
Discreet's entry into new markets, may result in significant price erosion that
could have a material adverse effect on Discreet's business, financial
condition, and results of operations.
Employees
As of April 30, 1999, Discreet had 454 full-time employees. Of such
employees, 162 were employed in research and development, 90 in sales, 26 in
marketing, 84 in customer support, 13 in manufacturing, 53 in administration
and finance, and 26 in the Canadian operations of Autodesk. Discreet believes
that its future success will depend in large part upon its ability to attract
and retain highly skilled technical, management and sales and marketing
personnel. Moreover, because the development and marketing of Discreet's
Advanced Systems New Media, and other design software requires knowledge of
film and video production and post-production, key technical personnel must be
proficient in a number of disciplines. Competition for such technical personnel
is intense, and the failure of Discreet to hire and retain talented technical
personnel or the loss of one or more key employees could have an adverse effect
on Discreet's business and results of operations. Discreet's employees are not
represented by a labor union, and Discreet considers its employee relations to
be good. In addition, the Company may experience increased compensation costs
to attract and retain skilled personnel.
ITEM 2. PROPERTIES
Discreet's headquarters and offices related to product development, domestic
marketing and sales, and production are located in leased office space in
Montreal, Canada. The Company also leases office space in various locations
throughout Canada for local sales, development, and technical support
personnel.
Discreet's foreign subsidiaries lease office space for their operations. In
August 1995, Old Discreet purchased an approximately 10,000 square foot office
building in London, England for use as a sales facility for approximately
(Pounds)1,148,000 (or approximately $1,858,000). In the eleven-month period
ended June 30, 1997, the carrying value of the London building was written down
to its estimated fair market value and the building was classified as assets
held for resale. In May 1999, Discreet sold the London building for net
proceeds of (Pounds)2,946,000 (or approximately $4,770,000) recognizing a gain
of (Pounds)319,000 (or approximately $516,000).
Discreet believes that its existing facilities and offices are adequate to
meet its requirements for the foreseeable future.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On June 2, 1998, Old Discreet was named as a defendant in a breach of
warranty action filed in the Supreme Court of the State of New York for the
County of New York entitled Griffith & Tekushan, Inc. v. Discreet Logic, Inc.
(Index No. 602684/98) (the "Action"). The complaint alleges, among other
things, that the Company breached certain warranties arising out of a software
licensing agreement and seeks damages of $1 million. On July 10, 1998, the
Action was removed from state court to the United States District Court for the
Southern District of New York (Case No. 98 Civ. 4909 (BSJ)) (the "U.S. District
Court"). On July 17, 1998, the Company, which succeeded Old Discreet as the
defendant in the Action filed a motion to dismiss the Action in its entirety.
On May 28, 1999, the U.S. District Court entered an order dismissing the Action
without prejudice based on plaintiff's request for voluntary dismissal. Though
the Company intends to contest this case vigorously if plaintiff files a new
complaint against the Company, the ultimate outcome of the case cannot be
predicted at this time.
On August 28, 1998, a complaint was filed in the Marin County, California,
Superior Court, entitled [Jerry Krim, on Behalf of Himself and All Others
Similarly Situated, v. Discreet Logic Inc., et al.,] case No. 174792 (the "Krim
Complaint"). The lawsuit names as defendants Old Discreet, Old Discreet's
directors and certain unidentified "John Does." The Krim Complaint alleged that
the defendants breached their fiduciary duties to Old Discreet's shareholders
in connection with the Acquisition. The Krim Complaint asked the court to
enjoin the consummation of the Acquisition or, alternatively, sought to rescind
the Acquisition or an award of unspecified damages from the defendants in the
event the Acquisition were consummated. The Company believes the claims
asserted in the complaint are without merit and intends to vigorously contest
them.
On September 29, 1998, a second complaint was filed in the Marin County,
California, Superior Court (the "Superior Court"), entitled William Clark, et
al. v. Discreet Logic Inc., et al., case No. 175037 (the "Clark Complaint").
The Clark Complaint was substantially similar to the Krim Complaint and named
as defendants the Company, certain of the Company's directors and certain
unidentified "John Does." The Clark Complaint alleged that the defendants
breached their fiduciary duties to Old Discreet's shareholders in connection
with the Acquisition. The Clark Complaint asks the court to enjoin the
consummation of the transaction or, alternatively, seeks to rescind the
transaction or an award of unspecified damages from the defendants in the event
the transaction is consummated. The Company believes the claims asserted in the
complaint are without merit and intends to vigorously contest them.
On December 2, 1998, the Superior Court entered an order consolidating the
Clark and Krim actions. On December 11, 1998, the Superior Court entered an
order on Old Discreet's October 26, 1998 motions to dismiss. The order
dismissed both the Krim and the Clark Complaints as against Old Discreet for
failing to state a claim against Old Discreet. The Superior Court's order
granted plaintiffs a 30-day leave to replead their complaints. On January 11,
1999, plaintiffs filed a consolidated amended complaint with the Superior Court
(the "Amended Complaint") which asserts the same breach of fiduciary duty cause
of action against Old Discreet, certain of the Old Discreet's directors and
certain unidentified "John Does," and seeks the same relief.
On April, 9, 1999, the Superior Court entered an order denying Old
Discreet's and certain of the individual defendants' motions to dismiss the
Amended Complaint on the grounds of inconvenient forum and certain of the
individual defendants' motions to dismiss for lack of personal jurisdiction. On
April, 16, 1999, the Company, which succeeded Old Discreet as a defendant in
the action filed a demurrer (a motion to dismiss the Amended Complaint) for
failure to state a claim as against Old Discreet. On April 26, 1999, certain of
the individual defendants filed a petition for writ of mandate with the
California Court of Appeal (the "Court of Appeal"), appealing the Superior
Court's April 9, 1999 order as to them. On May 26, 1999, the Court of Appeal
issued an Alternative Writ of Mandate, directing the Superior Court, by June
30, 1999, to reverse its April 9, 1999 denial of certain of the individual
defendants' motions to dismiss on personal jurisdiction grounds or show cause
why it has not done so. On June 16, 1999, the Superior Court entered an order
sustaining the Company's demurrer to the Amended Complaint, dismissing the
Company from the action without leave to amend. On June 18, 1999, the Superior
Court entered an order reversing the April 9, 1999 order and granting certain
of the individual defendants' motions to dismiss for lack of personal
jurisdiction.
14
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The Company believes the claims asserted in the Amended Complaint are
without merit and intends to vigorously contest them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the period from March 16, 1999 to March 31, 1999, no matters were
submitted to a vote of security holders of the Company, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market information
There is no established public trading market for any of Discreet's
outstanding equity securities.
Dividends
To date, Discreet has not declared or paid dividends on its capital stock.
Record Holders
As of June 28, 1999, the approximate number of record holders of each class
of common equity of Discreet was as follows:
<TABLE>
<CAPTION>
Class of Common Equity Number of Holders
---------------------- -----------------
<S> <C>
Class A voting common shares, no par value................. 1
Class E voting common shares, no par value................. 1
Class F non-voting common shares, no par value............. 1
</TABLE>
In addition, as of June 28, 1999, there were 20 record holders of
Exchangeable Shares, which are non-voting shares with a par value of $15.08 per
share. Each Exchangeable Share may be exchanged for one share of Autodesk
Common Stock.
Recent Sales of Unregistered Securities
On or immediately after the Amalgamation, Discreet issued and sold 100 of
its Class A voting common shares, no par value, to Dutchco in exchange for all
100 issued and outstanding shares of Amalgamation Sub.
On or immediately after the Amalgamation, Discreet issued and sold 100 of
its Class C non-voting preferred shares, no par value, to ACI in exchange for
all 100 issued and outstanding shares of Autodesk Quebec.
Immediately after the Acquisition and pursuant to pre-existing binding
obligations, Discreet issued 150,000 Class D non-voting preferred shares, no
par value, in payment of a portion of the fees incurred by a predecessor of
Discreet in connection with the Acquisition. 112,500 of such shares were issued
to Piper Jaffray Inc., financial advisor to Autodesk and ACI in connection with
the Acquisition, and the remaining 37,500 shares were issued to Aird & Berlis,
Canadian legal counsel to Autodesk, Dutchco and ACI.
The offers, sales and issuances of the above securities were deemed to be
exempt from registration under the Securities Act of 1933, as amended, in
reliance on Section 4(2) of the Securities Act, or Regulation D promulgated
thereunder. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof. All recipients
had adequate access, through their relationships with Discreet, to information
about Discreet.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents certain financial highlights
of Discreet. This financial information has been summarized from Discreet's
consolidated financial statements prepared under the basis of presentation as
described in Notes 1 and 2 of those statements.
<TABLE>
<CAPTION>
Two months Year ended January 31,
ended -----------------------------------
March 31, 1999 1999 1998 1997 1996 1995
-------------- ------- ------ ------ ------ ------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
For the Period
Total revenues............ $ 10,195 $11,419 $8,951 $7,524 $7,545 $5,986
Income from operations.... 2,024 1,469 1,416 619 752 506
Net income................ 1,104 751 685 261 381 276
At Period End
Total assets.............. 120,507 4,730 3,831 1,776 1,390 1,387
Long-term liabilities..... 2,097 -- -- -- -- --
Common Stock Data
Basic net income per
share.................... $ 0.09 $ 751 $ 685 $ 261 $ 381 $ 276
Diluted net income per
share.................... $ 0.09 $ 751 $ 685 $ 261 $ 381 $ 276
Shares used in computing
basic net income per
share.................... 12,917,166 1 1 1 1 1
Shares used in computing
diluted net income per
share.................... 12,917,166 1 1 1 1 1
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains trend analyses and other forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. All statements,
trend analyses, and other information contained herein relative to markets for
Discreet's products and trends in revenues, as well as other statements
including such words as "anticipate," "believe," "plan," "estimate," "expect,"
"goal," and "intend" and other similar expressions, constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks, and Discreet's actual results could differ materially from
those set forth in the forward-looking statements.
General
On March 16, 1999, pursuant to the Acquisition Agreement, by and among
Autodesk, Dutchco, Amalgamation Sub, Autodesk Quebec, ACI and Old Discreet,
Dutchco acquired all voting shares of Discreet by way of the Acquisition. As a
result of the Acquisition, Discreet became an indirect subsidiary of Autodesk.
Shortly prior to the Amalgamation (pursuant to which Old Discreet, Amalgamation
Sub and Autodesk Quebec were amalgamated to form Discreet), substantially all
of the assets of ACI were assigned to Autodesk Quebec. Upon the Amalgamation,
such assets were assumed by Discreet. Discreet adopted a fiscal year end of
March 31st.
The financial statements included in this report include the consolidated
results of operations, financial position, and cash flows of ACI for the years
ended January 31, 1997, 1998 and 1999. For the two-month period ended March 31,
1999, the financial statements include the consolidated results of operations
of ACI for the period from February 1st until the Amalgamation on March 16,
1999 and the results of operations of Old Discreet, Autodesk Quebec and
Amalgamation Sub for the period after the Amalgamation, of these entities under
common control, from March 16, 1999 through March 31, 1999. As a result,
changes in operations from January 31, 1999 through March 31, 1999 are largely
a result of adding the results of operations of Old
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Discreet, which were not included in the January 31, 1999, 1998, or 1997
amounts. Consequently, the results of the two months ended March 31, 1999 are
not comparable to any of the preceding periods reported. The related balance
sheets as of March 31, 1999 include the accounts of the Company and its
subsidiaries. All subsidiaries are wholly owned as of March 31, 1999.
Results of Operations
The following table sets forth, as a percentage of net revenues,
consolidated statement of operations data for the periods indicated. These
operating results are not necessarily indicative of results for any future
periods.
<TABLE>
<CAPTION>
Two months Year ended
ended January 31,
March 31, ----------------
1999 1999 1998 1997
---------- ---- ---- ----
<S> <C> <C> <C> <C>
Product revenues................................. 95% 69% 62% 56%
Service revenues................................. 5 31 38 44
--- --- --- ---
Total revenues................................. 100 100 100 100
--- --- --- ---
Cost of product revenues......................... 47 57 49 47
Cost of service revenues......................... 4 28 34 40
--- --- --- ---
Total cost of revenues......................... 51 85 83 87
--- --- --- ---
Sales and marketing.............................. 19 2 1 5
Research and development......................... 5 -- -- --
General and administrative....................... 5 -- -- --
--- --- --- ---
Total operating expenses....................... 29 2 1 5
--- --- --- ---
Operating income............................... 20 13 16 8
Other income (expense)........................... (3) -- (1) --
--- --- --- ---
Income before income taxes..................... 17 13 15 8
Provision for income taxes....................... 6 6 7 5
--- --- --- ---
Net income..................................... 11% 7% 8% 3%
=== === === ===
</TABLE>
Year ended January 31, 1999 compared to year ended January 31, 1998 and year
ended January 31, 1998 compared to year ended January 31, 1997
Product revenues
Discreet's product revenues for the year ended January 31, 1999 were $7,876
thousand, which represented a 41 percent increase from the year ended January
31, 1998 product revenues of $5,587 thousand. The increased revenues resulted
primarily from increased license revenues from new and upgrade product
offerings from the Company's market groups. Product revenues in the year ended
January 31, 1998 increased 32 percent from the $4,245 thousand posted in the
year ended January 31, 1997, primarily due to higher sales of AutoCAD software
and significant growth in ACI's market group revenues.
Service Revenues
The Company provides services on behalf of Autodesk, its ultimate parent
company. These services are charged back under a cost-plus arrangement and
recognized as revenues. For the year ended January 31, 1999 service revenues
were $3,543 thousand, which represented an increase of 5 percent from the year
ended January 31, 1998 service revenues of $3,364 thousand. The increase is
largely due to increases in advertising and promotional services provided
related to the launch of certain new and enhanced products introduced by the
Company during the year ended January 31, 1999. Service revenues increased
slightly from $3,279 thousand in fiscal year 1997 to $3,364 thousand in the
year ended January 31, 1998 (an increase of 3 percent).
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Cost of product revenues
Cost of product revenues are based on an inter-company transfer price with
Autodesk. This transfer price has been unchanged from 1997 to 1999. When
expressed as a percentage of product revenues, cost of product revenues
increased approximately 4 percent in the year ended January 31, 1999 as
compared to the year ended January 31, 1998 and decreased approximately 5
percent in the year ended January 31, 1998 from the year ended January 31,
1997. These fluctuations in cost of revenues are a result of price changes on
the associated product sales.
Cost of service revenues
Cost of service revenues represent the cost of services provided on behalf
of Autodesk. When expressed as a percentage of service revenues, cost of
service revenues has remained constant at 91% of service revenues from 1997 to
1999.
Sales and marketing
Sales and marketing expenses include salaries, sales commissions, travel,
and facility costs for the Company's marketing, sales, dealer training, and
support personnel. These expenses also include programs aimed at increasing
revenues, such as advertising, trade shows, and expositions, as well as various
sales and promotional programs designed for specific sales channels and end
users. When expressed as a percentage of total revenues, sales and marketing
expenses increased from 1 percent in fiscal year 1998 to 2 percent in the year
ended January 31, 1999. The increase in spending was largely due to higher
employee costs and increases in advertising and promotional costs associated
with the launch of certain new and enhanced products introduced by the
Company's market groups during the year ended January 31, 1999. For the year
ended January 31, 1998 sales and marketing expenses decreased 4 percent over
the year ended January 31, 1997 expenses. The Company expects to continue to
invest in sales and marketing of its products, to develop market opportunities,
and to promote the Company's competitive position. Accordingly, the Company
expects sales and marketing expenses to continue to be significant, both in
absolute dollars and as a percentage of net revenues.
Provision for income taxes
The Company's effective income tax rate was 47.8 percent in fiscal year 1999
compared to 49.1 percent and 58.2 percent in fiscal years 1998 and 1997,
respectively. The decrease in the effective income tax rates in fiscal years
1999 and 1998 compared to fiscal year 1997 was due to the decrease of items
deducted for accounting purposes but not benefitted for tax purposes, in
comparison to the increase in the Company's total revenues and expenditures.
See Note 11 to the consolidated financial statements for an analysis of the
differences between the Canadian federal statutory and effective income tax
rates.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position (SOP) 98-4, which amends certain
provisions of SOP 97-2. The Company believes it is in compliance with the
provisions of SOP 97-2 as amended by SOP 98-4. In December 1998, the AICPA
issued Statement of Position 98-9 ("SOP 98-9"), which amends certain provisions
of SOP 97-2 and extends the deferral of the application of certain passages of
SOP 97-2 provided by SOP 98-4 until the beginning of the Company's fiscal year
2001. The Company does not expect the adoption of this standard to have a
material effect on its consolidated operating results or financial position.
In June 1998, the Financial Accounting Standards Board "FASB" issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the
18
<PAGE>
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS 133 will be
effective for the Company's fiscal year ending March 31, 2002. The Company does
not expect the adoption of this standard to have a material effect on its
consolidated operating results or financial position.
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. Discreet is currently
proceeding with detailed reviews of every application used. It is expected that
some will have to be upgraded to Year 2000 compliant applications. Some
Discreet products run on platforms, or work with peripherals that are currently
not Year 2000 compliant. Accordingly, it is expected that some customers may
experience some difficulties related to non Discreet products, which may affect
the performance of Discreet products and, therefore, lead to an unusually high
number of calls to the Company's technical support department. Discreet
anticipates that the costs related to the detailed assessments, application
upgrades, and responding to the increased volume of support calls will not be
material to its results of operations, liquidity and capital resources.
Although management does not expect Year 2000 issues to have a material impact
on its business or future results of operations, there can be no assurance that
the potential problems described above, related to the platforms and
peripherals on and with which Discreet's products operate, will be resolved in
a timely manner, and that the Company will not experience significant costs or
delays in developing versions of its products that are compatible with Year
2000 compliant versions of these platforms and peripherals.
Liquidity and Capital Resources
Cash totaled $2,943 thousand at January 31, 1999, compared to $1,640
thousand at January 31, 1998. The $1,303 thousand increase in cash was due
primarily to cash generated from operations ($1,418 thousand). This increase
was offset by cash used to purchase fixed assets ($43 thousand) and the effect
of exchange rate changes on cash ($73 thousand).
The Company's principal commitments at March 31, 1999, consisted of
obligations under operating leases for facilities. For additional information,
see Note 12 to the consolidated financial statements. The Company believes that
its existing cash, and cash generated from operations will be sufficient to
satisfy its currently anticipated cash requirements for fiscal year 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and Schedules, together with the
auditors' reports thereon, appear at pages F-1 through F-50 and S-1 through
S-4, respectively, of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Occupations of Directors and Executive Officers
The following table sets forth the directors and the executive officers of
Discreet, their ages and the positions currently held by each such person with
Discreet.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Eric B. Herr..................... 51 Director and President
Steve Cakebread.................. 47 Director and Chief Financial Officer
Marcia K. Sterling............... 55 Director and Secretary
</TABLE>
These directors and executive officers have held office since the
Amalgamation. The directors, subject to the provisions of the Quebec Act, will
manage the business and affairs of the Company.
Eric B. Herr has been a director and the President of Discreet since the
Amalgamation. In addition, he has been Autodesk's President and Chief Operating
Officer since September 1996, having also served as the Acting Vice President,
AEC Market Group, from September 1996 through March 1997. Mr. Herr served as
the Chief Financial Officer from the time he joined Autodesk in May 1992 until
September 1996. From December 1992 through January 1995, Mr. Herr served as
Vice President, Emerging Businesses. From January 1995 to May 1995, Mr. Herr
served as Vice President, Finance and Administration.
Steve Cakebread has been a director and the Chief Financial Officer of
Discreet since the Amalgamation. Mr. Cakebread joined Autodesk in April 1997 as
Vice President and Chief Financial Officer. From April 1993 through March 1997,
he served as Vice President, Finance World Trade Corporation at Silicon
Graphics. He held various finance and general management positions at Hewlett-
Packard from January 1972 through March 1993.
Marcia K. Sterling has been a director and the Secretary of Discreet since
the Amalgamation. She joined Autodesk in October 1995 as Vice President,
Business Development and General Counsel. From September 1982 to October 1995,
she practiced corporate and securities law at Wilson Sonsini Goodrich & Rosati,
where she was a member.
ITEM 11. EXECUTIVE COMPENSATION
Compensation and Other Information Concerning Directors and Officers
Executive Compensation Summary
Discreet's directors and officers are not compensated for their services to
the Company.
Option Grants in Last Fiscal Year / Aggregate Option Exercises in Last Fiscal
Year and Fiscal Year-End Values
No Discreet stock options have been granted to and/or exercised by any
directors or officers.
Employment Agreements and Severance Arrangements
There are no employment agreements or severance arrangements with any of the
executive officers or directors of Discreet.
20
<PAGE>
Compensation Committee Interlocks and Insider Participation
Discreet does not have a compensation committee.
Compensation of Directors
The directors of Discreet do not receive compensation for their service as
members of the Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management of Discreet
Autodesk Development B.V., a Netherlands corporation and indirect wholly-
owned subsidiary of Autodesk, is the sole beneficial owner of the voting
securities, no par value, of Discreet, which shares are not publicly traded.
None of the executive officers or directors of Discreet beneficially owns
any Discreet equity securities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal years 1997, 1998, and 1999, revenues from services provided on
behalf of Autodesk accounted for approximately 44%, 38%, and 31% of total
revenues.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements of Discreet Logic Inc. and Subsidiaries:
Consolidated Statements of Operations--Years Ended January 31, 1997,
1998, and 1999, and the two months ended March 31, 1999
Consolidated Balance Sheets--January 31, 1998, 1999 and March 31,
1999
Consolidated Statements of Cash Flows--Years Ended January 31, 1997,
1998, and 1999, and the two months ended March 31, 1999
Consolidated Statement of Shareholders' Equity--Years Ended January
31, 1997, 1998 and 1999 and the two months ended March 31, 1999
Notes to Consolidated Financial Statements
Report of Arthur Andersen & Cie., Independent Public Accountants
2. Financial Statement Schedule: The following financial statement schedule
of Discreet Logic, Inc., for the years ended January 31, 1997, 1998, and
1999, and the two months ended March 31, 1999, is filed as part of this
Report and should be read in conjunction with the Consolidated Financial
Statements of Discreet Logic, Inc.
<TABLE>
<S> <C>
Schedule II--Valuation and Qualifying Accounts....................... S-1
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements or
Notes thereto.
21
<PAGE>
3. Financial Statements of Discreet Logic, Inc. and Subsidiaries (Old
Discreet)
Consolidated Statements of Operations--Eleven months ended June 30,
1997, year ended June 30, 1998 and the period from July 1, 1998 to
March 16, 1999
Consolidated Balance Sheets--June 30, 1998 and March 16, 1999
Consolidated Statements of Cash Flows--Eleven months ended June 30,
1997, year ended June 30, 1998 and the period from July 1, 1998 to
March 16, 1999
Consolidated Statement of Shareholders' Equity--Eleven months ended
June 30, 1997, year ended June 30, 1998 and the period from July 1,
1998 to March 16, 1999
Notes to Consolidated Financial Statements
Report of Arthur Andersen & Cie., Independent Public Accountants
4. Financial Statement Schedule: The following financial statement schedule
of Discreet Logic, Inc. ("Old Discreet") and subsidiaries, for the
fiscal years ended June 30, 1997, 1998, and the period from July 1, 1998
to March 16, 1999.
<TABLE>
<S> <C>
Schedule II--Valuation and Qualifying Accounts....................... S-4
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements or
Notes thereto.
5. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as
part of, or incorporated by reference into, this Report.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1 (1) Second Amended and Restated Agreement and Plan of Acquisition and
Amalgamation by and among Autodesk, Inc., Autodesk Development
B.V., 9066-9771 Quebec Inc., Autodesk Canada Inc., 9066-9854
Quebec Inc. and Discreet Logic Inc., dated as of November 18,
1998, as amended on December 18, 1998 and January 18, 1999.
2.2 (1) Second Amended and Restated Amalgamation Agreement by and among
Discreet Logic Inc., 9066-9854 Quebec Inc., 9066-9771 Quebec Inc.
and Autodesk, Inc. dated as of January 18, 1999.
3.1 (2) Articles of Amalgamation filed with the Inspector General of
Financial Institutions of the Province of Quebec pursuant to
Section 123.118 of the Companies Act of Quebec.
3.4 Bylaws of Registrant.
9.1 Voting and Exchange Trust Agreement dated March 16, 1999 among
Autodesk, Inc., the Registrant, Autodesk Development B.V., and
Montreal Trust Company of Canada.
10.1 Support Agreement by and among Autodesk, Inc., Autodesk
Development B.V. and the Registrant dated as of March 16, 1999.
10.8(3) Silicon Graphics, Inc. Value-Added Reseller Agreement, dated May
9, 1994, by and between the Company and Silicon Graphics, Inc.
10.16(3) Letter Agreement of Amendment, dated July 22, 1997, by and between
Old Discreet Logic Inc. and Banque Nationale de Paris (Canada).
10.19(3) Land Transfer Agreement, dated August 25, 1995, by and between Old
Discreet and Safeland PLC.
10.30 Silicon Graphics, Inc. Value-Added Reseller Agreement Extension
dated June 16, 1999, by and between the Registrant and Silicon
Graphics, Inc.
21.1 Subsidiaries of the Registrant.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
24.1 Power of Attorney (included on the signature page of this Report
on Form 10-K).
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
(1) Incorporated by reference to the appendix filed with Autodesk,
Inc.'s Discreet Logic Inc.'s, 9066-9771 Quebec Inc.'s and 9066-
9854 Quebec Inc.'s Joint Proxy Statement/Prospectus on Form S-4
filed on September 30, 1998, as amended on November 13, 1998,
November 25, 1998 and February 5, 1999 (Registration No. 333-
9771).
(2) Incorporated by reference to the exhibit filed with Autodesk,
Inc.'s Current Report on Form 8-K filed on March 31, 1999 (File
No. 000-14338).
(3) Incorporated by reference to the exhibit filed with Discreet Logic
Inc.'s Annual Report on Form 10-K for the fiscal year ended June
30, 1998 filed on September 28, 1998, as amended on October 29,
1998 and February 4, 1999 (File No. 000-26100).
</TABLE>
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Discreet Logic Inc.
/s/ Eric B. Herr
By:__________________________________
Eric B. Herr
President and Director
Dated: June 28, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that Eric B. Herr and Steve Cakebread,
whose signatures appear below, constitute and appoint Marcia K. Sterling as
their attorney-in-fact, with the power of substitution, for them in any and all
capacities, to sign any amendments to this report, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or her substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Eric B. Herr President and Director June 28, 1999
____________________________________ (Principal Executive Officer)
Eric B. Herr
/s/ Steve Cakebread Chief Financial Officer and June 28, 1999
____________________________________ Director
Steve Cakebread (Principal Financial and
Accounting Officer)
/s/ Marcia K. Sterling Secretary and Director June 28, 1999
____________________________________
Marcia K. Sterling
</TABLE>
24
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Discreet Logic Inc.:
We have audited the accompanying consolidated balance sheets of Discreet
Logic Inc. (a Quebec corporation) and subsidiaries (See Note 1 to the
Consolidated Financial Statements) as at January 31, 1998 and 1999 and March
31, 1999, and the related consolidated statements of operations, shareholders'
equity and cash flows, for the years ended January 31, 1997, 1998 and 1999 and
for the two-month period ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada, which are in substantial agreement with those in the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Discreet Logic Inc. and subsidiaries as at January 31, 1998 and 1999, and
March 31, 1999, and the results of their operations and their cash flows for
the years ended January 31, 1997, 1998 and 1999, and for the two-month period
ended March 31, 1999, in accordance with generally accepted accounting
principles in the United States of America.
ARTHUR ANDERSEN & CIE
Chartered Accountants
General Partnership
Montreal, Canada
June 23, 1999
F-1
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands of U.S. Dollars, except share data)
<TABLE>
<CAPTION>
January 31, January 31, March 31,
1998 1999 1999
ASSETS ----------- ----------- ---------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents................. $ 1,640 $ 2,943 $ 52,616
Accounts receivable (less reserves for
uncollectible accounts of $41, $99, and
$3,484, respectively).................... 830 1,291 13,737
Related party receivable.................. 1,338 435 977
Inventory--
Resale................................. -- -- 8,512
Demonstration.......................... -- -- 6,895
Income taxes receivable................... -- -- 418
Other current assets...................... 2 2 6,138
------- ------- ---------
3,810 4,671 89,293
Property and equipment--less accumulated
depreciation and amortization.............. 21 31 8,682
Deferred income taxes....................... -- 28 728
Other assets................................ -- -- 17,554
Assets held for resale...................... -- -- 4,250
------- ------- ---------
$ 3,831 $ 4,730 $ 120,507
======= ======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Borrowings under line of credit........... $ -- $ -- $ 1,847
Accounts payable.......................... 279 410 22,445
Related party payable..................... 977 841 2,099
Accrued expenses.......................... 299 383 11,795
Deferred revenue.......................... 169 441 7,866
Customer deposits......................... -- -- 309
Income taxes payable...................... 327 198 3,228
------- ------- ---------
2,051 2,273 49,589
------- ------- ---------
Deferred income taxes....................... -- -- 2,097
------- ------- ---------
Commitments and Contingencies (Notes 5, 12,
and 14)
Shareholders' Equity:
Preferred shares--
Class C: no par value; authorized-
unlimited; issued and outstanding-0, 0,
100 shares, respectively................ -- -- 1
Class D: no par value; authorized-150,000
shares; issued and outstanding-0, 0,
150,000 shares, respectively............ -- -- 71
------- ------- ---------
-- -- 72
------- ------- ---------
Common shares--
Class A: no par value; authorized-
unlimited; issued and outstanding-0, 0,
and 100 shares, respectively............ -- -- 1
Class B: no par value; authorized-
unlimited; issued and outstanding-0, 0,
and 0 shares, respectively.............. -- -- --
Class E: no par value; authorized-
unlimited; issued and outstanding-0, 0,
and 24,496,905 shares, respectively..... -- -- 82,540
Class F: no par value; authorized-
unlimited; issued and outstanding-0, 0,
and 24,496,905 shares, respectively..... -- -- 1
Exchangeable: $15.08 per share par value;
authorized-unlimited; issued and
outstanding-0, 0, and 1,813,604 shares,
respectively............................ -- -- 27,349
Common shares--no par value; authorized-
unlimited; issued and outstanding-1, 1
and 0 shares, respectively.............. 3 3 --
------- ------- ---------
3 3 109,891
------- ------- ---------
Total Capital Stock....................... 3 3 109,963
------- ------- ---------
Retained earnings (deficit)............... 1,897 2,648 (35,466)
Deferred compensation..................... -- -- (403)
Accumulated other comprehensive loss...... (120) (194) (5,273)
------- ------- ---------
Total shareholders' equity............. 1,780 2,457 68,821
------- ------- ---------
$ 3,831 $ 4,730 $ 120,507
======= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands of U.S. Dollars except share and per share data)
<TABLE>
<CAPTION>
Two Months
Year Ended Year Ended Year Ended Ended
January 31, 1997 January 31, 1998 January 31, 1999 March 31, 1999
---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Product Revenues........ $4,245 $5,587 $ 7,876 $ 9,711
Service Revenues........ 3,279 3,364 3,543 484
------ ------ ------- -----------
Total revenues........ 7,524 8,951 11,419 10,195
------ ------ ------- -----------
Cost of product
revenues............... 3,537 4,351 6,475 4,749
Cost of service
revenues............... 2,981 3,058 3,221 440
------ ------ ------- -----------
Total cost of
revenues............. 6,518 7,409 9,696 5,189
------ ------ ------- -----------
Gross margin........ 1,006 1,542 1,723 5,006
------ ------ ------- -----------
Operating expenses:
Research and
development, net of
tax credits of $0,
$0, $0, and $61,
respectively......... -- -- -- 502
Sales and marketing... 387 126 254 1,949
General and
administrative....... -- -- -- 531
------ ------ ------- -----------
Total operating
expenses........... 387 126 254 2,982
------ ------ ------- -----------
Operating income.... 619 1,416 1,469 2,024
------ ------ ------- -----------
Other income (expense):
Interest income
(expense)............ -- 38 50 (51)
Foreign currency
exchange gain
(loss)............... 6 (108) (81) (233)
------ ------ ------- -----------
Total other income
(expense).......... 6 (70) (31) (284)
------ ------ ------- -----------
Income before income
taxes................ 625 1,346 1,438 1,740
Provision for income
taxes.................. 364 661 687 636
------ ------ ------- -----------
Net income............ $ 261 $ 685 $ 751 $ 1,104
====== ====== ======= ===========
Earnings per share:
Basic............... $ 261 $ 685 $ 751 $ 0.09
====== ====== ======= ===========
Diluted............. $ 261 $ 685 $ 751 $ 0.09
====== ====== ======= ===========
Weighted average common
shares outstanding:
Basic................. 1 1 1 12,917,166
====== ====== ======= ===========
Diluted............... 1 1 1 12,917,166
====== ====== ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Two months
January 31, January 31, January ended March 31,
1997 1998 31, 1999 1999
----------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income................. $ 261 $ 685 $ 751 $ 1,104
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities--
Depreciation and
amortization............. 116 58 32 917
Deferred income taxes..... -- -- (28) 128
Net gain on property and
equipment sales and
disposals................ -- -- (1) --
Compensation expense
relate to stock options.. -- -- -- 25
Changes in assets and
liabilities--
Accounts receivable...... (1,319) 1,375 (461) (1,273)
Intercompany receivable.. 749 (2,087) 903 (542)
Inventory................ -- -- -- (144)
Income taxes receivable.. -- -- -- (40)
Other current assets..... (10) 10 -- 367
Borrowings under line of
credit.................. -- -- -- 1
Accounts payable......... 20 99 131 100
Intercompany payable..... 245 705 (136) 1,260
Accrued expenses......... (33) 172 84 509
Deferred revenue......... -- 169 272 (712)
Customer deposits........ -- -- -- (45)
Income taxes payable..... (179) 377 (129) 273
------- ------- ------- --------
Net cash provided by
(used in) operating
activities............. (150) 1,563 1,418 1,928
------- ------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment................. (20) (9) (43) (244)
Proceeds from property and
equipment sales and
disposals................. 4 5 1 --
------- ------- ------- --------
Net cash used in
investing activities... (16) (4) (42) (244)
------- ------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
common shares, net of
issuance costs............ -- -- -- 72
------- ------- ------- --------
Net cash provided by
financing activities... -- -- -- 72
------- ------- ------- --------
Foreign exchange effect on
cash....................... 70 (149) (73) (119)
------- ------- ------- --------
Increase (decrease) in cash
and cash equivalents....... (96) 1,410 1,303 1,637
Cash and cash equivalents,
beginning of year.......... 326 230 1,640 2,943
Discreet cash and cash
equivalents, March 16,
1999....................... 48,036
------- ------- ------- --------
Cash and cash equivalents,
end of year................ $ 230 $ 1,640 $ 2,943 $ 52,616
======= ======= ======= ========
Supplemental disclosure of
cash flow information:
Income taxes paid......... $ 492 $ 428 $ 828 $ 52
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Accumulated
Common Stock Accumulated Other Total
----------------------- Preferred Earnings Deferred Comprehensive Comprehensive Shareholders'
Shares Amount Stock (Deficit) Compensation Income Income (loss) Equity
------------ --------- --------- ----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
31, 1996.......... 1 $ 3 $-- $ 951 $ -- $ 40 $ 994
Comprehensive
income:
Net income........ 261 $ 261 261
Change in
cumulative
translation
adjustment....... (9) (9) (9)
-----
Comprehensive
income............ $ 252
------------ --------- ---- -------- ------ ===== ------- ---------
Balance, January
31, 1997.......... 1 3 -- 1,212 -- 31 1,246
Comprehensive
income............
