As filed with the Securities and Exchange Commission on February 5, 1999
Registration No. 333-65075
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AUTODESK, INC.
(Exact name of Registrant as specified in its charter)
--------------
Delaware 7372 94-2819853
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification Number)
111 McInnis Parkway Carol A. Bartz
San Rafael, CA 94903 Chairman and Chief Executive Officer
(415) 507-5000 Autodesk, Inc.
(Address, including zip 111 McInnis Parkway
code, and telephone
number,
including area code, of San Rafael, CA 94903
Registrant's principal
executive offices)
(415) 507-5000
(Name, address, including zip code, and telephone
number,
including area code, of Registrant's agent for
service)
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DISCREET LOGIC INC.
(Exact name of Registrant as specified in its charter)
--------------
Quebec 7372 98-0150790
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification Number)
10 Duke Street CT Corporation System
Montreal, Quebec 2 Oliver Street
Canada H3C 2L7 Boston, MA 92109
(514) 393-1616 (617) 482-1868
(Address, including zip (Name, address, including zip code, and telephone
code, and telephone number,
number, including area code, of Registrant's agent for
including area code, of service of process)
Registrant's principal
executive offices)
(Continued on next page)
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(Continued from previous page)
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9066-9771 QUEBEC INC.
(Exact name of Registrant as specified in its charter)
--------------
Quebec 7372
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification Number)
1000 Sherbrooke Street Marcia K. Sterling
West
27th Floor Vice President, Business Development,
Montreal, Quebec General Counsel and Secretary
Canada H3A 3G4 Autodesk, Inc.
(514) 987-5000 111 McInnis Parkway
(Address, including zip San Rafael, CA 94903
code, and telephone
number,
including area code, of (415) 507-5000
Registrant's principal
executive offices)
(Name, address, including zip code, and telephone
number,
including area code, of Registrant's agent for
service)
--------------
9066-9854 QUEBEC INC.
(Exact name of Registrant as specified in its charter)
--------------
Quebec 7372
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification Number)
1000 Sherbrooke Street Marcia K. Sterling
West
27th Floor Vice President, Business Development,
Montreal, Quebec General Counsel and Secretary
Canada H3A 3G4 Autodesk, Inc.
(514) 987-5000 111 McInnis Parkway
(Address, including zip San Rafael, CA 94903
code, and telephone
number,
including area code, of (415) 507-5000
Registrant's principal
executive offices)
(Name, address, including zip code, and telephone
number,
including area code, of Registrant's agent for
service)
--------------
Copies of all correspondence to:
Mark A. Bertelsen, Esq. Richard J. Szalwinski Mark J. Macenka, Esq.
Herbert P. Fockler, Esq. Chairman, President and Jocelyn M. Arel, Esq.
Don S. Williams, Esq. Chief Executive Officer Michael D. Hochberg, Esq.
Wilson Sonsini Goodrich Discreet Logic Inc. Testa, Hurwitz & Thibeault, LLP
& Rosati
Professional Corporation 10 Duke Street High Street Tower
650 Page Mill Road Montreal, Quebec, Canada Boston, MA 02110
Palo Alto, CA 94304-1050 H3C 2L7 (617) 248-7000
(650) 493-9300 (514) 393-1616
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement and the
satisfaction or waiver of certain conditions under the Acquisition Agreement
described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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[LOGO OF AUTODESK]
February 8, 1999
Dear Autodesk Stockholder:
You are cordially invited to attend an important Special Meeting of
Stockholders to be held on March 10, 1999, at 10:00 a.m., local time, at The
Executive Briefing Center, Autodesk, Inc., 111 McInnis Parkway, San Rafael,
California. Because of the importance of the business of the Autodesk meeting,
we hope as many of you as possible will attend in person or be represented by
sending in your proxies.
The business of the Autodesk meeting is to consider and vote on the issuance
of shares of Autodesk Common Stock in connection with a strategic business
combination with Discreet Logic Inc. ("Discreet"), a leader in the development
and marketing of digital systems and software for creating, editing and
compositing imagery and special effects for film, video, HDTV, broadcast and
the web. We believe the business combination with Discreet will position us to
create together the premier total solutions provider of digital content
design, creation and manipulation tools for the creation of moving images. The
acquisition will be effected principally by way of an amalgamation under the
laws of the Canadian province of Quebec (the "Amalgamation") whereby Discreet
will be combined with certain subsidiaries of Autodesk, resulting in the
formation of a new Autodesk subsidiary which will carry on the business of
Discreet.
The details of the Amalgamation and the subsequent transactions are included
in the attached Joint Proxy Statement/Prospectus. Also included is a form of
proxy for you to complete and return no later than March 9, 1999, as specified
in the enclosed Notice of Special Meeting. After careful consideration, your
Board of Directors has unanimously approved the proposed combination with
Discreet and has determined that the transaction is fair and in the best
interests of Autodesk and its stockholders, and recommends that you vote FOR
the resolution concerning the issuance of Autodesk Common Stock in connection
with the Amalgamation and subsequent transactions. The Autodesk Board believes
that the business combination with Discreet will enhance Autodesk's position
as a leading technology supplier to the entertainment and design industries
and will further Autodesk's strategy of diversification into complementary
high-growth businesses and markets. Based on the capitalization of each of
Autodesk and Discreet as of December 31, 1998, Autodesk will issue
approximately 9.9 million new shares of Autodesk Common Stock to shareholders
of Discreet (including shares of Autodesk Common Stock issuable upon exchange
of exchangeable shares to be issued pursuant to the transactions), which
shares will represent approximately 16.5% of the Autodesk Common Stock
outstanding upon consummation of the transactions (assuming exchange of all
exchangeable shares issued in the transactions and assuming the issuance by
Autodesk of 3 million additional shares of Autodesk Common Stock prior to the
closing of the transactions).
Yours very truly,
/s/ CAROL A. BARTZ
Carol A. Bartz
Chairman of the Board and Chief
Executive Officer
WE HOPE YOU WILL BE ABLE TO ATTEND THE AUTODESK MEETING. WHETHER OR NOT
YOU ARE ABLE TO ATTEND THE MEETING, IT IS STILL IMPORTANT THAT YOU BE
REPRESENTED AT THE AUTODESK MEETING. WE URGE YOU TO COMPLETE THE ENCLOSED
FORM OF PROXY AND RETURN IT IN THE POSTAGE-PAID ENVELOPE PROVIDED NOT LATER
THAN MARCH 9, 1999, AS SPECIFIED IN THE NOTICE OF AUTODESK SPECIAL MEETING.
REGARDLESS OF THE NUMBER OF SHARES YOU OWN, YOUR VOTE IS IMPORTANT.
AUTODESK, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of
Autodesk, Inc. (the "Autodesk Meeting") will be held at The Executive Briefing
Center, Autodesk, Inc., 111 McInnis Parkway, San Rafael, California, on March
10, 1999 at 10:00 a.m. (local time) for the purposes described below:
(i) to consider and vote upon the proposed issuance of shares of Common
Stock, $0.01 par value, of Autodesk, Inc. ("Autodesk Common Stock"),
pursuant to the Second Amended and Restated Agreement and Plan of
Acquisition and Amalgamation by and among Autodesk, Inc., 9066-9771 Quebec
Inc., 9066-9854 Quebec Inc., Autodesk Canada Inc., Autodesk Development
B.V. and Discreet Logic Inc. dated as of November 18, 1998, as amended on
December 18, 1998 and January 18, 1999 (the "Acquisition Agreement"), the
full text of which is set out in Appendix A to the accompanying Joint Proxy
Statement/Prospectus (the "Proxy Circular"); and
(ii) to transact such other business as may properly come before the
Autodesk Meeting or at any adjournment or postponement thereof, including a
proposal to adjourn the Autodesk Meeting, if necessary, to permit further
solicitation of proxies in the event sufficient votes are not obtained to
approve the proposed issuance of Autodesk Common Stock pursuant to the
Acquisition Agreement.
The foregoing proposal is described more fully in the accompanying Proxy
Circular.
Stockholders of record at the close of business on January 27, 1999 are
entitled to notice of, and to vote at, the Autodesk Meeting and any
adjournments or postponements thereof, and are cordially invited to attend the
Autodesk Meeting in person.
FOR THE BOARD OF DIRECTORS
/s/ MARCIA K. STERLING
Marcia K. Sterling
Vice President, Business Development,
General Counsel and Secretary
San Rafael, California
February 8, 1999
WHETHER OR NOT YOU EXPECT TO ATTEND THE AUTODESK MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED ENVELOPE IN ORDER TO ENSURE REPRESENTATION OF YOUR SHARES. NO
POSTAGE NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
PROXIES MUST BE RECEIVED BEFORE 5:00 P.M. (PACIFIC TIME) ON THE BUSINESS
DAY PRIOR TO THE DAY OF THE AUTODESK MEETING (OR ANY ADJOURNMENT THEREOF)
OR MAY BE DEPOSITED WITH THE AUTODESK SECRETARY PRIOR TO THE COMMENCEMENT
OF THE AUTODESK MEETING OR OF ANY ADJOURNMENT THEREOF.