Net income........ 685 685 685
Change in
cumulative
translation
adjustment....... (151) (151) (151)
-----
Comprehensive
income............ $ 534
------------ --------- ---- -------- ------ ===== ------- ---------
Balance, January
31, 1998.......... 1 3 -- 1,897 -- (120) 1,780
Comprehensive
income:
Net income........ 751 751 751
Change in
cumulative
translation
adjustment....... (74) (74) (74)
-----
Comprehensive
income............ $ 677
------------ --------- ---- -------- ------ ===== ------- ---------
Balance, January
31, 1999.......... 1 3 -- 2,648 -- (194) 2,457
Exchange of
Autodesk Canada,
Inc. Common Shares
for Class C
shares............ (1) (3) 1 (2)
Discreet Logic Inc.
Shareholders'
Equity March 16,
1999.............. 29,992,674 109,890 (39,218) (428) (4,963) 65,281
Exchange of
Discreet Logic
Inc. Common
Shares............ (29,992,674) (109,890) (109,890)
Issuance of Class B
shares from
exchange of
Discreet Logic
Inc.
Common Shares..... 29,992,674 109,890 109,890
Redemption of Class
B shares.......... (5,495,769) (27,349) (27,349)
Issuance of
Exchangeable
Shares from
redemption of
Class B shares.... 1,813,604 27,349 27,349
Conversion of Class
B shares.......... (24,496,905) (82,541) (82,541)
Issuance of Class E
shares............ 24,496,905 82,540 82,540
Issuance of Class F
shares............ 24,496,905 1 1
Issuance of Class D
shares............ 71 71
Issuance of Class A
shares............ 100 1 1
Compensation
expense related to
stock options..... 25 25
Comprehensive
income:
Net income........ 1,104 1,104 1,104
Change in
cumulative
translation
adjustment....... (116) (116) (116)
-----
Comprehensive
income............ $ 988
------------ --------- ---- -------- ------ ===== ------- ---------
Balance, March 31,
1999.............. 50,807,514 $ 109,891 $ 72 $(35,466) $ (403) $(5,273) $ 68,821
============ ========= ==== ======== ====== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars)
(1) Operations and Basis of Presentation
On March 16, 1999, pursuant to the terms of that certain Second Amended and
Restated Agreement and Plan of Acquisition and Amalgamation dated as of
November 18, 1998, as amended on December 18, 1998 and on January 18, 1999 (the
"Acquisition Agreement"), by and among Autodesk, Inc., a Delaware corporation
("Autodesk"), Autodesk Development, B.V., a Netherlands corporation and an
indirect wholly owned subsidiary of Autodesk ("Dutchco"), 9066-9771 Quebec
Inc., a Quebec Company and a wholly owned subsidiary of Dutchco ("Amalgamation
Sub"), 9066-9854 Quebec Inc., a Quebec Company and an indirect wholly owned
subsidiary of Autodesk ("Autodesk Quebec"), Autodesk Canada Inc., an Ontario
company and an indirect wholly owned subsidiary of Autodesk, ("ACI"), and
Discreet Logic Inc., a Quebec company ("Old Discreet"), Dutchco acquired all
voting shares of Discreet Logic Inc., a Quebec company, and the successor
company to Old Discreet resulting from the Amalgamation (as defined below)
("Discreet" or "the Company") by way of an amalgamation of entities under
common control under the Companies Act of Quebec of Old Discreet, Amalgamation
Sub and Autodesk Quebec (the "Amalgamation") and certain related transactions
described below (together with the Amalgamation, the "Acquisition"). As a
result of the Acquisition, Discreet became an indirect subsidiary of Autodesk.
Shortly prior to the Amalgamation, substantially all of the assets of ACI were
assigned to Autodesk Quebec as part of a corporate reorganization. Upon the
Amalgamation, such assets were assumed by Discreet. Discreet adopted a fiscal
year end of March 31st.
The financial statements included in this Form 10-K include the results of
operations, financial position, and cash flows of ACI for the fiscal years
ended January 31, 1997, 1998 and 1999. For the two-month period ended March 31,
1999, the financial statements include the results of operations of ACI for the
period from February 1 up through the Amalgamation on March 16, 1999 and the
combined results of operations of Old Discreet, Autodesk Quebec, and
Amalgamation Sub for the period after the Amalgamation from March 16, 1999
through March 31, 1999.
The related consolidated balance sheets as of March 31, 1999 include the
accounts of the Company and its subsidiaries. All subsidiaries are wholly owned
as of March 31, 1999. All significant intercompany accounts and transactions
have been eliminated upon consolidation.
Following the Amalgamation, the Company's operations also included
development, assembly, marketing and support of non-linear, digital systems and
software for creating, editing and compositing imagery and special effects for
film, video, HDTV, broadcast and the Web. The Company's systems and software
are utilized by creative professionals, for a variety of applications,
including feature films, television programs, commercials, music and corporate
videos, interactive game production, live broadcasting as well as Web design.
The Company sells its advanced systems and other products through its direct
sales force, as well as through distributors and resellers. The Company markets
and sells its systems directly in North America and in certain European and
Pacific Rim countries. Sales activities in North America are conducted from the
Company's Montreal headquarters, sales offices in Los Angeles, New York and
Chicago and field representatives based in Boston, San Francisco and Atlanta.
The Company also markets its systems through sales offices located in the
United Kingdom, France, Germany, Singapore, Brazil, Spain, India, Hong Kong,
Japan, and through a network of distributors and resellers in over 80
countries.
The Company also markets a number of other design software products that are
geared towards the Architecture, Engineering, and Construction market ("AEC");
the Mechanical Computer-Aided Design ("CAD") market; other easy-to-use,
affordable tools for professionals, occasional users, or consumers who draft,
diagram, and draw through its Personal Solutions Group ("PSG") market.
Architecture, Engineering, and
F-6
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Construction software is used to automate every phase of a building's life
cycle-from conceptual design through construction, maintenance, and renovation.
The Mechanical CAD market is dedicated to providing mechanical engineers,
designers, and drafters with advanced, value-based software solutions that are
designed to solve their professional design challenges. Prior to the
Amalgamation, these were substantially all of the Company's product offerings.
(2) Significant Accounting Policies
The accompanying consolidated financial statements reflect the application
of the following significant accounting policies, as described below and
elsewhere in the notes to consolidated financial statements. These consolidated
financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America, and are presented in
United States dollars ("U.S. Dollars").
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. Actual results may differ from these estimates.
(a) Revenue Recognition
The Company's revenue recognition policy is in compliance with the
provisions of the American Institute of Certified Public Accountants' Statement
of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by
Statement of Position 98-4 ("SOP 98-4"). Revenue is recognized at the time of
shipment, provided that no significant vendor obligations exist and collection
of the resulting receivable is deemed probable. The Company recognizes revenue
from post contract customer support and other related services ratably, as the
obligations are fulfilled, or when the related services are performed.
Agreements with the Company's Value Added Resellers ("VARs") generally do
not contain specific product-return privileges. However, the Company permits
its VARs to return product in certain instances, generally during periods of
product transition and during update cycles. The Company establishes allowances
for product returns based on estimated future returns of product as a direct
reduction of revenue and accounts receivable. Actual returns have not differed
materially from these estimates.
(b) Net Income (Loss) per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
The new standard simplifies the computation of earnings per share (EPS) and
increases comparability to international standards. Under SFAS No. 128, primary
EPS is replaced by "Basic" EPS, which excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. "Diluted" EPS, which is computed
similarly to fully diluted EPS, reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. The Company is required to disclose both basic and
diluted EPS. All prior period EPS data have been restated to conform to SFAS
No. 128.
F-7
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents, in thousands (except share and per share data)
a reconciliation of Basic EPS to Diluted EPS as required by SFAS No. 128:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Two Months Ended
January 31, 1997 January 31, 1998 January 31, 1999 March 31, 1999
------------------ ------------------ ------------------ -----------------------
Income Shares EPS Income Shares EPS Income Shares EPS Income Shares EPS
------ ------ ---- ------ ------ ---- ------ ------ ---- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
Common shareholders... $261 1 $261 $685 1 $685 $751 1 $751 $1,104 12,917,166 $0.09
==== ==== ==== =====
Effect of Dilutive
Securities
Impact of exercise of
stock options under
treasury stock
method................ -- -- -- -- -- -- -- -- -- -- -- --
---- --- ---- ---- --- ---- ---- --- ---- ------ ---------- -----
Diluted EPS
Income available to
common shareholders
and assumed
exercises............. $261 1 $261 $685 1 $685 $751 1 $751 $1,104 12,917,166 $0.09
==== === ==== ==== === ==== ==== === ==== ====== ========== =====
</TABLE>
(c) Research and Development Expenses
The Company charges to operations research and development costs as incurred
and presents such expenses net of income tax credits from the Canadian federal
and Quebec provincial governments (see Note 7). Software development costs are
considered for capitalization when technological feasibility is established in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. The Company sells software in a market that is subject to rapid
technological change, new product introductions and changing customer needs.
Accordingly, the Company has not capitalized software development costs due to
its inability to estimate the useful life of software under development.
(d) Translation of Foreign Currencies
The accounts of the Company are translated in accordance with SFAS No. 52,
Foreign Currency Translation. The Company's management has elected to present
these consolidated financial statements in U.S. dollars. The financial
statements of the Company and its subsidiaries are translated from their
functional currency into the reporting currency, the U.S. dollar, utilizing the
current rate method. Accordingly, assets and liabilities are translated at
exchange rates in effect at the end of the year, and revenues and expenses are
translated at the weighted average exchange rate during the year. All
cumulative translation gains or losses from the translation into the Company's
reporting currency are included as a component of shareholders' equity in the
consolidated balance sheets.
Foreign currency transaction gains (losses) included in other income
(expense) in the accompanying consolidated statements of operations were
$6,000, $(108,000), $(81,000), and $(233,000) for the years ended January 31,
1997, 1998, 1999, and the two-month period ended March 31, 1999, respectively.
(e) Concentration of Credit Risk
The Company has a Maximum Liability Agreement, with a leasing company, which
provides that the Company is contingently liable up to a maximum percentage of
the remaining principal payments outstanding related to the purchase of the
Company's products by customers financed by said leasing company. The maximum
liability is contingent on certain factors as defined in the agreement. As at
March 31, 1999, the Company had accrued $637,000, the maximum amount of the
contingent liability.
F-8
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has no other significant off-balance sheet concentration of
credit risk such as foreign exchange contracts, option contracts or other
foreign currency hedging arrangements. The Company maintains the majority of
cash balances with three financial institutions and its accounts receivable
credit risk is not concentrated within any geographic area. There were no
accounts receivable from a single customer which exceed 10 percent of total
accounts receivable as of January 31, 1998, 1999, and March 31, 1999.
(f) Postemployment and Postretirement Benefits
The Company does not provide postemployment and postretirement benefits.
(g) Cash Equivalents
Cash equivalents are carried at cost, which approximates market value. Cash
equivalents are short-term, highly liquid investments with original maturities
of less than three months. Cash equivalents consist of commercial paper and
money market mutual funds at January 31, 1998, 1999, and March 31, 1999.
(h) Inventory
Inventory consists of hardware purchased for resale and is valued at the
lower of cost (determined on a first-in, first-out basis) or net realizable
value. Demonstration inventory consists of hardware inventory used by the
Company and potential customers for product demonstrations which will be
subsequently sold.
(i) Property and Equipment
Property and equipment are stated at cost. Computer equipment, video
equipment, software, furniture and fixtures are depreciated using the straight-
line and declining balance methods over the estimated useful lives of the
assets, which range from two to five years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the estimated useful
life or the lease term. Property and equipment includes the following (in
thousands):
<TABLE>
<CAPTION>
January 31, January 31, March 31,
Asset Classification 1998 1999 1999
-------------------- ----------- ----------- ---------
<S> <C> <C> <C>
Computer equipment, video equipment
and software............................. $ 282 $ 279 $ 22,799
Leasehold improvements.................... 18 38 1,824
Furniture and fixtures.................... 114 109 2,825
----- ----- --------
414 426 27,448
Less: Accumulated depreciation and
amortization............................. (393) (395) (18,766)
----- ----- --------
$ 21 $ 31 $ 8,682
===== ===== ========
</TABLE>
(j) Other Assets
Other assets include acquired technology, goodwill, and other deferred
charges, and are amortized on a straight-line basis over the estimated useful
lives of the assets, which range from three to ten years. The Company evaluates
the realizability and the related periods of amortization of these assets on a
regular basis.
F-9
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other assets included the following amounts:
<TABLE>
<CAPTION>
January 31, January 31, March 31,
Asset Classification 1998 1999 1999
-------------------- ----------- ----------- ---------
<S> <C> <C> <C>
Acquired technology.......................... $ -- $ -- $ 6,938
Goodwill..................................... -- -- 30,873
Other deferred charges....................... -- -- 862
----- ----- --------
-- -- 38,673
Less-Accumulated amortization................ -- -- (21,119)
----- ----- --------
$ -- $ -- $ 17,554
===== ===== ========
</TABLE>
(k) Legal Costs
The Company accrues legal costs to be incurred when such amounts are
probable and the amounts can be reasonably estimated. Material assumptions used
to estimate the amounts accrued include, primarily, the advice of legal counsel
regarding the nature, length and estimated legal costs of each case. These
liabilities are not discounted to reflect their present values.
(l) Comprehensive Income
As of February 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no impact on the
Company's net income or stockholders' equity. SFAS 130 requires foreign
currency translation adjustments to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
(m) Recent Accounting Pronouncements
In March 1998, the AICPA issued Statement of Position (SOP) 98-4, which
amends certain provisions of SOP 97-2. The Company believes it is in compliance
with the provisions of SOP 97-2 as amended by SOP 98-4. In December 1998, the
American Institute of Certified Public Accountants ("AICPA") issued Statement
of Position 98-9 ("SOP 98-9"), which amends certain provisions of SOP 97-2 and
extends the deferral of the application of certain passages of SOP 97-2
provided by SOP 98-4 until the beginning of the Company's fiscal year 2001. The
Company does not expect the adoption of this standard to have a material effect
on its consolidated operating results or financial position.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 will be effective for the
Company's fiscal year ending March 31, 2002. The Company does not expect the
adoption of this standard to have a material effect on its consolidated
operating results or financial position.
F-10
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Other Current Assets
Other current assets consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31, January 31, March 31,
1998 1999 1999
----------- ----------- ---------
<S> <C> <C> <C>
Prepaid expenses......................... $ -- $ -- $4,099
Sales tax receivable..................... -- -- 1,766
Other.................................... 2 2 273
----- ----- ------
$ 2 $ 2 $6,138
===== ===== ======
</TABLE>
(4) Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31, January 31, March 31,
1998 1999 1999
----------- ----------- ---------
<S> <C> <C> <C>
Payroll and payroll related............. $ 48 $141 $ 3,755
Professional fees....................... -- -- 891
Commissions............................. 124 88 1,159
Sales tax and VAT payable............... -- -- 177
Accrued restructuring expenses.......... -- -- 689
Maximum liability accrual............... -- -- 637
Acquisition costs....................... -- -- 930
Merger costs............................ -- -- 864
ESPP Witholdings........................ 67 53 134
Other................................... 60 101 2,559
---- ---- -------
$299 $383 $11,795
==== ==== =======
</TABLE>
(5) Litigation and Related Settlement Expenses
(a) Griffith & Tekushan, Inc.
On June 2, 1998, Old Discreet was named as a defendant in a breach of
warranty action filed in the Supreme Court of the State of New York for the
County of New York entitled Griffith & Tekushan, Inc. v. Discreet Logic, Inc.
(Index No. 602684/98) (the "Action"). The complaint alleges, among other
things, that the Company breached certain warranties arising out of a software
licensing agreement and seeks damages of $1 million. On July 10, 1998, the
Action was removed from state court to the United States District Court for the
Southern District of New York (Case No. 98 Civ. 4909 (BSJ)) (the "U.S. District
Court"). On July 17, 1998, the Company, which succeeded Old Discreet as the
defendant in the Action filed a motion to dismiss the Action in its entirety.
On May 28, 1999, the U.S. District Court entered an order dismissing the Action
without prejudice based on plaintiff's request for voluntary dismissal. Though
the Company intends to contest this case vigorously if plaintiff files a new
complaint against the Company, the ultimate outcome of the case cannot be
predicted at this time.
(b) Class Action Litigation
F-11
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 28, 1998, a complaint was filed in the Marin County, California,
Superior Court, entitled Jerry Krim, on Behalf of Himself and All Others
Similarly Situated, v. Discreet Logic Inc., et al., case No. 174792 (the "Krim
Complaint"). The lawsuit names as defendants Old Discreet, Old Discreet's
directors and certain unidentified "John Does." The Krim Complaint alleged that
the defendants breached their fiduciary duties to Old Discreet's shareholders
in connection with the Acquisition. The Krim Complaint asked the court to
enjoin the consummation of the Acquisition or, alternatively, sought to rescind
the Acquisition or an award of unspecified damages from the defendants in the
event the Acquisition were consummated. The Company believes the claims
asserted in the complaint are without merit and intends to vigorously contest
them.
On September 29, 1998, a second complaint was filed in the Marin County,
California, Superior Court (the "Superior Court"), entitled William Clark, et
al. v. Discreet Logic Inc., et al., case No. 175037 (the "Clark Complaint").
The Clark Complaint was substantially similar to the Krim Complaint and named
as defendants the Company, certain of the Company's directors and certain
unidentified "John Does." The Clark Complaint alleged that the defendants
breached their fiduciary duties to Old Discreet's shareholders in connection
with the Acquisition. The Clark Complaint asks the court to enjoin the
consummation of the transaction or, alternatively, seeks to rescind the
transaction or an award of unspecified damages from the defendants in the event
the transaction is consummated. The Company believes the claims asserted in the
complaint are without merit and intends to vigorously contest them.
On December 2, 1998, the Superior Court entered an order consolidating the
Clark and Krim actions. On December 11, 1998, the Superior Court entered an
order on Old Discreet's October 26, 1998 motions to dismiss. The order
dismissed both the Krim and the Clark Complaints as against Old Discreet for
failing to state a claim against Old Discreet. The Superior Court's order
granted plaintiffs a 30-day leave to replead their complaints. On January 11,
1999, plaintiffs filed a consolidated amended complaint with the Superior Court
(the "Amended Complaint") which asserts the same breach of fiduciary duty cause
of action against Old Discreet, certain of the Old Discreet's directors and
certain unidentified "John Does," and seeks the same relief.
On April, 9, 1999, the Superior Court entered an order denying Old
Discreet's and certain of the individual defendants' motions to dismiss the
Amended Complaint on the grounds of inconvenient forum and certain of the
individual defendants' motions to dismiss for lack of personal jurisdiction. On
April, 16, 1999, the Company which succeeded Old Discreet, as a defendant in
the action filed a demurrer (a motion to dismiss the Amended Complaint) for
failure to state a claim as against Old Discreet. On April 26, 1999, certain of
the individual defendants filed a petition for writ of mandate with the
California Court of Appeal (the "Court of Appeal"), appealing the Superior
Court's April 9, 1999 order as to them. On May 26, 1999, the Court of Appeal
issued an Alternative Writ of Mandate, directing the Superior Court, by June
30, 1999, to reverse its April 9, 1999 denial of certain of the individual
defendants' motions to dismiss on personal jurisdiction grounds or show cause
why it has not done so. On June 16, 1999, the Superior Court entered an order
sustaining the Company's demurrer to the Amended Complaint and dismissing the
Company from the action without leave to amend. On June 18, 1999, the Superior
Court entered an Order reversing the April 9, 1999 Order and granting certain
of the individual defendants' motions to dismiss for lack of personal
jurisdiction.
The Company believes the claims asserted in the Amended Complaint are
without merit and intends to vigorously contest them.
(6) Demand Line of Credit, Leasing and Tax Credit Facilities
The Company has a revolving demand line of credit and leasing facility with
its bank which provides for a revolving demand line of credit under which it
can borrow up to Cdn$7,000,000 (approximately $4,630,000 at March 31, 1999).
Advances under the line accrue interest monthly at the Canadian prime rate
(6.75% at
F-12
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 1999) plus 0.25%. Additionally, the agreement provides for a
Cdn$600,000 (approximately $397,000 at March 31, 1999) demand leasing facility,
and a Cdn$600,000 (approximately $397,000 at March 31, 1999) demand research
and development tax credit facility. Advances under these facilities accrue
interest monthly at the Canadian prime rate (6.75% at March 31, 1999) plus 1%.
The line and facilities are secured by essentially all of the Company's North
American assets. As additional security, the Company assigned to the bank its
insurance on these assets. The Company is required to maintain certain
financial ratios, including minimum levels of working capital, debt service
coverage and equity to asset ratios. As of March 31, 1999, there were no
amounts outstanding under the demand leasing and demand research and
development tax credit facilities, however, the amount available to Discreet
under the line of credit was reduced by the letter of guarantee discussed
below.
The Company's Japanese subsidiary has a line of credit agreement with its
bank. Under this agreement, the subsidiary can borrow up to $3,000,000.
Advances under this line accrue interest at the prevailing overnight rate for
the period (approximately 1.725% at March 31, 1999) and are secured by a letter
of guarantee, in the amount of $3,000,000, issued by the Company in favor of
the subsidiary's bank. As of March 31, 1999, the subsidiary had borrowed
(Yen)221,468,000 (approximately $1,847,000 at March 31, 1999).
(7) Canadian Federal and Provincial Income Tax Credits
The Company is entitled to research and development incentives in the form
of income tax credits from the Canadian federal government ("Federal") and from
the Province of Quebec ("Provincial"). Federal income tax credits are received
on qualified Canadian research and development expenditures and equipment
purchases. Provincial income tax credits are received on qualified research and
development salaries in the Province of Quebec. The Federal and Provincial
income tax credits are earned at 20% of qualified research and development
expenditures. Additionally, the Federal credit may be limited to a credit
against income taxes payable.
The Company recorded $61,000 of income tax credits as a reduction of
research and development expenses for the two-month period ended March 31,
1999. These income tax credits represent credits earned based on qualifying
research and development expenditures. In addition, the Company recorded,
$14,000 of income tax credits as a reduction in the carrying value of property
and equipment for the two-month period ended March 31, 1999. These income tax
credits represent credits earned based on qualifying property and equipment
purchases.
(8) Employee Benefit Plans
Stock option plans
The Company's employees are eligible to receive option grants under
Autodesk's stock option plans. Under these stock option plans, incentive and
nonqualified stock options may be granted to officers, employees, directors,
and consultants to purchase shares of Autodesk's common stock. Options vest
over periods of one to five years and generally have terms of up to ten years.
The exercise price of the stock options is determined by Autodesk's Board of
Directors on the date of grant and is at least equal to the fair market value
of the stock on the grant date. At March 31, 1999, there were 1,157,437 options
outstanding at exercise prices ranging from $0.15 to $73.49.
Employee stock purchase plan
Autodesk has an employee stock purchase plan ("plan") for all employees,
including the Company's employees, meeting certain eligibility criteria. Under
the plan, eligible employees may purchase shares of Autodesk's common stock, at
their discretion up to 15 percent of their compensation subject to certain
limitations, at not less than 85 percent of fair market value as defined in the
plan.
F-13
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Shareholders' Equity
(a) Common Shares
On March 15, 1999, ACI contributed substantially all of its assets to 9066-
9854 Quebec Inc. ("Autodesk Quebec"), a Quebec company and indirect wholly-
owned subsidiary of Autodesk, on March 16, 1999, Discreet Logic Inc.
amalgamated with Autodesk Quebec and 9066-9771 Quebec Inc., a Quebec company
and indirect wholly owned subsidiary of Autodesk ("Amalgamation Sub") (the
"Amalgamation"). One hundred Class A and 100 Class C shares were issued to the
sole shareholders of Autodesk Quebec and Amalgamation Sub. 150,000 shares were
issued in payment of fees to financial and legal advisors. Upon the
Amalgamation, Old Discreet common shareholders received 1 Class B share for
each Old Discreet Common Share held at that date. Approximately 29,993 thousand
Class B shares were issued. Subsequently, approximately 24,497 thousand Class B
shares were converted to Discreet Units (each Discreet Unit consists of 1 Class
E share and 1 Class F share) and approximately 5,496 thousand Class B shares
were exchanged for Exchangeable shares, according to the election made by each
holder of Old Discreet common shares. For the years ended January 31, 1997,
1998, and 1999, ACI had one share of common stock issued and outstanding. As of
March 31, 1999, the capitalization of Discreet consisted of the following:
<TABLE>
<CAPTION>
Class of
Equity Authorized Issued & Outstanding Voting Rights
-------- ---------- -------------------- --------------------
<C> <C> <C> <S>
Exchangeable Unlimited 1,813,604 Non-voting common
Class A Unlimited 100 Voting common
Class B Unlimited None Non-voting common
Class C Unlimited 100 Non-voting preferred
Class D 150,000 150,000 Non-voting preferred
Class E Unlimited 24,496,905 Voting common
Class F Unlimited 24,496,905 Non-voting common
</TABLE>
F-14
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Dividends
The Company has never declared or paid cash dividends and does not
anticipate paying any cash dividends on its capital stock in the foreseeable
future. In the event cash dividends are declared or paid, the Company
anticipates that they would be declared and paid in U.S. dollars. Part 1A of
the Quebec Companies Act prohibits the Company from paying dividends that would
prevent it from discharging its liabilities when due or that would bring the
book value of its assets to an amount less than the sum of its liabilities and
its issued and paid-up share capital account. At March 31, 1999, the Company
could not distribute any dividends.
(10) Related Party Transactions
(a) Sales to Related Parties
During fiscal years 1997, 1998, 1999, and the two-month period ended March
31, 1999, the Company recorded revenue from services provided on behalf of
Autodesk, Inc., the ultimate parent company, of $3,279 thousand, $3,364
thousand, $3,543 thousand, and $484 thousand, respectively. At March 31, 1999,
approximately $953 thousand remained outstanding and has been classified as a
related party receivable.
(b) Purchases from Related Parties
During the fiscal years ended January 31, 1997, 1998, 1999, and the two-
month period ended March 31, 1999, purchases of $3,537 thousand, $4,351
thousand, $6,475 thousand, and $4,749 thousand were made from Autodesk, Inc. At
March 31, 1999, a payable of $1,768 thousand remained outstanding and is
classified as a related party payable.
During the two-month period ended March 31, 1999, $325 thousand and $6
thousand of operating expenses were paid, on behalf of the Company, by Autodesk
and ACI, respectively. These amounts have been classified in the related party
payable as of March 31, 1999.
(11) Income Taxes
The Company applies the provisions of SFAS No. 109, Accounting for Income
Taxes. Under the provisions of SFAS No. 109, the Company recognizes a current
tax liability or asset for current taxes payable or refundable and a deferred
tax liability or asset for the estimated future tax effects of temporary
differences between the carrying value of assets and liabilities for financial
reporting and their tax basis and carryforwards to the extent they are
realizable.
F-15
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the deferred income tax assets and the deferred income tax
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
January 31, January 31, March 31,
1998 1999 1999
----------- ----------- ---------
<S> <C> <C> <C>
Deferred income tax assets--
Foreign tax loss carryforwards............. $ -- $ -- $ 5,808
Restructuring expenses..................... -- -- 241
Initial and secondary public offering
issuance costs............................ -- -- 306
Other temporary differences................ -- 28 3,465
----- ----- -------
-- 28 9,820
Less: Valuation allowance.................. -- -- (9,092)
----- ----- -------
$ -- $ 28 $ 728
===== ===== =======
Deferred income tax liabilities--
Difference between book and tax basis of
property and equipment.................... $ -- $ -- $ 824
Federal research and development tax
credits................................... -- -- 222
Other temporary differences................ -- -- 1,051
----- ----- -------
$ -- $ -- $ 2,097
===== ===== =======
</TABLE>
The Company provides deferred income taxes for research and development tax
credits earned in the current year, which are included in taxable income in the
subsequent year. In accordance with Canadian tax laws, stock issuance costs are
deductible over a five-year period.
The Company has recorded a valuation allowance against certain deferred
income tax assets including the tax benefit of certain foreign net operating
loss carryforwards as the tax benefits do not meet the recognition criteria set
forth in SFAS 109 due to the uncertainty of their realization.
The following table presents income before income taxes for the entities
incorporated in the following jurisdictions (in thousands):
<TABLE>
<CAPTION>
Year ended Year ended Year ended Two months ended
January 31, 1997 January 31, 1998 January 31, 1999 March 31, 1999
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Canada.................. $ 625 $ 1,346 $1,438 $2,128
United States........... -- -- -- 75
United Kingdom.......... -- -- -- (663)
European and Other...... -- -- -- 200
----- ------- ------ ------
$ 625 $ 1,346 $1,438 $1,740
===== ======= ====== ======
</TABLE>
F-16
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The income tax provision is composed of the following (in thousands):
<TABLE>
<CAPTION>
Year ended Year ended Year ended Two months ended
January 31, 1997 January 31, 1998 January 31, 1999 March 31, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Current--
Federal............... $ 236 $428 $463 $ 605
Provincial............ 128 233 252 208
Foreign............... -- -- -- (156)
----- ---- ---- -----
364 661 715 657
----- ---- ---- -----
Deferred--
Federal............... -- -- (18) (21)
Provincial............ -- -- (10) --
Foreign............... -- -- -- --
----- ---- ---- -----
-- -- (28) (21)
----- ---- ---- -----
Total provision..... $ 364 $661 $687 $ 636
===== ==== ==== =====
</TABLE>
The reconciliation between the Canadian federal statutory income tax rate
and the effective tax rate is as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended Two months ended
January 31, 1997 January 31, 1998 January 31, 1999 March 31, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Provision at the
Canadian federal
statutory rate......... 38.0% 38.0% 38.0% 38.0 %
Foreign taxes........... -- -- -- 0.3
Effect of basis
differences not
benefited.............. 13.4 4.3 3.0 (0.5)
Provincial taxes, net of
federal tax
abatements............. 5.8 5.8 5.8 (0.3)
Other items............. 1.0 1.0 1.0 (1.0)
---- ---- ---- ----
Tax provision......... 58.2% 49.1% 47.8% 36.5 %
==== ==== ==== ====
</TABLE>
The Company has $15,024,000 of cumulative foreign net operating loss
carryforwards, which may be available to reduce future income tax liabilities
in those jurisdictions. The loss carryforwards will expire beginning June 30,
2001.
These net operating loss carryforwards are subject to review and adjustment
by the respective tax authorities and may be limited in certain cases upon a
significant ownership change of the corporation, as defined. Reorganizations of
the corporate structure as discussed in Note 1 of the consolidated financial
statements may diminish the realizability of these losses.
F-17
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Commitments and Contingencies
(a) Lease commitments
The Company has operating lease commitments for certain facilities and
equipment, which expire at various dates through June 2007. The following
schedule outlines the future minimum rental payments under these leases at
March 31, 1999 (in thousands):
<TABLE>
<S> <C>
Year ended March 31,
2000.............................................................. $ 1,849
2001.............................................................. 1,926
2002.............................................................. 1,443
2003.............................................................. 1,225
2004 and thereafter............................................... 5,954
-------
Total future minimum rental payments.............................. $12,397
=======
</TABLE>
Rent expense was $262,000, $162,000, and $171,000, for the years ended
January 31, 1997, January 31, 1998, and January 31, 1999, respectively. Rent
expense for the two-month period ended March 31, 1999, was $95,000.
(b) Letters of Guarantee
The Company has provided letters of guarantee in the amount of $3,000,000 as
of March 31, 1999.
(13) Segments
During the year ended January 31, 1999, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for reporting information about a company's operating segments. Prior
year amounts have been restated to conform to the current year's presentation.
Management identified the Company's reportable segments based on differences
in customer type and distribution method. The Company operates in three
segments--the Design Solutions segment (consisting of the MCAD and AECAD market
groups), the Personal Solutions Group ("PSG"), and New Media/Advanced Systems
(consisting of the Discreet and Kinetix market groups). The Design Solutions
segment derives revenues from the sales of design software products whose end
users include architects, engineers, construction firms, designers, and
drafters. The Personal Solutions Group develops and sells design software
products for professionals, occasional users, or consumers who design, draft,
and diagram. Finally, the New Media/Advanced Systems segment derives revenues
from the sale of its products to creative professionals for a variety of
applications, including feature films, television programs, commercials, music
and corporate videos, interactive game production, live broadcasting and Web
design. All segments distribute their respective products through authorized
dealers and distributors. The PSG and New Media/Advanced Systems segments also
sell their products directly to end users.
F-18
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company evaluates each segment's performance on the basis of income from
operations before income taxes. The Company currently does not separately
accumulate and report asset information by market group. Information concerning
the operations of the Company's reportable segments is as follows:
<TABLE>
<CAPTION>
Year ended Two-month
----------------------------------- period ended
January 31, January 31, January 31, March 31,
1997 1998 1999 1999
----------- ----------- ----------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Net revenues:
Design Solutions......... $7,023 $8,297 $10,372 $ 1,425
Personal Solutions
Group................... 120 166 362 61
New Media/Advanced
Systems................. 381 488 685 8,709
------ ------ ------- -------
$7,524 $8,951 $11,419 $10,195
====== ====== ======= =======
<CAPTION>
Year ended
----------------------------------- Two-month
January 31, January 31, January 31, period ended
1997 1998 1999 March 31, 1999
----------- ----------- ----------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Income from operations:
Design Solutions......... $ 373 $1,138 $ 1,084 $ 137
Personal Solutions
Group................... 28 39 74 15
New Media/Advanced
Systems................. 218 239 311 1,872
------ ------ ------- -------
$ 619 $1,416 $ 1,469 $ 2,024
====== ====== ======= =======
<CAPTION>
Year ended Two-month
----------------------------------- period ended
January 31, January 31, January 31, March 31,
1997 1998 1999 1999
----------- ----------- ----------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Depreciation and
Amortization:
Design Solutions......... $ 121 $ 61 $ 32 $ 4
Personal Solutions
Group................... -- -- -- --
New Media/Advanced
Systems................. -- -- -- 913
------ ------ ------- -------
$ 121 $ 61 $ 32 $ 917
====== ====== ======= =======
Information regarding the Company's operations by geographic area is as
follows:
<CAPTION>
Year ended Two-month
----------------------------------- period ended
January 31, January 31, January 31, March 31,
1997 1998 1999 1999
----------- ----------- ----------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Net revenues:
Canada................... $7,524 $8,951 $11,419 $ 2,584
United States............ -- -- -- 3,639
Other Americas........... -- -- -- 157
------ ------ ------- -------
Total Americas........... 7,524 8,951 11,419 6,380
Europe................... -- -- -- 2,340
Asia Pacific............. -- -- -- 1,475
------ ------ ------- -------
Total net revenues......... $7,524 $8,951 $11,419 $10,195
====== ====== ======= =======
</TABLE>
F-19
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
January 31, January 31, March 31,
1998 1999 1999
----------- ----------- ---------
(In thousands)
<S> <C> <C> <C>
Long-lived assets:
Canada..................................... $ 21 $ 59 $ 96,850
United States.............................. -- -- 18,642
Other Americas............................. -- -- 8,753
---- ---- ---------
Total Americas............................. 21 59 124,245
Europe..................................... -- -- 22,617
Asia Pacific............................... -- -- 1,438
Consolidating eliminations................... -- -- (117,814)
---- ---- ---------
Total long-lived assets...................... $ 21 $ 59 $ 30,486
==== ==== =========
</TABLE>
Revenues from services provided on behalf of the Company's parent company,
Autodesk, Inc., accounted for 44%, 38%, and 31% of total revenues in the years
ended January 31, 1997, 1998, and 1999, respectively. No single customer
accounted for more than 10% of total revenues in the two-month period ended
March 31, 1999.
(14) Dependence on Key Suppliers
The Company is dependent on Silicon Graphics, Inc. to manufacture and supply
a large proportion of the workstations and certain peripherals used in the
Company's systems. The Company purchases electronic tablets manufactured by
Wacom Technology Corporation ("Wacom") and believes that while alternative
suppliers are available, there can be no assurance that alternative electronic
tablets would be functionally equivalent or be available in a timely manner or
on similar terms.
(15) Purchase of Land and Facilities
In August 1995, Old Discreet purchased land and an office building in
London, England for approximately (Pounds)1,148,000 (or approximately
$1,857,000 at March 31, 1999). In the year ended July 31, 1996, the carrying
value of the London building was written down to its estimated fair market
value and this building was classified as asset held for resale. In May 1999,
the Company sold the London building for net proceeds of (Pounds)2,946,000 (or
approximately $4,770,000) realizing a gain of (Pounds)319,000 (or approximately
$516,000).
(16) Government Assistance
(a) SDI loan
Old Discreet entered into a loan agreement with the Societe de Developpement
Industriel du Quebec dated as of May 7, 1998, whereby an interest free loan was
granted to the Company by the Quebec government in the amount of Cdn$2,800,000
(approximately $1,852,000 at March 31, 1999). The loan is conditional to the
Company meeting certain criteria:
1. During the five-year period following the disbursement of the loan by
the Quebec government, the Company is required to create 200 jobs and
maintain each of these jobs for a five-year period after their creation.
2. The loan should not exceed Cdn$2,800,000 or 20% of the costs incurred
by Old Discreet for the acquisition of Lightscape Technologies, Inc.
F-20
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The loan is payable in four annual installments of Cdn$600,000
(approximately $397,000 at March 31, 1999) commencing in July 2004 and a final
installment of Cdn$400,000 (approximately $265,000 at March 31, 1999) in July
2008. The loan is interest free until July 2004, after which it will bear
interest at the Canadian prime rate (approximately 6.75% at March 31, 1999)
plus 1.5%. In the situation where the criteria mentioned above are not
respected, a portion of the loan may have to be repaid at an earlier date. The
loan was disbursed to Old Discreet in July 1998. As of March 31, 1999, the loan
has been classified in accounts payable.
(b) PACST Subsidy Program
The Company entered into a financial assistance contract with the Quebec
Government dated as of March 27, 1998 under a subsidy program designed to
improve competencies in science and technology. The contract provides that the
Company is eligible to receive up to Cdn$3,012,000 (approximately $1,992,000 at
March 31, 1999) in the form of reimbursement of expenses incurred by the
Company for new employee training (mainly reimbursement of salary). The
Company's job creation estimate provided to the Quebec Government at the time
of signature of the contract was 251 science and technology related jobs to be
created over a three-year period. As of March 31, 1999, an advance of
Cdn$350,000 (approximately $231,000 at March 31, 1999) was received which
covers 40% of the first year estimated subsidy. The program requires the
Company to meet certain criteria in order to earn the subsidies. Since the
criteria have not yet been met by the Company, the advance has been classified
as a liability in accrued expenses at March 31, 1999.
(17) Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for the years ended January 31,
1999 and 1998 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Fiscal
quarter quarter quarter quarter year
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Year ended January 31, 1999
Net revenues.......................... $3,160 $2,955 $2,586 $2,718 $11,419
Gross margin.......................... 573 492 231 427 1,723
Income from operations................ 531 388 225 325 1,469
Net income............................ 292 137 109 213 751
Basic net income per share............ 292 137 109 213 751
Diluted net income per share.......... 292 137 109 213 751
Year ended January 31, 1998
Net revenues.......................... $2,216 $1,826 $2,226 $2,683 $ 8,951
Gross margin.......................... 344 345 400 453 1,542
Income from operations................ 302 304 426 384 1,416
Net income............................ 139 161 182 203 685
Basic net income per share............ 139 161 182 203 685
Diluted net income per share.......... 139 161 182 203 685
</TABLE>
(18) Subsequent Events
On May 3, 1999, Discreet transferred eight of its direct and indirect
subsidiaries to Autodesk, Inc. (Autodesk). These subsidiaries included Bandit
Communications, Inc. ("Bandit"), and Bandit's three subsidiaries Discreet Logic
USA, Inc., Discreet Logic Investment Inc., and Discreet Logic Research, Inc.,
Lightscape Technologies, Inc. ("Lightscape") and Lightscape's subsidiary
Lightscape Graphics, Inc., D-Vision Systems Inc., and Discreet Logic (Desktop)
Inc. Discreet's operations continue to include activities related to the
operations of the aforementioned subsidiaries which are now owned directly or
indirectly by Autodesk, Discreet's ultimate parent company.
F-21
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Discreet Logic Inc.:
We have audited the accompanying consolidated balance sheets of Discreet
Logic Inc. (a Quebec corporation) and subsidiaries, as at June 30, 1998 and
March 16, 1999 and the related consolidated statements of operations,
shareholders' equity and cash flows for the eleven-month period ended June 30,
1997, the year ended June 30, 1998 and the period from July 1, 1998 to March
16, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada, which are in substantial agreement with those in the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Discreet Logic Inc. and subsidiaries as at June 30, 1998 and March 16, 1999,
and the results of their operations and their cash flows for the eleven-month
period ended June 30, 1997, the year ended June 30, 1998 and the period from
July 1, 1998 to March 16, 1999, in accordance with generally accepted
accounting principles in the United States of America.
ARTHUR ANDERSEN & CIE
Chartered Accountants
General Partnership
Montreal, Canada
June 23, 1999
F-22
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
CONSOLIDATED BALANCE SHEETS
(amounts in U.S. Dollars except share data)
<TABLE>
<CAPTION>
June 30, March 16,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 46,459,113 $ 48,036,230
Accounts receivable (less reserves for
uncollectible accounts of $3,654,000
and $3,436,000 respectively).................... 32,102,444 11,172,969
Inventory--
Resale......................................... 7,880,378 8,368,099
Demonstration.................................. 4,776,387 6,895,314
Income taxes receivable.......................... -- 378,190
Other current assets............................. 4,718,671 6,502,637
------------ ------------
95,936,993 81,353,439
Property and equipment--less accumulated
depreciation and amortization..................... 9,576,129 8,590,988
Deferred income taxes.............................. 877,514 699,963
Other assets....................................... 25,635,785 18,285,905
Assets held for resale............................. 4,384,160 4,250,419
------------ ------------
$136,410,581 $113,180,714
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Borrowings under line of credit.................. $ 2,713,131 $ 1,845,760
Accounts payable................................. 23,265,953 21,934,256
Accrued expenses................................. 12,833,320 10,903,561
Deferred revenue................................. 6,544,620 8,136,812
Customer deposits................................ 288,113 354,248
Income taxes payable............................. 9,882,485 2,755,660
------------ ------------
55,527,622 45,930,297
Deferred income taxes.............................. 2,228,634 1,969,027
------------ ------------
Commitments and Contingencies (Notes 5, 12, and 15)
Shareholders' Equity:
Preferred shares--no par value
Authorized--unlimited number of shares
Issued and outstanding--none
Common shares--no par value
Authorized--unlimited number of shares
Issued and outstanding--29,617,504 shares at
June 30, 1998
and 29,992,674 shares at March 16, 1999......... 107,748,709 109,890,493
Accumulated deficit.............................. (24,163,115) (39,218,956)
Deferred compensation............................ (907,491) (427,821)
Accumulated other comprehensive loss............. (4,023,778) (4,962,326)
------------ ------------
Total shareholders' equity..................... 78,654,325 65,281,390
------------ ------------
$136,410,581 $113,180,714
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in U.S. Dollars except share data)
<TABLE>
<CAPTION>
Period from
Eleven Months July 1, 1998
Ended Year Ended to
June 30, 1997 June 30, 1998 March 16, 1999
------------- ------------- --------------
<S> <C> <C> <C>
Total revenues.................... $ 101,923,931 $ 151,558,128 $ 66,824,472
Cost of revenues.................. 47,571,342 62,033,320 33,395,284
------------- ------------- -------------
Gross profit.................. 54,352,589 89,524,808 33,429,188
------------- ------------- -------------
Operating expenses:
Research and development, net of
tax credits of $696,000,
$1,108,000, and $983,000,
respectively................... 9,707,890 14,847,019 11,159,557
Sales and marketing............. 23,206,070 34,320,612 23,599,341
General and administrative...... 6,500,705 16,307,022 12,548,464
Write-off of purchased research
and development (Note 15)...... 2,263,000 6,915,000 --
Gain on sale of investment (Note
16)............................ -- (2,500,000) --
Costs of terminated agreement
(Note 17)...................... -- 1,712,860 --
Costs of merger transaction
(Note 1)....................... -- -- 6,378,000
Restructuring expense (Note
19)............................ -- (1,504,472) --
Litigation and related
settlement expenses (Note 5)... 6,500,000 (405,000) --
------------- ------------- -------------
Total operating expenses...... 48,177,665 69,693,041 53,685,362
------------- ------------- -------------
Operating income (loss)....... 6,174,924 19,831,767 (20,256,174)
------------- ------------- -------------
Other income (expense):
Interest income................. 1,233,924 1,118,343 1,705,804
Interest expense................ (55,318) (135,625) (71,513)
Foreign currency exchange gain
(loss)......................... (187,843) 1,083,450 895,876
------------- ------------- -------------
Total other income (expense).. 990,763 2,066,168 2,530,167
------------- ------------- -------------
Income (loss) before income
taxes.......................... 7,165,687 21,897,935 (17,726,007)
Provision for (recovery of) for
income taxes..................... 6,489,343 10,853,995 (2,670,166)
------------- ------------- -------------
Net income (loss)............... $ 676,344 $ 11,043,940 $ (15,055,841)
============= ============= =============
Earnings (loss) per share:
Basic........................... $ 0.02 $ 0.38 $ (0.50)
============= ============= =============
Diluted......................... $ 0.02 $ 0.36 $ (0.50)
============= ============= =============
Weighted average common shares
outstanding:
Basic........................... 27,947,807 29,029,147 29,842,536
============= ============= =============
Diluted......................... 28,893,652 30,792,932 29,842,536
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in U.S. Dollars except share data)
<TABLE>
<CAPTION>
Common Stock
------------------------
Accumulated
Other Total
Accumulated Deferred Comprehensive Comprehensive Shareholders'
Shares Amount Deficit Compensation Income (Loss) Loss Equity
---------- ------------- ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1996.. 27,699,426 $ 78,922,914 $ (35,883,399) $ -- $ (696,499) $ 42,343,016
Exercise of common stock
options................ 321,577 1,128,256 1,128,256
Issuance of shares
through Employee Stock
Purchase Plan.......... 96,412 350,499 350,499
Grant of compensatory
stock options.......... 673,750 (673,750) --
Comprehensive income:
Net income............. 676,344 $ 676,344 676,344
Change in cumulative
translation
adjustment............ (117,520) (117,520) (117,520)
------------
Comprehensive income.... $ 558,824
---------- ------------- ------------- ---------- ------------ ------------ ------------
Balance, June 30, 1997.. 28,117,415 81,075,419 (35,207,055) (673,750) (814,019) 44,380,595
Exercise of common stock
options................ 253,163 1,136,747 1,136,747
Issuance of shares
through Employee Stock
Purchase Plan ......... 46,926 524,165 524,165
Issuance of shares to D-
Vision (Note 15(b)).... 555,000 10,649,063 10,649,063
Issuance of shares to
Intel, net of issuance
costs of $17,625 (Note
8(d)).................. 645,000 13,527,375 13,527,375
Grant of compensatory
stock options.......... 835,940 (835,940) --
Compensation expense
related to stock
options................ 602,199 602,199
Comprehensive income:
Net income............. 11,043,940 11,043,940 11,043,940
Change in cumulative
translation
adjustment............ (3,209,759) (3,209,759) (3,209,759)
------------
Comprehensive income.... $ 7,834,181
---------- ------------- ------------- ---------- ------------ ------------ ------------
Balance, June 30,
1998................... 29,617,504 107,748,709 (24,163,115) (907,491) (4,023,778) 78,654,325
Exercise of common stock
options................ 307,673 1,471,306 1,471,306
Issuance of shares
through Employee Stock
Purchase Plan ......... 67,497 695,476 695,476
Cancellation of
compensatory stock
options................ (24,998) 24,998 --
Compensation expense
related to stock
options................ 454,672 454,672
Comprehensive loss:
Net loss............... (15,055,841) (15,055,841) (15,055,841)
Change in cumulative
translation
adjustment............ (938,548) (938,548) (938,548)
------------
Comprehensive loss...... $(15,994,389)
---------- ------------- ------------- ---------- ============ ------------ ------------
Balance, March 16,
1999................... 29,992,674 $ 109,890,493 $ (39,218,956) $ (427,821) $ (4,962,326) $ 65,281,390
========== ============= ============= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in U.S. Dollars)
<TABLE>
<CAPTION>
Eleven Months Period from
Ended Year Ended July 1, 1998 to
June 30, 1997 June 30, 1998 March 16, 1999
------------- ------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................. $ 676,344 $ 11,043,940 $ (15,055,841)
Adjustments to reconcile net
income (loss) to cash provided by
operating activities--
Depreciation and amortization..... 5,987,256 16,384,309 12,299,106
Deferred income taxes............. 503,699 3,769,945 (82,056)
Write-off of purchased research &
development...................... 2,263,000 6,915,000 --
Write-off of assets for
restructuring.................... -- 610,472 --
Reversal of restructuring
reserve, net..................... -- (1,504,472) --
Gain on sale of investment in
Essential Communications
Corporation...................... -- (2,500,000) --
Compensation expense related to
stock options.................... -- 602,199 454,672
Changes in assets and liabilities
(net of effect of
acquisitions)--
Settlement of class action
litigation...................... -- (10,800,000) --
Insurance proceeds related to
class action litigation......... -- 3,459,000 --
Accounts receivable.............. (10,819,617) (4,326,039) 20,929,475
Inventory........................ 2,986,146 3,378,732 (2,909,876)
Income taxes receivable.......... 2,743,232 448,059 (378,190)
Other current assets............. (248,546) (682,982) (1,783,966)
Accounts payable................. 14,336,101 (3,880,117) (3,160,097)
Accrued expenses................. 799,643 (8,328,774) (1,929,759)
Deferred revenue................. 3,333,788 (1,558,674) 1,592,192
Income taxes payable............. 4,734,484 5,148,001 (7,126,825)
Customer deposits................ (1,258,442) (1,071,506) 66,135
Due to related parties........... (25,535) -- --
------------ ------------ -------------
Net cash provided by operating
activities..................... 26,011,553 17,107,093 2,914,970
------------ ------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment........................ (6,265,405) (9,501,868) (3,487,742)
Proceeds from disposal of property
and equipment.................... 4,885 818,000 --
Increase in other assets.......... (2,480,908) -- (227,791)
Cash paid for Denim acquisition
and related costs................ (9,125,611) -- --
Cash paid for D-Vision acquisition
and related costs................ -- (10,342,000) --
Proceeds from sale of investment
in Essential Communications
Corporation...................... -- 2,500,000 --
------------ ------------ -------------
Net cash used in investing
activities..................... (17,867,039) (16,525,868) (3,715,533)
------------ ------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from government loan..... -- -- 1,828,400
Proceeds from (repayment of) line
of credit........................ -- 2,713,131 (1,595,862)
Proceeds from issuance of common
shares, net of issuance costs.... -- 13,527,375 --
Proceeds from the exercise of
stock options.................... 1,128,256 1,136,747 1,471,306
Proceeds from the employee stock
purchase plan.................... 350,499 524,165 695,476
------------ ------------ -------------
Net cash provided by financing
activities..................... 1,478,755 17,901,418 2,399,320
------------ ------------ -------------
Foreign exchange effect on cash.... 386,808 (3,691,658) (21,640)
------------ ------------ -------------
Increase in cash and cash
equivalents....................... 10,010,077 14,790,985 1,577,117
Cash and cash equivalents,
beginning of year................. 21,658,051 31,668,128 46,459,113
------------ ------------ -------------
Cash and cash equivalents, end of
year.............................. $ 31,668,128 $ 46,459,113 $ 48,036,230
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Period from
Eleven Months Year Ended July 1, 1998
Ended June 30, to
June 30, 1997 1998 March 16, 1999
------------- ------------ --------------
<S> <C> <C> <C>
Supplemental disclosure of cash
flow information:
Interest paid during the year.... $ 16,579 $ 150,243 $ 55,363
Income taxes paid during the
year............................ 1,141,487 2,527,720 4,028,581
In connection with the acquisition
of Lightscape in December 1997,
the following non-cash transaction
occurred:
Fair value of assets acquired.... $ -- $ 7,614,322 $ --
Liabilities assumed.............. -- (7,614,322) --
---------- ------------ ----------
Cash paid for acquisition, net of
cash acquired..................... $ -- $ -- $ --
========== ============ ==========
In connection with the acquisition
of D-Vision in July 1997, the
following non-cash transaction
occurred:
Fair value of assets acquired.... $ -- $ 27,210,063 $ --
Liabilities assumed.............. -- (5,811,000) --
Cash acquired.................... -- (408,000) --
Issuance of 555,000 shares of
common stock.................... -- (10,649,063) --
---------- ------------ ----------
Cash paid for acquisition, net of
cash acquired..................... $ -- $ 10,342,000 $ --
========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars)
(1) Operations
Discreet Logic Inc. ("Discreet" or "the Company") was incorporated under
Part 1A of the Quebec Companies Act on September 10, 1991. The Company and its
subsidiaries develop, assemble, market and support non-linear, digital systems
and software for creating, editing and compositing imagery and special effects
for film, video, HDTV, broadcast and the Web. The Company's systems and
software are utilized by creative professionals, for a variety of applications,
including feature films, television programs, commercials, music and corporate
videos, interactive game production, live broadcasting as well as Web design.
The Company sells its advanced systems and other products through its direct
sales force, as well as through distributors and resellers. The Company markets
and sells its systems directly in North America and in certain European and
Pacific Rim countries. Sales activities in North America are conducted from the
Company's Montreal headquarters, sales offices in Los Angeles, New York and
Chicago and field representatives based in Boston, San Francisco, and Atlanta.
The Company also markets its systems through sales offices located in the
United Kingdom, France, Germany, Singapore, Brazil, India, Hong Kong and Japan
and through a network of distributors and resellers in over 80 countries.
On March 16, 1999, pursuant to the terms of that certain Second Amended and
Restated Agreement and Plan of Acquisition and Amalgamation dated as of
November 18, 1998, as amended on December 18, 1998 and on January 18, 1999 (the
"Acquisition Agreement"), by and among Autodesk, Inc., a Delaware corporation
("Autodesk"), Autodesk Development, B.V., a Netherlands corporation and an
indirect wholly owned subsidiary of Autodesk ("Dutchco"), 9066-9771 Quebec
Inc., a Quebec Company and a wholly owned subsidiary of Dutchco ("Amalgamation
Sub"), 9066-9854 Quebec Inc., a Quebec Company and an indirect wholly owned
subsidiary of Autodesk ("Autodesk Quebec"). Autodesk Canada, Inc., an Ontario
company and an indirect wholly owned subsidiary of Autodesk, ("ACI"), and
Discreet Logic, Inc., a Quebec company ("Old Discreet"), Dutchco acquired all
voting shares of the successor company to Discreet resulting from the
Amalgamation (as defined below) by way of an amalgamation of entities under
common control under the Companies Act of Quebec of Old Discreet, Amalgamation
Sub and Autodesk Quebec (the "Amalgamation") and certain related transactions
described below (together with the Amalgamation, the "Acquisition"). As a
result of the Acquisition, Discreet became an indirect subsidiary of Autodesk.
Shortly prior to the Amalgamation, substantially all of the assets of ACI were
assigned to Autodesk Quebec as part of a corporate reorganization. Upon the
Amalgamation, such assets were assumed by Discreet.
In connection with the Acquisition, Discreet incurred costs of approximately
$6,000,000 primarily for investment banking, legal and accounting fees related
to the merger. These costs were charged to operations on March 16, 1999 upon
the closing of the Acquisition transactions. The Company also wrote-off certain
assets, in the amount of $378,000, which became redundant as a result of the
Acquisition.
F-28
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Significant Accounting Policies
The accompanying consolidated financial statements reflect the application
of the following significant accounting policies, as described below and
elsewhere in the notes to consolidated financial statements. These consolidated
financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America, and are presented in
United States dollars ("U.S. Dollars").
(a) Change of Fiscal Year
On January 9, 1997, the Board of Directors of the Company approved the
change of the Company's fiscal year end from July 31 to June 30. This change
was effective beginning with the Company's second fiscal quarter of 1997.
The consolidated financial statements are presented for the period from July
1, 1998 to March 16, 1999, the twelve-month period ended June 30, 1998, and the
eleven-month period ended June 30, 1997. Consequently, the results for the
twelve-month period ended June 30, 1998 are not directly comparable with those
for the eleven-month period ended June 30, 1997, or those for the period from
July 1, 1998 to March 16, 1999.
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.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All subsidiaries are wholly owned as of March 16, 1999.
All significant intercompany accounts and transactions have been eliminated
upon consolidation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. Actual results may differ from these estimates.
(c) Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, Software Revenue Recognition.
The statement provides specific industry guidance and stipulates that revenue
recognized from software arrangements is to be allocated to each element of the
arrangement based on the relative fair values of the elements, such as software
products, upgrades, enhancements, postcontract customer support, installation
or training. Under SOP 97-2, the determination of fair value is based on
objective evidence that is specific to the vendor. If such evidence of fair
value for each element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time that the evidence of fair value does
exist or until all elements of the arrangement are delivered. Revenue allocated
to software products, specified upgrades, and enhancements is generally
recognized upon delivery of the related products, upgrades, and enhancements.
Revenue allocated to postcontract customer support is generally recognized
ratably over the term of the support, and revenue allocated to service elements
is generally recognized as the services are performed. SOP 97-2 was adopted by
the Company effective January 1, 1998 and has not had a material effect on
revenue recognition.
F-29
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company recognizes revenue from software licenses, and the related
hardware and peripherals, upon shipment of the products. Sales of Discreet
products do not require significant production, modification or customization
of software. Installation of the software is routine, requires insignificant
effort and is not essential to the functionality of the system or software. The
Company documents evidence of its arrangements with customers, which include
the condition that the goods are FOB origin. The fees are fixed and are
specified in the arrangements. If collectibility is considered probable,
Discreet recognizes revenue upon delivery (shipment). The Company recognizes
revenue from post contract customer support and other related services ratably,
as the obligations are fulfilled, or when the related services are performed.
Post contract customer support, training, installation, systems integration and
rental services, are performed primarily under separately priced arrangements
under which the Company has recorded revenues of $13,606,000, $14,050,000 and
$8,553,000 for the eleven-month period ended June 30, 1997, the year ended June
30, 1998, and the period from July 1, 1998 to March 16, 1999, respectively.
Revenues from sales to Value Added Resellers (VARs) and distributors are
recognized on the shipment of product to these parties. The Company has
reserves for estimated returns. Actual returns have not differed materially
from these estimates and have not been significant.
(d) Net Income (Loss) per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
The new standard simplifies the computation of earnings per share (EPS) and
increases comparability to international standards. Under SFAS No. 128, primary
EPS is replaced by "Basic" EPS, which excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. "Diluted" EPS, which is computed
similarly to fully diluted EPS, reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. The Company is required to disclose both basic and
diluted EPS.
The following table presents, in thousands (except for EPS amounts) a
reconciliation of Basic EPS to Diluted EPS as required by SFAS No. 128:
<TABLE>
<CAPTION>
Eleven Months Ended Year Ended Period from July 1, 1998 to
June 30, 1997 June 30, 1998 March 16, 1999
------------------- -------------------- -----------------------------
Income Shares EPS Income Shares EPS Loss Shares EPS
------ ------ ----- ------- ------ ----- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common shareholders... $676 27,948 $0.02 $11,044 29,029 $0.38 $ (15,056) 29,843 $ (0.50)
===== ===== ========
Effect of Dilutive
Securities
Impact of exercise of
stock options under
treasury stock
method................ -- 946 -- 1,764 -- --
---- ------ ------- ------ ---------- -------- --------
Diluted EPS
Income available to
common shareholders
and assumed
exercises............. $676 28,894 $0.02 $11,044 30,793 $0.36 $ (15,056) 29,843 $ (0.50)
==== ====== ===== ======= ====== ===== ========== ======== ========
</TABLE>
In accordance with SFAS No. 128, in periods that the Company incurs a net
loss, all outstanding options are excluded from the calculation of diluted EPS.
For the period from July 1, 1998 to March 16, 1999, the Company has excluded
all outstanding options from the calculation of diluted EPS as a result of
being in a loss position. In fiscal 1997 and 1998, 196,132 and 439,141
antidilutive weighted shares, respectively, have been excluded from the
calculation of diluted EPS.
F-30
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(e) Research and Development Expenses
The Company charges to operations research and development costs as incurred
and presents such expenses net of income tax credits from the Canadian federal
and Quebec provincial governments (see Note 7). Software development costs are
considered for capitalization when technological feasibility is established in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. The Company sells software in a market that is subject to rapid
technological change, new product introductions and changing customer needs.
Accordingly, the Company has not capitalized software development costs due to
its inability to estimate the useful life of software under development.
(f) Translation of Foreign Currencies
The accounts of the Company are translated in accordance with SFAS No. 52,
Foreign Currency Translation. The Company's management has elected to present
these consolidated financial statements in U.S. dollars. The financial
statements of the Company and its subsidiaries are translated from their
functional currency into the reporting currency, the U.S. dollar, utilizing the
current rate method. Accordingly, assets and liabilities are translated at
exchange rates in effect at the end of the year, and revenues and expenses are
translated at the weighted average exchange rate during the year. All
cumulative translation gains or losses from the translation into the Company's
reporting currency are included as a component of accumulated other
comprehensive income in the consolidated balance sheets.
Foreign currency transaction gains (losses) included in other income
(expense) in the accompanying consolidated statements of operations were
$(187,843), $1,083,450 and $895,776 for the eleven-month period ended June 30,
1997, the year ended June 30, 1998, and the period from July 1, 1998 to March
16, 1999, respectively.
(g) Concentration of Credit Risk
During fiscal 1998, the Company amended and restated its Maximum Liability
Agreement with a leasing company. The agreement provides that the Company is
continently liable up to a maximum percentage of the remaining principal
payments outstanding related to the purchase of the Company's products by
customers financed by said leasing company. The maximum liability is contingent
on certain factors as defined in the agreement. As at June 30, 1998 and March
16, 1999, the Company had accrued $648,000 and $637,000, respectively, the
maximum amount of the contingent liability as a charge to general and
administrative expenses.
The Company has no other significant off-balance sheet concentration of
credit risk such as foreign exchange contracts, option contracts or other
foreign currency hedging arrangements. The Company maintains the majority of
cash balances with three financial institutions and its accounts receivable
credit risk is not concentrated within any geographic area. There were no
accounts receivable from a single customer which exceeded 10 percent of total
accounts receivable as of June 30, 1998 and March 16, 1999.
(h) Postemployment and Postretirement Benefits
The Company does not provide postemployment and postretirement benefits.
Cash equivalents are carried at cost, which approximates market value. Cash
equivalents are short-term, highly liquid investments with original maturities
of less than three months. Cash equivalents consist of commercial paper and
money market mutual funds at June 30, 1998 and March 16, 1999.
F-31
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(j) Inventory
Inventory consists of hardware purchased for resale and is valued at the
lower of cost (determined on a first-in, first-out basis) or net realizable
value. Demonstration inventory consists of hardware inventory used by the
Company and potential customers for product demonstrations which will be
subsequently sold.
(k) Property and Equipment
The Company provides for depreciation and amortization using the straight-
line and declining-balance methods over the estimated useful lives of the
assets as follows:
<TABLE>
<CAPTION>
Estimated June 30, March 16,
Asset Classification Useful Life 1998 1999
-------------------- -------------------- ------------ ------------
<S> <C> <C> <C>
Computer equipment, video
equipment and
software.................. 2-5 Years $ 19,775,508 $ 22,274,474
Shorter of term of
Leasehold improvements..... lease or useful life 1,735,401 1,785,492
Furniture and fixtures..... 5 Years 2,503,772 2,718,865
------------ ------------
24,014,681 26,778,831
Less--Accumulated
depreciation and
amortization.............. (14,438,552) (18,187,843)
------------ ------------
$ 9,576,129 $ 8,590,988
============ ============
</TABLE>
(l) Other Assets
Other assets include acquired technology, goodwill, and other deferred
charges, and are amortized on a straight-line basis over the estimated useful
lives of the assets, which range from three to five years. The Company
evaluates the realizability and the related periods of amortization of these
assets on a regular basis.
Other assets included the following amounts:
<TABLE>
<CAPTION>
June 30, March 16,
Asset Classification 1998 1999
-------------------- ------------ ------------
<S> <C> <C>
Acquired technology............................. $ 6,938,137 $ 6,938,137
Goodwill........................................ 30,873,542 30,873,542
Other deferred charges.......................... 639,840 861,873
------------ ------------
38,451,519 38,673,552
Less--Accumulated amortization.................. (12,815,734) (20,387,647)
------------ ------------
$ 25,635,785 $ 18,285,905
============ ============
</TABLE>
(m) Legal Costs
The Company accrues legal costs to be incurred when such amounts are
probable and the amounts can be reasonably estimated. Material assumptions used
to estimate the amounts accrued include, primarily, the advice of legal counsel
regarding the nature, length and estimated legal costs of each case. These
liabilities are not discounted to reflect their present values.
F-32
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(n) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 will be effective for the
Company's fiscal year ending June 30, 2002. Management believes that this
statement will not have a significant impact on the Company.
In March 1998, the AICPA issued Statement of Position (SOP) 98-4, which
amends certain provisions of SOP 97-2. The Company believes it is in compliance
with the provisions of SOP 97-2 as amended by SOP 98-4. In December 1998, the
AICPA issued Statement of Position 98-9, which amends certain provisions of SOP
97-2 and extends the deferral of the application of certain passages of SOP 97-
2 provided by SOP 98-4 until the beginning of Discreet's fiscal year 2000.
Discreet is currently evaluating the impact of SOP 98-9 on its financial
statement and related disclosures.
(3) Other Current Assets
Other current assets consist of the following:
<TABLE>
<CAPTION>
June 30, March 16,
1998 1999
---------- ----------
<S> <C> <C>
Prepaid expenses....................................... $2,754,321 $4,099,155
Sales tax receivable................................... 1,147,833 1,765,630
Other receivables...................................... 816,517 637,852
---------- ----------
$4,718,671 $6,502,637
========== ==========
</TABLE>
(4) Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30, March 16,
1998 1999
----------- -----------
<S> <C> <C>
Payroll and payroll related......................... $ 4,180,410 $ 3,713,400
Professional fees................................... 764,869 891,010
Commissions......................................... 2,676,242 1,158,813
Sales tax and VAT payable........................... 1,542,036 177,225
Accrued restructuring expenses...................... 825,000 689,373
Maximum liability accrual........................... 647,667 637,098
Acquisition costs................................... 1,021,305 930,254
Other............................................... 1,175,791 2,706,388
----------- -----------
$12,833,320 $10,903,561
=========== ===========
</TABLE>
(5) Litigation and Related Settlement Expenses
(a) Class action securities litigation
On May 29, 1996, June 13, 1996 and April 29, 1997, certain of the Company's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against the Company and certain of its
officers and directors among others. The three lawsuits were filed in the
Superior Court of the State of
F-33
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
California, the United States District Court, District of Massachusetts and the
United States District Court, Northern District of California, respectively. On
or about November 25, 1997, a settlement of all three shareholder class actions
received final court approval. Under the $10,800,000 settlement, the Company
contributed approximately $7,400,000 from its own funds, with the remainder
provided by insurance.