[LOGO OF DISCREET LOGIC]
February 8, 1999
Dear Discreet Shareholder:
As most of you are aware, Discreet has entered into an agreement to combine
with Autodesk, Inc. ("Autodesk") in a strategic business combination. We are
pleased to invite you to attend an important Special General Meeting of
Shareholders (the "Discreet Meeting"), to be held on March 10, 1999 at 1:00
p.m. (Montreal time) at the Ritz-Carlton Hotel, 1228 Sherbrooke Street West,
Montreal, Quebec, Canada. Because of the importance of the business of the
Discreet Meeting, we would like as many of you as possible either to attend in
person, or to be represented by sending in your proxies.
The business of the Discreet Meeting is to consider and vote on a proposal
to approve consummation of an amalgamation under the laws of Quebec (the
"Amalgamation") to implement the previously announced combination of Discreet
and Autodesk and to approve the Second Amended and Restated Agreement and Plan
of Acquisition and Amalgamation by and among Autodesk, 9066-9771 Quebec Inc.,
9066-9854 Quebec Inc., Autodesk Development Canada Inc., Autodesk Development
B.V. and Discreet dated as of November 18, 1998, as amended on December 18,
1998 and January 18, 1999 (the "Acquisition Agreement"). The Amalgamation will
result in the creation of a newly formed indirect subsidiary of Autodesk which
will carry on the business of Discreet ("New Discreet").
After careful consideration, and based on the unanimous recommendation of a
special committee of the Discreet Board of Directors consisting of directors
who are not employees of Discreet and who do not own a significant number of
Discreet common shares, Discreet's Board of Directors has approved the
Acquisition Agreement by the unanimous vote of all non-interested directors
and believes that the Amalgamation and certain related transactions
(collectively, with the Amalgamation, the "Transactions") are fair and in the
best interests of Discreet and its shareholders, and recommends that you vote
FOR the proposal to approve consummation of the Amalgamation and to approve
the Acquisition Agreement. The Board of Directors of Discreet believes that
the Transactions offer Discreet and its shareholders a number of important
benefits, including the potential for the combined company to capitalize on
the expanded product offerings, the distribution, marketing and product
synergies, and the greater financial, product development, distribution, sales
and marketing resources that would result from combining the two companies.
The details of the Transactions are included in the attached Joint Proxy
Statement/Prospectus (the "Proxy Circular"). Also included is a form of proxy.
Please review the Proxy Circular--it has been prepared to help you make an
informed investment and voting decision.
If the Acquisition Agreement is approved and the Transactions are
consummated, then Discreet shareholders will effectively have two choices:
(i) to exchange each of their Discreet common shares for 0.33 shares of
Autodesk Common Stock; or
(ii) subject to possible proration, to exchange each of their Discreet
Common Shares for 0.33 of an exchangeable share of New Discreet (the
"New Discreet Exchangeable Shares"). New Discreet will be a Quebec
company. Each New Discreet Exchangeable Share may subsequently be
exchanged, at the option of the holder, for one share of Autodesk
Common Stock. Until such exchange, each New Discreet Exchangeable Share
will entitle its holder to receive dividends functionally equivalent to
any
dividends paid on one share of Autodesk Common Stock and will carry the
right to direct the number of votes at meetings of the stockholders of
Autodesk equal to that number of votes to which such New Discreet
Exchangeable Share would be entitled if exchanged for Autodesk Common
Stock. This is an option which may appeal to certain of Discreet's
Canadian shareholders for Canadian tax reasons. You will receive
shortly a green Letter of Transmittal and Election Form for use in
making an election to receive New Discreet Exchangeable Shares.
Please review the Proxy Circular carefully with respect to your choices and
their anticipated tax effects.
WE HOPE YOU WILL BE ABLE TO ATTEND THE DISCREET MEETING. WHETHER OR NOT
YOU ARE ABLE TO ATTEND THE MEETING, IT IS STILL IMPORTANT THAT YOU BE
REPRESENTED AT THE DISCREET MEETING. WE URGE YOU TO COMPLETE THE ENCLOSED
FORM OF PROXY AND RETURN IT IN THE POSTAGE-PAID ENVELOPE PROVIDED NOT LATER
THAN MARCH 9, 1999, AS SPECIFIED IN THE NOTICE OF SPECIAL GENERAL MEETING.
REGARDLESS OF THE NUMBER OF SHARES YOU OWN, YOUR VOTE IS IMPORTANT.
Yours very truly,
/s/ RICHARD J. SZALWINSKI
Richard J. Szalwinski
Chairman of the Board, President and
Chief Executive Officer
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY. IF YOU WISH TO RECEIVE NEW
DISCREET EXCHANGEABLE SHARES PURSUANT TO THE TRANSACTIONS, YOU WILL RECEIVE
SHORTLY A LETTER OF TRANSMITTAL AND ELECTION FORM WITH INSTRUCTIONS ON HOW
TO DEPOSIT YOUR DISCREET COMMON SHARES AND MAKE AN ELECTION TO RECEIVE NEW
DISCREET EXCHANGEABLE SHARES IN EXCHANGE THEREFOR. IN ORDER TO BE ELIGIBLE
TO RECEIVE NEW DISCREET EXCHANGEABLE SHARES, YOU MUST RETURN THE GREEN
LETTER OF TRANSMITTAL AND ELECTION FORM, TOGETHER WITH YOUR CERTIFICATES
REPRESENTING DISCREET COMMON SHARES, PROMPTLY, BUT IN NO EVENT LATER THAN
IMMEDIATELY FOLLOWING THE EFFECTIVE TIME OF THE AMALGAMATION, AS INDICATED
IN THE INSTRUCTIONS THERETO. HOWEVER, IF YOU WISH TO RECEIVE AUTODESK
COMMON STOCK, DO NOT SURRENDER YOUR CERTIFICATES REPRESENTING DISCREET
COMMON SHARES AT THE PRESENT TIME, BUT RATHER WAIT UNTIL YOU HAVE BEEN
ADVISED TO DO SO.
DISCREET LOGIC INC.
NOTICE OF SPECIAL GENERAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a special general meeting of the holders of
Common Shares of Discreet Logic Inc. (the "Discreet Meeting") will be held on
March 10, 1999 at 1:00 p.m. (Montreal time) at the Ritz-Carlton Hotel, 1228
Sherbrooke Street West, Montreal, Quebec, Canada for the purposes described
below:
(i) to consider and vote upon a proposal of the Board of Directors to
approve the Second Amended and Restated Agreement and Plan of Acquisition
and Amalgamation (the "Acquisition Agreement") by and among Autodesk, Inc.,
9066-9771 Quebec Inc. ("Amalgamation Sub"), 9066-9854 Quebec Inc.
("Autodesk Quebec"), Autodesk Canada Inc., Autodesk Development B.V. and
Discreet Logic Inc. ("Discreet") dated as of November 18, 1998, and as
amended on December 18, 1998 and January 18, 1999, the full text of which
is set out in Appendix A to the accompanying Joint Proxy
Statement/Prospectus (the "Proxy Circular"), and the by-law giving effect
to the resulting amalgamation of Discreet, Autodesk Quebec and Amalgamation
Sub; and
(ii) to transact such other business as may properly come before the
Discreet Meeting or at any adjournment or postponement thereof, including a
proposal to adjourn the Discreet Meeting, if necessary, to permit further
solicitation of proxies in the event there are not sufficient votes at the
time of the Discreet Meeting to approve and adopt the Acquisition Agreement
and/or approve the consummation of the transactions contemplated thereby.
The Proxy Circular as well as a proxy form accompany this Notice of Special
General Meeting of Shareholders. Discreet Shareholders registered as of the
close of business on January 27, 1999 are entitled to receive notice of, and
to vote at, the Discreet Meeting and any adjournment or postponement thereof.
By Order of the Board of Directors
/s/ FRANCOIS PLAMONDON
Francois Plamondon,
Executive Vice-President,
Chief Financial Officer,
Treasurer and Secretary
Montreal, Quebec
February 8, 1999
SHAREHOLDERS MAY EXERCISE THEIR VOTING RIGHTS BY ATTENDING THE DISCREET
MEETING OR BY COMPLETING A FORM OF PROXY. SHAREHOLDERS WHO ARE UNABLE TO BE
PRESENT IN PERSON AT THE DISCREET MEETING ARE REQUESTED TO COMPLETE, SIGN,
DATE AND RETURN THE ENCLOSED FORM OF PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE PROVIDED FOR THAT PURPOSE. PROXIES MUST BE RECEIVED
BEFORE 5:00 P.M. (MONTREAL TIME) ON THE BUSINESS DAY PRIOR TO THE DISCREET
MEETING (OR ANY ADJOURNMENT THEREOF) OR MAY BE DEPOSITED WITH THE CHAIRMAN
OF THE DISCREET MEETING PRIOR TO THE COMMENCEMENT OF THE DISCREET MEETING
(OR OF ANY ADJOURNMENT THEREOF).