In the year ended July 31, 1996, the Company had provided a $2,506,000
litigation reserve for legal costs associated with defending the class action
lawsuits. During the eleven-month period ended June 30, 1997, the Company
recorded a provision of $6,500,000 to accrue the additional estimated
settlement costs to be borne by the Company.
In the twelve-month period ended June 30, 1998, the Company reversed
$405,000 of litigation and related settlement expenses in order to adjust
previously estimated legal costs to the actual amount of costs incurred.
The accrued litigation and settlement reserves were $0 and $0 as of June 30,
1998 and March 16, 1999, respectively.
(b) Griffith & Tekushan, Inc.
On June 2, 1998, the Company was named as a defendant in a breach of
warranty action filed in the Supreme Court of the State of New York for the
County of New York entitled Griffith & Tekushan, Inc. v. Discreet Logic, Inc.
(Index No. 602684/98) (the "Action"). The complaint alleges, among other
things, that the Company breached certain warranties arising out of a software
licensing agreement and seeks damages of $1 million. On July 10, 1998, the
Action was removed from state court to the United States District Court for the
Southern District of New York (Case No. 98 Civ. 4909 (BSJ)) (the "Court"). On
July 17, 1998, the Company filed a motion to dismiss the Action in its
entirety. On May 28, 1999, the Court entered an order dismissing the Action
without prejudice based on plaintiff's request for voluntary dismissal. The
Company intends to contest this case vigorously; however, the ultimate outcome
of the case cannot be predicted at this time.
(c) Class Action Litigation
On August 28, 1998, a complaint was filed in the Marin County, California,
Superior Court, entitled Jerry Krim, on Behalf of Himself and All Others
Similarly Situated, v. Discreet Logic Inc., et al., case No. 174792 (the "Krim
Complaint"). The lawsuit names as defendants the Company, the Company's
directors and certain unidentified "John Does." The Krim Complaint alleges that
the defendants breached their fiduciary duties to shareholders in connection
with the proposed merger transaction with Autodesk, Inc. The Krim Complaint
asks the court to enjoin the consummation of the transaction or, alternatively,
seeks to rescind the transaction or an award of unspecified damages from the
defendants in the event the transaction is consummated. The Company believes
the claims asserted in the complaint are without merit and intends to
vigorously contest them.
On September 29, 1998, a second complaint was filed in the Marin County,
California, Superior Court, entitled William Clark, et al. v. Discreet Logic
Inc., et al., case No. 175037 (the "Clark Complaint"). The Clark Complaint is
substantially similar to the Krim Complaint and names as defendants the
Company, certain of the Company's directors and certain unidentified "John
Does." The Clark Complaint alleges that the defendants breached their fiduciary
duties to shareholders in connection with the proposed merger transaction with
Autodesk, Inc. The Clark Complaint asks the court to enjoin the consummation of
the transaction or, alternatively, seeks to rescind the transaction or an award
of unspecified damages from the defendants in the event the transaction is
consummated. The Company believes the claims asserted in the complaint are
without merit and intends to vigorously contest them.
F-34
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On December 2, 1998, the Marin County, California, Superior Court (the
"Court") entered an order consolidating the Clark and Krim actions. On December
11, 1998, the Court entered an order on the Company's October 26, 1998 motions
to dismiss. The order dismissed both the Krim and the Clark Complaints as
against the Company for failing to state a claim against the Company. The
Court's order granted plaintiffs 30-days leave to replead their complaints. On
January 11, 1999, plaintiffs filed a consolidated amended complaint with the
Court (the "Amended Complaint") which asserts the same breach of fiduciary duty
cause of action against the Company, certain of the Company's directors and
certain unidentified "John Does," and seeks the same relief.
On April 9, 1999, the Court entered an order denying the Company's and
certain of the individual defendants' motions to dismiss the Amended Complaint
on the grounds of inconvenient forum and certain of the individual defendants'
motions to dismiss for lack of personal jurisdiction. On April 16, 1999, the
Company filed a demurrer (a motion to dismiss the Amended Complaint) for
failure to state a claim as against the Company. On April 26, 1999, certain of
the individual defendants filed a petition for writ of mandate with the
California Court of Appeal (the "Court of Appeal"), appealing the Court's April
9, 1999 order as to them. On May 26, 1999, the Court of Appeal issued an
Alternative Writ of Mandate, directing the Court, by June 30,
1999, to reverse its April 9, 1999 denial of certain of the individual
defendants' motions to dismiss on personal
F-35
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
jurisdiction grounds or show cause why it has not done so. On June 16, 1999,
the Court entered an Order sustaining the Company's demurrer to the Amended
Complaint, dismissing the Company from the action without leave to amend. On
June 18, 1999, the Court entered an Order reversing the April 9, 1999 Order and
granting certain of the individual defendants' motions to dismiss for lack of
personal jurisdiction.
The Company believes the claims asserted in the Amended Complaint are
without merit and intends to vigorously contest them.
(6) Demand Line of Credit, Leasing and Tax Credit Facilities
In August 1997, the Company amended its revolving demand line of credit and
leasing facility with its bank. The new agreement provides for a revolving
demand line of credit under which it can borrow up to Cdn$7,000,000
(approximately $4,630,000 at March 16, 1999). Advances under the line accrue
interest monthly at the Canadian prime rate (6.75% at March 16, 1999) plus
0.25%. Additionally, the agreement provides for a Cdn$600,000 (approximately
$397,000 at March 16, 1999) demand leasing facility, and a Cdn$600,000
(approximately $397,000 at March 16, 1999) demand research and development tax
credit facility. Advances under these facilities accrue interest monthly at the
Canadian prime rate (6.75% at March 16, 1999) plus 1%. The line and facilities
are secured by essentially all of the Company's North American assets. As
additional security, the Company assigned to the bank its insurance on these
assets. The Company is required to maintain certain financial ratios, including
minimum levels of working capital, debt service coverage and equity to asset
ratios. As of March 16, 1999, there were no amounts outstanding under the
demand leasing and demand research and development tax credit facilities,
however, the amount available to the Company under the line of credit was
reduced by the letter of guarantee discussed below.
During fiscal 1998, the Company's Japanese subsidiary entered into a line of
credit agreement with its bank. Under this agreement, the subsidiary can borrow
up to $3,000,000. Advances under this line accrue interest at the prevailing
overnight rate for the period (approximately 1.695% at March 16, 1999) and are
secured by a letter of guarantee, in the amount of $3,000,000, issued by the
Company in favor of the subsidiary's bank. As of June 30, 1998 and March 16,
1999, the subsidiary had borrowed (Yen)376,824,000 (approximately $2,725,000 at
June 30, 1998) and (Yen)221,468,000 (approximately $1,847,000 at March 16,
1999), respectively.
(7) Canadian Federal and Provincial Income Tax Credits
The Company is entitled to research and development incentives in the form
of income tax credits from the Canadian federal government ("Federal") and from
the Province of Quebec ("Provincial"). Federal income tax credits are received
on qualified Canadian research and development expenditures and equipment
purchases. Provincial income tax credits are received on qualified research and
development salaries in the Province of Quebec. The Federal and Provincial
income tax credits are earned at 20% of qualified research and development
expenditures. Additionally, the Federal credit may be limited to a credit
against income taxes payable.
The Company recorded $696,000, $1,108,000, and $983,000 of income tax
credits as a reduction of research and development expenses for the eleven-
month period ended June 30, 1997, the year ended June 30, 1998, and the period
from July 1, 1998 to March 16, 1999, respectively. These income tax credits
represent credits earned based on qualifying research and development
expenditures. In addition, the Company recorded, $196,000, $374,000 and
$246,000 of income tax credits as a reduction in the carrying value of property
and equipment for the eleven-month period ended June 30, 1997, the year ended
June 30, 1998, and the period from July 1, 1998 to March 16, 1999,
respectively. These income tax credits represent credits earned based on
qualifying property and equipment purchases.
F-36
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Shareholders' Equity
(a) Preferred Shares
The Board of Directors is authorized to issue preferred shares, in one or
more series, and to fix the rights, dividend rates, conversion rights, voting
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, and the number of shares constituting any series or the
designations of such series, without further vote or action by the
shareholders.
(b) Private Placement of Shares to Intel Corporation
On March 4, 1998, Discreet completed a private placement of 645,000 common
shares, no par value per share, for proceeds to the Company of approximately
$13,527,000, net of issuance costs.
Under a separate agreement, the Strategic Development Agreement (the
"Agreement") dated as of March 4, 1998 by and between Discreet and Intel
Corporation ("Intel") provides for the mutual collaboration of Intel and
Discreet regarding the possible development of real-time effects software
designed specifically to run on certain Intel products and to allow the free
flow of certain developmental information between the parties to facilitate
similar development efforts. The nature of the Agreement is preliminary and, as
such, the Agreement does not provide for extensive obligations or liability on
behalf of either party. Under the Agreement, Discreet agrees to provide a
perpetual, non-transferable, non-assignable, non-exclusive, world-wide,
royalty-free license, without the right to sublicense, to internally use, copy
and modify certain Discreet proprietary software and related material solely
for the purposes of performance analysis, optimization and design and sale of
certain Intel products.
Discreet retains sole ownership on all such software, even if such software
is modified by Intel. There are no "purchase rights' under the Agreement. Under
the Agreement, each party will bear its own costs associated with performance
of the agreement, which will generally entail training, travel and related
meeting expenses. Discreet believes that the agreement is not material to
Discreet's operations.
(c) Dividends
The Company has never declared or paid cash dividends and does not
anticipate paying any cash dividends on its capital stock in the foreseeable
future. In the event cash dividends are declared or paid, the Company
anticipates that they would be declared and paid in U.S. dollars. Part 1A of
the Quebec Companies Act prohibits the Company from paying dividends that would
prevent it from discharging its liabilities when due or that would bring the
book value of its assets to an amount less than the sum of its liabilities and
its issued and paid-up share capital account. At March 16, 1999, the Company
could not distribute any dividends.
(9) Stock Option and Stock Purchase Plans
The Company applies the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock issued to Employees, in accounting for its stock-based
compensation plans. During the year ended June 30, 1997, the Company adopted
only the disclosure requirements of Statement of Financial Accounting Standards
No. 123 (SFAS 123), Accounting for Stock-Based Compensation. SFAS 123
establishes financial accounting and reporting standards based on a fair value
concept for stock-based employee compensation plans. This statement requires an
employer that continues to apply the accounting provisions of APB 25 to
disclose pro forma amounts reflecting the difference between compensation
costs, including tax effects, that would have been recognized in the income
statement, if the fair value based method had been used.
F-37
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents pro forma net loss and EPS, had compensation cost
for the Company's stock-based employee compensation plans been determined using
the provisions of SFAS No. 123.
<TABLE>
<CAPTION>
Period from
July 1, 1998
to
1997 1998 March 16, 1999
---------- ------------ --------------
<S> <C> <C> <C>
Net income (loss):
As Reported......................... $ 676,344 $ 11,043,940 $ (15,055,841)
Pro forma........................... $ (982,638) $ 5,983,221 $ (18,241,000)
Basic net income (loss) per share:
As Reported......................... $ 0.02 $ 0.38 $ (0.50)
Pro forma........................... $ (0.04) $ 0.21 $ (0.61)
Diluted net income (loss) per share:
As Reported......................... $ 0.02 $ 0.36 $ (0.50)
Pro forma........................... $ (0.04) $ 0.19 $ (0.61)
</TABLE>
The fair value of each graded vesting option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in fiscal 1997, 1998 and the
period from July 1, 1998 to March 16, 1999: risk free interest rates between
5.0% and 6.3%; expected dividend yields of 0%; expected term after vest date of
approximately 0.4 to 0.5 years; and expected volatility of 100%.
Because the fair value based method of accounting has not been applied to
options granted prior to August 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
(a) Restricted Stock and Stock Option Plan
On June 14, 1994, the Company's Board of Directors approved the
establishment of the 1994 Restricted Stock and Stock Option Plan (the "1994
Plan") for the Company's officers, employees, consultants and directors. Under
the 1994 Plan, the Compensation Committee of the Board of Directors (the
"Compensation Committee") may grant stock options for a maximum of 5,000,000
common shares. Under the terms of the 1994 Plan, the purchase price, which
approximates fair market value, and vesting schedule applicable to each option
grant is determined by the Compensation Committee.
On August 12, 1996, the Company's Board of Directors authorized the
repricing of 106,600 stock options previously granted under the 1994 Plan. The
repricing provided for the exercise price of the 106,600 options to be reduced
to $6.375 per share, representing the fair value per common share on the date
of repricing. Prior to the repricing, such options had exercise prices ranging
from $19.25 to $28.50 per share. In exchange for the repriced options, the
159,900 stock options remaining from these grants were forfeited.
On November 20, 1997, the shareholders approved an amendment to the
Company's 1994 Amended and Restated Restricted Stock and Stock Option Plan to
reserve an additional 2,000,000 shares of common stock for issuance under this
plan.
(b) 1995 Nonemployee Director Stock Option Plan
On March 27, 1995, the Company's Board of Directors adopted, and in April
1995, the shareholders approved, the 1995 Non-Employee Director Stock Option
Plan (the "Director Plan"). Under the Director Plan, the Compensation Committee
may grant options to purchase up to 200,000 common shares to non-employee
directors of the Company. The Director Plan authorizes the grant (a) to each
person who becomes a member of the Board of Directors and who is not an
employee, officer or direct and indirect owner of 5% or more of the
F-38
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common shares of the Company (a "Non-Employee Director"), on the date such
person is first elected to the Board of Directors without further action by the
Compensation Committee, of an option to purchase 20,000 common shares and (b)
to each person receiving an option pursuant to clause (a) who is a Non-Employee
Director on the fifth anniversary of the date such person was first elected to
the Board of Directors, during the term of the Director Plan, of an option to
purchase 15,000 common shares, provided that such person has continuously
served as a Non-Employee Director during such 5-year period. The exercise price
will be the fair market value at the date of grant and the options will expire
10 years from the date of grant. All options vest in three equal annual
installments, with the first vesting on the date of grant. As of March 16,
1999, 60,000 options were granted and outstanding at fair market value under
the Director Plan.
(c) 1995 Employee Stock Purchase Plan
On March 27, 1995, the Company's Board of Directors adopted, and in April
1995, the shareholders approved, the 1995 Employee Stock Purchase Plan, whereby
the Company has reserved and may issue to employees up to an aggregate of
300,000 common shares in semiannual offerings over a ten year period. Common
shares are sold at 85% of fair market value. As of March 16, 1999, 227,563
shares had been issued under the plan.
(d) 1997 Special Limited Non-Employee Director Stock Option Plan
On February 10, 1997, the Company's Board of Directors adopted the 1997
Special Limited Non-Employee Director Stock Option Plan (the "1997 Plan").
Under the 1997 Plan, options to purchase 10,000 of the Company's common shares
were granted to each of two of the Company's non-employee directors at the Fair
Market Value (as defined in the 1997 Plan) of the shares on the date of the
grant, February 10, 1997. The total number of common shares originally
available for grant under the 1997 Plan was 20,000. The options granted
pursuant to the 1997 Plan expire 10 years from the date of grant and vest in
three equal annual installments. As of March 16, 1999, 20,000 options were
granted and outstanding under the 1997 Plan.
(e) Stock Option Activity
The following is a summary of all stock option activity:
<TABLE>
<CAPTION>
Eleven Months ended Year ended Period from July 1, 1998
June 30, 1997 June 30, 1998 to March 16, 1999
-------------------- ------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- --------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Beginning Outstanding... 2,744,646 $7.77 2,505,913 $ 5.64 3,020,570 $ 9.53
Options Granted......... 1,689,638 5.41 901,771 19.03 1,086,000 11.16
Options Exercised....... (321,577) 3.51 (253,163) 4.49 (307,673) 4.05
Options Canceled........ (1,606,794) 9.63 (133,951) 10.31 (372,826) 9.63
---------- --------- -------------
Ending Outstanding...... 2,505,913 5.64 3,020,570 9.53 3,426,071 10.52
---------- --------- -------------
Exercisable............. 389,832 $4.71 469,122 $ 5.10 838,554 $ 8.34
========== ========= =============
Weighted Average Fair
Value of Options
Granted During the
Year................... $3.85 $13.87 $ 6.87
</TABLE>
F-39
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table provides further detail on the options granted during
1997, 1998, and the period from July 1, 1998 to March 16, 1999 in relation to
their respective fair values as calculated above:
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ---------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Exercise price equal to
fair value............. 1,472,238 $5.18 424,198 $16.47 1,086,000 $11.16
Exercise price greater
than fair value........ 147,400 6.48 386,000 24.25 -- --
Exercise price less than
fair value............. 70,000 7.88 91,573 8.94 -- --
--------- ----- ------- ------ --------- ------
1,689,638 $5.41 901,771 $19.03 1,086,000 $11.16
========= ===== ======= ====== ========= ======
</TABLE>
The following table summarizes the options outstanding and exercisable as at
March 16, 1999:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Range of Options Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.05-$2.88............... 168,732 5.54 $ 1.21 168,732 $ 1.21
$4.50-$4.63............... 291,435 7.41 $ 4.50 114,551 $ 4.50
$5.50-$6.03............... 862,750 7.81 $ 5.85 170,000 $ 5.56
$6.38-$8.94............... 385,654 7.35 $ 7.41 193,355 $ 7.09
$11.00-$11.56............. 975,000 9.53 $11.17 -- $ --
$15.75-$24.25............. 742,500 8.45 $21.19 191,916 $20.61
--------- ---- ------ ------- ------
$0.05-$24.25.............. 3,426,071 8.24 $10.52 838,554 $ 8.34
========= ==== ====== ======= ======
</TABLE>
(10) Related Party Transactions
(a) Sales to Related Parties
During fiscal 1998, the Company recorded revenue from system sales made to
Behaviour Entertainment Inc. and Behaviour Studios, Inc., companies controlled
by the Company's Chairman and Chief Executive Officer, in the amounts of
$320,573 and $1,837,077, respectively. At June 30, 1998, approximately $445,000
remained outstanding and is included in other current assets.
In accordance with the Company's policy, these sales were on terms no less
favorable to the Company than provided by the Company to unrelated third
parties.
(b) Purchases from Related Parties
The Company purchased consulting services, in the amount of $64,000 and
$106,244, from BHVR Communications Inc., purchased marketing services in the
amount of $409,000 and $1,383,639 from Behaviour Design Inc. for the period
from July 1, 1998 to March 16, 1999 and the year ended June 30, 1998,
respectively. The Company purchased marketing services in the amount of
$223,090 from Behaviour Entertainment Inc. for the year ended June 30, 1998.
These related parties are companies controlled by the Company's Chairman and
Chief Executive Officer. At March 16, 1999, approximately $208,000 remained
outstanding and is included in accounts payable.
F-40
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company made rental payments in the amount of $1,089,583 and $941,151
to TGR Zone Corporation ("TGR Zone"), a company indirectly owned by Discreet
Logic's Chairman and Chief Executive Officer, for space in its new
headquarters in Montreal for the period from July 1, 1998 to March 16, 1999
and the year end June 30, 1998, respectively. The commitments related to the
lease on this building are disclosed in Note 12.
In accordance with the Company's policy, the purchase of these services was
on terms no less favorable to the Company than could be obtained by the
Company from unrelated third parties.
(11) Income Taxes
The Company applies the provisions of SFAS No. 109, Accounting for Income
Taxes. Under the provisions of SFAS No. 109, the Company recognizes a current
tax liability or asset for current taxes payable or refundable and a deferred
income tax liability or asset for the estimated future tax effects of
temporary differences between the carrying value of assets and liabilities for
financial reporting and their tax basis and carryforwards to the extent they
are realizable.
The components of the deferred income tax assets and the deferred income
tax liabilities are as follows:
<TABLE>
<CAPTION>
June 30, 1998 March 16, 1999
------------- --------------
<S> <C> <C>
Deferred income tax assets--
Foreign tax loss carryforwards.............. $ 5,499,216 $ 5,807,862
Restructuring expenses...................... 278,009 240,916
Initial and secondary public offering
issuance costs............................. 686,776 305,568
Other temporary differences................. 2,005,176 3,437,492
----------- -----------
8,469,177 9,791,838
Less: Valuation allowance................... 7,591,663 9,091,875
----------- -----------
$ 877,514 $ 699,963
=========== ===========
Deferred income tax liabilities--
Difference between book and tax basis of
property and equipment..................... $ 1,250,871 $ 824,452
Federal research and development tax
credits.................................... 330,568 221,561
Other temporary differences................. 647,195 923,014
----------- -----------
$ 2,228,634 $ 1,969,027
=========== ===========
</TABLE>
The Company provides deferred income taxes for research and development tax
credits earned in the current year, which are included in taxable income in
the subsequent year. In accordance with Canadian tax laws, stock issuance
costs are deductible over a five-year period.
The Company has recorded a valuation allowance against certain deferred
income tax assets including the tax benefit of certain foreign net operating
loss carryforwards as the tax benefits do not meet the recognition criteria
set forth in SFAS 109 due to the uncertainty of their realization.
F-41
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents income (loss) before income taxes for the
entities incorporated in the following jurisdictions:
<TABLE>
<CAPTION>
Period from
Eleven Months Year Ended July 1, 1998
Ended June 30, to March 16,
June 30, 1997 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
Canada.......................... $ 6,110,923 $ 19,215,124 $ (9,123,374)
United States................... 1,486,294 19,536,559 (302,431)
United Kingdom.................. (320,982) 3,261,899 (496,872)
European and Other.............. (110,548) (20,115,647) (7,803,330)
----------- ------------ -------------
$ 7,165,687 $ 21,897,935 $ (17,726,007)
=========== ============ =============
The income tax provision (recovery) is composed of the following:
<CAPTION>
Period from
Eleven Months Year Ended July 1, 1998
Ended June 30, to March 16,
June 30, 1997 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
Current--
Federal....................... $ 3,641,996 $ 1,131,398 $ (1,192,323)
Provincial.................... 930,323 248,972 (383,158)
Foreign....................... 1,979,000 5,703,680 (949,874)
----------- ------------ -------------
6,551,319 7,084,050 (2,525,355)
=========== ============ =============
Deferred--
Federal....................... 229,580 2,683,103 (243,021)
Provincial.................... 190,996 394,825 (45,422)
Foreign....................... (482,552) 692,017 143,632
----------- ------------ -------------
(61,976) 3,769,945 (144,811)
----------- ------------ -------------
Total provision
(recovery)............... $ 6,489,343 $ 10,853,995 $ (2,670,166)
=========== ============ =============
</TABLE>
The reconciliation between the Canadian federal statutory income tax rate
and the effective tax rate is as follows:
<TABLE>
<CAPTION>
Period from
Eleven Months July 1, 1998
Ended Year Ended to
June 30, 1997 June 30, 1998 March 16, 1999
------------- ------------- --------------
<S> <C> <C> <C>
Provision (benefit) at the
Canadian federal statutory
rate........................... 38.0% 38.0% (38.0%)
Foreign taxes................... 4.5 2.6 (2.6)
Effect of not benefiting foreign
subsidiaries' tax losses....... 11.9 7.3 6.6
Effect of basis differences not
benefited...................... 47.0 23.7 15.1
Provincial taxes, net of federal
tax abatement.................. 2.7 1.4 1.0
Utilization of net operating
losses not previously
benefited...................... (13.2) (22.1) 0.0
Other items..................... (0.3) (1.3) 2.8
----- ----- -----
Tax provision (recovery)...... 90.6% 49.6% (15.1%)
===== ===== =====
</TABLE>
F-42
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has $15,024,000 of cumulative foreign net operating loss
carryforwards, which may be available to reduce future income tax liabilities
in those jurisdictions. The loss carryforwards will expire beginning June 30,
2001.
These net operating loss carryforwards are subject to review and adjustment
by the respective tax authorities and may be limited in certain cases upon a
significant ownership change of the corporation, as defined.
(12) Commitments and Contingencies
(a) Lease commitments
The Company has operating lease commitments for certain facilities and
equipment, which expire, at various dates, through June 2007. The following
schedule outlines the future minimum rental payments under these leases at
March 16, 1999:
<TABLE>
<S> <C>
Period ended March 16,
2000.......................................................... $ 1,716,714
2001.......................................................... 1,804,279
2002.......................................................... 1,410,133
2003.......................................................... 1,224,607
2004 and thereafter........................................... 5,954,088
-----------
Total minimum lease payments.................................. $12,109,821
===========
</TABLE>
The above commitments include leases for locations, which the Company plans
to close under the restructuring plan (see Note 19).
Rental expenses related to the operating leases were approximately
$1,600,000, $1,985,000 and $1,683,000 for the eleven-month period ended June
30, 1997, the year ended June 30, 1998, and the period from July 1, 1998 to
March 16, 1999, respectively. Included in the minimum lease payment commitment
is approximately Cdn$12,342,935 (approximately $8,163,370 at March 16, 1999)
representing future payment due to a related party from which the Company
leases office space in Montreal.
(b) Letters of Guarantee
The Company has provided letters of guarantee in the amount of $3,000,000 as
of June 30, 1998 and March 16, 1999.
F-43
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Financial Information by Geographic Area
The Company operates in one operating segment primarily digital image
processing solution systems for creating, editing and compositing special
visual effects for film and video, including training and other services
incidental to these products.
Revenues by geographic destination and as a percentage of total revenues are
as follows:
<TABLE>
<CAPTION>
Eleven Months Period from
Ended Year Ended July 1, 1998 to
Geographic Area by Destination June 30, 1997 June 30, 1998 March 16, 1999
------------------------------- ------------- ------------- ---------------
<S> <C> <C> <C>
North America........... $ 43,752,904 $ 70,866,936 $33,177,069
Europe.................. 36,839,458 45,385,523 19,492,697
Pacific Rim............. 15,396,131 26,745,421 11,361,796
Other................... 5,935,438 8,560,248 2,792,910
------------ ------------ -----------
$101,923,931 $151,558,128 $66,824,472
============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Eleven Months Period from
Ended Year Ended July 1, 1998 to
Geographic Area by Destination June 30, 1997 June 30, 1998 March 16, 1999
------------------------------- ------------- ------------- ---------------
<S> <C> <C> <C>
North America........... 42.9% 46.8% 49.6%
Europe.................. 36.1 29.9 29.2
Pacific Rim............. 15.2 17.6 17.0
Other................... 5.8 5.7 4.2
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Revenues are attributed to countries based on the geographic location of
external customers.
Revenues from external customers and long-lived assets for the Company's
Canadian, U.S., U.K., German, French and other operations are as follows:
<TABLE>
<CAPTION>
Canada U.S. U.K. France Germany Other Eliminations Consolidated
----------- ----------- ----------- ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997--
Revenues from
external customers.. $ 5,872,359 $42,135,249 $16,596,218 $10,298,958 $12,388,084 $14,633,063 $ -- $101,923,931
Long-lived assets.... $88,377,863 $ 4,581,953 $ 6,184,521 $ 6,158,373 $ 4,580,216 $45,321,144 $(132,135,797) $ 23,068,273
1998--
Revenues from
external customers.. $10,174,057 $65,461,287 $20,434,970 $14,640,546 $14,132,721 $26,714,547 $ -- $151,558,128
Long-lived assets.... $94,554,066 $25,715,267 $ 5,167,747 $ 3,926,255 $ 4,266,631 $26,361,245 $(120,395,135) $ 39,596,076
1999--
Revenues from
external customers.. $ 3,790,587 $31,091,427 $ 8,313,588 $ 5,755,868 $ 6,511,209 $11,361,793 $ -- $ 66,824,472
Long-lived assets.... $91,284,005 $22,324,068 $ 4,752,430 $ 4,309,270 $ 2,783,792 $16,302,827 $(110,629,079) $ 31,127,313
</TABLE>
F-44
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
"Other" includes the revenues and long-lived assets of the Company's Asian
and less significant European subsidiaries.
Revenues from external customers by product are as follows:
<TABLE>
<CAPTION>
Advanced
Systems Products New Media Products Services Total
---------------- ------------------ ----------- ------------
<S> <C> <C> <C> <C>
1997-- $ 71,054,278 $17,263,203 $13,606,450 $101,923,931
1998-- $124,929,272 $12,578,686 $14,050,170 $151,558,128
1999-- $ 50,818,145 $ 7,452,889 $ 8,553,438 $ 66,824,472
</TABLE>
Export sales from Canada were $4,334,962 and $1,704,944 for the fiscal year
ended June 30, 1998 and the period from July 1, 1998 to March 16, 1999,
respectively.
(14) Dependence on Key Suppliers
The Company is dependent on Silicon Graphics, Inc. to manufacture and supply
a large proportion of the workstations and certain peripherals used in the
Company's systems. The Company purchases electronic tablets manufactured by
Wacom Technology Corporation ("Wacom") and believes that while alternative
suppliers are available, there can be no assurance that alternative electronic
tablets would be functionally equivalent or be available on a timely manner or
on similar terms.
(15) Acquisitions
(a) Denim Software
On June 12, 1997, the Company, through its wholly-owned subsidiary 3380491
Canada Inc. ("Acquisition Sub"), acquired substantially all of the assets and
assumed certain liabilities of Denim Software L.L.C., a Delaware limited
liability company ("Denim"), pursuant to the terms of an Asset Purchase
Agreement dated as of June 12, 1997 among Acquisition Sub, Denim, Sam Khulusi,
Frank Khulusi, Westco Denim Investments Group, Ltd., a California limited
partnership, and Frank Khulusi Family Limited Partnership, a California limited
partnership. The purchased assets consist primarily of Denim software products,
including ILLUMINAIRE Paint, ILLUMINAIRE Composition and ILLUMINAIRE Studio and
related know-how and goodwill.
The aggregate purchase price for these assets was comprised of the
following:
<TABLE>
<S> <C>
Cash consideration............................................... $ 9,126,000
Transaction costs................................................ 850,000
Liabilities assumed.............................................. 2,209,000
-----------
Total purchase price............................................. $12,185,000
===========
</TABLE>
At closing, cash consideration, of approximately $9,126,000 and certain
liabilities, of approximately $655,000, were paid. The cash used by the Company
to fund the acquisition was derived primarily from operations. The transaction
has been accounted for using the purchase method. The Company incurred a one-
time charge of $2,263,000 based on an appraisal, or $0.08 per share, for in-
process research and development that had not yet reached technical feasibility
and had no alternative use, purchased and expensed in the eleven-month period
ended June 30, 1997. The terms of the transaction were the result of arms-
length negotiations between the representatives of Discreet and Denim.
F-45
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Allocation of the aggregate purchase price was as follows:
<TABLE>
<S> <C>
In-process research and development............................. $ 2,263,000
Acquired technology............................................. 1,463,991
Goodwill........................................................ 7,852,000
Fair value of tangible assets acquired.......................... 606,009
-----------
$12,185,000
===========
</TABLE>
(b) D-Vision Systems
On July 15, 1997, the Company acquired all of the outstanding shares of
capital stock of D-Vision Systems, Inc. ("D-Vision"), an Illinois corporation,
pursuant to a Stock Purchase Agreement dated as of July 10, 1997, among the
Company, D-Vision, the former stockholders of D-Vision (the "Selling
Stockholders") and certain other individuals (the "D-Vision Acquisition"). As a
result of the D-Vision Acquisition, the Company acquired the D-Vision OnLINE
and PRO software products for non-linear video and digital media editing
solutions including related know-how and goodwill. The purchase price was paid
in a combination of 555,000 newly issued Discreet Logic common shares and
approximately $10,750,000 in cash. In addition, approximately $4,000,000 of the
cash consideration was 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. In June 1999, the escrow agent
released $1,900,000 of the escrow funds, less $30,000 which had previously been
released to pay legal expenses. 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 and accordingly, the purchase price
and acquisition costs were allocated to the net assets acquired, consisting of
approximately $5,269,000 of in-process research and development and was changed
to operations in the fourth quarter of 1997. Approximately $19,747,000 was
allocated to intangible assets, which includes goodwill and acquired
technology, and is being amortized on a straight-line basis over 3 and 5 years,
respectively. A portion of the purchase price, net liabilities of D-Vision and
transaction costs was allocated to purchased in-process research and
development that had not yet reached technical feasibility and had not
alternative use for which the Company incurred a one-time charge against
earnings in the amount of $5,269,000 ($0.18 per share), 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.
The aggregate purchase price for D-Vision was as follows:
<TABLE>
<S> <C>
Cash consideration............................................... $10,750,000
Common shares issued............................................. 10,649,063
Transaction costs................................................ 1,500,000
Liabilities assumed.............................................. 4,311,000
-----------
Total purchase price........................................... $27,210,063
===========
</TABLE>
Allocation of the aggregate purchase price was as follows:
<TABLE>
<S> <C>
In-process research and development............................. $ 5,269,000
Acquired technology............................................. 3,100,000
Goodwill........................................................ 16,647,807
Fair value of tangible assets acquired.......................... 2,193,256
-----------
$27,210,063
===========
</TABLE>
F-46
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) Lightscape Technologies, Inc.
On December 2, 1997, Discreet entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") with Lantern Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Discreet Logic ("Merger
Sub"), and Lightscape Technologies, Inc., a Delaware corporation
("Lightscape"). On December 30, 1997, pursuant to the Merger Agreement, and
upon the satisfaction of certain closing conditions, Merger Sub merged (the
"Lightscape Merger") with and into Lightscape with Lightscape as the surviving
corporation and a wholly-owned subsidiary of Discreet. As a result of the
Lightscape Merger, Discreet Logic acquired, among other products, the
Lightscape product, a software application which integrates radiosity and
raytracing with physically based lighting, including related know-how and
goodwill. The aggregate purchase price for Lightscape includes the assumption
of approximately $5,700,000 of net liabilities (of which approximately
$3,400,000 was paid at the closing), not including costs associated with the
transaction, and up to $6,800,000 in contingent consideration to be paid only
if certain revenue objectives are achieved by Lightscape in calendar 1999. The
acquisition has been accounted for as a purchase. A portion of the purchase
price and transaction costs was allocated to purchased in-process research and
development that had not yet reached technical feasibility and had no
alternative use for which Discreet Logic incurred a one-time charge against
earnings in the amount of $1,646,000 ($0.06 per share), based on an appraisal,
in the quarter ended December 31, 1997. The terms of the transaction were the
result of arm's-length negotiations between the representatives of Discreet and
Lightscape.
The aggregate purchase price for Lightscape was as follows:
<TABLE>
<S> <C>
Transaction costs............................................... $ 1,200,000
Liabilities assumed............................................. 6,414,332
-----------
Total purchase price.......................................... $ 7,614,332
===========
</TABLE>
Allocation of the aggregate purchase price was as follows:
<TABLE>
<S> <C>
In-process research and development............................. $ 1,646,000
Acquired technology............................................. 990,000
Goodwill........................................................ 4,250,946
Fair value of tangible assets acquired.......................... 727,386
-----------
$ 7,614,332
===========
</TABLE>
(d) Proforma Information
The following presents, on an unaudited basis, certain items of the
Company's result of operations, for the fiscal years ended June 30, 1997 and
1998, as though the acquisitions discussed above had occurred on August 1,
1996:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Revenues...................................... $ 108,151,000 $ 152,277,000
Operating income (loss)....................... $ 4,370,000 $ (3,093,000)
Net loss...................................... $ (633,000) $ (11,888,000)
</TABLE>
F-47
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(16) Gain on Sale of Investment
During the quarter ended April 30, 1996, Discreet recorded a write-down of
its investment in the preferred shares of Essential Communications Corporation
("Essential"), in the amount of $2,500,000 to reflect the uncertainty regarding
the realizability of this investment. Discreet made the investment in Essential
in anticipation of realizing benefits from the networking technology that
Essential was developing. When it became doubtful that Essential would be able
to realize its development efforts, due to financial constraints, and that the
technological benefits may not be achieved on time to meet market demand, the
investment was written down to reflect the other than temporary impairment in
its value.
In May 1998, Essential was sold. As a result of this sale, the Company
received proceeds of $2,500,000 in exchange for its preferred shares. Upon
receipt of the proceeds, the Company realized a gain of approximately
$2,500,000.
(17) Cost of Terminated Agreement with MGI
In the quarter ended June 30, 1998, the Company announced a mutual
termination of its Arrangement Agreement entered into on March 9, 1998 with MGI
Software Corp. ("MGI"). Both the Company and MGI determined that, in light of
current conditions which could result in significant delays in the realization
of previously discussed anticipated benefits and synergies of the merger, it
was in the best interests of both companies to terminate the agreement and
remain independent companies. The Company incurred approximately $1,713,000 of
costs, expensed in the year ended June 30, 1998, related to this terminated
agreement.
(18) Purchase of Land and Facilities
In August 1995, the Company purchased land and an office building in London,
England for approximately (Pounds)1,148,000 (or approximately $1,857,000 at
March 16, 1999). Additionally, in December 1995, the Company purchased land and
a building in Montreal for Cdn$1,730,000 (or approximately $1,250,000 at June
30, 1997). During fiscal 1996, the carrying value of the London and Montreal
buildings were written down to their estimated fair market values and these
buildings were classified as assets held for resale. In September 1997, the
Company sold its Montreal land and office building for a price not materially
different from its carrying value. In May 1999, the Company sold the London
building for net proceeds of (Pounds)2,946,000 (or approximately $4,770,000)
realizing a gain of (Pounds)319,000 (or approximately $516,000).
(19) Restructuring
During the fiscal year ended July 31, 1996, the Company recorded a pre-tax
restructuring charge of $15 million to cover the direct costs of restructuring
the Company's operations and to bring operating expenses in line with the
Company's current revenue level. The focus of the Company's restructuring plan
was to solidify its senior management team, reduce operating expenses through
workforce reductions and office closings, consolidate research and development
activities in Montreal, discontinue certain product lines, and restructure its
sales force to emphasize indirect sales channels. The Company began
implementation of its restructuring plan in the fourth fiscal quarter of 1996
and had substantially completed the implementation of the plan at the end of
fiscal 1997. The major aspects of the restructuring plan and remaining amounts
in accrued liabilities are discussed below.
The restructuring entailed the closing and moving of several offices in
North America and Europe. It also included the termination of approximately 110
positions across all departments and around the world.
F-48
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the restructuring charge are as follows:
<TABLE>
<S> <C>
Asset write down................................................ $ 5,621,000
Lease terminations and leasehold improvements reserve........... 5,169,000
Severance....................................................... 2,800,000
Professional services and other................................. 1,410,000
-----------
$15,000,000
===========
</TABLE>
The primary component of the asset write down is an amount of $2.2 million
for goodwill and acquired technology. The other components of the write down
are primarily fixed assets which have no future use.
In the fourth quarter of fiscal 1998, the Company reversed approximately
$2,333,000 of excess reserves, related primarily to the estimated cost of
terminating leases, no longer considered necessary to complete the
restructuring plan.
The charges against the restructuring reserve include the following amounts:
<TABLE>
<CAPTION>
Period from
Eleven months ended July 1, 1998
June 30, 1997 Year ended June 30, 1998 to March 16, 1999
------------------- -------------------------------- -----------------
Charges Charges Reversed Total Charges
------------------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Asset write down........ $1,056,000 $ 359,000 $ 141,000 $ 500,000 $ --
Lease terminations and
leasehold improvements
reserve................ 1,078,000 366,000 1,947,000 2,313,000 --
Severance............... 1,768,000 205,000 245,000 450,000 --
Professional services
and other.............. 460,000 234,000 -- 234,000 98,000
---------- ---------- ---------- ---------- -------
$4,362,000 $1,164,000 $2,333,000 $3,497,000 $98,000
========== ========== ========== ========== =======
</TABLE>
The following reflects the remaining accrued restructuring expense as of
June 30, 1998 and March 16, 1999, by major component:
<TABLE>
<CAPTION>
June 30, March 16,
1998 1999
-------- ---------
<S> <C> <C>
Asset write down......................................... $ -- $ --
Lease terminations and leasehold improvements reserve.... 350,000 350,000
Severance................................................ -- --
Professional services and other.......................... 425,000 327,000
-------- --------
$775,000 $677,000
======== ========
</TABLE>
During the fourth fiscal quarter of 1998, the Company accrued an additional
$829,000 charge, which is included as a component of the restructuring expense
in 1998, for the closure of its U.K. research and development facility, and the
related termination of 17 employees.
The components of the charge are as follows:
<TABLE>
<S> <C>
Asset write down................................................... $444,000
Severance.......................................................... 198,000
Professional services and other.................................... 187,000
--------
$829,000
========
</TABLE>
F-49
<PAGE>
DISCREET LOGIC INC. AND SUBSIDIARIES (OLD DISCREET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the period from July 1, 1998 to March 16, 1999, approximately $38,000
of professional fees was charged against this restructuring reserve. As of
March 16, 1999, the Company still has approximately $12,000 in restructuring
reserves primarily for estimated cost of professional fees associated with the
winding down of its subsidiary.
(20) Government Assistance
(a) SDI loan
The Company entered into a loan agreement with the Societe de Developpement
Industriel du Quebec dated as of May 7, 1998 whereby an interest free loan was
granted to the Company by the Quebec government in the amount of Cdn$2,800,000
(approximately $1,852,000 at March 16, 1999) in relation with the Lightscape
acquisition. The loan is conditional to the Company meeting certain criteria:
1. During the five-year period following the disbursement of the loan by
the Quebec government, the Company is required to create 200 jobs and
maintain each of these jobs for a five year period after their creation.
2. The loan should not exceed Cdn$2,800,000 or 20% of the costs incurred
by the Company for the Lightscape acquisition.
The loan is payable in four annual installments of Cdn$600,000
(approximately $397,000 at March 16, 1999) commencing in July 2004 and a final
installment of Cdn$400,000 (approximately $265,000 at March 16, 1999) in July
2008. The loan is interest free until July 2004, after which it will bear
interest at the Canadian prime rate (approximately 6.75% at March 16, 1999)
plus 1.5%. In the situation where the criteria mentioned above are not
respected, a portion of the loan may have to be repaid at an earlier date. The
loan was disbursed to the Company in July 1998. The loan has been classified in
the accounts payable as at March 16, 1999.
(b) PACST Subsidy Program
The Company entered into a financial assistance contract with the Quebec
Government dated as of March 27, 1998 under a subsidy program designed to
improve competencies in science and technology. The contract provides that the
Company is eligible to receive up to Cdn$3,012,000 (approximately $1,992,000 at
March 16, 1999) in the form of reimbursement of expenses incurred by the
Company for new employee training (mainly reimbursement of salary). The
Company's job creation estimate provided to the Quebec Government at the time
of signature of the contract was 251 science and technology related jobs to be
created over a three-year period. As of March 16, 1999, an advance of
Cdn$350,000 (approximately $231,000 at March 16, 1999) was received which
covers 40% of the first year estimated subsidy. The program requires the
Company to meet certain criteria in order to earn the subsidies. Since the
criteria have not yet been met by the Company, the advance has been classified
as a liability in accounts payable at March 16, 1999.
F-50
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS ON SCHEDULE
To Discreet Logic Inc.:
We have audited in accordance with generally accepted auditing standards in
Canada, which are in substantial agreement with those in the United States of
America, the consolidated financial statements of Discreet Logic Inc. and
subsidiaries, (See Note 1 to the consolidated financial statements) as at
January 31, 1998 and 1999 and March 31, 1999 and for the years ended January
31, 1997, 1998 and 1999 and the two-month period ended March 16, 1999 included
in this 10-K. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in Item 16 is
the responsibility of the Company's management and is presented for the
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen & Cie
Chartered Accountants
General Partnership
Montreal, Canada
June 23, 1999
S-1
<PAGE>
SCHEDULE II
DISCREET LOGIC, INC.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Effect of Charged to costs and Write Balance at
Description beginning of period amalgamation expenses offs end of period
- ----------- ------------------- ------------ -------------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Two-month period ended
March 31, 1999
Allowance for doubtful
accounts............. $98,595 $3,436,000 $ -- $(50,229) $3,484,366
Restructuring
reserve.............. $ -- $ 689,000 $ -- $ -- $ 689,000
Year ended January 31,
1999
Allowance for doubtful
accounts............. $40,935 $ -- $57,660 $ -- $ 98,595
Year ended January 31,
1998
Allowance for doubtful
accounts............. $36,890 $ -- $ 4,045 $ -- $ 40,935
Year ended January 31,
1997
Allowance for doubtful
accounts............. $11,988 $ -- $24,902 $ -- $ 36,890
</TABLE>
S-2
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS ON SCHEDULE
To Discreet Logic Inc.:
We have audited in accordance with generally accepted auditing standards in
Canada, which are in substantial agreement with those in the United States of
America, the consolidated financial statements of Discreet Logic Inc. and
subsidiaries, at June 30, 1998 and March 16, 1999, and the eleven-month period
ended June 30, 1997, the year ended June 30, 1998, and the period from July 1,
1998 to March 16, 1999, included in this 10-K. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 16 is the responsibility of the Company's
management and is presented for the purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen & Cie
Chartered Accountants
General Partnership
Montreal, Canada
June 23, 1999
S-3
<PAGE>
SCHEDULE II
DISCREET LOGIC INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Addition Charged to Balance at
Beginning of Due to Costs and Write- Translation End of
Description Period Acquisition Expenses offs Adjustments Period
----------- ------------ ----------- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
June 30, 1997.......... 3,649,000 -- -- 48,000 114,000 3,487,000
June 30, 1998.......... 3,487,000 309,000 -- 88,000 54,000 3,654,000
March 16, 1999......... 3,654,000 -- 150,000 326,000 42,000 3,436,000
</TABLE>
<TABLE>
<CAPTION>
Balance at
Beginning of Charged to Costs Charged Against Balance at End of
Period and Expenses Reserve Reserve Reversals Period
------------ ---------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Restructuring Reserve
June 30, 1997.......... 8,634,484 -- 4,361,781 -- 4,272,703
June 30, 1998.......... 4,272,703 829,000 1,943,088 2,333,615 825,000
March 16, 1999......... 825,000 -- 136,000 -- 689,000
</TABLE>
S-4
<PAGE>
EXHIBIT 3.4
DISCREET LOGIC INC.
LOGIQUE DISCRETE INC.
(the "Company")
BY-LAW 1999-1, BEING THE GENERAL BY-LAW
HEAD OFFICE
- -----------
1. The directors may from time to time fix the address of the Head Office of
the Company within the judicial district specified in the Articles of the
Company.
SEAL
- ----
2. The seal, an impression of which is stamped in the margin hereof, shall be
the seal of the Company.
DIRECTORS
- ---------
3. Subject to the Articles of the Company, the business and affairs of the
Company shall be managed by a minimum of (1) and a maximum of fifteen (15)
directors of whom a majority in office from time to time shall form a
quorum. Any change in the number of directors shall require the fixing of
a quorum.
4. Election of directors shall not be by ballot unless such a ballot is
demanded by a shareholder or proxy holder entitled to vote at the meeting
at which directors are elected.
5. Notwithstanding any vacancy, the remaining directors may exercise all the
powers of the Board of Directors as long as a quorum of directors remains
in office. Any vacancy on the Board of Directors may be filled by the
remaining directors, except for a vacancy resulting from an increase in the
number or minimum number of directors or from a failure to elect the number
of minimum number of directors required by the Articles of the Company.
MEETING OF DIRECTORS
- --------------------
6. Directors may meet at any place and no formal notice shall be necessary if
all the directors are present or if those absent signify their consent in
writing to the meeting to the meeting being held in their absence. Notice
of any meeting of directors shall be delivered, mailed, or telegraphed to
each director not less than two (2) days before the meeting is to take
place and shall specify the time and place of such meeting.
<PAGE>
-2-
7. Directors' meetings may be called by any director of the Company.
8. Matters arising at any meeting of directors shall be decided by the
affirmative vote of a majority of the directors and in the case of an
equality of votes, the chairman shall not have a second vote.
9. All by-laws and resolutions of directors shall be enacted or passed at
duly-convened meetings. Alternatively, a resolution in writing signed by
all the directors entitled to vote on that resolution at a meeting of
directors is as valid as if it had been passed at a meeting of directors.
10. A director may, if all the directors of the Company consent, participate
in a meeting of directors by means of such communications facilities as
permit all persons participating in the meeting to communicate with each
other and a director participating in such a meeting by such means is
deemed to be present at that meeting.
11. Where the Company has only one (1) director, that one (1) director
constitutes a meeting.
OFFICERS
- --------
12.1 The directors may designate the offices of the Company, specify their
duties and titles related to such offices and, subject to the provisions
of the Companies Act, delegate to the holders of such officers powers to
manage the business and affairs of the Company.
12.2 The directors shall elect from among themselves a President, and, if they
see fit, a Chairman of meetings and one (1) or more Vice-Presidents of the
Company, and may also appoint all other officers thereof.
12.3 A director may be appointed to any one or more offices of the Company and
two (2) or more offices of the Company may be held by the same person.
12.4 The appointment of all officers shall be at the pleasure of the Board of
Directors.
MEETINGS OF SHAREHOLDERS
- ------------------------
13. Subject to the provisions of the Companies Act, meetings of the
shareholders shall be held at the Head Office of the Company or elsewhere
as the directors may determine. Notice of the time and place of a meeting
of shareholders and the nature of any special business to be transacted
thereat shall be sent to each shareholder entitled to vote at the meeting
to his last known post office address not less that ten (10) days nor more
than twenty-five (25) days
<PAGE>
-3-
before the meeting. Subject to the provisions of the Companies Act,
meetings of shareholders may be held at any time and place without such
notice if all the shareholders of the Company entitled to vote at such
meeting are present thereat, and any business may be transacted at such
meeting.
14. Notice of any meeting or any irregularity in any meeting, or in the notice
thereof, may be waived by any shareholder or the duly-appointed proxy of
any shareholder and, without limiting the generality of the foregoing, any
shareholder or the duly-appointed proxy of any shareholder may consent in
writing to a meeting being held or having being held in his absence
without notice and without a quorum, and such meeting shall be deemed to
be validly and legally constituted as if a quorum were present. A
shareholder and any other person entitled to attend a meeting of
shareholders may, in any manner, waive notice of a meeting of shareholders
and attendance of any such person at a meeting of shareholders and
attendance of any such person at a meeting of shareholders constitutes
such a waiver of notice except where he attends a meeting for the express
purpose of objecting to the transaction of any business on the grounds
that the meeting is not lawfully called.
15. The holders of fifty-one percent (51%) of the shares entitled to vote at a
meeting of shareholders, present in person or by proxy, constitute a
quorum.
16. Voting at a meeting of shareholders shall be by show of hands except where
a poll is demanded by a shareholder or by a proxyholder entitled to vote
at the meeting. Matters arising at any meeting of shareholders shall,
except as otherwise specifically provided by law, the By-laws of the
Company or any Unanimous Shareholders' Agreement, be decided by a
resolution passed by the affirmative vote of fifty-one percent (51%) of
the shares represented at such meeting. In case of an equality of votes,
chairman shall not have a second vote.
17. All resolutions of shareholders shall be passed at duly convened meetings,
Alternatively, except as otherwise specifically provided by law, a
resolution in writing signed by all the shareholders entitled to vote on
that resolution at a meeting of shareholders is as valid as if it had been
passed at a meeting of the shareholders.
18. If the Company has only one (1) shareholder, or only one (1) holder of any
class or series of shares, the one (1) shareholder present in person or by
proxy constitutes a meeting.
SHARES & CERTIFICATES
- ---------------------
19. The directors may from time to time allot shares in the capital stock of
the Company to such person or persons, corporation or corporations and for
such consideration as the directors shall determine by resolution. The
right to
<PAGE>
-4-
transfer or otherwise deal with the shares may be restricted by a
Shareholders' Agreement or a Unanimous Shareholders' Agreement.
20. Every shareholder shall be entitled to a share certificate stating the
number and class of shares held by him as recorded in the records of the
Company.
21. Share certificates shall be in such form as the Board of Directors may
approve and such certificates shall be signed by at least one (1) director
or officer of the Company or otherwise as the Board of Directors may
direct.
LEGAL PROCEEDINGS
- -----------------
22. Any one (1) director or officer of the Company or such other person as the
directors may from time to time appoint is authorized and empowered: to
represent the Company in connection with all Writs of Attachment which may
be served upon the Company; to make any affidavit which may be necessary
in case of oppositions or other judicial proceedings; to make demands of
abandonment or petitions for a winding-up order or in bankruptcy upon or
against any of the debtors of the Company; and to attend and vote at
meetings of creditors and to grant proxies in connection therewith.
FINANCIAL YEAR END
- ------------------
23. The financial year end of the Company shall be determined by the directors
from time to time.
INDEMNIFICATION OF DIRECTORS & OFFICERS
- ---------------------------------------
24. To the extent permitted by law, and without restricting the generality of
Section 25 of this General By-law, the Company shall indemnify any
director or officer of the Company, any former director or officer of the
Company or any person who acts or has acted at the Company's request as a
director or officer of a body corporate of which the Company is or was a
shareholder of creditor, and his heirs and legal representatives, against
all costs, charges and expenses, (including, without limitation, any
amount paid to settle an action or satisfy a judgment) reasonably incurred
by him in respect of any civil, criminal or administrative action or
proceeding to which he is made a party by reason of being or having been a
director or officer of the Company or of such body corporate, if he acted
honestly and in good faith with a view to the best interests of the
Company or such body corporate and in the case of a criminal or
administrative action or proceeding that is enforced by a monetary
penalty, he had reasonable grounds for believing that his conduct was
lawful.
<PAGE>
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25. Without restricting the generality of Section 24 of this General By-law,
The directors of the Company are hereby authorized from time to time to
cause the Company to undertake to and to indemnify and hold harmless any
director or officer of the Company or any other person who has undertaken
or is about to undertake any liability on behalf of the Company or any body
corporate controlled by it and to secure such director, officer or other
person against any loss by encumbering the whole or any part of the
moveable or immoveable property of the Company. Any action taken by the
directors under this Section shall not require the approval of or
confirmation by the shareholders.
UNANIMOUS SHAREHOLDERS' AGREEMENT
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26. The by-laws of the Company shall be subject to the provisions of any
Unanimous Shareholders' Agreement. Whenever the provisions of any By-law
of the Company conflict with or derogate from the provisions of such a
Unanimous Shareholders' Agreement, the provisions of such Agreement shall
prevail.
INTERPRETATION
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27. In every by-law or resolution of the Company, where the context requires or
permits, words connoting any gender shall include corresponding words
connoting any other gender, masculine, feminine or neuter and words
connoting any number shall include corresponding words connoting singular,
composite or plural number.
The foregoing By-law 1999-1 is certified as the General By-law of the
Company, enacted by its directors and as confirmed by the voting
shareholders effective March 16, 1999.
/s/ Marcia K. Sterling
--------------------------------
Marcia K. Sterling
Secretary
<PAGE>
EXHIBIT 9.1
VOTING AND EXCHANGE TRUST AGREEMENT
AGREEMENT made as of the 16th day of March, 1998
BETWEEN:
AUTODESK, INC.,
a corporation subsisting under the laws
of the State of Delaware,
(hereinafter referred to as the "Parent")
--and--
DISCREET LOGIC INC.,
a company subsisting under the laws
of the Province of Quebec,
(hereinafter referred to as the "Corporation")
--and--
AUTODESK DEVELOPMENT B.V.,
a corporation subsisting under the laws
of The Netherlands,
(hereinafter referred to as "Dutchco")
--and--
MONTREAL TRUST COMPANY OF CANADA,
a trust company incorporated under the
laws of Canada,
(hereinafter referred to as the "Trustee").
WHEREAS, pursuant to the Second Amended and Restated Agreement and Plan of
Acquisition and Amalgamation dated as of November 18, 1998, as amended, by and
among Parent, Dutchco, 9066-9771 Quebec Inc. ("Amalgamation Sub"), 9066-9854
Quebec Inc. ("Autodesk Quebec"), Autodesk Canada Inc. and Discreet Logic Inc.
(the "Company") (such agreement being hereinafter referred to as the
"Combination Agreement"), the parties agreed that immediately after the
Effective Time (as such term is defined in the Combination Agreement), Parent,
Dutchco, the Corporation and a Canadian trust company would execute and deliver
a Voting and Exchange Trust Agreement containing the terms and conditions set
forth in Exhibit D to the Combination Agreement together with such other terms
and conditions as may be agreed to by the parties to the Combination Agreement
acting reasonably;
AND WHEREAS, to give effect to the amalgamation contemplated in the
Combination Agreement and the Second Amended and Restated Amalgamation Agreement
dated as of January 18, 1999 among the Company, Autodesk Quebec and Amalgamation
Sub, articles of amalgamation (the "Articles of Amalgamation") were filed
pursuant to the Companies Act (Quebec) whereby the Company, Autodesk Quebec and
Amalgamation Sub were amalgamated to continue as the Corporation (the
"Amalgamation");
<PAGE>
AND WHEREAS, pursuant to the Amalgamation (i) the shareholders of the
Company ("Discreet Shareholders") received one Class B non-voting common share
of the Corporation ("Class B Shares") for each common share of the Company held
by each such shareholder immediately prior to the Amalgamation, (ii) Dutchco, a
wholly-owned subsidiary of Parent, became the registered and beneficial owner of
all of the issued and outstanding Class A Shares of the Corporation, and (iii)
Autodesk Canada Inc., an indirect wholly-owned subsidiary of Parent, became the
registered and beneficial owner of all of the issued and outstanding Class C
Shares of the Corporation;
AND WHEREAS, subsequent to the Amalgamation, the holders of Class B Shares
had the right to elect to retract the Class B Shares received by them upon the
Amalgamation in exchange for exchangeable non-voting shares of the Corporation
(the "Exchangeable Shares") on the basis of 0.33 of one Exchangeable Share for
each Class B Share so retracted;
AND WHEREAS, immediately following the retraction of the Class B Shares by
the holders thereof, the remaining Class B Shares not so retracted were
automatically converted into units each consisting of one Class E Share and one
Class F Share;
AND WHEREAS, the Articles of Amalgamation set forth the rights, privileges,
restrictions and conditions (collectively the "Exchangeable Share Provisions")
attaching to the Exchangeable Shares;
AND WHEREAS, pursuant to the Combination Agreement and the terms and
conditions of the Exchangeable Shares, the Parent is to provide voting rights in
the Parent to each holder (other than the Parent, its subsidiaries and
Affiliates) from time to time of Exchangeable Shares, such voting rights per
Exchangeable Share to be equivalent to the voting rights per Parent Common
Share;
AND WHEREAS, pursuant to the Combination Agreement and the terms and
conditions of the Exchangeable Shares, Dutchco is to grant to and in favour of
the holders (other than the Parent, its subsidiaries and Affiliates) from time
to time of Exchangeable Shares the right, in the circumstances set forth herein,
to require Dutchco to purchase from each such holder all or any part of the
Exchangeable Shares held by the holder;
AND WHEREAS, the parties desire to make appropriate provision and to
establish a procedure whereby voting rights in the Parent shall be exercisable
by holders (other than the Parent, its subsidiaries and Affiliates) from time to
time of Exchangeable Shares by and through the Trustee, which will hold legal
title to one share of Series B Preferred Stock of the Parent to which voting
rights attach for the benefit of such holders, and whereby the right to require
Dutchco to purchase Exchangeable Shares from the holders thereof (other than the
Parent, its subsidiaries and Affiliates) shall be exercisable by such holders
from time to time of Exchangeable Shares by and through the Trustee, which will
hold legal title to such right for the benefit of such holders;
AND WHEREAS, pursuant to the provisions attaching to the Class E Shares and
the Class F Shares of the Corporation, the Corporation has the right to redeem
all of the issued and outstanding Class E Shares and Class F Shares;
AND WHEREAS, pursuant to the provisions attaching to the Class E Shares and
the Class F Shares of the Corporation, Dutchco has, upon notice by the
Corporation of its intent to redeem the Class E Shares and the Class F Shares,
the right to purchase all of the issued and outstanding Class E Shares and Class
F Shares;
AND WHEREAS, the parties desire to make appropriate provision whereby
Dutchco covenants to exercise the Class E Redemption Call Right and the Class F
Redemption Call Right and the Trustee shall be entitled to enforce such covenant
on behalf of the Class E and Class F Shareholders;
AND WHEREAS, these recitals and any statements of fact in this trust
agreement are made by the Parent, Dutchco and the Corporation and not by the
Trustee;
NOW THEREFORE, in consideration of the respective covenants and agreements
provided in this trust agreement and for other good and valuable consideration
(the receipt and sufficiency of which are hereby acknowledged), the parties
agree as follows:
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<PAGE>
ARTICLE 1
Definitions and Interpretation
1.1 Definitions. In this trust agreement, the following terms shall have the
following meanings:
"Affiliate" of any person means any other person directly or indirectly
controlled by, or under common control of, that person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control of"), as applied to any person, means
the possession by another person, directly or indirectly, of the power to direct
or cause the direction of the management and policies of that first mentioned
person, whether through the ownership of voting securities, by contract or
otherwise; provided, however, that any former directors, executive officers or
principal shareholders of Discreet Logic Inc. who may be deemed to be an
affiliate of Parent, after the Effective Date, shall not be considered an
"Affiliate" for purposes of this Agreement.
"Automatic Exchange Rights" means the benefit of the obligation of Dutchco to
effect the automatic exchange of Parent Common Shares for Exchangeable Shares
pursuant to section 5.12 hereof.
"Beneficiaries" means, for the purposes of matters relating to the Voting
Share, the Exchangeable Shares Shareholders and, for the purposes of matters
relating herein to the Covenants, the Class E and F Shareholders.
"Beneficiary Votes" has the meaning ascribed thereto in section 4.2 hereof.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means a day other than a Saturday, Sunday or a day when banks
are not open for business in either or both of San Francisco, California or
Montreal, Quebec.
"Canadian Dollar Equivalent" means in respect of an amount expressed in a
foreign currency (the "Foreign Currency Amount") at any date the product
obtained by multiplying (a) the Foreign Currency Amount by (b) the noon spot
exchange rate on such date for such foreign currency expressed in Canadian
dollars as reported by the Bank of Canada or, in the event such spot exchange
rate is not available, such exchange rate on such date for such foreign currency
expressed in Canadian dollars as may be deemed by the Board of Directors to be
appropriate for such purpose.
"Class B Conversion Time" means the time at which each outstanding Class B
Share shall automatically be converted into a unit consisting of one Class E
Share and one Class F Share as contemplated in section 5.1 of the provisions
attaching to the Class B Shares.
"Class E and F Shareholders" means the registered holders from time to time of
the Class E Shares and the Class F Shares.
"Class E Shares" means the Class E voting common shares in the share capital
of the Corporation.
"Class F Shares" means the Class F non-voting common shares in the share
capital of the Corporation.
"Class E Redemption Right" means the right of the Corporation to redeem the
Class E Shares as contemplated in section 4.1 of the provisions attaching to the
Class E Shares.
"Class F Redemption Right" means the right of the Corporation to redeem the
Class F Shares as contemplated in section 4.1 of the provisions attaching to the
Class F Shares.
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<PAGE>
"Class E Redemption Call Right" means the overriding right of Dutchco
contemplated in section 4.3 of the provisions attached to the Class E Shares
pursuant to which Dutchco is entitled, upon and notwithstanding the proposed
exercise by the Corporation of the Class E Redemption Right, to purchase all but
not less than all of the issued and outstanding Class E Shares from all but not
less than all of the holders of the issued and outstanding Class E Shares.
"Class F Redemption Call Right" means the overriding right of Dutchco
contemplated in section 4.3 of the provisions attached to the Class F Shares
pursuant to which Dutchco is entitled, upon and notwithstanding the proposed
exercise by the Corporation of the Class F Redemption Right, to purchase all but
not less than all of the issued and outstanding Class F Shares from all but not
less than all of the holders of the issued and outstanding Class F Shares.
"Covenants" means the covenants of the Corporation contained in section 7.1
hereof and the covenant of Dutchco contained in section 7.2 hereof.
"Current Market Price" means, in respect of a Parent Common Share on any date,
the Canadian Dollar Equivalent of the average of the closing prices of a Parent
Common Shares on Nasdaq on each of the thirty (30) consecutive trading days
ending not more than three trading days before such date, or, if the Parent
Common Shares are not then quoted on Nasdaq, on such other stock exchange or
automated quotation system on which the Parent Common Shares are listed or
quoted, as the case may be, as may be selected by the Board of Directors for
such purpose; provided, however, that if there is no public distribution or
trading activity of Parent Common Shares during such period then the Current
Market Price of a Parent Common Share shall be determined by the Board of
Directors based upon the advice of such qualified independent financial advisors
as the Board of Directors may deem to be appropriate, and provided further that
any such selection, opinion or determination by the Board of Directors shall be
conclusive and binding.
"Exchange Right" has the meaning ascribed thereto in section 5.1 hereof.
"Exchangeable Shares Shareholders" means the registered holders from time to
time of the Exchangeable Shares other than the Parent, its subsidiaries and
Affiliates.
"Insolvency Event" means the institution by the Corporation of any proceeding
to be adjudicated bankrupt or insolvent or to be dissolved or wound up, or the
consent of the Corporation to the institution of bankruptcy, insolvency,
dissolution or winding up proceedings against it, or the filing of a petition,
answer or consent seeking dissolution or winding up under any bankruptcy,
insolvency or analogous laws, including without limitation the Companies
Creditors' Arrangement Act (Canada) and the Bankruptcy and Insolvency Act
(Canada), and the failure by the Corporation to contest in good faith any such
proceedings commenced in respect of the Corporation within 15 days of becoming
aware thereof, or the consent by the Corporation to the filing of any such
petition or to the appointment of a receiver, or the making by the Corporation
of a general assignment for the benefit of creditors, or the admission in
writing by the Corporation of its inability to pay its debts generally as they
become due, or the Corporation not being permitted, pursuant to solvency
requirements of applicable law, to redeem any Retracted Shares pursuant to
section 6.6 of the Exchangeable Share Provisions.
"Liquidation Call Right" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"Liquidation Event" has the meaning ascribed thereto in section 5.12(b)
hereof.
"Liquidation Event Effective Date" has the meaning ascribed thereto in section
5.12(c) hereof.
"List" has the meaning ascribed thereto in section 4.6 hereof.
"Nasdaq" means the Nasdaq National Market.
"Officer's Certificate" means, with respect to the Parent, Dutchco or the
Corporation, as the case may be, a certificate signed by any one of the Chairman
of the Board, a Vice-Chairman of the Board, the President, any Vice-President or
any other senior officer of the Parent, Dutchco or the Corporation, as the case
may be.
"Parent Consent" has the meaning ascribed thereto in section 4.2 hereof.
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<PAGE>
"Parent Meeting" has the meaning ascribed thereto in section 4.2 hereof.
"Parent Successor" has the meaning ascribed thereto in section 12.1(a) hereof.
"person" includes an individual, partnership, corporation, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator and other legal representative.
"Redemption Call Right" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"Retracted Shares" has the meaning ascribed thereto in section 5.7 hereof.
"Retraction Call Right" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"Support Agreement" means that certain support agreement made as of even date
hereof between the Corporation, Dutchco and the Parent.
"Trust" means the trust created by this Agreement.
"Trust Estate" means the Voting Share, any other securities, the Exchange
Right, the Automatic Exchange Rights, the Covenants and any money or other
property which may be held by the Trustee from time to time pursuant to this
trust agreement.
"Trustee" means Montreal Trust Company of Canada and, subject to the
provisions of Article 11 hereof, includes any successor trustee.
"Voting Rights" means the voting rights attached to the Voting Share.
"Voting Share" means the one share of Series B Preferred Stock of the Parent,
issued by the Parent to and deposited with the Trustee, which entitles the
holder of record to a number of votes at meetings of holders of Parent Common
Shares equal to that number of votes that holders of the Exchangeable Shares
outstanding from time to time other than Exchangeable Shares held by the Parent,
its subsidiaries and Affiliates would be entitled to if such Exchangeable Shares
were exchanged for Parent Common Shares.