[LOGO OF AUTODESK] [LOGO OF DISCREET LOGIC]
JOINT PROXY STATEMENT/PROSPECTUS
---------------
This Joint Proxy Statement/Prospectus (this "Proxy Circular") is being
furnished to Autodesk Stockholders and Discreet Shareholders in connection
with the solicitation of proxies by management of Autodesk for use at the
Special Meeting of Autodesk Stockholders to be held at 10:00 a.m., local time,
on March 10, 1999, at The Executive Briefing Center, Autodesk, Inc., 111
McInnis Parkway, San Rafael, California (the "Autodesk Meeting"), and any
adjournment or postponement thereof, and by management of Discreet at the
Special General Meeting of Discreet Shareholders to be held at 1:00 p.m.,
local time, on March 10, 1999, at the Ritz-Carlton Hotel, 1228 Sherbrooke
Street West, Montreal, Quebec, Canada (the "Discreet Meeting"), and at any
adjournment or postponement thereof. Certain capitalized terms used in this
Proxy Circular without definition have the meanings given in the Glossary of
Terms found at page 1.
The Autodesk Meeting and Discreet Meeting each relates to a business
combination transaction involving Dutchco, Autodesk and Discreet. The business
combination will be completed by way of an amalgamation under the Quebec Act
and certain related transactions described below. Pursuant to the Articles of
Amalgamation, Discreet will be amalgamated with Autodesk Quebec and
Amalgamation Sub to form New Discreet, which will be a subsidiary of Dutchco
following the Transactions. Each holder of Discreet Common Shares will receive
upon the Amalgamation one New Discreet Class B Share for each Discreet Common
Share then held by such holder. Immediately following the Amalgamation, each
such New Discreet Class B Share will automatically, based upon the prior
election of the holder thereof, either (i) be redeemed by New Discreet for
0.33 New Discreet Exchangeable Shares, or (ii) be converted into one New
Discreet Unit, which will immediately thereafter be acquired by Dutchco in
exchange for 0.33 shares of Autodesk Common Stock, in either case without any
further required action on the part of the holder. Pursuant to the Acquisition
Agreement, the maximum number of Discreet Common Shares which ultimately may
be exchanged for New Discreet Exchangeable Shares may not exceed 19.99% of the
number of Discreet Common Shares outstanding immediately prior to the
Effective Time. If, based upon the elections of Discreet Shareholders, the
percentage of Discreet Common Shares to be exchanged for New Discreet
Exchangeable Shares would exceed 19.99% of the Discreet Common Shares
outstanding immediately prior to the Effective Time, such electing Discreet
Shareholders will receive, pro rata, New Discreet Units in lieu of New
Discreet Exchangeable Shares in respect of such excess, which New Discreet
Units will immediately be acquired by Dutchco in exchange for 0.33 shares of
Autodesk Common Stock. The New Discreet Exchangeable Shares will be
exchangeable at any time at the option of the holder, and will be
automatically exchanged on the eleventh anniversary of the Effective Time (or
earlier upon the occurrence of certain events, including the liquidation,
dissolution or winding-up of Autodesk or New Discreet), for Autodesk Common
Stock on a one-for-one basis plus the Dividend Amount.
At the Autodesk Meeting, Autodesk Stockholders will be asked to consider and
vote upon the Autodesk Resolution and to transact such further or other
business as may properly come before the Autodesk Meeting or any adjournment
or postponement thereof. At the Discreet Meeting, Discreet Shareholders will
be asked to consider and vote upon a proposal to approve the Discreet
Resolution and to transact such further or other business as may properly come
before the Discreet Meeting or any adjournment or postponement thereof. This
Proxy Circular and the accompanying form of proxy and (in the case of Discreet
Shareholders only) the Letter of Transmittal and Election are first being
mailed to Autodesk Stockholders and Discreet Shareholders on or about February
8, 1999.
Pursuant to the Transactions, Discreet Shareholders may choose to receive
either shares of Autodesk Common Stock or New Discreet Exchangeable Shares. It
is strongly recommended that US Holders (as defined herein) who own Discreet
Common Shares do not elect to receive New Discreet Exchangeable Shares since
the ownership and disposition of such shares may have certain adverse tax
consequences.
---------------
See "Risk Factors" beginning at page 26 for certain considerations relevant
to approval of the matters referred to above and an investment in the
securities referred to herein.
---------------
NEITHER THIS TRANSACTION NOR THE SECURITIES OFFERED HEREBY HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is February 5, 1999.
AVAILABLE INFORMATION
Autodesk and Discreet are subject to the informational requirements of the
Securities Exchange Act, and in accordance therewith file reports, proxy
statements and other information with the SEC. The reports, proxy statements
and other information filed by Autodesk and Discreet with the SEC can be
inspected and copied at or obtained at prescribed rates from the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and should be available for inspection at the
SEC's Regional Offices located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611. The SEC maintains a website (the "SEC Website") that
contains reports, proxy and information statements and other information
regarding Autodesk and Discreet. The address of the SEC Website is
http://www.sec.gov. Autodesk Common Stock and Discreet Common Shares are
quoted on the Nasdaq National Market. Reports and other information concerning
Autodesk and Discreet also can be inspected at the offices of the National
Association of Securities Dealers, Inc., Market Listing Section, 1735 K
Street, N.W., Washington, D.C. 20006.
Autodesk, Discreet, Amalgamation Sub and Autodesk Quebec have filed with the
SEC the Form S-4 under the Securities Act registering the shares of Autodesk
Common Stock, New Discreet Exchangeable Shares, New Discreet Class B Shares,
New Discreet Class E Shares and New Discreet Class F Shares to be received by
Discreet Shareholders in connection with the Transactions. This Proxy Circular
does not contain all of the information set forth in the Form S-4, certain
parts of which are omitted from this Proxy Circular in accordance with the
rules and regulations of the SEC. For further information, reference is hereby
made to the Form S-4. Copies of the Form S-4 (including the exhibits and
schedules thereto), may be inspected, without charge, at the offices of the
SEC, or obtained at prescribed rates from the Public Reference Section of the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or
accessed via the SEC Website at http://www.sec.gov.
No person is authorized to give any information or to make any
representation not contained in this Proxy Circular and, if given or made,
such information or representation should not be relied upon as having been
authorized. This Proxy Circular does not constitute an offer to sell, or a
solicitation of an offer to purchase, any securities, or the solicitation of a
proxy, by any person in any jurisdiction in which such an offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is unlawful
to make such an offer or solicitation of an offer or proxy solicitation.
Neither delivery of this Proxy Circular nor any distribution of the securities
referred to in this Proxy Circular shall, under any circumstances, create an
implication that there has been no change in the information set forth herein
since the date of this Proxy Circular.
----------------
INFORMATION PROVIDED BY AUTODESK AND DISCREET
All information in this Proxy Circular relating to Discreet has been
supplied by Discreet. All information relating to Autodesk, ACI, Autodesk
Quebec, Amalgamation Sub or Dutchco has been supplied by Autodesk. The
unaudited pro forma combined condensed financial information contained in this
Proxy Circular was prepared by Autodesk with information furnished, in part,
by Discreet.
----------------
TRADEMARKS
This Proxy Circular contains trademarks of Autodesk and Discreet and also
may include other trademarks and trade names which are the property of their
respective owners.
----------------
ii
FORWARD-LOOKING STATEMENTS
This Proxy Circular contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. Any statements contained herein (including without limitation
statements to the effect that Autodesk, Discreet or their respective
managements "believes," "expects," "anticipates," "plans" and similar
expressions) that are not statements of historical fact should be considered
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of certain factors,
including those set forth in the "Risk Factors" section below. Reference is
also made to the particular discussions set forth under "Autodesk Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Discreet Management's Discussion and Analysis of Financial Condition and
Results of Operations."
INCORPORATION OF DOCUMENTS BY REFERENCE
All documents and reports subsequently filed by Autodesk or Discreet
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Circular and prior to the Effective Time shall be deemed to
be incorporated by reference in this Proxy Circular and to be part hereof from
the dates of filing of such documents or reports. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Proxy Circular to
the extent that a statement contained herein or in any other subsequently
filed document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Circular.