1.2 Interpretation Not Affected by Headings, etc. The division of this
Agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this Agreement.
1.3 Number, Gender, etc. Words importing the singular number only shall
include the plural and vice versa. Words importing the use of any gender shall
include all genders.
1.4 Date for any Action. If any date on which any action is required to be
taken under this trust agreement is not a Business Day, such action shall be
required to be taken on the next succeeding Business Day.
ARTICLE 2
Purpose of Agreement
2.1 Establishment of Trust. The purpose of this Agreement is to create the
Trust for the benefit of the Beneficiaries, as herein provided. The Trustee will
hold the Voting Share in order to enable the Trustee to exercise the Voting
Rights and will hold the Exchange Right and the Automatic Exchange Rights and
the other rights with respect to matters relating to the Voting Share granted in
or resulting from the Trustee being a party to this Agreement in order to enable
the Trustee to exercise or enforce such rights, in each case as trustee for and
on behalf of the Exchangeable Shares Shareholders as provided in this Agreement.
The Trustee will hold the Covenants and will hold the other rights with respect
to matters relating to the Covenants granted in or resulting from the Trustee
being a party to this Agreement in order to enable the
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<PAGE>
Trustee to exercise or enforce such rights, in each case as trustee for and on
behalf of the Class E and F Shareholders as provided in this Agreement.
ARTICLE 3
VOTING SHARE
3.1 Issue and Ownership of the Voting Share. The Parent hereby issues to and
deposits with the Trustee the Voting Share to be hereafter held of record by the
Trustee as trustee for and on behalf of, and for the use and benefit of, the
Beneficiaries and in accordance with the provisions of this Agreement. Parent
hereby acknowledges receipt from the Trustee as trustee for and on behalf of the
beneficiaries of good and valuable consideration (and the sufficiency thereof)
for the issuance of the Voting Share by the Parent to the Trustee. During the
term of the Trust and subject to the terms and conditions of this Agreement, the
Trustee shall possess and be vested with full legal ownership of the Voting
Share and shall be entitled to exercise all of the rights and powers of an owner
with respect to the Voting Share, provided that the Trustee shall:
(a) hold the Voting Share and the legal title thereto as trustee solely
for the use and benefit of the Beneficiaries in accordance with the provisions
of this Agreement; and
(b) except as specifically authorized by this Agreement, have no power
or authority to sell, transfer, vote or otherwise deal in or with the Voting
Share and the Voting Share shall not be used or disposed of by the Trustee for
any purpose other than the purposes for which this Trust is created pursuant
to this Agreement.
3.2 Legended Share Certificates. The Corporation will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Beneficiaries of their right to instruct the Trustee with respect to the
exercise of the Beneficiary Votes.
3.3 Safe Keeping of Certificate. The certificate representing the Voting Share
shall at all times be held in safekeeping by the Trustee.
ARTICLE 4
EXERCISE OF VOTING SHARE
4.1 Voting Share. The Trustee, as the holder of record of the Voting Share,
shall be entitled to all of the Voting Rights, including the right to consent to
or to vote the Voting Share in person or by proxy, on any matter, question or
proposition whatsoever that may properly come before the shareholders of the
Parent at a Parent Meeting or in connection with a Parent Consent (in each case,
as hereinafter defined). The Voting Rights shall be and remain vested in and
exercised by the Trustee. Subject to section 8.15 hereof, the Trustee shall
exercise the Voting Rights only:
(a) on the basis of instructions received pursuant to this Article 4
from Beneficiaries entitled to instruct the Trustee as to the voting thereof
at the time at which the Parent Consent is sought or the Parent Meeting is
held; or
(b) to the extent that no instructions are received from a Beneficiary
with respect to the Voting Rights to which such Beneficiary is entitled, the
Trustee shall not exercise or permit the exercise of such Voting Rights.
4.2 Number of Votes. With respect to all meetings of shareholders of the
Parent at which holders of Parent Common Shares are entitled to vote (a "Parent
Meeting") and with respect to all written consents sought by the Parent from its
shareholders including the holders of Parent Common Shares (a "Parent Consent"),
each Beneficiary shall be entitled to instruct the Trustee to cast and exercise,
in the manner instructed, one of the votes comprised in the Voting Rights for
each Exchangeable Share owned of record by such Beneficiary on the record date
established by the Parent or by applicable law for such Parent Meeting or Parent
Consent, as the case may be (the "Beneficiary Votes") in respect of each matter,
question or proposition to be voted on at such Parent Meeting or to be consented
to in connection with such Parent Consent.
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<PAGE>
4.3 Mailings to Shareholders. With respect to each Parent Meeting and Parent
Consent, the Trustee will mail or cause to be mailed (or otherwise communicate
in the same manner as the Parent utilizes in communications to holders of Parent
Common Shares, subject to the Trustee being advised in writing of such method
and its ability to provide this method of communication) to each of the
Beneficiaries named in the List (as hereinafter defined) on the same day as the
initial mailing or notice (or other communication) with respect thereto is given
by the Parent to its shareholders:
(a) a copy of such notice, together with any related materials to be
provided to shareholders of the Parent;
(b) a statement that such Beneficiary is entitled, subject to the
provisions of section 4.7, to instruct the Trustee as to the exercise of the
Beneficiary Votes with respect to such Parent Meeting or Parent Consent, as
the case may be, or, pursuant and subject to section 4.7, to attend such
Parent Meeting and to exercise personally the Beneficiary Votes thereat;
(c) a statement as to the manner in which such instructions may be given
to the Trustee, including an express indication that instructions may be given
to the Trustee to give:
(i) a proxy to such Beneficiary or his designee to exercise
personally such Beneficiary's Beneficiary Votes; or
(ii) a proxy to a designated agent or other representative of the
management of the Parent to exercise such Beneficiary's Beneficiary
Votes;
(d) a statement that if no such instructions are received from the
Beneficiary, the Beneficiary Votes to which such Beneficiary is entitled will
not be exercised;
(e) a form of direction whereby the Beneficiary may so direct and
instruct the Trustee as contemplated herein; and
(f) a statement of the time and date by which such instructions must be
received by the Trustee in order to be binding upon it, which in the case of a
Parent Meeting shall not be earlier than the close of business on the second
Business Day prior to such meeting, and of the method for revoking or amending
such instructions.
The materials referred to above are to be provided by Parent to the Trustee,
but shall be subject to review and comment by the Trustee. For the purpose of
determining the Beneficiary Votes to which a Beneficiary is entitled in respect
of any such Parent Meeting or Parent Consent, the number of Exchangeable Shares
owned of record by the Beneficiary shall be determined at the close of business
on the record date established by the Parent or by applicable law for purposes
of determining shareholders entitled to vote at such Parent Meeting or to give
written consent in connection with such Parent Consent. The Parent will notify
the Trustee in writing of any decision of the Board of Directors of the Parent
with respect to the calling of any such Parent Meeting or the seeking of any
such Parent Consent and shall provide all necessary information and materials to
the Trustee in each case promptly and in any event in sufficient time to enable
the Trustee to perform its obligations contemplated by this section 4.3.
4.4 Copies of Shareholder Information. The Parent will deliver to the
Trustee copies of all proxy materials (including notices of Parent Meetings but
excluding proxies to vote Parent Common Shares), information statements, reports
(including without limitation all interim and annual financial statements) and
other written communications that are to be distributed from time to time to
holders of Parent Common Shares in sufficient quantities and in sufficient time
so as to enable the Trustee to send or cause to be sent those materials to each
Beneficiary at the same time as such materials are first sent to holders of
Parent Common Shares. The Trustee will mail or otherwise send to each
Beneficiary, at the expense of the Parent, copies of all such materials (and all
materials specifically directed to the Beneficiaries or to the Trustee for the
benefit of the Beneficiaries by the Parent) received by the Trustee from the
Parent at the same time as such materials are first sent to holders of Parent
Common Shares. The Trustee will also make available for inspection by any
Beneficiary at the Trustee's principal corporate trust office in the city of
Toronto, Ontario all proxy materials, information statements, reports and other
written communications that are:
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<PAGE>
(a) received by the Trustee as the registered holder of the Voting Share
and made available by the Parent to the holders of Parent Common Shares; or
(b) specifically directed to the Beneficiaries or to the Trustee for the
benefit of the Beneficiaries by the Parent.
4.5 Other Materials. Immediately after receipt by the Parent or any
shareholder of the Parent of any material sent or given generally to the holders
of Parent Common Shares by or on behalf of a third party, including without
limitation dissident proxy and information circulars (and related information
and material) and tender and exchange offer circulars (and related information
and material), the Parent shall use its best efforts to obtain and deliver to
the Trustee copies thereof in sufficient quantities so as to enable the Trustee
to forward such material (unless the same has been provided directly to
Beneficiaries by such third party) to each Beneficiary as soon as possible
thereafter. As soon as possible after receipt thereof, the Trustee will mail or
otherwise send to each Beneficiary, at the expense of the Parent, copies of all
such materials received by the Trustee from the Parent. The Trustee will also
make available for inspection by any Beneficiary at the Trustee's principal
corporate trust office in the city of Toronto, Ontario copies of all such
materials.
4.6 List of Persons Entitled to Vote. The Corporation shall, (a) prior to
each annual, general and special Parent Meeting or the seeking of any Parent
Consent and (b) forthwith upon each request made at any time by the Trustee in
writing, prepare or cause to be prepared a list (a "List") of the names and
addresses of the Beneficiaries arranged in alphabetical order and showing the
number of Exchangeable Shares held of record by each such Beneficiary, in each
case at the close of business on the date specified by the Trustee in such
request or, in the case of a List prepared in connection with a Parent Meeting
or a Parent Consent, at the close of business on the record date established by
the Parent or pursuant to applicable law for determining the holders of Parent
Common Shares entitled to receive notice of and/or to vote at such Parent
Meeting or to give consent in connection with such Parent Consent. Each such
List shall be delivered to the Trustee promptly after receipt by the Corporation
of such request or the record date for such meeting or seeking of consent, as
the case may be, and in any event within sufficient time as to enable the
Trustee to perform its obligations under this Agreement. The Parent agrees to
give the Corporation notice (with a copy to the Trustee) of the calling of any
Parent Meeting or the seeking of any Parent Consent, together with the record
dates therefor, sufficiently prior to the date of the calling of such meeting or
seeking of such consent so as to enable the Corporation to perform its
obligations under this section 4.6.
4.7 Entitlement to Direct Votes. Any Beneficiary named in a List prepared in
connection with any Parent Meeting or any Parent Consent will be entitled (a) to
instruct the Trustee in the manner described in section 4.3 with respect to the
exercise of the Beneficiary Votes to which such Beneficiary is entitled or (b)
to attend such meeting and personally to exercise thereat (or to exercise with
respect to any written consent), as the proxy of the Trustee, the Beneficiary
Votes to which such Beneficiary is entitled.
4.8 Voting by Trustee, and Attendance of Trustee Representative, at Parent
Meetings.
(a) In connection with each Parent Meeting and Parent Consent, the
Trustee shall exercise, either in person or by proxy, in accordance with the
instructions received from a Beneficiary pursuant to section 4.3, the
Beneficiary Votes as to which such Beneficiary is entitled to direct the vote
(or any lesser number thereof as may be set forth in the instructions);
provided, however, that such written instructions are received by the Trustee
from the Beneficiary prior to the time and date fixed by it for receipt of
such instructions in the notice given by the Trustee to the Beneficiary
pursuant to section 4.3.
(b) The Trustee shall cause such representatives as are empowered by it
to sign and deliver, on behalf of the Trustee, proxies for Voting Rights to
attend each Parent Meeting. Upon submission by a Beneficiary (or its designee)
of identification satisfactory to the Trustee's representatives, and at the
Beneficiary's request, such representatives shall sign and deliver to such
Beneficiary (or its designee) a proxy to exercise personally the Beneficiary
Votes as to which such Beneficiary is otherwise entitled hereunder to direct
the vote, if such Beneficiary either (i) has not previously given the Trustee
instructions pursuant to section 4.3 in respect of such meeting, or (ii)
submits to the Trustee's representatives written revocation of any such
previous instructions. At such meeting, the Beneficiary exercising such
Beneficiary Votes shall have the same rights as the Trustee to speak at the
meeting in respect of any matter, question or proposition, to vote by way of
ballot at the meeting in respect of any matter, question or proposition and to
vote at such meeting by way of a show of hands in respect of any matter,
question or proposition.
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<PAGE>
4.9 Distribution of Written Materials. Any written materials to be
distributed by the Trustee to Beneficiaries pursuant to this Agreement shall be
delivered or sent by mail (or otherwise communicated in the same manner as the
Parent utilizes in communications to holders of Parent Common Shares, subject to
the Trustee being advised in writing of such method and its ability to provide
this method of communication) to each Beneficiary at its address as shown on the
books of the Corporation. The Corporation shall provide or cause to be provided
to the Trustee for this purpose, on a timely basis and without charge or other
expense:
(a) current lists of the Beneficiaries and the registered holders of
Exchangeable Shares; and
(b) upon the request of the Trustee, mailing labels to enable the Trustee
to carry out its duties under this Agreement.
4.10 Termination of Voting Rights. All of the rights of a Beneficiary with
respect to the Beneficiary Votes exercisable in respect of the Exchangeable
Shares held by such Beneficiary, including the right to instruct the Trustee as
to the voting of or to vote personally such Beneficiary Votes, shall be deemed
to be surrendered by the Beneficiary to the Parent and such Beneficiary Votes
and the Voting Rights represented thereby shall cease immediately upon the
delivery by such holder to the Trustee of the certificates representing such
Exchangeable Shares in connection with the exercise by the Beneficiary of the
Exchange Right or the occurrence of the automatic exchange of Exchangeable
Shares for Parent Common Shares, as specified in Article 5 hereof (unless in
either case (a) Dutchco shall not have delivered the requisite Parent Common
Shares issuable in exchange therefor to the Trustee for delivery to the
Beneficiaries or (b) such exchange of Exchangeable Shares for Parent Common
Shares occurs after the close of business on the record date for a Parent
Meeting or the seeking of a Parent Consent but prior to such Parent Meeting or
the effective date of such Parent Consent), or upon the retraction or redemption
of Exchangeable Shares pursuant to Article 6 or Article 7 of the Exchangeable
Share Provisions, respectively, or upon the effective date of the liquidation,
dissolution or winding-up of the Corporation pursuant to Article 5 of the
Exchangeable Share Provisions, or upon the purchase of Exchangeable Shares from
the holder thereof by Dutchco pursuant to the exercise by Dutchco of the
Retraction Call Right, the Redemption Call Right or the Liquidation Call Right
(unless Dutchco shall not have delivered the requisite Parent Common Shares and
cheque, if any, deliverable in exchange thereof to the Trustee for delivery to
the Beneficiaries and such redemption, retraction or purchase occurs after the
close of business on the record date for a Parent Meeting or the seeking of a
Parent Consent but prior to such Parent Meeting or the effective date of such
Parent Consent).
ARTICLE 5
EXCHANGE RIGHT AND AUTOMATIC EXCHANGE
5.1 Grant and Ownership of the Exchange Right. Dutchco hereby grants to the
Trustee as trustee for and on behalf of, and for the use and benefit of, the
Beneficiaries the right (the "Exchange Right"), upon the occurrence and during
the continuance of an Insolvency Event, to require Dutchco to purchase from each
or any Beneficiary all or any part of the Exchangeable Shares held by the
Beneficiary and the Automatic Exchange Rights, all in accordance with the
provisions of this Agreement. Dutchco hereby acknowledges receipt from the
Trustee as trustee for and on behalf of the Beneficiaries of good and valuable
consideration (and the sufficiency thereof) for the grant of the Exchange Right
and the Automatic Exchange Right by Dutchco to the Trustee. During the term of
the Trust and subject to the terms and conditions of this Agreement, the Trustee
shall possess and be vested with full legal ownership of the Exchange Right and
the Automatic Exchange Rights and shall be entitled to exercise all of the
rights and powers of an owner with respect to the Exchange Right and the
Automatic Exchange Rights, provided that the Trustee shall:
(a) hold the Exchange Right and the Automatic Exchange Rights and the
legal title thereto as trustee solely for the use and benefit of the
Beneficiaries in accordance with the provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, have no power
or authority to exercise or otherwise deal in or with the Exchange Right or
the Automatic Exchange Rights, and the Trustee shall not exercise any such
rights for any purpose other than the purposes for which this Trust is created
pursuant to this Agreement.
5.2 Legended Share Certificates. The Corporation will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Beneficiaries of:
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(a) their right to instruct the Trustee with respect to the exercise of
the Exchange Right in respect of the Exchangeable Shares held by a
Beneficiary; and
(b) the Automatic Exchange Rights.
5.3 General Exercise of Exchange Right. The Exchange Right shall be and
remain vested in and exercised by the Trustee. Subject to section 8.15, the
Trustee shall exercise the Exchange Right only:
(a) on the basis of instructions received pursuant to this Article 5 from
Beneficiaries entitled to instruct the Trustee as to the exercise thereof; or
(b) to the extent that no instructions are received from a Beneficiary
with respect to the Exchange Right, the Trustee shall not exercise or permit
the exercise of the Exchange Right.
5.4 Purchase Price. The purchase price payable by Dutchco for each
Exchangeable Share to be purchased by Dutchco under the Exchange Right shall be
an amount per share equal to (a) the Current Market Price of a Parent Common
Share on the last Business Day prior to the day of closing of the purchase and
sale of such Exchangeable Share under the Exchange Right plus (b) an additional
amount equivalent to the full amount of all dividends declared and unpaid on
each such Exchangeable Share and all dividends declared on Parent Common Shares
which have not been declared on such Exchangeable Shares in accordance with
section 3.1 of the Exchangeable Share Provisions (provided that if the record
date for any such declared and unpaid dividends occurs on or after the day of
closing of such purchase and sale the purchase price shall not include such
additional amount equivalent to such declared and unpaid dividends). In
connection with each exercise of the Exchange Right, Dutchco will provide to the
Trustee an Officer's Certificate setting forth the calculation of the purchase
price for each Exchangeable Share. The purchase price for each such Exchangeable
Share so purchased may be satisfied only by Dutchco delivering or causing to be
delivered to the Trustee, on behalf of the relevant Beneficiary, one Parent
Common Share and a cheque for the balance, if any, of the purchase price.
5.5 Exercise Instructions. Subject to the terms and conditions herein set
forth, a Beneficiary shall be entitled, upon the occurrence and during the
continuance of an Insolvency Event, to instruct the Trustee to exercise the
Exchange Right with respect to all or any part of the Exchangeable Shares
registered in the name of such Beneficiary on the books of the Corporation. To
cause the exercise of the Exchange Right by the Trustee, the Beneficiary shall
deliver to the Trustee, in person or by certified or registered mail, at its
principal corporate trust office in Toronto, Ontario or Montreal, Quebec or at
such other places in Canada as the Trustee may from time to time designate by
written notice to the Beneficiaries, the certificates representing the
Exchangeable Shares which such Beneficiary desires Dutchco to purchase, duly
endorsed in blank, and accompanied by such other documents and instruments as
may be required to effect a transfer of Exchangeable Shares under the Companies
Act (Quebec) and the by-laws of the Corporation and such additional documents
and instruments as the Trustee or Dutchco may reasonably require together with
(a) a duly completed form of notice of exercise of the Exchange Right, contained
on the reverse of or attached to the Exchangeable Share certificates, stating
(i) that the Beneficiary thereby instructs the Trustee to exercise the Exchange
Right so as to require Dutchco to purchase from the Beneficiary the number of
Exchangeable Shares specified therein, (ii) that such Beneficiary has good title
to and owns all such Exchangeable Shares to be acquired by Dutchco free and
clear of all liens, claims and encumbrances, (iii) the names in which the
certificates representing the Parent Common Shares deliverable in connection
with the exercise of the Exchange Right are to be issued and (iv) the names and
addresses of the persons to whom such new certificates should be delivered and
(b) payment (or evidence satisfactory to the Trustee, the Corporation and
Dutchco of payment) of the taxes (if any) payable as contemplated by section 5.8
of this Agreement. If only a part of the Exchangeable Shares represented by any
certificate or certificates delivered to the Trustee are to be purchased by
Dutchco under the Exchange Right, a new certificate for the balance of such
Exchangeable Shares shall be issued to the holder at the expense of the
Corporation.
5.6 Delivery of Parent Common Shares; Effect of Exercise. Promptly after
receipt of the certificates representing the Exchangeable Shares which the
Beneficiary desires Dutchco to purchase under the Exchange Right together with
such documents and instruments of transfer and a duly completed form of notice
of exercise of the Exchange Right (and payment of taxes, if any, or evidence
thereof), duly endorsed for transfer to Dutchco, the Trustee shall notify the
Parent, Dutchco and the Corporation of its receipt of the same, which notice to
the Parent, Dutchco and the Corporation shall constitute exercise of the
Exchange Right by the Trustee on behalf of the holder of such Exchangeable
Shares, and
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Dutchco shall immediately thereafter deliver or cause to be delivered to the
Trustee, for delivery to the Beneficiary of such Exchangeable Shares (or to such
other persons, if any, properly designated by such Beneficiary), the
certificates for the number of Parent Common Shares deliverable in connection
with the exercise of the Exchange Right, which shares shall be duly issued as
fully paid and non-assessable and shall be free and clear of any lien, claim or
encumbrance, and cheques for the balance, if any, of the total purchase price
therefor. Immediately upon the giving of notice by the Trustee to the Parent,
Dutchco and the Corporation of the exercise of the Exchange Right, as provided
in this section 5.6, the closing of the transaction of purchase and sale
contemplated by the Exchange Right shall be deemed to have occurred, and the
Beneficiary of such Exchangeable Shares shall be deemed to have transferred to
Dutchco all of its right, title and interest in and to such Exchangeable Shares
and in the related interest in the Trust Estate and shall cease to be a holder
of such Exchangeable Shares and shall not be entitled to exercise any of the
rights of a holder in respect thereof, other than the right to receive such
Beneficiary's proportionate part of the total purchase price therefor, unless
the requisite number of Parent Common Shares (together with a cheque for the
balance, if any, of the total purchase price therefor) is not allotted, issued
and delivered by Dutchco to the Trustee, for delivery to such Beneficiary (or to
such other persons, if any, properly designated by such Beneficiary), within
five Business Days of the date of the giving of such notice by the Trustee, in
which case the rights of the Beneficiary shall remain unaffected until such
Parent Common Shares are so allotted, issued and delivered by Dutchco and any
such cheque is so delivered and paid. Concurrently with such Beneficiary ceasing
to be a holder of Exchangeable Shares, the Beneficiary shall be considered and
deemed for all purposes to be the holder of the Parent Common Shares to be
delivered to it pursuant to the Exchange Right.
5.7 Exercise of Exchange Right Subsequent to Retraction. In the event that a
Beneficiary has exercised its right under Article 6 of the Exchangeable Share
Provisions to require the Corporation to redeem any or all of the Exchangeable
Shares held by the Beneficiary (the "Retracted Shares") and is notified by the
Corporation pursuant to section 6.6 of the Exchangeable Share Provisions that
the Corporation will not be permitted as a result of solvency requirements of
applicable law to redeem all such Retracted Shares, and provided that Dutchco
shall not have exercised the Retraction Call Right with respect to the Retracted
Shares and that the Beneficiary has not revoked the retraction request delivered
by the Beneficiary to the Corporation pursuant to section 6.7 of the
Exchangeable Share Provisions, the retraction request will constitute and will
be deemed to constitute notice from the Beneficiary to the Trustee instructing
the Trustee to exercise the Exchange Right with respect to those Retracted
Shares which the Corporation is unable to redeem. In any such event, the
Corporation hereby agrees with the Trustee and in favour of the Beneficiary
immediately to notify the Trustee of such prohibition against the Corporation
redeeming all of the Retracted Shares and immediately to forward or cause to be
forwarded to the Trustee all relevant materials delivered by the Beneficiary to
the Corporation or to the transfer agent of the Exchangeable Shares (including
without limitation a copy of the retraction request delivered pursuant to
section 6.1 of the Exchangeable Share Provisions) in connection with such
proposed redemption of the Retracted Shares and the Trustee will thereupon
exercise the Exchange Right with respect to the Retracted Shares that the
Corporation is not permitted to redeem and will require the Parent to purchase
such shares in accordance with the provisions of this Article 5.
5.8 Stamp or Other Transfer Taxes. Upon any sale of Exchangeable Shares to
Dutchco pursuant to the Exchange Right or the Automatic Exchange Rights, the
share certificate or certificates representing the Parent Common Shares to be
delivered in connection with the payment of the total purchase price therefor
shall be issued in the name of the Beneficiary of the Exchangeable Shares so
sold or in such names as such Beneficiary may otherwise direct in writing
without charge to the holder of the Exchangeable Shares so sold; provided,
however, that such Beneficiary (a) shall pay (and neither the Parent, Dutchco,
the Corporation nor the Trustee shall be required to pay) any documentary,
stamp, transfer or other taxes that may be payable in respect of any transfer
involved in the issuance or delivery of such shares to a person other than such
Beneficiary or (b) shall have established to the satisfaction of the Trustee,
the Parent, Dutchco and the Corporation that such taxes, if any, have been paid.
5.9 Notice of Insolvency Event. Immediately upon the occurrence of an
Insolvency Event or any event which with the giving of notice or the passage of
time or both would be an Insolvency Event, the Corporation, Dutchco and/or the
Parent, as the case may be, shall give written notice thereof to the Trustee. As
soon as practicable after receiving notice from the Corporation, Dutchco and/or
the Parent, as the case may be, or from any other person of the occurrence of an
Insolvency Event, the Trustee will mail to each Beneficiary, at the expense of
Dutchco and/or the Parent, a notice of such Insolvency Event, which notice shall
contain a brief statement of the right of the Beneficiaries with respect to the
Exchange Right.
5.10 Qualification of Parent Common Shares in the United States. The Parent
represents and warrants that it has taken all actions and done all things as are
necessary or desirable to cause the Parent Common Shares (and that it will take
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all actions and do all things as are necessary or desirable to cause such shares
or securities into which Parent Common Shares may be reclassified or changed) to
be issued and delivered pursuant to the Exchangeable Share Provisions, Exchange
Right or the Automatic Exchange Rights to be freely tradeable thereafter in the
United States (other than any restrictions on transfers by reason of a holder
being an "affiliate" of the Parent or, prior to the Effective Date, for purposes
of United States federal or state securities law). The Parent will in good faith
expeditiously take all such actions and do all such things as are necessary or
desirable to cause all Parent Common Shares to be delivered pursuant to the
Exchangeable Share Provisions, Exchange Right or the Automatic Exchange Rights
to be listed, quoted or posted for trading on all stock exchanges and quotation
systems on which outstanding Parent Common Shares are listed, quoted or posted
for trading at such time.
5.11 Reservation of Parent Common Shares. The Parent hereby represents,
warrants and covenants that it has irrevocably reserved for issuance and will at
all times keep available, free from pre-emptive and other rights, out of its
authorized and unissued capital stock such number of Parent Common Shares (a) as
is equal to the sum of (i) the number of Exchangeable Shares issued and
outstanding from time to time and (ii) the number of Exchangeable Shares
issuable upon the exercise of all rights to acquire Exchangeable Shares
outstanding from time to time and (b) as are now and may hereafter be required
to enable and permit the Corporation and Dutchco to meet their respective
obligations hereunder, under the Support Agreement, under the Exchangeable Share
Provisions and under any other security or commitment pursuant to which the
Parent may now or hereafter be required to issue Parent Common Shares.
5.12 Automatic Exchange on Liquidation of the Parent.
(a) The Parent will give the Trustee notice of each of the following events at
the time set forth below:
(i) in the event of any determination by the Board of Directors of
the Parent to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to the Parent or to effect any other distribution of
assets of the Parent among its shareholders for the purpose of winding up its
affairs, at least 60 days prior to the proposed effective date of such
liquidation, dissolution, winding-up or other distribution; and
(ii) immediately, upon the earlier of (A) receipt by the Parent of
notice of and (B) the Parent otherwise becoming aware of any threatened or
instituted claim, suit, petition or other proceedings with respect to the
involuntary liquidation, dissolution or winding-up of the Parent or to effect
any other distribution of assets of the Parent among its shareholders for the
purpose of winding up its affairs.
(b) Immediately following receipt by the Trustee from the Parent of notice of
any event (a "Liquidation Event") contemplated by section 5.12(a)(i) or
5.12(a)(ii) above, the Trustee will give notice thereof to the Beneficiaries.
Such notice shall include a brief description of the automatic exchange of
Exchangeable Shares for Parent Common Shares provided for in section 5.12(c).
(c) In order that the Beneficiaries will be able to participate on a pro rata
basis with the holders of Parent Common Shares in the distribution of assets of
the Parent in connection with a Liquidation Event, on the fifth Business Day
prior to the effective date (the "Liquidation Event Effective Date") of a
Liquidation Event all of the then outstanding Exchangeable Shares held by
Beneficiaries shall be automatically exchanged for Parent Common Shares. To
effect such automatic exchange, Dutchco shall purchase each Exchangeable Share
outstanding on the fifth Business Day prior to the Liquidation Event Effective
Date and held by Beneficiaries, and each Beneficiary shall sell the Exchangeable
Shares held by it at such time, for a purchase price per share equal to (a) the
Current Market Price of a Parent Common Share on the fifth Business Day prior to
the Liquidation Event Effective Date, which shall be satisfied in full by
Dutchco delivering or causing to be delivered to the Beneficiary one Parent
Common Share, plus (b) an additional amount equivalent to the full amount of all
dividends declared and unpaid on each such Exchangeable Share and all dividends
declared on Parent Common Shares which have not been declared on such
Exchangeable Shares in accordance with section 3.1 of the Exchangeable Share
Provisions (provided that if the record date for any such declared and unpaid
dividends occurs on or after the day of closing of such purchase and sale the
purchase price shall not include such additional amount equivalent to such
declared and unpaid dividends). In connection with such automatic exchange, the
Parent will provide to the Trustee an Officer's Certificate setting forth the
calculation of the purchase price for each Exchangeable Share.
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(d) On the fifth Business Day prior to the Liquidation Event Effective Date,
the closing of the transaction of purchase and sale contemplated by the
automatic exchange of Exchangeable Shares for Parent Common Shares shall be
deemed to have occurred, and each Beneficiary shall be deemed to have
transferred to Dutchco all of the Beneficiary's right, title and interest in and
to its Exchangeable Shares and the related interest in the Trust Estate and
shall cease to be a holder of such Exchangeable Shares and Dutchco shall deliver
or cause to be delivered to the Beneficiary the Parent Common Shares deliverable
upon the automatic exchange of Exchangeable Shares for Parent Common Shares and
shall deliver to the Trustee for delivery to the Beneficiary a cheque for the
balance, if any, of the total purchase price for such Exchangeable Shares.
Concurrently with such Beneficiary ceasing to be a holder of Exchangeable
Shares, the Beneficiary shall be considered and deemed for all purposes to be
the holder of the Parent Common Shares issued to it pursuant to the automatic
exchange of Exchangeable Shares for Parent Common Shares and the certificates
held by the Beneficiary previously representing the Exchangeable Shares
exchanged by the Beneficiary with Dutchco pursuant to such automatic exchange
shall thereafter be deemed to represent the Parent Common Shares delivered to
the Beneficiary by Dutchco pursuant to such automatic exchange. Upon the request
of a Beneficiary and the surrender by the Beneficiary of Exchangeable Share
certificates deemed to represent Parent Common Shares, duly endorsed in blank
and accompanied by such instruments of transfer as Dutchco may reasonably
require, Dutchco shall deliver or cause to be delivered to the Beneficiary
certificates representing the Parent Common Shares of which the Beneficiary is
the holder.
5.13 Withholding Rights. Parent, Dutchco and the Trustee shall be entitled to
deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of Exchangeable Shares such amounts as Parent, Dutchco
or the Trustee is required to deduct and withhold with respect to the making of
such payment under the United States Internal Revenue Code of 1986, as amended,
the Income Tax Act (Canada) or any provision of state, local, provincial or
foreign tax law. To the extent that amounts are so withheld, such withheld
amounts shall be treated for all purposes of this Agreement as having been paid
to the holder of the shares in respect of which such deduction and withholding
was made, provided that such withheld amounts are actually remitted to the
appropriate taxing authority. To the extent that the amount so required to be
deducted or withheld from any payment to a holder exceeds the cash portion of
the consideration otherwise payable to the holder, the Parent, Dutchco and the
Trustee are hereby authorized to sell or otherwise dispose of at fair market
value such portion of such consideration as is necessary to provide sufficient
funds to the Parent, Dutchco or the Trustee, as the case may be, in order to
enable it to comply with such deduction or withholding requirement and the
Parent or the Trustee shall give an accounting to the holder with respect
thereto and any balance of such sale proceeds.
ARTICLE 6
Restrictions on Issue of Parent Special Voting Stock
6.1 Issue of Additional Shares. During the term of this Agreement, the Parent
will not create, issue or allot (or make any agreement to so do) any other
shares of Series B Preferred Stock of the Parent in addition to the Voting
Share.
ARTICLE 7
Covenants
7.1 Corporation Covenant. Immediately following the Class B Conversion Time,
the Corporation will give notice to Dutchco of its intention to exercise the
Class E Redemption Right and the Class F Redemption Right as provided in the
share provisions for the Class E Shares and the Class F Shares and this
Agreement shall constitute good and valid notice by the Corporation to Dutchco
of its intention to exercise such redemptions.
7.2 Dutchco Covenant. Immediately upon the Corporation providing notice to
Dutchco of its intention to exercise the Class E Redemption Right and the Class
F Redemption Right as contemplated in section 7.1 hereof, Dutchco will exercise
the Class E Redemption Call Right and the Class F Redemption Call Right and this
Agreement shall constitute good and valid notice by Dutchco to the Corporation
of its exercise of both the Class E Redemption Call Right and the Class F
Redemption Call Right.