iii
TABLE OF CONTENTS
Page
----
GLOSSARY OF TERMS......................................................... 1
AUTODESK AND DISCREET REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES...... 6
CANADIAN/US EXCHANGE RATES................................................ 6
SUMMARY................................................................... 7
Parties to the Acquisition Agreement...................................... 7
Special Meeting of Stockholders of Autodesk............................... 8
Special Meeting of Shareholders of Discreet............................... 9
Risk Factors.............................................................. 10
Reasons for the Transactions.............................................. 10
Piper Jaffray Fairness Opinion............................................ 10
Volpe Brown Whelan Fairness Opinion....................................... 10
The Transactions.......................................................... 10
Accounting Treatment...................................................... 15
Offering of Autodesk Common Stock......................................... 15
Stock Ownership Following Completion of the Transactions.................. 15
Material Canadian Federal Income Tax Considerations....................... 16
Material United States Federal Income Tax Considerations.................. 17
Regulatory Matters........................................................ 18
MARKET PRICE AND DIVIDEND INFORMATION..................................... 19
Autodesk Common Stock..................................................... 19
Discreet Common Shares.................................................... 20
SELECTED HISTORICAL AND UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL
DATA..................................................................... 21
UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA............ 24
COMPARATIVE PER SHARE DATA................................................ 25
RISK FACTORS.............................................................. 26
Risks Relating to the Transactions........................................ 26
Risks Relating to the Combined Company.................................... 30
AUTODESK SPECIAL MEETING.................................................. 40
Date, Time and Place of Autodesk Meeting.................................. 40
Purpose................................................................... 40
Record Date and Outstanding Shares........................................ 40
Vote Required............................................................. 40
Voting Agreements......................................................... 41
Solicitation of Proxies; Expenses......................................... 41
No Appraisal Rights....................................................... 41
Recommendation of the Autodesk Board...................................... 41
DISCREET SPECIAL MEETING.................................................. 42
Date, Time and Place of Discreet Meeting.................................. 42
Purpose................................................................... 42
Record Date and Outstanding Shares........................................ 42
Vote Required............................................................. 42
Proxies................................................................... 42
Voting Agreements......................................................... 43
Solicitation of Proxies; Expenses......................................... 43
No Appraisal Rights....................................................... 43
Recommendation of the Discreet Board...................................... 43
iv
TABLE OF CONTENTS--(Continued)
Page
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APPROVAL OF THE TRANSACTIONS.............................................. 44
Background of the Transactions............................................ 44
Joint Reasons for the Transactions........................................ 54
Discreet's Reasons for the Transactions .................................. 55
Autodesk's Reasons for the Transactions................................... 57
Interests of Certain Persons in the Transactions.......................... 59
Opinion of Autodesk's Financial Advisor................................... 60
Opinion of Discreet's Financial Advisor................................... 66
Proposed Market Purchases of Discreet Common Shares....................... 71
TERMS OF THE TRANSACTIONS................................................. 72
General................................................................... 72
Effective Time of the Amalgamation........................................ 73
Conversion of Discreet Common Shares...................................... 73
Treatment of Discreet Employee Plans...................................... 73
Procedures for Election and Exchange of Share Certificates by Discreet
Shareholders............................................................. 74
Operations of the Combined Company Following the Transactions............. 76
Transaction Mechanics..................................................... 76
Stock Ownership Following Completion of the Transactions.................. 77
Accounting Treatment...................................................... 78
Offering of Autodesk Common Stock......................................... 78
Description of New Discreet Exchangeable Shares........................... 78
Representations and Warranties............................................ 81
Business of Autodesk Pending Consummation of the Transactions............. 82
Business of Discreet Pending Consummation of the Transactions............. 82
Non-Solicitation by Discreet of Alternative Transactions.................. 83
Indemnification........................................................... 84
Conditions to the Transactions............................................ 85
Termination, Amendment and Waiver......................................... 86
Fees and Expenses......................................................... 87
Assignment................................................................ 88
Confidentiality Agreement................................................. 89
Agreements of Autodesk and Discreet Affiliates............................ 89
Autodesk and Discreet Voting Agreements................................... 89
Support Agreement......................................................... 89
Voting and Exchange Trust Agreement....................................... 90
Stock Exchange Listings................................................... 90
Eligibility for Investment in Canada...................................... 91
Regulatory Matters........................................................ 91
Resale of Shares Received in Connection with the Transactions............. 91
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.............. 93
MATERIAL CANADIAN FEDERAL AND UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS TO DISCREET SHAREHOLDERS.................................. 102
Canadian Federal Income Tax Considerations................................ 102
Discreet Shareholders Resident in Canada.................................. 102
Discreet Shareholders Not Resident in Canada.............................. 108
Material United States Federal Income Tax Considerations.................. 109
US Holders................................................................ 110
v
TABLE OF CONTENTS--(Continued)
Page
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Non-US Holders............................................................ 113
Backup Withholding........................................................ 113
Federal Estate Tax Treatment.............................................. 114
AUTODESK.................................................................. 115
BUSINESS.................................................................. 115
Background................................................................ 115
Products.................................................................. 115
Product Development and Enhancement....................................... 118
Marketing and Sales....................................................... 120
Customer and Dealer Support............................................... 120
Developer Programs........................................................ 121
Backlog................................................................... 122
Competition............................................................... 122
Intellectual Property and Licenses........................................ 122
Production................................................................ 123
Employees................................................................. 123
Properties................................................................ 123
Legal Proceedings......................................................... 124
AUTODESK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 125
Restatement of Financial Statements....................................... 125
Results of Operations..................................................... 126
Nine Months Ended October 31, 1998 and 1997............................... 126
In-Process Technologies Overview.......................................... 128
Valuation analysis........................................................ 129
Allocation of value....................................................... 131
Comparison to Actual Results.............................................. 131
Fiscal Years Ended January 31, 1998, 1997 and 1996........................ 132
In-Process Technologies Overview.......................................... 134
Valuation analysis........................................................ 136
Comparison to Actual Results.............................................. 137
Certain Risk Factors Which May Impact Future Operating Results............ 139
Liquidity and Capital Resources........................................... 144
AUTODESK MANAGEMENT, EXECUTIVE COMPENSATION AND PRINCIPAL STOCKHOLDERS.... 146
Autodesk Management....................................................... 146
Compensation of Directors................................................. 148
Autodesk Executive Compensation........................................... 148
Option Grants............................................................. 149
Option Exercises and Holdings............................................. 149
Autodesk Principal Stockholders........................................... 150
Employment Contracts and Certain Transactions............................. 151
Pro Forma Stock Ownership of Autodesk Principal Stockholders and
Directors................................................................ 152
DISCREET.................................................................. 154
BUSINESS.................................................................. 154
Background................................................................ 154
Products.................................................................. 155
Advanced Systems.......................................................... 155
vi
TABLE OF CONTENTS--(Continued)
Page
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System Components......................................................... 156
New Media Software........................................................ 157
Customers................................................................. 158
Marketing and Sales....................................................... 158
Systems Integration, Service and Support.................................. 159
Research and Development.................................................. 159
Proprietary Rights........................................................ 160
Manufacturing and Suppliers............................................... 161
Competition............................................................... 162
Employees................................................................. 162
Properties................................................................ 162
Legal Proceedings......................................................... 163
Recent Acquisitions....................................................... 164
DISCREET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 165
Certain Factors That May Affect Future Results............................ 166
Overview.................................................................. 168
Results of Operations..................................................... 180
Quarterly Results of Operations........................................... 189
Liquidity and Capital Resources........................................... 190
DISCREET MANAGEMENT, EXECUTIVE COMPENSATION AND PRINCIPAL SHAREHOLDERS.... 193
Discreet Management....................................................... 193
Compensation and Other Information Concerning Discreet Officers........... 195
Employment Agreements and Severance Arrangements.......................... 197
Compensation Committee Interlocks Insider Participation................... 200
Compensation of Discreet Directors........................................ 200
Certain Relationships and Related Transactions............................ 200
Security Ownership of Certain Beneficial Owners and Management of
Discreet................................................................. 201
AMALGAMATION SUB.......................................................... 203
Business.................................................................. 203
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 203
Amalgamation Sub Management............................................... 203
Amalgamation Sub's Sole Shareholder....................................... 204
AUTODESK QUEBEC........................................................... 205
Business.................................................................. 205
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 205
Autodesk Quebec Management................................................ 205
Autodesk Quebec's Sole Shareholder........................................ 206
DESCRIPTION OF CAPITAL STOCK.............................................. 207
Autodesk Capital Stock.................................................... 207
Discreet Share Capital.................................................... 208
Comparison of Shareholders' Rights........................................ 208
EXPERTS................................................................... 215
ATTENDANCE BY INDEPENDENT ACCOUNTANTS AT THE AUTODESK MEETING AND THE
DISCREET MEETING......................................................... 215
vii
TABLE OF CONTENTS--(Continued)
Page
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LEGAL MATTERS.............................................................. 216
FINANCIAL STATEMENTS....................................................... F-1
Index to Consolidated Financial Statements................................. F-1
Discreet Logic Inc. and Subsidiaries....................................... F-2
Autodesk, Inc.............................................................. F-45
APPENDIX A ACQUISITION AGREEMENT
APPENDIX B AMALGAMATION AGREEMENT
APPENDIX C FORM OF SUPPORT AGREEMENT
APPENDIX D FORM OF VOTING AND EXCHANGE TRUST AGREEMENT
APPENDIX E-1 AUTODESK RESOLUTION
APPENDIX E-2 DISCREET RESOLUTION
APPENDIX F OPINION OF AUTODESK FINANCIAL ADVISOR
APPENDIX G OPINION OF DISCREET FINANCIAL ADVISOR
viii
GLOSSARY OF TERMS
The following terms have the following meanings when used in this Proxy
Circular (including the summary). These defined terms are not used in the
consolidated financial statements contained herein. The * (asterisk) appearing
after the Discreet product names identifies the product as being from
Discreet.
"ACI" means Autodesk Canada Inc., an Ontario corporation and wholly owned
subsidiary of Autodesk.
"Acquisition Agreement" means the Second Amended and Restated Agreement and
Plan of Acquisition and Amalgamation by and among Autodesk, Dutchco,
Amalgamation Sub, Autodesk Quebec, ACI and Discreet dated as of November 18,
1998, as amended on December 18, 1998 and January 18, 1999, a copy of which is
attached as Appendix A to this Proxy Circular.
"Amalgamation" means the amalgamation of Amalgamation Sub, Autodesk Quebec
and Discreet pursuant to the Articles of Amalgamation.
"Amalgamation Agreement" means the Second Amended and Restated Amalgamation
Agreement dated as of January 18, 1999 by and among Discreet, Autodesk Quebec,
Amalgamation Sub and Autodesk, a copy of which is attached as Appendix B to
this Proxy Circular.
"Amalgamation Sub" means 9066-9771 Quebec Inc., a newly incorporated Quebec
company and wholly owned subsidiary of Dutchco.
"Antitrust Division" means the Antitrust Division of the United States
Department of Justice.
"Articles of Amalgamation" means the articles of amalgamation to be filed
with the Inspector General of Financial Institutions of the Province of Quebec
pursuant to Section 123.118 of the Quebec Act to give effect to the
Amalgamation.
"Autodesk" means Autodesk, Inc., a Delaware corporation, together with its
subsidiaries, unless the context otherwise requires.
"Autodesk Board" means the Board of Directors of Autodesk.
"Autodesk Common Stock" means the common stock of Autodesk, par value $0.01
per share.
"Autodesk Meeting" means the special meeting of Autodesk Stockholders to be
held on March 10, 1999 at 10:00 a.m, local time, at The Executive Briefing
Center, Autodesk, Inc., 111 McInnis Parkway, San Rafael, California, to
consider and vote on the Autodesk Resolution.
"Autodesk Quebec" means 9066-9854 Quebec Inc., a newly incorporated Quebec
company, which is a wholly owned subsidiary of ACI and an indirect wholly
owned subsidiary of Autodesk.
"Autodesk Record Date" means January 27, 1999.
"Autodesk Resolution" means the special resolution for consideration at the
Autodesk Meeting by the Autodesk Stockholders concerning the issuance of
Autodesk Common Stock pursuant to the Transactions in the form set forth in
Appendix E-1 to this Proxy Circular.
"Autodesk Stockholder" means a holder of Autodesk Common Stock.
"Business Day" means any day other than a Saturday, Sunday or a day on which
banks are not open for business in either of San Francisco, California or
Montreal, Quebec.
"Call Rights" means the Liquidation Call Right, the Redemption Call Right
and the Retraction Call Right, collectively.
1
"Canadian Dollar Equivalent" means, with respect to an amount expressed in
US dollars (the "US Dollar Amount") at any date, the product obtained by
multiplying (i) the US Dollar Amount by (ii) the noon spot exchange rate on
such date for US dollars expressed in Canadian dollars as reported by the Bank
of Canada or, in the event such spot exchange rate is not available, such
exchange rate on such date for US dollars expressed in Canadian dollars as may
be deemed by the Board of Directors of New Discreet to be appropriate for such
purpose.
"Canadian dollars" and "Cdn$" mean the lawful currency of Canada.
"Canadian Tax Act" means the Income Tax Act (Canada), including all
regulations made thereunder, all amendments to such statute or regulations
from time to time, and any statute or regulation that supplements or
supersedes such statute or regulation.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Combined Company" means Autodesk, New Discreet and their respective
subsidiaries as a consolidated entity following the Amalgamation.
"Depositary" means Harris Trust & Savings Bank.
"DGCL" means the General Corporation Law of the State of Delaware, including
all regulations made thereunder, all amendments to such statute or regulations
from time to time, and any statute or regulation that supplements or
supersedes such statute or regulation.
"Discreet" means Discreet Logic Inc., a Quebec company, together with its
subsidiaries, unless the context otherwise requires.
"Discreet Board" means the Board of Directors of Discreet.
"Discreet Common Shares" means the common shares of Discreet, no par value
per share.
"Discreet Employee Stock Purchase Plan" means Discreet's 1995 Employee Stock
Purchase Plan.
"Discreet Meeting" means the special general meeting of Discreet
Shareholders to be held on March 10, 1999 at 1:00 p.m, local time, at the
Ritz-Carlton Hotel, 1228 Sherbrooke Street West, Montreal, Quebec, Canada, to
consider and vote upon the Discreet Resolution.
"Discreet Record Date" means January 27, 1999.
"Discreet Resolution" means the special resolution for consideration by the
Discreet Shareholders at the Discreet Meeting concerning the Acquisition
Agreement and the Transactions, in the form set forth in Appendix E-2 to this
Proxy Circular.
"Discreet Share Option" means an option to purchase Discreet Common Shares
issued under a Discreet Stock Option Plan.
"Discreet Shareholder" means a holder of record of Discreet Common Shares.
"Discreet Special Committee" means the special committee of the Discreet
Board, consisting of three directors who are not employees of Discreet and who
do not own a significant number of Discreet Common Shares, formed to review
the proposed Transactions and to determine whether they are in the best
interests of Discreet and its shareholders, and make a recommendation with
respect thereto.
"Discreet Stock Option Plans" means Discreet's Amended and Restated 1994
Restricted Stock and Stock Option Plan, 1995 Non-Employee Director Stock
Option Plan and 1997 Special Limited Non-Employee Director Stock Plan.
2
"Dividend Amount" means an amount equivalent to the full amount of all
declared and unpaid dividends on the New Discreet Exchangeable Shares plus all
dividends declared on Autodesk Common Stock which have not been declared in an
economically equivalent amount on the New Discreet Exchangeable Shares in
accordance with the rights attaching to the New Discreet Exchangeable Shares.
"Dutchco" means Autodesk Development B.V., a Netherlands corporation and
indirect wholly owned subsidiary of Autodesk.
"Effective Time" means 4:28 p.m. (Montreal time) on the date shown on the
Certificate of Amalgamation to be issued by the Inspector General of Financial
Institutions of the Province of Quebec confirming the Amalgamation pursuant to
Section 123.119 of the Quebec Act.
"Election Deadline" means 4:29 p.m. (Montreal time) on the date shown on the
Certificate of Amalgamation to be issued by the Inspector General of Financial
Institutions of the Province of Quebec confirming the Amalgamation pursuant to
Section 123.119 of the Quebec Act.
"Elected Amount" means the amount selected by a holder of New Discreet Class
B Shares to be the proceeds of disposition of the New Discreet Class B Shares
in the election made pursuant to the Canadian Tax Act.
"Eligible Holder" means a holder (i) who is a Canadian resident for purposes
of the Canadian Tax Act other than any such holder who is exempt from tax
under the Canadian Tax Act, or (ii) which is a partnership that owns New
Discreet Class B Shares if one or more of its members would be an Eligible
Holder if such member held directly such shares.
"Exchange Ratio" means 0.33 shares of Autodesk Common Stock or New Discreet
Exchangeable Shares, as the case may be, for each Discreet Common Share.
"Exchange Rights" means the rights of holders of New Discreet Exchangeable
Shares to require Dutchco to purchase their New Discreet Exchangeable Shares
using one share of Autodesk Common Stock for each New Discreet Exchangeable
Share in the circumstances described in Article 5 of the Voting and Exchange
Trust Agreement.
"Form S-3" means the Registration Statement on Form S-3 under the Securities
Act (together with all amendments and exhibits thereto) to be filed by
Autodesk to register the shares of Autodesk Common Stock issuable from time to
time upon exchange of the New Discreet Exchangeable Shares issued in
connection with the Transactions.
"Form S-4" means the Registration Statement on Form S-4 under the Securities
Act (together with all amendments and exhibits thereto) filed by Autodesk and
Discreet to register the issuance of shares of Autodesk Common Stock, New
Discreet Exchangeable Shares, New Discreet Class B Shares, New Discreet Class
E Shares and New Discreet Class F Shares in connection with the Transactions.
"FTC" means the United States Federal Trade Commission.
"HSR Act" means the United States Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"HSR Notice" means a Notification and Report Form filed with the Antitrust
Division and the FTC.
"Letter of Transmittal and Election Form" means the Letter of Transmittal
and Election Form (on green paper) for use by Discreet Shareholders who elect
to receive New Discreet Exchangeable Shares pursuant to the Transactions. A
copy of the Letter of Transmittal and Election Form will be mailed to each
Discreet Shareholder and additional copies are available upon request from the
Depositary.
"Liquidation Call Right" means the overriding right of Dutchco, in the event
of and notwithstanding the proposed liquidation, dissolution or winding-up of
New Discreet, to purchase from all but not less than all of the
3
holders of New Discreet Exchangeable Shares all but not less than all of the
New Discreet Exchangeable Shares held by each such holder, as more
particularly described in Article 5.4 of the provisions attaching to the New
Discreet Exchangeable Shares set forth in Appendix A to the Amalgamation
Agreement.
"Nasdaq National Market" means the Nasdaq National Market of The Nasdaq
Stock Market, Inc.
"New Discreet" means a new subsidiary of Dutchco and indirect subsidiary of
Autodesk resulting from the Amalgamation which will carry on, among other
things, the business of Discreet.
"New Discreet Class A Shares" means the Class A voting common shares in the
share capital of New Discreet having the rights, privileges, restrictions and
conditions set forth in Appendix A to the Amalgamation Agreement.
"New Discreet Class B Shares" means the Class B non-voting common shares in
the share capital of New Discreet having the rights, privileges, restrictions
and conditions set forth in Appendix A to the Amalgamation Agreement.