7.3 Trust. The Corporation makes the covenant contained in section 7.1
hereof, and Dutchco makes the covenant contained in section 7.2 hereof, to and
in favour of the Trustee for the benefit of the Class E and F Shareholders and
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acknowledges that the Trustee shall hold the Covenants as trustee for and on
behalf of the Class E and F Shareholders and in accordance with the provisions
of this Agreement. Each of the Corporation and Dutchco hereby acknowledges
receipt from the Trustee as trustee for and on behalf of such Class E and F
Shareholders of good and valuable consideration (and the sufficiency thereof)
for the making of such covenants to the Trustee. Until such time as all Class E
Shares and Class F Shares held by holders other than Parent, its subsidiaries
and the Affiliates have been redeemed and subject to the terms and conditions of
this Agreement, the Trustee shall possess and be entitled to exercise all of the
rights and powers of an owner of the Class E Shares and Class F Shares, provided
that the Trustee shall:
(a) hold the rights associated with the Covenants as trustee solely for
the use and benefit of the Class E and F Shareholders in accordance with the
provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, have no power or
authority to deal in or with the Covenants or the Class E Shares and the Class
F Shares for any purpose other than the purposes for which this Trust is
created pursuant to this Agreement.
ARTICLE 8
Concerning the Trustee
8.1 Powers and Duties of the Trustee. The rights, powers and authorities of
the Trustee under this Agreement, in its capacity as trustee of the Trust, shall
include:
(a) purchasing the Voting Share from the Parent as trustee for and on
behalf of the Beneficiaries in accordance with the provisions of this
Agreement;
(b) granting proxies and distributing materials to Beneficiaries as
provided in this Agreement;
(c) voting the Beneficiary Votes in accordance with the provisions of
this Agreement;
(d) receiving the grant of the Exchange Right and the Automatic Exchange
Rights from Dutchco as trustee for and on behalf of the Beneficiaries in
accordance with the provisions of this Agreement;
(e) receiving the Covenants from Dutchco and the Corporation for and on
behalf of the Beneficiaries in accordance with the provisions of this
Agreement;
(f) exercising the Exchange Right and enforcing the benefit of the
Automatic Exchange Rights, in each case in accordance with the provisions of
this Agreement, and in connection therewith receiving from Beneficiaries
Exchangeable Shares and other requisite documents and distributing to such
Beneficiaries the Parent Common Shares and cheques, if any, to which such
Beneficiaries are entitled upon the exercise of the Exchange Right or pursuant
to the Automatic Exchange Rights, as the case may be;
(g) holding title to the Trust Estate;
(h) investing any monies forming, from time to time, a part of the Trust
Estate as provided in this Agreement;
(i) taking action on its own initiative or at the direction of a
Beneficiary or Beneficiaries to enforce the obligations of the Parent, Dutchco
and/or the Corporation under this Agreement; and
(j) taking such other actions and doing such other things as are
specifically provided in this Agreement.
In the exercise of such rights, powers and authorities, the Trustee shall have
(and is granted) such incidental and additional rights, powers and authority not
in conflict with any of the provisions of this Agreement as the Trustee, acting
in good faith and in the reasonable exercise of its discretion, may deem
necessary, appropriate or desirable to effect the purpose of the Trust. Any
exercise of such discretionary rights, powers and authorities by the Trustee
shall be final,
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conclusive and binding upon all persons affected thereunder, including the
Parties hereto and the Beneficiaries. For greater certainty, the Trustee shall
have only those duties as are set out specifically in this Agreement.
The Trustee in exercising its rights, powers, duties and authorities hereunder
shall act honestly and in good faith with a view to the best interests of the
Beneficiaries and shall exercise the care, diligence and skill that a reasonably
prudent trustee would exercise in comparable circumstances.
8.2 No Conflict of Interest. The Trustee represents to the Corporation,
Dutchco and the Parent that at the date of execution and delivery of this
Agreement there exists no material conflict of interest in the role of the
Trustee as a fiduciary hereunder and the role of the Trustee in any other
capacity. The Trustee shall, within 90 days after it becomes aware that such a
material conflict of interest exists, either eliminate such material conflict of
interest or resign in the manner and with the effect specified in Article 11.
If, notwithstanding the foregoing provisions of this section 8.2, the Trustee
has such a material conflict of interest, the validity and enforceability of
this Agreement shall not be affected in any manner whatsoever by reason only of
the existence of such material conflict of interest. If the Trustee contravenes
the foregoing provisions of this section 8.2, any Party hereto or Beneficiary
may apply to the Ontario Court General Division for an order that the Trustee be
replaced as trustee hereunder.
8.3 Dealings with Transfer Agents, Registrars, etc. The Corporation, Dutchco
and the Parent irrevocably authorize the Trustee, from time to time, to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent registrar or
transfer agent, of the Exchangeable Shares and the Parent Common Shares; and
(b) requisition, from time to time, (i) from any such registrar or
transfer agent any information readily available from the records maintained
by it which the Trustee may reasonably require for the discharge of its duties
and responsibilities under this Agreement and (ii) from the registrar or
transfer agent of the Parent Common Shares, and any subsequent registrar or
transfer agent of such shares, the share certificates issuable upon the
exercise from time to time of the Exchange Right and pursuant to the automatic
exchange of Exchangeable Shares for Parent Common Shares in the manner
specified in Article 5 hereof.
The Corporation, Dutchco and the Parent irrevocably authorize their respective
registrars and transfer agents to comply with all such requests. The Parent and
Dutchco covenant that they will supply the Parent's registrar or transfer agent
with duly executed share certificates for the purpose of completing the exercise
from time to time of the Exchange Right and the automatic exchange of
Exchangeable Shares for Parent Common Shares, in each case pursuant to Article 5
hereof.
8.4 Books and Records. The Trustee shall keep available for inspection by the
Parent, Dutchco and the Corporation, at the Trustee's principal corporate trust
office in Toronto, Ontario correct and complete books and records of account
relating to the Trustee's actions under this Agreement, including without
limitation all information relating to mailings and instructions to and from
Beneficiaries and all transactions pursuant to the Exchange Right and the
Automatic Exchange Rights. On or before March 31, 1999, and on or before March
31 in every year thereafter, so long as the Voting Share is on deposit with the
Trustee, the Trustee shall transmit to the Parent, Dutchco and the Corporation a
brief report, dated as of the preceding December 31, with respect to:
(a) the property and funds comprising the Trust Estate as of that date;
(b) the number of exercises of the Exchange Right, if any, and the
aggregate number of Exchangeable Shares received by the Trustee on behalf of
Beneficiaries in consideration of delivery by Dutchco of Parent Common Shares
and any other consideration in connection with the Exchange Right, during the
calendar year ended on such date; and
(c) all other actions taken by the Trustee in the performance of its
duties under this Agreement which it had not previously reported.
8.5 Income Tax Returns and Reports. The Trustee shall, to the extent
necessary, prepare and file on behalf of the Trust appropriate United States and
Canadian income tax returns and any other returns or reports as may be required
by applicable law or pursuant to the rules and regulations of any securities
exchange or other trading system, if any, through
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which the Exchangeable Shares are traded and, in connection therewith and
without limiting the generality of section 8.10 hereof, may obtain the advice
and assistance of such experts as the Trustee may consider necessary or
advisable.
8.6 Indemnification Prior to Certain Actions by Trustee. The Trustee shall
exercise any or all of the rights, duties, powers or authorities vested in it by
this Agreement at the request, order or direction of any Beneficiary upon such
Beneficiary furnishing to the Trustee reasonable funding, security and indemnity
against the costs, expenses and liabilities which may be incurred by the Trustee
therein or thereby, provided that no Beneficiary shall be obligated to furnish
to the Trustee any such funding, security or indemnity in connection with the
exercise by the Trustee of any of its rights, duties, powers and authorities
with respect to the Voting Share pursuant to Article 4 hereof, subject to
section 8.15, and with respect to the Exchange Right pursuant to Article 5
hereof, subject to section 8.15, and with respect to the Automatic Exchange
Rights pursuant to Article 5 hereof.
None of the provisions contained in this Agreement shall require the Trustee
to expend or risk its own funds or otherwise incur financial liability in the
exercise of any of its rights, powers, duties or authorities unless funded,
given security and indemnified as aforesaid.
8.7 Actions by Beneficiaries. No Beneficiary shall have the right to
institute any action, suit or proceeding or to exercise any other remedy
authorized by this Agreement for the purpose of enforcing any of its rights or
for the execution of any trust or power hereunder unless the Beneficiary has
requested the Trustee to take or institute such action, suit or proceeding and
furnished the Trustee with the funding, security and indemnity referred to in
section 8.6 and the Trustee shall have failed to act within a reasonable time
thereafter. In such case, but not otherwise, the Beneficiary shall be entitled
to take proceedings in any court of competent jurisdiction such as the Trustee
might have taken; it being understood and intended that no one or more
Beneficiaries shall have any right in any manner whatsoever to affect, disturb
or prejudice the rights hereby created by any such action, or to enforce any
right hereunder or under the Voting Rights, the Exchange Rights or the Automatic
Exchange Rights except subject to the conditions and in the manner herein
provided, and that all powers and trusts hereunder shall be exercised and all
proceedings at law shall be instituted, had and maintained by the Trustee,
except only as herein provided, and in any event for the equal benefit of all
Beneficiaries.
8.8 Reliance upon Declarations. The Trustee shall not be considered to be in
contravention of any of its rights, powers, duties and authorities hereunder if,
when required, it acts and relies in good faith upon lists, mailing labels,
notices, statutory declarations, certificates, opinions, reports or other papers
or documents furnished pursuant to the provisions hereof or required by the
Trustee to be furnished to it in the exercise of its rights, powers, duties and
authorities hereunder if such lists, mailing labels, notices, statutory
declarations, certificates, opinions, reports or other papers or documents
comply with the provisions of section 8.9 hereof, if applicable, and with any
other applicable provisions of this Agreement.
8.9 Evidence and Authority to Trustee. The Corporation, Dutchco and/or the
Parent shall furnish to the Trustee evidence of compliance with the conditions
provided for in this Agreement relating to any action or step required or
permitted to be taken by the Corporation, Dutchco and/or the Parent or the
Trustee under this agreement or as a result of any obligation imposed under this
Agreement, including, without limitation, in respect of the Voting Rights or the
Exchange Right or the Automatic Exchange Rights and the taking of any other
action to be taken by the Trustee at the request of or on the application of the
Corporation, Dutchco and/or the Parent forthwith if and when:
(a) such evidence is required by any other section of this Agreement to
be furnished to the Trustee in accordance with the terms of this section 8.9;
or
(b) the Trustee, in the exercise of its rights, powers, duties and
authorities under this Agreement, gives the Corporation, Dutchco and/or the
Parent written notice requiring it to furnish such evidence in relation to any
particular action or obligation specified in such notice.
Such evidence shall consist of an Officer's Certificate of the Corporation,
Dutchco and/or the Parent or a statutory declaration or a certificate made by
persons entitled to sign an Officer's Certificate stating that any such
condition has been complied with in accordance with the terms of this Agreement.
Whenever such evidence relates to a matter other than the Voting Rights or the
Exchange Right or the automatic exchange of Exchangeable Shares for Parent
Common Shares pursuant to section 5.12, and except as otherwise specifically
provided herein, such evidence may consist of a report or opinion of any
solicitor, auditor, accountant,
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appraiser, valuer, engineer or other expert or any other person whose
qualifications give authority to a statement made by him, provided that if such
report or opinion is furnished by a director, officer or employee of the
Corporation, Dutchco and/or the Parent it shall be in the form of an Officer's
Certificate or a statutory declaration.
Each statutory declaration, certificate, opinion or report furnished to the
Trustee as evidence of compliance with a condition provided for in this
Agreement shall include a statement by the person giving the evidence:
(a) declaring that he has read and understands the provisions of this
Agreement relating to the condition in question;
(b) describing the nature and scope of the examination or investigation
upon which he based the statutory declaration, certificate, statement or
opinion; and
(c) declaring that he has made such examination or investigation as he
believes is necessary to enable him to make the statements or give the
opinions contained or expressed therein.
8.10 Experts, Advisers and Agents. The Trustee may:
(a) in relation to these presents act and rely on the opinion or advice
of or information obtained from any solicitor, auditor, accountant, appraiser,
valuer, engineer or other expert, whether retained by the Trustee or by the
Corporation, Dutchco and/or the Parent or otherwise, and may employ such
assistants as may be necessary to the proper discharge of its powers and
duties and determination of its rights hereunder and may pay proper and
reasonable compensation for all such legal and other advice or assistance as
aforesaid; and
(b) employ such agents and other assistants as it may reasonably require
for the proper discharge of its powers and duties hereunder, and may pay
reasonable remuneration for all services performed for it (and shall be
entitled to receive reasonable remuneration for all services performed by it)
in the discharge of the trusts hereof and compensation for all disbursements,
costs and expenses made or incurred by it in the discharge of its duties
hereunder and in the management of the Trust.
8.11 Investment of Moneys Held By Trustee. Unless otherwise provided in this
Agreement, any moneys held by or on behalf of the Trustee which under the terms
of this Agreement may or ought to be invested or which may be on deposit with
the Trustee or which may be in the hands of the Trustee may be invested and
reinvested in the name or under the control of the Trustee in securities in
which, under the laws of the Province of Ontario or the Province of Quebec,
trustees are authorized to invest trust moneys, provided that such securities
are stated to mature within two years after their purchase by the Trustee, and
the Trustee shall so invest such moneys on the written direction of the
Corporation. Pending the investment of any moneys as hereinbefore provided, such
moneys may be deposited in the name of the Trustee at a chartered bank in Canada
or, with the consent of the Corporation, in the deposit department of the
Trustee or any other loan or trust the Corporation authorized to accept deposits
under the laws of Canada or any province thereof at the rate of interest then
current on similar deposits.
8.12 Trustee Not Required to Give Security. The Trustee shall not be required
to give any bond or security in respect of the execution of the trusts, rights,
duties, powers and authorities of this Agreement or otherwise in respect of the
premises.
8.13 Trustee Not Bound to Act on the Corporation's Request. Except as in this
Agreement otherwise specifically provided, the Trustee shall not be bound to act
in accordance with any direction or request of the Corporation and/or the Parent
or of their respective Boards of Directors until a duly authenticated copy of
the instrument or resolution containing such direction or request shall have
been delivered to the Trustee, and the Trustee shall be empowered to act and
rely upon any such copy purporting to be authenticated and believed by the
Trustee to be genuine.
8.14 Authority to Carry on Business. The Trustee represents to the
Corporation, Dutchco and the Parent that at the date of execution and delivery
by it of this Agreement it is authorized to carry on the business of a trust
company in the Province of Quebec and the Province of Ontario but if,
notwithstanding the provisions of this section 8.14, it ceases to be so
authorized to carry on business, the validity and enforceability of this
Agreement, the Covenants, the Voting Rights, the
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Exchange Right and the Automatic Exchange Rights shall not be affected in any
manner whatsoever by reason only of such event but the Trustee shall, within 90
days after ceasing to be authorized to carry on the business of a trust company
in the Province of Quebec and in the Province of Ontario, either become so
authorized or resign in the manner and with the effect specified in Article 11.
8.15 Conflicting Claims. If conflicting claims or demands are made or asserted
with respect to any interest of any Beneficiary in any Exchangeable Shares,
including any disagreement between the heirs, representatives, successors or
assigns succeeding to all or any part of the interest of any Beneficiary in any
Exchangeable Shares resulting in conflicting claims or demands being made in
connection with such interest, then the Trustee shall be entitled, at its sole
discretion, to refuse to recognize or to comply with any such claim or demand.
In so refusing, the Trustee may elect not to exercise any Voting Rights,
Exchange Right or Automatic Exchange Rights, the Covenants subject to such
conflicting claims or demands and, in so doing, the Trustee shall not be or
become liable to any person on account of such election or its failure or
refusal to comply with any such conflicting claims or demands. The Trustee shall
be entitled to continue to refrain from acting and to refuse to act until:
(a) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Right Automatic Exchange Rights or the Covenants subject to
such conflicting claims or demands have been adjudicated by a final judgment
of a court of competent jurisdiction; or
(b) all differences with respect to the Voting Rights, Exchange Right or
Automatic Exchange Rights subject to such conflicting claims or demands have
been conclusively settled by a valid written agreement binding on all such
adverse claimants, and the Trustee shall have been furnished with an executed
copy of such agreement.
If the Trustee elects to recognize any claim or comply with any demand made by
any such adverse claimant, it may in its discretion require such claimant to
furnish such surety bond or other security satisfactory to the Trustee as it
shall deem appropriate fully to indemnify it as between all conflicting claims
or demands.
8.16 Acceptance of Trust. The Trustee hereby accepts the Trust created and
provided for by and in this Agreement and agrees to perform the same upon the
terms and conditions herein set forth and to hold all rights, privileges and
benefits conferred hereby and by law in trust for the various persons who shall
from time to time be Beneficiaries, subject to all the terms and conditions
herein set forth.
8.17 Incumbency Certificate. Each of the Parent, Dutcho and Corporation shall
file with the Trustee a certificate of incumbency setting forth the names of the
individuals authorized to give instructions, directions or other instruments to
the Trustee (each an "Authorized Person") together with specimen signatures of
such persons, and the Trustee shall be entitled to rely on the latest
certificate of incumbency filed with it unless it receives notice, in accordance
with section 15.3 of this Agreement, of a change in Authorized Persons with
updated specimen signatures.
8.18 No Expenditure of Funds. None of the provisions contained in this
Agreement shall require the Trustee to expend or risk its own funds or otherwise
incur financial liability in the performance of any of its duties or in the
exercise of any of its rights or powers unless indemnified as aforesaid.
ARTICLE 9
Compensation
9.1 Fees and Expenses of the Trustee. The Parent, Dutchco and the Corporation
jointly and severally agree to pay to the Trustee reasonable compensation for
all of the services rendered by it under this Agreement and will reimburse the
Trustee for all reasonable expenses (including taxes) and disbursements,
including the cost and expense of any suit or litigation of any character and
any proceedings before any governmental agency reasonably incurred by the
Trustee in connection with its rights and duties under this Agreement; provided
that the Parent, Dutchco and the Corporation shall have no obligation to
reimburse the Trustee for any expenses or disbursements paid, incurred or
suffered by the Trustee in any suit or litigation in which the Trustee is
determined to have acted in bad faith or with negligence or wilful misconduct.
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ARTICLE 10
Indemnification and Limitation of Liability
10.1 Indemnification of the Trustee. The Parent, Dutchco and the Corporation
jointly and severally agree to indemnify and hold harmless the Trustee and each
of its directors, officers, employees and agents appointed and acting in
accordance with this Agreement (collectively, the "Indemnified Parties") against
all claims, losses, damages, costs, penalties, fines and reasonable expenses
(including reasonable expenses of the Trustee's legal counsel) which, without
fraud, negligence, wilful misconduct or bad faith on the part of such
Indemnified Party, may be paid, incurred or suffered by the Indemnified Party by
reason of or as a result of the Trustee's acceptance or administration of the
Trust, its compliance with its duties set forth in this Agreement, or any
written or oral instructions delivered to the Trustee by the Parent, Dutchco or
the Corporation pursuant hereto. In no case shall the Parent, Dutchco or the
Corporation be liable under this indemnity for any claim against any of the
Indemnified Parties unless the Parent, Dutchco and the Corporation shall be
notified by the Trustee of the written assertion of a claim or of any action
commenced against the Indemnified Parties, promptly after any of the Indemnified
Parties shall have received any such written assertion of a claim or shall have
been served with a summons or other first legal process giving information as to
the nature and basis of the claim. Subject to clause (ii) below, the Parent,
Dutchco and the Corporation shall be entitled to participate at their own
expense in the defence and, if the Parent, Dutchco or the Corporation so elect
at any time after receipt of such notice, either of them may assume the defence
of any suit brought to enforce any such claim. The Trustee shall have the right
to employ separate counsel in any such suit and participate in the defence
thereof but the fees and expenses of such counsel shall be at the expense of the
Trustee unless: (i) the employment of such counsel has been authorized by the
Parent, Dutchco or the Corporation; or (ii) the named parties to any such suit
include both the Trustee and the Parent, Dutchco or the Corporation and the
Trustee shall have been advised by counsel acceptable to the Parent or the
Corporation that there may be one or more legal defenses available to the
Trustee which are different from or in addition to those available to the Parent
or the Corporation (in which case the Parent, Dutchco and the Corporation shall
not have the right to assume the defence of such suit on behalf of the Trustee
but shall be liable to pay the reasonable fees and expenses of counsel for the
Trustee).
10.2 Limitation of Liability. The Trustee shall not be held liable for any
loss which may occur by reason of depreciation of the value of any part of the
Trust Estate or any loss incurred on any investment of funds pursuant to this
Agreement, except to the extent that such loss is attributable to the fraud,
negligence, wilful misconduct or bad faith on the part of the Trustee.
10.3 None of the provisions contained in this Agreement shall require the
Trustee to expend or risk its own funds or otherwise incur financial liability
in the performance of any of its duties or in the exercise of any of its rights
or powers unless indemnified as aforesaid.
ARTICLE 11
Change of Trustee
11.1 Resignation. The Trustee, or any trustee hereafter appointed, may at any
time resign by giving written notice of such resignation to the Parent, Dutchco
and the Corporation specifying the date on which it desires to resign, provided
that such notice shall never be given less than 60 days before such desired
resignation date unless the Parent, Dutchco and the Corporation otherwise agree
and provided further that such resignation shall not take effect until the date
of the appointment of a successor trustee and the acceptance of such appointment
by the successor trustee. Upon receiving such notice of resignation, the Parent,
Dutchco and the Corporation shall promptly appoint a successor trustee by
written instrument in duplicate, one copy of which shall be delivered to the
resigning trustee and one copy to the successor trustee.
11.2 Removal. The Trustee, or any trustee hereafter appointed, may be removed
at any time on 60 days' prior notice by written instrument executed by the
Parent, Dutchco and the Corporation, in duplicate, one copy of which shall be
delivered to the trustee so removed and one copy to the successor trustee
provided that such removal shall not take effect until the date of the
appointment of a successor trustee and the acceptance of such appointment by the
successor trustee.
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11.3 Successor Trustee. Any successor trustee appointed as provided under this
Agreement shall execute, acknowledge and deliver to the Parent, Dutchco and the
Corporation and to its predecessor trustee an instrument accepting such
appointment. Thereupon, the resignation or removal of the predecessor trustee
shall become effective and such successor trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, duties and
obligations of its predecessor under this Agreement, with like effect as if
originally named as trustee in this Agreement. However, on the written request
of the Parent, Dutchco and the Corporation or of the successor trustee, the
trustee ceasing to act shall, upon payment of any amounts then due it pursuant
to the provisions of this Agreement, execute and deliver an instrument
transferring to such successor trustee all the rights and powers of the trustee
so ceasing to act. Upon the request of any such successor trustee, the Parent,
Dutchco, the Corporation and such predecessor trustee shall execute any and all
instruments in writing for more fully and certainly vesting in and confirming to
such successor trustee all such rights and powers.
11.4 Notice of Successor Trustee. Upon acceptance of appointment by a
successor trustee as provided herein, the Parent, Dutchco and the Corporation
shall cause to be mailed notice of the succession of such trustee hereunder to
each Beneficiary specified in a List. If the Parent, Dutchco or the Corporation
shall fail to cause such notice to be mailed within 10 days after acceptance of
appointment by the successor trustee, the successor trustee shall cause such
notice to be mailed at the expense of the Parent, Dutchco and the Corporation.
ARTICLE 12
Parent Successors
12.1 Certain Requirements in Respect of Combination, etc. The Parent shall not
enter into any transaction (whether by way of reconstruction, reorganization,
consolidation, merger, transfer, sale, lease or otherwise) whereby all or
substantially all of its undertaking, property and assets would become the
property of any other person or, in the case of a merger, of the continuing
corporation resulting therefrom unless:
(a) such other person or continuing corporation is a corporation (herein
called the "Parent Successor") incorporated under the laws of any state of the
United States or the laws of Canada or any province thereof;
(b) the Parent Successor, by operation of law, becomes, without more,
bound by the terms and provisions of this Agreement or, if not so bound,
executes, prior to or contemporaneously with the consummation of such
transaction a agreement supplemental hereto and such other instruments (if
any) as are satisfactory to the Trustee and in the opinion of legal counsel to
the Trustee are necessary or advisable to evidence the assumption by the
Parent Successor of liability for all moneys payable and property deliverable
hereunder and the covenant of such Parent Successor to pay and deliver or
cause to be delivered the same and its agreement to observe and perform all
the covenants and obligations of the Parent under this Agreement; and
(c) such transaction shall, to the satisfaction of the Trustee and in the
opinion of legal counsel to the Trustee, be upon such terms as substantially
to preserve and not to impair in any material respect any of the rights,
duties, powers and authorities of the Trustee or of the Beneficiaries
hereunder.
12.2 Vesting of Powers in Successor. Whenever the conditions of section 12.1
hereof have been duly observed and performed, the Trustee, if required, by
section 12.1 hereof, the Parent Successor and the Corporation shall execute and
deliver the supplemental agreement provided for in Article 13 and thereupon the
Parent Successor shall possess and from time to time may exercise each and every
right and power of the Parent under this Agreement in the name of the Parent or
otherwise and any act or proceeding by any provision of this Agreement required
to be done or performed by the Board of Directors of the Parent or any officers
of the Parent may be done and performed with like force and effect by the Board
of Directors or officers of such Parent Successor.
12.3 Wholly-Owned Subsidiaries. Nothing herein shall be construed as
preventing the amalgamation or merger of any wholly-owned subsidiary of the
Parent with or into the Parent or the winding-up, liquidation or dissolution of
any wholly-owned subsidiary of the Parent provided that all of the assets of
such subsidiary are transferred to the Parent or another wholly-owned subsidiary
of the Parent and any such transactions are expressly permitted by this Article
12.
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ARTICLE 13
Amendments and Supplemental Trust Agreements
13.1 Amendments, Modifications, etc. Except as contemplated by section 13.2
below, this Agreement may not be amended or modified except by an agreement in
writing executed by the Corporation, the Parent, Dutchco and the Trustee and
approved by the holders of Exchangeable Shares in accordance with section 10.2
of the Exchangeable Share Provisions provided that the Trustee shall not agree
to any amendment to the provisions of Article 7 or waive any right thereunder
without the consent of the Class E and F Shareholders at a meeting of those
holders held in accordance with the provisions attaching to the Class E Shares
and the Class F Shares.
13.2 Ministerial Amendments. Notwithstanding the provisions of section 13.1
hereof, the parties to this Agreement may in writing, at any time and from time
to time, without the approval of the Beneficiaries, amend or modify this
Agreement for the purposes of:
(a) adding to the covenants of any party hereto for the protection of the
Corporation or the Beneficiaries hereunder;
(b) making such provisions or modifications not inconsistent with this
Agreement as may be necessary or desirable with respect to matters or
questions arising hereunder which, in the opinion of the Board of Directors of
each of the Parent, Dutchco and the Corporation and in the opinion of the
Trustee and its counsel, having in mind the best interests of the
Beneficiaries as a whole, it may be expedient to make, provided that such
Boards of Directors and the Trustee and its counsel shall be of the opinion
that such provisions and modifications will not be prejudicial to the
interests of the Beneficiaries; or
(c) making such changes or corrections hereto which, on the advice of
counsel to the Corporation, the Parent, Dutchco and the Trustee, are required
for the purpose of curing or correcting any ambiguity or defect or
inconsistent provision or clerical omission or mistake or manifest error
contained herein, provided that the Trustee and its counsel and the Board of
Directors of each of the Corporation, Dutchco and the Parent shall be of the
opinion that such changes or corrections will not be prejudicial to the
interests of the Beneficiaries.
13.3 Meeting to Consider Amendments. The Corporation, at the request of the
Parent, shall call a meeting or meetings of the Beneficiaries for the purpose of
considering any proposed amendment or modification requiring approval pursuant
hereto. Any such meeting or meetings shall be called and held in accordance with
the by-laws of the Corporation, the Exchangeable Share Provisions, the articles
of the Corporation and all applicable laws.
13.4 Changes in Capital of Parent and the Corporation. At all times after the
occurrence of any event effected pursuant to section 2.7 or section 2.8 of the
Support Agreement, as a result of which either the Parent Common Shares or the
Exchangeable Shares or both are in any way changed, this Agreement shall
forthwith be amended and modified as necessary in order that it shall apply with
full force and effect, mutatis mutandis, to all new securities into which the
Parent Common Shares or the Exchangeable Shares or both are so changed and the
parties hereto shall execute and deliver a supplemental agreement giving effect
to and evidencing such necessary amendments and modifications.
13.5 Execution of Supplemental Agreements. No amendment to or modification or
waiver of any of the provisions of this Agreement otherwise permitted hereunder
shall be effective unless made in writing and signed by all of the parties
hereto. From time to time the Corporation (when authorized by a resolution of
the Board of Directors), Dutchco (when authorized by a resolution of its Board
of Directors), the Parent (when authorized by a resolution of its Board of
Directors) and the Trustee may, subject to the provisions of these presents, and
they shall, when so directed by these presents, execute and deliver by their
proper officers, agreements or other instruments supplemental hereto, which
thereafter shall form part hereof, for any one or more of the following
purposes:
(a) evidencing the succession of Parent Successors to the Parent and the
covenants of and obligations assumed by each such Parent Successor in
accordance with the provisions of Article 12 and the successor of any
successor trustee in accordance with the provisions of Article 11;
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(b) making any additions to, deletions from or alterations of the
provisions of this Agreement or the Voting Rights, the Exchange Right, the
Automatic Exchange Rights or the Covenants which, in the opinion of the
Trustee and its counsel, will not be prejudicial to the interests of the
Beneficiaries as a whole or are in the opinion of counsel to the Trustee
necessary or advisable in order to incorporate, reflect or comply with any
legislation the provisions of which apply to the Parent, Dutchco, the
Corporation, the Trustee or this Agreement; and
(c) for any other purposes not inconsistent with the provisions of this
Agreement, including without limitation to make or evidence any amendment or
modification to this Agreement as contemplated hereby, provided that, in the
opinion of the Trustee and its counsel, the rights of the Trustee and the
Beneficiaries as a whole will not be prejudiced thereby.
ARTICLE 14
Termination
14.1 Term. The Trust created by this Agreement shall be effective upon the
issuance by the Corporation of Class E Shares, Class F Shares and/or
Exchangeable Shares and shall continue until the earliest to occur of the
following events:
(a) no outstanding Exchangeable Shares are held by a Beneficiary;
(b) each of the Corporation, Dutchco and the Parent elects in writing to
terminate the Trust and such termination is approved by the Beneficiaries of
the Exchangeable Shares in accordance with section 10.2 of the Exchangeable
Share Provisions; and
(c) 21 years after the death of the last survivor of the descendants of
His Majesty King George VI of the United Kingdom of Great Britain and Northern
Ireland living on the date of the creation of the Trust.
14.2 Survival of Agreement. This Agreement shall be effective upon the
issuance by the Corporation of Class E Shares, Class F Shares and/or
Exchangeable Shares and shall survive any termination of the Trust and shall
continue until there are no Exchangeable Shares outstanding held by a
Beneficiary; provided, however, that the provisions of Articles 9 and 10 shall
survive any such termination of this Agreement.
ARTICLE 15
General
15.1 Severability. If any provision of this Agreement is held invalid, illegal
or unenforceable, the validity, legality or enforceability of the remainder of
this Agreement shall not in any way be affected or improved thereby and this
Agreement shall be carried and as near as possible in accordance with its
original terms and conditions; and to this end the provisions of this Agreement
are intended to be and shall be deemed severable; provided, however, that if the
provision or provisions so held to be invalid, in the reasonable judgment of the
parties hereto, is or are so fundamental to the intent of the parties hereto and
the operation of this Agreement that the enforcement of the other provisions
hereof, in the absence of such invalid provision or provisions, would damage
irreparably the intent of the parties in entering into this Agreement, the
parties hereto shall agree to amend or otherwise modify this Agreement so as to
carry out the intent and purposes hereof and the transactions contemplated
hereby.
15.2 Enurement. This Agreement shall be binding upon and enure to the benefit
of the parties hereto and their respective successors and permitted assigns and
to the benefit of the Beneficiaries.
15.3 Notices to Parties. All notices and other communications between the
parties hereunder shall be in writing and shall be deemed to have been given if
delivered personally or by confirmed telecopy to the parties at the following
addresses (or at such other address for such party as shall be specified in like
notice):
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a) if to the Parent or Dutchco at:
Autodesk, Inc.
20400 Stevens Creek Boulevard
Cupertino, CA 95401-2217
Attention: Marcia K. Sterling
Vice President Business Development, General Counsel and
Secretary
Telecopy:
(408) 517-1886
(b) if to the Corporation at:
Discreet Logic Inc.
10 Duke Street
Montreal, Quebec
Canada H3C 2L7
Attention: Francois Plamondon
Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
Telecopy:
(514) 393-3996
(c) if to the Trustee at:
Montreal Trust Company of Canada
Suite 605 - 151 Front Street West
Toronto, Ontario
M5J 2N1
Attention: Manager, Corporate Trust Services
Telecopy: (416) 981-9777
Any notice or other communication given personally shall be deemed to have been
given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of confirmed receipt thereof,
provided such notice or other communication is received prior to 5:00 p.m.
(local time) on a Business Day, and otherwise it shall be deemed to have been
given and received upon the immediately following Business Day.
15.4 Notice of Beneficiaries. Any and all notices to be given and any
documents to be sent to any Beneficiaries may be given or sent to the address of
such Beneficiary shown on the register of holders of Exchangeable Shares, Class
E Shares or Class F Shares as the case may be, in any manner permitted by the
by-laws of the Corporation from time to time in force in respect of notices to
shareholders and the provisions of the then prevailing law and shall be deemed
to be received (if given or sent in such manner) at the time specified in such
by-laws and the provisions of the then prevailing law, the provisions of which
by-laws shall apply mutatis mutandis to notices or documents as aforesaid sent
to such holders.
15.5 Risk of Payments by Post. Whenever payments are to be made or documents
are to be sent to any Beneficiary by the Trustee or by the Corporation, or by
such Beneficiary to the Trustee or to the Parent, Dutchco or the Corporation,
the making of such payment or sending of such document sent through the post
shall be at the risk of the Corporation, in the case of payments made or
documents sent by the Trustee or the Corporation, and the Beneficiary, in the
case of payments made or documents sent by the Beneficiary.