"New Discreet Class C Shares" means the Class C non-voting preferred shares
in the share capital of New Discreet having the rights, privileges,
restrictions and conditions set forth in Appendix A to the Amalgamation
Agreement.
"New Discreet Class D Shares" means the Class D non-voting preferred shares
in the share capital of New Discreet having the rights, privileges,
restrictions and conditions set forth in Appendix A to the Amalgamation
Agreement.
"New Discreet Class E Shares" means the Class E voting common shares in the
share capital of New Discreet having the rights, privileges, restrictions and
conditions set forth in Appendix A to the Amalgamation Agreement.
"New Discreet Class F Shares" means the Class F non-voting common shares in
the share capital of New Discreet having the rights, privileges, restrictions
and conditions set forth in Appendix A to the Amalgamation Agreement.
"New Discreet Exchangeable Shares" means the exchangeable non-voting shares
in the share capital of New Discreet having the rights, privileges,
restrictions and conditions set forth in Appendix A to the Amalgamation
Agreement.
"New Discreet Transfer Agent" means the Trust Company of Bank of Montreal,
as transfer agent and registrar for the New Discreet Exchangeable Shares.
"New Discreet Units" means the units, each consisting of one New Discreet
Class E Share and one New Discreet Class F Share.
"Original Agreement" means the Agreement and Plan of Acquisition and
Arrangement by and among Autodesk, Dutchco, Amalgamation Sub, ACI, Autodesk
Quebec and Discreet dated as of August 20, 1998.
"Piper Jaffray" means Piper Jaffray, Inc., financial advisor to Autodesk.
"Quebec Act" means the Companies Act (Quebec), including all regulations
made thereunder, all amendments to such statute or regulations from time to
time, and any statute or regulation that supplements or supersedes such
statute or regulation.
"Redemption Call Right" means the overriding right of Dutchco in the event
of and notwithstanding a proposed redemption of New Discreet Exchangeable
Shares by New Discreet, to purchase from all but not less than all of the
holders of New Discreet Exchangeable Shares all but not less than all of the
New Discreet Exchangeable Shares held by each such holder, as more
particularly described in the provisions attaching to the New Discreet
Exchangeable Shares set forth in Appendix A to the Amalgamation Agreement.
4
"Reissuance Offering" means the offering and sale by Autodesk of
approximately 3 million shares of Autodesk Common Stock prior to the Effective
Time in order to ensure that the Transactions may be accounted for as a
pooling-of-interests.
"Retraction Call Right" means the overriding right of Dutchco in the event
of and notwithstanding a request by a holder of New Discreet Exchangeable
Shares for New Discreet to redeem any or all of the New Discreet Exchangeable
Shares registered in the name of such holder, to purchase all but not less
than all of the New Discreet Exchangeable Shares that are the subject of such
request directly from such holder, as more particularly described in the
provisions attaching to the New Discreet Exchangeable Shares set forth in
Appendix A to the Amalgamation Agreement.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the United States Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Securities Exchange Act" means the United States Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
"Special Voting Share" means the one share of Series B Preferred Stock of
Autodesk to be issued to the Trustee by Autodesk upon consummation of the
Transactions and to be held by the Trustee pursuant to the terms of the Voting
and Exchange Trust Agreement.
"Support Agreement" means the agreement to be entered into by and among
Autodesk, Dutchco and New Discreet in connection with the Transactions,
substantially in the form attached as Appendix C to this Proxy Circular.
"Transactions" means the business combination of Autodesk and Discreet
effected by way of (i) the Amalgamation, (ii) the redemption of New Discreet
Class B Shares for Exchangeable Shares, (iii) the automatic conversion of New
Discreet Class B Shares into New Discreet Units and (iv) the acquisition by
Dutchco of New Discreet Units in exchange for shares of Autodesk Common Stock.
"Treaty" means the Convention Between the United States and Canada with
Respect to Taxes on Income and on Capital signed at Washington on September
26, 1980, as amended by the Protocols signed on June 14, 1983, March 28, 1984,
March 17, 1995 and July 29, 1997.
"Trustee" means Montreal Trust Company of Canada, as trustee under the
Voting and Exchange Trust Agreement.
"US dollars," "$" and "US$" mean the lawful currency of the United States.
"US GAAP" means the generally accepted accounting principles in effect in
the United States as of the date of the financial statements contained in this
Proxy Circular.
"Volpe Brown Whelan" means Volpe Brown Whelan & Company, LLC, financial
advisor to Discreet.
"Voting and Exchange Trust Agreement" means the agreement to be entered into
immediately after the Effective Time by and among Autodesk, New Discreet,
Dutchco and the Trustee in connection with the Transactions, substantially in
the form attached as Appendix D to this Proxy Circular.
"Voting Rights" means the voting rights attached to the Special Voting Share
exercisable by the Trustee at the direction of the holders of New Discreet
Exchangeable Shares, other than Autodesk, its subsidiaries and affiliates,
pursuant to the terms of the Voting and Exchange Trust Agreement.
"WSE" means The Winnipeg Stock Exchange.
5
AUTODESK AND DISCREET REPORTING CURRENCIES
AND ACCOUNTING PRINCIPLES
The financial statements and the pro forma financial statements of, and the
selected historical and pro forma financial data concerning, Autodesk and
Discreet, as the case may be, contained in this Proxy Circular are reported in
US dollars and have been prepared in accordance with US GAAP.
CANADIAN/US EXCHANGE RATES
According to Dow Jones Interactive, for Discreet's fiscal 1994 through
fiscal 1998 and for the six months ended December 31, 1997 and 1998, the high
and low exchange rates (i.e., the rate at which Canadian dollars were sold for
US dollars), the average exchange rate (i.e., the average of the exchange
rates on the last day of each month during the period) and end-of-period
exchange rates for one Canadian dollar expressed in US dollars for the periods
indicated are set forth below:
Fiscal Year Eleven Months Fiscal Year Six Months
ended July 31, ended June 30, ended June 30, Ended December 31,
-------------------- -------------- -------------- ------------------
1994 1995 1996 1997 1998 1997 1998
------ ------ ------ -------------- -------------- --------- ---------
US$ US$ US$ US$ US$ US$ US$
High for period......... 0.7777 0.7455 0.7523 0.7514 0.7293 0.7293 0.6583
Low for period.......... 0.7167 0.7096 0.7218 0.7150 0.6837 0.6951 0.6425
Average for period...... 0.7438 0.7260 0.7343 0.7322 0.7645 0.7166 0.6518
End of period........... 0.7236 0.7287 0.7276 0.7249 0.6800 0.6988 0.6511
On February 3, 1999, the noon buying rate for Cdn$1.00 was US$0.6607.
6
SUMMARY
The following is a summary of certain information about Autodesk, Dutchco,
Discreet, the Acquisition Agreement and the Transactions, and is qualified in
its entirety by reference to the full text of this Proxy Circular and the
appendices hereto. Autodesk Stockholders and Discreet Shareholders are urged to
read this Proxy Circular and the accompanying appendices in their entirety.
References to "dollars" or "$" shall be to US dollars unless otherwise
specified herein. This Proxy Circular contains a number of forward-looking
statements which reflect the current view of Autodesk and/or Discreet with
respect to future events that are expected to have an effect on their future
individual or combined operations and financial performance, including, but not
limited to, forward-looking statements regarding the expected benefits and
synergies of the Transactions and regarding the reasons for the Transactions.
These forward-looking statements are subject to various risks and
uncertainties, including those set forth under "Risk Factors" and elsewhere
herein, that could cause actual results to differ materially from historical
results or those currently anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements.
Parties to the Acquisition Agreement
Autodesk. Autodesk develops, markets and supports personal computer software
for design, drafting, visualization and multimedia content creation. Autodesk
has structured its internal marketing and development organizations around five
key market groups that most closely match Autodesk's customer base:
Architecture, Engineering and Construction ("AEC"), Mechanical Computer-Aided
Design ("MCAD"), Geographic Information Systems ("GIS"), Personal Solutions
Group ("PSG") and Multimedia ("Kinetix"). Autodesk's AEC Market Group provides
solutions from Autodesk and third-party developers to manage every phase of a
building's life cycle--from conceptual design through construction, maintenance
and renovation. Autodesk's MCAD Market Group provides mechanical engineers,
designers and drafters with advanced, value-based solutions designed to solve
their professional design challenges. Autodesk's GIS products provide easy-to-
use mapping and GIS technology to help businesses and governments manage their
assets and infrastructure. Autodesk's PSG Market Group develops easy-to-use,
affordable tools for professionals, occasional users and consumers who design,
draft, and diagram. The Kinetix division of Autodesk is devoted to bringing
powerful 3D content-creation software to computer-industry professionals
focused on two markets: entertainment (film, broadcast video and interactive
games) and design conceptualization and visualization. Kinetix provides two
core platform products--3D Studio MAX and 3D Studio VIZ--that specifically
focus on these markets.
Autodesk is a corporation organized under the laws of the State of Delaware.
Its principal executive offices are located at 111 McInnis Parkway, San Rafael,
California 94903, and its telephone number is (415) 507-5000.
Autodesk Development B.V. Dutchco is a Netherlands corporation and indirect
wholly owned subsidiary of Autodesk.
Autodesk Canada Inc. ACI is an Ontario corporation and wholly owned
subsidiary of Autodesk.
9066-9771 Quebec Inc. Amalgamation Sub is a company recently organized by
Dutchco under the laws of Quebec for the purpose of effecting the Amalgamation.
It has no material assets and has not engaged in any activities except in
connection with the Amalgamation.
9066-9854 Quebec Inc. Autodesk Quebec is a company recently organized by ACI
under the laws of Quebec for the purpose of effecting the Amalgamation. At
present, it has no material assets and has not engaged in any activities except
in connection with the Amalgamation. Prior to the Effective Time, ACI will
transfer substantially all of its assets and liabilities to Autodesk Quebec,
and ACI will continue to be Autodesk Quebec's sole shareholder.
Discreet. Discreet develops, assembles, markets and supports non-linear, on-
line digital systems and software for creating, editing and compositing imagery
and special effects for film, video, HDTV, broadcast and the Web. Discreet's
systems and software are utilized by creative professionals for a variety of
applications,
7
including feature films, television programs, commercials, music and corporate
videos, interactive game production, live broadcasting as well as Web design.
Discreet's systems have played key roles in the creation of special visual
effects for films such as Armageddon, Titanic, Forrest Gump, Independence Day,
The Fifth Element, Batman & Robin, Contact and Air Force One; television
programs and special events such as ABC's "World News Tonight with Peter
Jennings"; 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; 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 high-end turnkey systems and software focused towards three
markets: special effects, editing and broadcast production. Discreet's systems
include its inferno* and flame* systems (special effects), its fire* and smoke*
systems (editing) and its frost* system (broadcast production). Discreet's
flame* system is an uncompressed, on-line, resolution independent, non-linear,
digital system and is used to create, edit and composite special visual effects
in an on-line, real-time environment, providing instant feedback to the
creative professional. Discreet's inferno* system is an uncompressed, on-line,
resolution independent, non-linear, digital system providing all of the
features of flame* with film tools and increased film resolution and colour
control for digital film work. Discreet's fire* system is an uncompressed, on-
line, non-linear, digital video editing system with special effects
capabilities. Discreet's smoke* system is an uncompressed, on-line, non-linear,
digital video editing system with limited special effects capabilities. In the
broadcast production market, Discreet offers its frost* system, a computer-
based set of modeling, animation and rendering tools for the creation and
manipulation of 3D graphics, including virtual sets for broadcast companies.
Discreet's new media software products include its effect* and paint* products,
and its edit* and light* products. Discreet sells its systems and software
through a direct sales force as well as through distributors and resellers.
Discreet is a company organized under the laws of the province of Quebec. Its
principal executive offices are located at 10 Duke Street, Montreal, Quebec H3C
2L7, and its telephone number is (514) 393-1616.
Special Meeting of Stockholders of Autodesk
Time, Date, Place and Purpose
The Autodesk Meeting will be held at The Executive Briefing Center, Autodesk,
Inc., 111 McInnis Parkway, San Rafael, California on March 10, 1999 at 10:00
a.m., local time. The purpose of the Autodesk Meeting is to approve the
Autodesk Resolution and to transact such further or other business as may
properly come before the Autodesk Meeting or any postponement or adjournment
thereof, including a proposal to adjourn the Autodesk Meeting, if necessary, to
permit further solicitation of proxies in the event there are not sufficient
votes at the time of the Autodesk Meeting to approve the Autodesk Resolution.
See "Autodesk Special Meeting--Date, Time and Place of Autodesk Meeting" and
"--Purpose."
Record Date; Vote Required and Voting Agreements
Only Autodesk Stockholders of record at the close of business on the Autodesk
Record Date are entitled to notice of and to vote at the Autodesk Meeting.
Under the DGCL and the rules of the Nasdaq National Market, the Autodesk
Resolution requires the affirmative vote of a majority of the total votes cast
regarding such proposal at a meeting at which a quorum is present or
represented by proxy. See "Autodesk Special Meeting--Record Date and
Outstanding Shares" and "--Vote Required."
As of the Autodesk Record Date, there were 1,098 Autodesk Stockholders of
record and 47,327,000 shares of Autodesk Common Stock outstanding. Each
Autodesk Stockholder will be entitled to cast one vote per share on each matter
to be acted upon at the Autodesk Meeting. Autodesk's executive officers and
directors (who together beneficially own an aggregate of 96,378 shares of
Autodesk Common Stock as of the Autodesk Record
8
Date, representing approximately 0.20% of the votes entitled to be cast at the
Autodesk Meeting) have agreed to vote their shares in favor of the Autodesk
Resolution. In addition, such persons have granted irrevocable proxies to
Discreet's management to vote their shares of Autodesk Common Stock in
accordance with the voting agreements. See "Autodesk Special Meeting--Vote
Required," "--Voting Agreements" and "Terms of the Transactions--Autodesk and
Discreet Voting Agreements."
Recommendation of the Autodesk Board of Directors
The Autodesk Board has unanimously approved the Acquisition Agreement and the
Transactions and has determined that the Transactions are fair and in the best
interests of Autodesk and its stockholders. After careful consideration, the
Autodesk Board unanimously recommends that you vote FOR the Autodesk
Resolution. Autodesk Stockholders should read this Proxy Circular carefully
before voting. See "Approval of the Transactions--Background of the
Transactions," "--Joint Reasons for the Transactions," "--Autodesk's Reasons
for the Transactions," and "Autodesk Special Meeting--Recommendation of the
Autodesk Board."
No Appraisal Rights
Autodesk Stockholders will not be entitled to appraisal or similar rights
under the DGCL in connection with the Transactions. See "Autodesk Special
Meeting--No Appraisal Rights."
Special Meeting of Shareholders of Discreet
Time, Date, Place and Purpose
The Discreet Meeting will be held at the Ritz-Carlton Hotel, 1228 Sherbrooke
Street West, Montreal, Quebec, Canada on March 10, 1999 at 1:00 p.m. local
time. The purpose of the Discreet Meeting is to consider and vote upon the
Discreet Resolution and to transact such further or other business as may
properly come before the Discreet Meeting or any adjournment thereof, including
a proposal to adjourn the Discreet Meeting, if necessary, to permit further
solicitation of proxies in the event there are not sufficient votes at the time
of the Discreet Meeting to approve the Discreet Resolution. See "Discreet
Special Meeting--Date, Time and Place of Discreet Meeting" and "--Purpose."
Record Date; Vote Required and Voting Agreements
Only Discreet Shareholders of record at the close of business on the Discreet
Record Date are entitled to notice of and to vote at the Discreet Meeting. The
Discreet Resolution must be approved by the affirmative vote of not less than
sixty-six and two-thirds percent (66 2/3%) of the Discreet Common Shares
present or represented by proxy at the Discreet Meeting at which a quorum is
present. See "Discreet Special Meeting--Record Date and Outstanding Shares" and
"--Vote Required."
As of the Discreet Record Date, there were 153 Discreet Shareholders of
record and 29,949,629 Discreet Common Shares outstanding. Each Discreet
Shareholder will be entitled to cast one vote per share on each matter to be
acted upon at the Discreet Meeting. Discreet's executive officers and certain
of Discreet's directors (who own an aggregate of 11,514,490 Discreet Common
Shares as of the Discreet Record Date, representing approximately 38.4% of the
votes entitled to be cast at the Discreet Meeting) have agreed to vote their
shares in favor of the Discreet Resolution. In addition, such persons have
granted irrevocable proxies to Autodesk's management to vote their Discreet
Common Shares in accordance with the voting agreements. See "Discreet Special
Meeting--Vote Required," "--Voting Agreements," "Approval of the Transactions--
Interests of Certain Persons in the Transactions" and "Terms of the
Transactions--Autodesk and Discreet Voting Agreements."
Recommendation of the Discreet Board of Directors
After careful consideration, based on the unanimous recommendation of the
Discreet Special Committee, Discreet's Board of Directors has approved the
Acquisition Agreement by the unanimous vote of all non-
9
interested directors and believes that the Transactions are in the best
interests of Discreet and its shareholders, and recommends that you vote FOR
the Discreet Resolution. Discreet Shareholders should read this Proxy Circular
carefully prior to voting. See "Approval of the Transactions--Background of the
Transactions," "--Joint Reasons for the Transactions," "--Discreet's Reasons
for the Transactions," and "Discreet Special Meeting--Recommendation of the
Discreet Board."
No Appraisal Rights
Discreet Shareholders are not entitled to appraisal or similar rights
pursuant to the Quebec Act in connection with the Transactions. See "Discreet
Special Meeting--No Appraisal Rights" and "Description of Capital Stock--
Comparison of Shareholders' Rights--Dissenters' Rights."
Risk Factors
In considering whether to approve the Autodesk Resolution and the Discreet
Resolution, Autodesk Stockholders and Discreet Shareholders, respectively,
should carefully review and consider the information contained below under the
caption "Risk Factors."