15.6 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
15.7 Jurisdiction. This Agreement shall be construed and enforced in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
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15.8 Attornment. Each of the Parent, Dutchco and the Corporation agree that
any action or proceeding arising out of or relating to this Agreement may be
instituted in the courts of Ontario waive any objection which it may have now or
hereafter to the venue of any such action or proceeding, irrevocably submits to
the non-exclusive jurisdiction of the said courts in any such action or
proceeding, agrees to be bound by any judgment of the said courts and not to
seek, and hereby waives, any review of the merits of any such judgment by the
courts of any other jurisdiction and each of Parent, Dutchco and the Corporation
hereby appoint Aird & Berlis at its office in Toronto as Parent's, Dutchco's and
the Corporation's attorney for service of process.
15.9 Guaranty/Assignment. The Parent hereby unconditionally and irrevocably
guarantees the prompt and full performance by Dutchco of, and shall cause
Dutchco to comply with, its obligations hereunder. Dutchco, upon prior notice to
the Trustee, may assign all or a portion of its rights and obligations hereunder
to the Parent or any Affiliate thereof, which shall thereupon assume such
assigned rights and obligations, without the consent of the Trustee, the
Beneficiary, or the Corporation subject to the Trustee, the Corporation and the
Parent or Affiliate, as the case may be, entering into a supplemental agreement
pursuant to section 13.5(c) reflecting such assignment and assumption. This
Agreement may not be assigned by the Parent without the prior written consent of
Dutchco, the Trustee and the Corporation and the approval of the holders of the
Exchangeable Shares in accordance with section 10.2 of the Exchangeable Share
Provisions and the Class E and F Shareholders other than the Parent, its
subsidiaries and Affiliates.
15.10 Language. The parties have agreed that this Agreement be drafted in
English. Les parties ont convenu que cette convention soit redigee en langue
anglaise.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
Autodesk, Inc.
By: /s/ Carol A. Bartz
-------------------------------------
Carol A. Bartz
Chief Executive Officer
Autodesk Development B.V.
By: /s/ Michael E. Sutton
-------------------------------------
Michael E. Sutton
Directeur
Discreet Logic Inc.
By: /s/ Marcia K. Sterling
-------------------------------------
Marcia K. Sterling
Secretary
Montreal Trust Company of Canada
By: /s/ Daniel E. Marz
-------------------------------------
Daniel E. Marz
Senior Corporate Trust Officer
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EXHIBIT 10.1
SUPPORT AGREEMENT
MEMORANDUM OF AGREEMENT made as of the 16th day of March, 1999
BETWEEN:
AUTODESK, INC.,
a corporation subsisting under the laws
of the State of Delaware,
(hereinafter referred to as the "Parent"),
--and--
AUTODESK DEVELOPMENT B.V.,
a corporation subsisting under the laws
of The Netherlands,
(hereinafter referred to as "Dutchco"),
--and--
DISCREET LOGIC INC.,
a corporation subsisting under the laws
of the Province of Quebec,
(hereinafter referred to as the "Corporation").
WHEREAS pursuant to the Second Amended and Restated Agreement and Plan of
Acquisition and Amalgamation dated as of November 18, 1998, as amended, by and
among the Parent, Dutchco, 9066-9771 Quebec Inc. ("Amalgamation Sub"), Autodesk
Canada Inc. ("ACI") 9066-9854 Quebec Inc. ("Autodesk Quebec") and Discreet Logic
Inc. (a predecessor to the Corporation) (such agreement being hereinafter
referred to as the "Combination Agreement"), the parties agreed that immediately
after the Effective Time (as such term is defined in the Combination Agreement),
the Parent, Dutchco and the Corporation would execute and deliver a Support
Agreement containing the terms and conditions set forth in Exhibit C to the
Combination Agreement, together with such other terms and conditions as may be
agreed to by the parties to the Combination Agreement acting reasonably;
AND WHEREAS pursuant to the Combination Agreement, articles of amalgamation
dated March 16, 1999 (the "Articles of Amalgamation") were filed pursuant to the
Companies Act (Quebec) whereby Discreet Logic Inc., Autodesk Quebec and
Amalgamation Sub amalgamated to continue as the Corporation;
AND WHEREAS immediately following to the Amalgamation, holders of certain
issued and outstanding Class B non-voting common share of the Corporation (the
"Class B Shares") elected to retract such shares in exchange for Exchangeable
Non-Voting Shares of the Corporation (the "Exchangeable Shares") on the basis of
0.33 of an Exchangeable Share for each Class B Share so retracted;
AND WHEREAS the Articles of Amalgamation set forth the rights, privileges,
restrictions and conditions (collectively, the "Exchangeable Share Provisions")
attaching to the Exchangeable Shares;
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AND WHEREAS pursuant to the Transactions (as defined in the Combination
Agreement), Dutchco, an indirect wholly owned subsidiary of the Parent, is the
registered and beneficial owner of all of the issued and outstanding Class A
Shares of the Corporation and all of the issued and outstanding Class E Shares
and Class F Shares of the Corporation, and ACI, a wholly owned subsidiary of the
Parent, is the registered and beneficial owner of all of the issued and
outstanding Class C Shares of the Corporation, U.S. Bancorp Piper Jaffray Inc.
is the registered and beneficial owner of 112,500 of the issued and outstanding
Class D Shares of the Corporation and Aird & Berlis is the registered and
beneficial owner of 37,500 of the issued and outstanding Class D Shares of the
Corporation;
AND WHEREAS the parties hereto desire to make appropriate provision and to
establish a procedure whereby the Parent and Dutchco will take certain actions
and make certain payments and deliveries necessary to ensure that the
Corporation will be able to make certain payments and to deliver or cause to be
delivered, Parent Common Shares in satisfaction of the obligations of the
Corporation under the Exchangeable Share Provisions with respect to the payment
and satisfaction of Liquidation Amounts, Retraction Prices and Redemption
Prices, all in accordance with the Exchangeable Share Provisions;
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree as
follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 Defined Terms. Each term denoted herein by initial capital letters and not
otherwise defined herein shall have the meaning ascribed thereto in the
Exchangeable Share Provisions, unless the context requires otherwise.
1.2 Interpretation not Affected by Headings, etc. The division of this
agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this agreement.
1.3 Number, Gender, etc. Words importing the singular number only shall
include the plural and vice versa. Words importing the use of any gender shall
include all genders.
1.4 Date for any Action. In the event that any date on or by which any action
is required or permitted to be taken under this agreement is not a Business Day,
such action shall be required or permitted to be taken on or by the next
succeeding Business Day. For the purposes of this agreement, a "Business Day"
means any day other than a Saturday, Sunday or a day when banks are not open for
business in either or both of San Francisco, California or Montreal, Quebec.
ARTICLE 2
COVENANTS OF THE PARENT, DUTCHCO AND THE CORPORATION
2.1 Funding of the Corporation. So long as any Exchangeable Shares are
outstanding, the Parent (and Dutchco in the case of subclauses (b), (e) and (f))
will:
(a) not declare or pay any dividend on the Parent Common Shares unless (i) the
Corporation will have sufficient assets, funds and other property available to
enable the due declaration and the due and punctual payment in accordance with
applicable law, of an equivalent dividend on the Exchangeable Shares and (ii)
the Corporation shall simultaneously declare or pay, as the case may be, an
equivalent dividend on the Exchangeable Shares, in each case in accordance with
the Exchangeable Share Provisions;
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(b) cause the Corporation to declare simultaneously with the declaration of
any dividend on the Parent Common Shares an equivalent dividend on the
Exchangeable Shares and, when such dividend is paid on the Parent Common Shares,
cause the Corporation to pay simultaneously therewith such equivalent dividend
on the Exchangeable Shares, in each case in accordance with the Exchangeable
Share Provisions;
(c) advise the Corporation sufficiently in advance of the declaration by the
Parent of any dividend on the Parent Common Shares and take all such other
actions as are necessary, in cooperation with the Corporation, to ensure that
the respective declaration date, record date and payment date for a dividend on
the Exchangeable Shares shall be the same as the record date, declaration date
and payment date for the corresponding dividend on the Parent Common Shares and
shall correspond with any required dating for any stock exchange purpose on
which the Exchangeable Shares are listed;
(d) ensure that the record date for any dividend declared on the Parent Common
Shares is not less than 10 Business Days after the declaration date for such
dividend;
(e) take all such actions and do all such things as are necessary or desirable
to enable and permit the Corporation, in accordance with applicable law, to pay
and otherwise perform its obligations with respect to the satisfaction of the
Liquidation Amount in respect of each issued and outstanding Exchangeable Share
upon the liquidation, dissolution or winding-up of the Corporation, including
without limitation all such actions and all such things as are necessary or
desirable to enable and permit the Corporation to cause to be delivered Parent
Common Shares to the holders of Exchangeable Shares in accordance with the
provisions of Article 5 of the Exchangeable Share Provisions; and
(f) take all such actions and do all such things as are necessary or desirable
to enable and permit the Corporation, in accordance with applicable law, to pay
and otherwise perform its obligations with respect to the satisfaction of the
Retraction Price and the Redemption Price, including without limitation all such
actions and all such things as are necessary or desirable to enable and permit
the Corporation to cause to be delivered Parent Common Shares to the holders of
Exchangeable Shares, upon the redemption of the Exchangeable Shares in
accordance with the provisions of Article 6 or Article 7 of the Exchangeable
Share Provisions, as the case may be.
2.2 Segregation of Funds. The Parent will and if applicable will cause the
Corporation to deposit a sufficient amount of funds in a separate account and
segregate a sufficient amount of such assets and other property as is necessary
to enable the Corporation to pay or otherwise satisfy the applicable Liquidation
Amount, Retraction Price or Redemption Price, in each case for the benefit of
holders from time to time of the Exchangeable Shares, and will use such funds,
assets and other property so segregated exclusively for the payment or other
satisfaction of the Liquidation Amount, the Retraction Price or the Redemption
Price, as applicable.
2.3 Reservation of Parent Common Shares. The Parent hereby represents,
warrants and covenants that it has irrevocably reserved for issuance and will at
all times keep available, free from pre-emptive and other rights, out of its
authorized and unissued capital stock such number of Parent Common Shares (or
other shares or securities into which the Parent Common Shares may be
reclassified or changed as contemplated by section 2.7 hereof) (a) as is equal
to the sum of (i) the number of Exchangeable Shares issued and outstanding from
time to time and (ii) the number of Exchangeable Shares issuable upon the
exercise of all rights to acquire Exchangeable Shares outstanding from time to
time and (b) as are now and may hereafter be required to enable and permit the
Corporation to meet its obligations hereunder, under the Voting and Exchange
Trust Agreement, under the Exchangeable Share Provisions and under any other
security or commitment pursuant to which the Parent may now or hereafter be
required to issue Parent Common Shares.
2.4 Notification of Certain Events. In order to assist the Parent and Dutchco
to comply with their obligations hereunder, the Corporation will give the Parent
and Dutchco notice of each of the following events at the time set forth below:
(a) in the event of any determination by the Board of Directors of the
Corporation to institute voluntary liquidation, dissolution or winding up
proceedings with respect to the Corporation or to effect any other distribution
of the assets of the Corporation among its shareholders for the purpose of
winding up its affairs, at least 60 days prior to the proposed effective date of
such liquidation, dissolution, winding up or other distribution;
(b) immediately, upon the earlier of receipt by the Corporation of notice of
and the Corporation otherwise becoming aware of any threatened or instituted
claim, suit, petition or other proceeding with respect to the involuntary
liquidation,
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dissolution or winding up of the Corporation or to effect any other
distribution of the assets of the Corporation among its shareholders for the
purpose of winding up its affairs;
(c) immediately, upon receipt by the Corporation of a Retraction Request (as
defined in the Exchangeable Share Provisions);
(d) at least 130 days prior to any accelerated Automatic Redemption Date
determined by the Board of Directors of the Corporation in accordance with the
Exchangeable Share Provisions; and
(e) as soon as practicable upon the issuance by the Corporation of any
Exchangeable Shares or rights to acquire Exchangeable Shares (other than the
issuance of Exchangeable Shares upon the redemption of outstanding Class B
Shares pursuant to the Transactions).
2.5 Delivery of Parent Common Shares. In furtherance of its obligations under
sections 2.1(e) and 2.1(f) hereof, upon notice from the Corporation of any event
which requires the Corporation to cause to be delivered Parent Common Shares to
any holder of Exchangeable Shares, Dutchco shall forthwith deliver the requisite
Parent Common Shares to or to the order of the former holder of the surrendered
Exchangeable Shares, as the Corporation shall direct. All such Parent Common
Shares shall be duly issued as fully paid and non-assessable and shall be free
and clear of any lien, claim, encumbrance, security interest or adverse claim.
In consideration of the delivery of each such Parent Common Share by Dutchco,
the Corporation shall issue to Dutchco, or as Dutchco shall direct, such number
of Class A Shares of the Corporation as is equal to the fair value of such
Parent Common Share.
2.6 Qualification of Parent Common Shares in the United States. The Parent
represents and warrants that it has taken all actions and done all things as are
necessary or desirable to cause the Parent Common Shares to be issued and
delivered pursuant to the Exchangeable Share Provisions, the Exchange Right or
the Automatic Exchange Rights (as defined in the Voting and Exchange Trust
Agreement) to be freely tradeable thereafter in the United States (other than
any restrictions on transfers by reason of a holder being an "affiliate" of the
Parent or, prior to the Effective Date, for purposes of United States federal or
state securities law). The Parent will in good faith expeditiously take all such
actions and do all such things as are necessary or desirable to cause all Parent
Common Shares to be delivered pursuant to the Exchangeable Share Provisions,
Exchange Right or the Automatic Exchange Rights to be listed, quoted or posted
for trading on all stock exchanges and quotation systems on which outstanding
Parent Common Shares are listed, quoted or posted for trading at such time.
2.7 Economic Equivalence.
(a) The Parent will not without the prior approval of the Corporation and the
prior approval of the holders of the Exchangeable Shares given in accordance
with Section 10.2 of the Exchangeable Share Provisions:
(i) issue or distribute Parent Common Shares (or securities exchangeable
for or convertible into or carrying rights to acquire Parent Common Shares) to
the holders of all or substantially all of the then outstanding Parent Common
Shares by way of stock dividend or other distribution, other than an issue of
Parent Common Shares (or securities exchangeable for or convertible into or
carrying rights to acquire Parent Common Shares) to holders of Parent Common
Shares who exercise an option to receive dividends in Parent Common Shares (or
securities exchangeable for or convertible into or carrying rights to acquire
Parent Common Shares) in lieu of receiving cash dividends; or
(ii) issue or distribute rights, options or warrants to the holders of all
or substantially all of the then outstanding Parent Common Shares entitling
them to subscribe for or to purchase Parent Common Shares (or securities
exchangeable for or convertible into or carrying rights to acquire Parent
Common Shares); or
(iii) issue or distribute to the holders of all or substantially all of the
then outstanding Parent Common Shares (A) shares or securities of the Parent
of any class other than Parent Common Shares (other than shares convertible
into or exchangeable for or carrying rights to acquire Parent Common Shares),
(B) rights, options or warrants other than those referred to in section
2.7(a)(ii) above, (C) evidences of indebtedness of the Parent or (D) assets of
the Parent;
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unless (i) the Corporation is able under applicable law to issue or distribute
the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets simultaneously to
holders of the Exchangeable Shares, and (ii) the Corporation shall issue or
distribute such rights, options, securities, shares, evidences of indebtedness
or other assets simultaneously to holders of the Exchangeable Shares.
(b) The Parent will not without the prior approval of the Corporation and the
prior approval of the holders of the Exchangeable Shares given in accordance
with Section 10.2 of the Exchangeable Share Provisions:
(i) subdivide, redivide or change the then outstanding Parent Common Shares
into a greater number of Parent Common Shares; or
(ii) reduce, combine or consolidate or change the then outstanding Parent
Common Shares into a lesser number of Parent Common Shares; or
(iii) reclassify or otherwise change the Parent Common Shares or effect an
amalgamation, merger, reorganization or other transaction affecting the Parent
Common Shares;
unless (i) the Corporation is able under applicable law to simultaneously make
the same or an economically equivalent change to, or in the rights of the
holders of, the Exchangeable Shares, and (ii) the Corporation simultaneously
does make the same or an economically equivalent change to, or in the rights of
the holders of, the Exchangeable Shares.
(c) The Parent will ensure that the record date for any event referred to in
section 2.7(a) or 2.7(b) above, or (if no record date is applicable for such
event) the effective date for any such event, is not less than 20 Business Days
(or such shorter period as the Parent and the Corporation may agree upon) after
the date on which such event is declared or announced by the Parent (with
simultaneous notice thereof to be given by the Parent to the Corporation).
(d) The Board of Directors of the Corporation shall determine, in good faith
and in its sole discretion (with the assistance of such reputable and qualified
independent financial advisors and/or other experts as the board may require),
economic equivalence for the purposes of any event referred to in Section 2.7(a)
or 2.7(b) above and each such determination shall be conclusive and binding on
Dutchco and the Parent. In making each such determination, the following factors
shall, without excluding other factors determined by the Board of Directors of
the Corporation to be relevant, be considered by the Board of Directors of the
Corporation:
(i) in the case of any stock dividend or other distribution payable in
Parent Common Shares, the number of such shares issued in proportion to the
number of Parent Common Shares previously outstanding;
(ii) in the case of the issuance or distribution of any rights, options or
warrants to subscribe for or purchase Parent Common Shares (or securities
exchangeable for or convertible into or carrying rights to acquire Parent
Common Shares), the relationship between the exercise price of each such
right, option or warrant and the current market value (as determined by the
Board of Directors of the Corporation in the manner above contemplated) of a
Parent Common Share;
(iii) in the case of the issuance or distribution of any other form of
property (including without limitation any shares or securities of the Parent
of any class other than Parent Common Shares, any rights, options or warrants
other than those referred to in Section 2.7(d)(ii) above, any evidences of
indebtedness of the Parent or any assets of the Parent), the relationship
between the fair market value (as determined by the Board of Directors of the
Corporation in the manner above contemplated) of such property to be issued or
distributed with respect to each outstanding Parent Common Share and the
current market value (as determined by the Board of Directors of the
Corporation in the manner above contemplated) of a Parent Common Share;
(iv) in the case of any subdivision, redivision or change of the then
outstanding Parent Common Shares into a greater number of Parent Common Shares
or the reduction, combination or consolidation or change of the then
outstanding Parent Common Shares into a lesser number of Parent Common Shares
or any amalgamation, merger, reorganization or other transaction affecting the
Parent Common Shares, the effect thereof upon the then outstanding Parent
Common Shares; and
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(v) in all such cases, the general taxation consequences of the relevant
event to holders of Exchangeable Shares to the extent that such consequences
may differ from the taxation consequences to holders of Parent Common Shares
as a result of differences between taxation laws of Canada and the United
States (except for any differing consequences arising as a result of differing
marginal taxation rates and without regard to the individual circumstances of
holders of Exchangeable Shares).
For purposes of the foregoing determinations, the current market value of any
security listed and traded or quoted on a securities exchange or automated
quotation system shall be the average of the closing prices of such security
during the three consecutive trading days ending not more than five trading days
before the date of determination on the principal securities exchange on which
such securities are listed and traded or quoted; provided, however, that if
there is no active public distribution or trading activity of such securities
during such period, then the current market value thereof shall be determined by
the Board of Directors of the Corporation, in good faith and in its sole
discretion (with the assistance of such reputable and qualified independent
financial advisors and/or other experts as the board may require), and provided
further that any such determination by the Board of Directors of the Corporation
shall be conclusive and binding on the Parent.
2.8 Tender Offers, Etc. In the event that a tender offer, share exchange
offer, issuer bid, take-over bid or similar transaction with respect to Parent
Common Shares (an "Offer") is proposed by the Parent or is proposed to the
Parent or its shareholders and is recommended by the Board of Directors of the
Parent, or is otherwise effected or to be effected with the consent or approval
of the Board of Directors of the Parent, the Parent will use its best efforts
expeditiously and in good faith to take all such actions and do all such things
as are necessary or desirable to enable and permit holders of Exchangeable
Shares to participate in such Offer to the same extent and on an economically
equivalent basis as the holders of Parent Common Shares, without discrimination.
Without limiting the generality of the foregoing, the Parent will use its best
efforts expeditiously and in good faith to ensure that holders of Exchangeable
Shares may participate in all such Offers without being required to retract
Exchangeable Shares as against the Corporation (or, if so required, to ensure
that any such retraction shall be effective only upon, and shall be conditional
upon, the closing of the Offer and only to the extent necessary to tender or
deposit to the Offer).
2.9 Ownership of Outstanding Shares. Without the prior approval of the
Corporation and the prior approval of the holders of the Exchangeable Shares
given in accordance with Section 10.2 of the Exchangeable Share Provisions, the
Parent covenants and agrees in favour of the Corporation that, as long as any
outstanding Exchangeable Shares are owned by any person or entity other than the
Parent or any of its Affiliates, Parent will be and remain the direct or
indirect beneficial owner of all issued and outstanding shares in the capital of
the Corporation other than the Class D Shares and all outstanding securities of
the Corporation, in each case carrying or otherwise entitled to voting rights in
any circumstances, and in each case other than the Exchangeable Shares or the
Class D Shares.
2.10 Parent Not To Vote Exchangeable Shares. The Parent covenants and agrees
that it will appoint and cause to be appointed proxyholders with respect to all
Exchangeable Shares held by the Parent and its subsidiaries and Affiliates for
the sole purpose of attending each meeting of holders of Exchangeable Shares in
order to be counted as part of the quorum for each such meeting. The Parent
further covenants and agrees that it will not, and will cause its subsidiaries
and Affiliates not to, exercise any voting rights which may be exercisable by
holders of Exchangeable Shares from time to time pursuant to the Exchangeable
Share Provisions or pursuant to the provisions of the Companies Act (Quebec) (or
any successor or other corporate statute by which the Corporation in the future
shall be governed) with respect to any Exchangeable Shares held by it or by its
subsidiaries or Affiliates in respect of any matter considered at any meeting of
holders of Exchangeable Shares.
2.11 Due Performance. On and after the Effective Time, Parent and Dutchco
shall duly and timely perform all of their respective obligations expressed in
the Combination Agreement.
2.12 Preservation of Existence of Corporation. Without the prior approval of
the holders of Exchangeable Shares given in accordance with Section 10.2 of the
Exchangeable Shares Provisions, the Parent, Dutchco and Corporation covenant and
agree that, so long as any Exchangeable Shares are owned by any person or entity
other than the Parent or its Affiliates, the separate existence of Corporation
shall be preserved and Corporation shall not be liquidated, wound up or
dissolved or merged with or into another entity.
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2.13 Certain Requirements in Respect of Combination, etc. The Parent shall not
enter into any transaction (whether by way of reconstruction, reorganization,
consolidation, merger, transfer, sale, lease or otherwise) whereby all or
substantially all of its undertaking, property and assets would become the
property of any other person or, in the case of a merger, of the continuing
corporation resulting therefrom unless:
(a) such other person or continuing corporation is a corporation (herein
called the "Parent Successor") incorporated under the laws of any state of the
United States or the laws of Canada or any province thereof;
(b) the Parent Successor, by operation of law, becomes, without more, bound by
the terms and provisions of this trust agreement or, if not so bound, executes,
prior to or contemporaneously with the consummation of such transaction a trust
agreement supplemental hereto and such other instruments (if any) as are
satisfactory to the Trustee and in the opinion of legal counsel to the Trustee
are necessary or advisable to evidence the assumption by the Parent Successor of
liability for all moneys payable and property deliverable hereunder and the
covenant of such Parent Successor to pay and deliver or cause to be delivered
the same and its agreement to observe and perform all the covenants and
obligations of the Parent under this trust agreement; and
(c) such transaction shall, to the satisfaction of the Trustee and in the
opinion of legal counsel to the Trustee, be upon such terms as substantially to
preserve and not to impair in any material respect any of the rights, duties,
powers and authorities of the Trustee or of the Beneficiaries hereunder.
ARTICLE 3
GENERAL
3.1 Term. This agreement shall come into force and be effective upon the issue
by the Corporation of Exchangeable Shares and shall terminate and be of no
further force and effect at such time as no Exchangeable Shares (or securities
or rights convertible into or exchangeable for or carrying rights to acquire
Exchangeable Shares) are held by any party other than the Parent and any of its
Affiliates.
3.2 Changes in Capital of Parent and the Corporation. Notwithstanding the
provisions of Section 3.4, at all times after the occurrence of any event
effected pursuant to Section 2.7 or 2.8 hereof, as a result of which either the
Parent Common Shares or the Exchangeable Shares or both are in any way changed,
this agreement shall forthwith be amended and modified as necessary in order
that it shall apply with full force and effect, mutatis mutandis, to all new
securities into which the Parent Common Shares or the Exchangeable Shares or
both are so changed and the parties hereto shall execute and deliver an
agreement in writing giving effect to and evidencing such necessary amendments
and modifications.
3.3 Severability. If any provision of this agreement is held invalid, illegal
or unenforceable, the validity, legality or enforceability of the remainder of
this agreement shall not in any way be affected or improved thereby and this
agreement shall be carried and as near as possible in accordance with its
original terms and conditions; and to this end the provisions of this agreement
are intended to be and shall be deemed severable; provided, however, that if the
provision or provisions so held to be invalid, in the reasonable judgment of the
parties hereto, is or are so fundamental to the intent of the parties hereto and
the operation of this agreement that the enforcement of the other provisions
hereof, in the absence of such invalid provision or provisions, would damage
irreparably the intent of the parties in entering into this agreement, the
parties hereto shall agree to amend or otherwise modify this agreement so as to
carry out the intent and purposes hereof and the transactions contemplated
hereby.
3.4 Amendments, Modifications, etc. Except as contemplated by Section 3.5,
this agreement may not be amended or modified except by an agreement in writing
executed by the Corporation, Dutchco and the Parent and approved by the holders
of the Exchangeable Shares in accordance with Section 10.2 of the Exchangeable
Share Provisions.
3.5 Ministerial Amendments. Notwithstanding the provisions of Section 3.4, the
parties to this agreement may in writing, at any time and from time to time,
without the approval of the holders of the Exchangeable Shares, amend or modify
this agreement for the purposes of:
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(a) adding to the covenants of any of the parties for the protection of the
holders of the Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with this
agreement as may be necessary or desirable with respect to matters or questions
which, in the opinion of the Boards of Directors of each of the Corporation,
Dutchco and the Parent, it may be expedient to make, provided that each such
Board of Directors shall be of the opinion that such amendments or modifications
will not be prejudicial to the interests of the holders of the Exchangeable
Shares; or
(c) making such changes or corrections which, on the advice of counsel to the
Corporation, Dutchco and the Parent, are required for the purpose of curing or
correcting any ambiguity or defect or inconsistent provision or clerical
omission or mistake or manifest error, provided that the Boards of Directors of
each of the Corporation, Dutchco and the Parent shall be of the opinion that
such changes or corrections will not be prejudicial to the interests of the
holders of the Exchangeable Shares.
3.6 Meeting to Consider Amendments. The Corporation, at the request of the
Parent or Dutchco, shall call a meeting or meetings of the holders of the
Exchangeable Shares for the purpose of considering any proposed amendment or
modification requiring approval pursuant to Section 3.4 hereof. Any such meeting
or meetings shall be called and held in accordance with the by-laws of the
Corporation, the Exchangeable Share Provisions and all applicable laws.
3.7 Amendments Only in Writing. No amendment to or modification or waiver of
any of the provisions of this agreement otherwise permitted hereunder shall be
effective unless made in writing and signed by all of the parties hereto.
3.8 Enurement. This agreement shall be binding upon and enure to the benefit
of the parties hereto and their respective successors and assigns.
3.9 Notices to Parties. All notices and other communications between the
parties shall be in writing and shall be deemed to have been given if delivered
personally or by confirmed telecopy to the parties at the following addresses
(or at such other address for either such party as shall be specified in like
notice):
(a) if to the Parent or Dutchco at:
Autodesk, Inc.
20400 Stevens Creek Boulevard
Cupertino, CA 95401-2217
Attention: Marcia K. Sterling
Vice President Business Development, General Counsel and Secretary
Telecopy:
(408) 517-1886
(b) if to the Corporation at:
Discreet Logic Inc.
10 Duke Street
Montreal, Quebec
Canada H3C 2L7
Attention: Francois Plamondon
Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Telecopy:
(514) 393-3996
Any notice or other communication given personally shall be deemed to have been
given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of confirmed receipt thereof,
provided such notice or other communication is received prior to 5:00 p.m.
(local time) on a Business Day, and otherwise it shall be deemed to have been
given and received upon the immediately following Business Day.
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3.10 Counterparts. This agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
3.11 Jurisdiction. This agreement shall be construed and enforced in
accordance with the laws of the Province of Quebec and the laws of Canada
applicable therein.
3.12 Attornment. The Parent, Dutchco and the Corporation agree that any action
or proceeding arising out of or relating to this agreement may be instituted in
the courts of Quebec, waive any objection which they may have now or hereafter
to the venue of any such action or proceeding, irrevocably submits to the non-
exclusive jurisdiction of the said courts in any such action or proceeding,
agree to be bound by any judgment of the said courts and not to seek, and hereby
waive, any review of the merits of any such judgment by the courts of any other
jurisdiction and the Parent and Dutchco hereby appoint the Corporation at its
registered office in the Province of Quebec as the Parent's and Dutchco's
attorney for service of process.
3.13 Guaranty/Assignment. Parent hereby unconditionally and irrevocably
guarantees the prompt and full performance by Dutchco of, and shall cause
Dutchco to comply with, its obligations hereunder and pursuant to the
Transactions. Dutchco may assign all or a portion of its rights and obligations
hereunder to Parent or any Affiliate of Parent, which shall thereupon assume
such assigned rights and/or obligations without the consent of the Corporation
subject to the Corporation and Parent or such Affiliate, as the case may be,
entering into a supplemental agreement reflecting such assignment and
assumption. This agreement may not be assigned by the Parent without the prior
written consent of Dutchco and the Corporation approved by the holders of the
Exchangeable Shares in accordance with Section 10.2 of the Exchangeable Share
Provisions.
3.14 Language. The parties have agreed that this agreement be drafted in
English. Les parties ont convenu que cette convention soit redigee en langue
anglaise.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be duly
executed as of the date first above written.
AUTODESK, INC.
By: /s/ Carol A. Bartz
--------------------------
Name: Carol A. Bartz
Title: Chief Executive Officer
AUTODESK DEVELOPMENT B.V.
By: /s/ Michael E. Sutton
-----------------------------
Name: Michael E. Sutton
Title: Directeur
DISCREET LOGIC INC.
By: /s/ Marcia K. Sterling
------------------------------
Name: Marcia K. Sterling
Title: Secretary
10
<PAGE>
EXHIBIT 10.30
[SGI LETTERHEAD]
VIA FAX (514/393-3996)
June 16, 1999
Ms. Rose Mary Correia
Discreet Logic, Inc.
10, Rue Duke
Montreal CANADA H3C 2L7
Re: Extension of Value Added Reseller Agreement, No. 12-11-441
Dear Ms. Correia:
This letter shall serve to extend the discount and payment terms of the
Value Added Reseller Agreement ("Agreement") between Silicon Graphics, Inc.
("SGI") and Discreet Logic Inc. ("Discreet"), as amended and extended. This
extension shall be effective as of July 1, 1999 and continue until and
including July 31, 1999.
All other terms and conditions of the Agreement shall apply to purchases of
SGI product by Discreet during the term of this extension.
Please indicate your acceptance of these terms of the extension by signing
where provided below.
Very truly yours
/s/ Fred Welz
-------------------------------------
Fred Welz
Vice President, Americas
International
cc: Paul Michalovic (via FAX)
Matt Miller
Acknowledged and agreed
By: /s/ Steve Cakebread
---------------------------------
Name: Steve Cakebread
---------------------------------
Title: V.P. CFO
---------------------------------
Date:
---------------------------------
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF DISCREET LOGIC INC.
The Registrant owns 100% of the outstanding voting securities of the
following corporations, as of June 23, 1999, all of which are included in the
Registrant's consolidated financial statements:
<TABLE>
<CAPTION>
<S> <C>
Name Jurisdiction of Incorporation
---- -----------------------------
Discreet Logic Asia- Pacific Pte, Ltd. Singapore
Discreet Logic KK Japan
Discreet Logic (Brazil) Industria e Comercio
Ltda Brazil
Discreet Logic Europe S.A. Luxembourg
Discreet Logic France SARL France
Discreet Logic (UK) Ltd. United Kingdom
Discreet Logic GmbH Germany
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 2,943
<SECURITIES> 0
<RECEIVABLES> 1,390
<ALLOWANCES> 99
<INVENTORY> 0
<CURRENT-ASSETS> 4,671
<PP&E> 426
<DEPRECIATION> 395
<TOTAL-ASSETS> 4,730
<CURRENT-LIABILITIES> 2,273
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 2,454
<TOTAL-LIABILITY-AND-EQUITY> 4,730
<SALES> 11,419
<TOTAL-REVENUES> 11,419
<CGS> 9,696
<TOTAL-COSTS> 196
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 58
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,438
<INCOME-TAX> 687
<INCOME-CONTINUING> 751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 751
<EPS-BASIC> 751<F1>
<EPS-DILUTED> 751
<FN>
<F1>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 52,616
<SECURITIES> 0
<RECEIVABLES> 17,221
<ALLOWANCES> 3,484
<INVENTORY> 15,407
<CURRENT-ASSETS> 89,293
<PP&E> 27,448
<DEPRECIATION> 18,766
<TOTAL-ASSETS> 120,507
<CURRENT-LIABILITIES> 49,589
<BONDS> 0
0
72
<COMMON> 109,891
<OTHER-SE> (41,142)
<TOTAL-LIABILITY-AND-EQUITY> 120,507
<SALES> 10,195
<TOTAL-REVENUES> 10,195
<CGS> 5,189
<TOTAL-COSTS> 2,982
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 1,740
<INCOME-TAX> 636
<INCOME-CONTINUING> 1,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,104
<EPS-BASIC> 0.09<F1>
<EPS-DILUTED> 0.09
<FN>
<F1>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