Reasons for the Transactions
Autodesk and Discreet have identified several potential benefits of the
Transactions that they believe will contribute to the success of the Combined
Company. The parties believe that the business combination with Discreet will
position the Combined Company to create the premier total solutions provider of
digital content design, creation and manipulation tools for the creation of
moving images. See "Approval of the Transactions--Background of the
Transactions," "--Joint Reasons for the Transactions," "-- Autodesk's Reasons
for the Transactions" and "Discreet's Reasons for the Transactions."
Piper Jaffray Fairness Opinion
Piper Jaffray has delivered to the Autodesk Board its written opinion, dated
January 18, 1999, to the effect that, as of such date, the Exchange Ratio was
fair from a financial point of view to Autodesk. The full text of the opinion
of Piper Jaffray, which sets forth assumptions made and matters considered, is
attached as Appendix F to this Proxy Circular and is incorporated herein by
reference. Autodesk Stockholders are urged to, and should, read such opinion in
its entirety. See "Approval of the Transactions--Opinion of Autodesk's
Financial Advisor" and Appendix F attached hereto.
Volpe Brown Whelan Fairness Opinion
Volpe Brown Whelan has delivered to the Discreet Board its written opinion,
dated January 18, 1999, to the effect that, as of such date, the consideration
to be received by Discreet Shareholders in connection with the Transactions was
fair from a financial point of view to the Discreet Shareholders. The full text
of the opinion of Volpe Brown Whelan, which sets forth assumptions made and
matters considered, is attached as Appendix G to this Proxy Circular and is
incorporated herein by reference. Discreet Shareholders are urged to, and
should, read such opinion in its entirety. See "Approval of the Transactions--
Opinion of Discreet's Financial Advisor" and Appendix G attached hereto.
The Transactions
The Amalgamation and Share Exchanges
The Transactions will be completed by way of an Amalgamation under the Quebec
Act and certain related transactions described below. Pursuant to the Articles
of Amalgamation, Discreet will be amalgamated with Autodesk Quebec and
Amalgamation Sub to form New Discreet. Each holder of Discreet Common Shares
will
10
receive upon the Amalgamation one New Discreet Class B Share for each Discreet
Common Share then held by such holder. Immediately following the Amalgamation,
each such New Discreet Class B Share will automatically, based upon the prior
election of the holder thereof, either (i) be redeemed by New Discreet for 0.33
New Discreet Exchangeable Shares (subject to proration) or (ii) be converted
into one New Discreet Unit, which will immediately thereafter be acquired by
Dutchco in exchange for 0.33 shares of Autodesk Common Stock, in either case
without any further required action on the part of the holder. The New Discreet
Exchangeable Shares will be exchangeable at any time at the option of the
holder, and will automatically be exchanged on the eleventh anniversary of the
Effective Time (or earlier upon the occurrence of certain events, including the
liquidation, dissolution or winding-up of Autodesk or New Discreet), for
Autodesk Common Stock on a one-for-one basis plus the Dividend Amount.
Election to Receive Exchangeable Shares; Limitation on Number of Exchangeable
Shares
If the Transactions are approved, Discreet Shareholders may elect ultimately
to receive either Autodesk Common Stock or New Discreet Exchangeable Shares
upon consummation of the Transactions. Certain eligible persons who are
Canadian residents for purposes of the Canadian Tax Act, to the extent they
receive New Discreet Exchangeable Shares pursuant to the Transactions, will be
permitted to elect with New Discreet in prescribed form pursuant to Section 85
of the Canadian Tax Act so as generally to be treated as having engaged in a
tax-free rollover for Canadian federal income tax purposes (a "Rollover
Election"). See "Material Canadian Federal and United States Federal Income Tax
Considerations to Discreet Shareholders--Discreet Shareholders Resident in
Canada." However, pursuant to the Acquisition Agreement, the maximum number of
Discreet Common Shares which ultimately may be exchanged for New Discreet
Exchangeable Shares may not exceed 19.99% of the number of Discreet Common
Shares outstanding immediately prior to the Effective Time. If, based upon the
elections of Discreet Shareholders, the percentage of Discreet Common Shares to
be exchanged for New Discreet Exchangeable Shares would exceed 19.99% of the
Discreet Common Shares outstanding immediately prior to the Effective Time,
such electing Discreet Shareholders will receive, pro rata, New Discreet Units
in lieu of New Discreet Exchangeable Shares in respect of such excess, which
New Discreet Units will immediately be acquired by Dutchco in exchange for 0.33
shares of Autodesk Common Stock. Thus, for example, if the holders of 35% of
the Discreet Common Shares outstanding immediately prior to the Effective Time
elect to receive New Discreet Exchangeable Shares in the Transactions, then
each such electing holder would ultimately receive (i) New Discreet
Exchangeable Shares in respect of approximately 57.11% of such holder's
Discreet Common Shares, and (ii) shares of Autodesk Common Stock in respect of
the remaining approximately 42.89% of such holder's Discreet Common Shares.
Because of the limitation on the number of New Discreet Exchangeable Shares
issuable pursuant to the Transactions, Discreet Shareholders who elect to
receive New Discreet Exchangeable Shares may nevertheless receive shares of
Autodesk Common Stock in respect of some of their Discreet Common Shares. To
the extent they ultimately receive shares of Autodesk Common Stock in lieu of
New Discreet Exchangeable Shares, Discreet Shareholders will be precluded from
engaging in a tax-free rollover for Canadian federal income tax purposes and
may be taxable in Canada in respect of such exchange as described below under
"Material Canadian Federal and United States Federal Income Tax Considerations
to Discreet Shareholders--Discreet Shareholders Resident in Canada--Exchange of
New Discreet Units for Autodesk Common Stock." Such holders will, however, be
permitted to make Rollover Elections with respect to any New Discreet
Exchangeable Shares actually received pursuant to the Transactions. While there
can be no assurance that any of such persons will elect to receive New Discreet
Exchangeable Shares, as of December 31, 1998, the number of Discreet Common
Shares held by directors, officers and 5% shareholders of Discreet who are
known to Discreet to be Canadian residents was 5,993,146, or 20% of the
Discreet Common Shares outstanding as of such date.
Discreet Shareholders who receive New Discreet Exchangeable Shares in the
Transactions may not be able to determine at the time they request to receive
Autodesk Common Stock in exchange for their New Discreet
11
Exchangeable Shares (referred to as a "Retraction Request") what the value of
the Autodesk Common Stock they receive in such exchange will be. See "Risk
Factors--Risks Relating to Timing of Exchange of New Discreet Exchangeable
Shares for Autodesk Common Stock." However, a holder of New Discreet
Exchangeable Shares may be able to sell the Autodesk Common Stock underlying
his New Discreet Exchangeable Shares on the date of the Retraction Request, and
thereby be fully aware of the value of the consideration to be received on
exchange of the New Discreet Exchangeable Shares as of such date, provided that
such holder (i) specifies a Retraction Date which is three Business Days after
the date of such holder's Retraction Request, (ii) ensures that the Retraction
Request is received by New Discreet on the date it is made, and (iii) sells
through a broker who is able to ensure that the Autodesk Common Stock received
on the exchange is delivered to the buyer on the settlement date.
Effective Time
As promptly as practicable after satisfaction or waiver of the conditions set
forth in the Acquisition Agreement, the parties thereto will cause Discreet to
be amalgamated with Autodesk Quebec and Amalgamation Sub to form New Discreet
by filing Articles of Amalgamation and related documents as contemplated by
Section 123.118 of the Quebec Act with the Inspector General of Financial
Institutions of the Province of Quebec. As permitted by the Quebec Act, the
parties will request that the Certificate of Amalgamation be dated on the date
on which the Articles of Amalgamation are filed. The Amalgamation will become
effective at 4:28 p.m. (Montreal time) on the date shown on the Certificate of
Amalgamation (the "Effective Time"). See "Terms of the Transactions--Effective
Time of the Amalgamation."
Exchange of Discreet Share Certificates
A Letter of Transmittal and Election Form (on green paper) will be provided
separately to each Discreet Shareholder for use by each such shareholder (i) to
elect to receive New Discreet Exchangeable Shares and (ii) to transmit
certificates representing Discreet Common Shares should such Discreet
Shareholder wish to receive New Discreet Exchangeable Shares. Discreet
Shareholders who wish to receive New Discreet Exchangeable Shares should use
the GREEN Letter of Transmittal and Election Form to deposit their Discreet
Common Shares on or before the Election Deadline. If the Transactions are not
consummated, all deposited share certificates will be returned by the
Depositary forthwith to the shareholders entitled thereto.
As soon as practicable after the Effective Time, the Depositary will send
additional letters of transmittal to former Discreet Shareholders who did not
elect to receive New Discreet Exchangeable Shares and who did not deposit their
certificates prior to the Election Deadline. Discreet Shareholders wishing to
receive Autodesk Common Stock are advised not to surrender their certificates
representing Discreet Common Shares at the present time, but rather to wait
until they have been advised by Autodesk to do so. See "Terms of the
Transactions--Procedures for Election and Exchange of Shares Certificates by
Discreet Shareholders."
Treatment of Discreet Employee Plans
In connection with the Transactions, (i) each Discreet Share Option
outstanding as of the Effective Time under the Discreet Stock Option Plans will
be assumed by Autodesk and will become an option to purchase shares of Autodesk
Common Stock, with appropriate adjustments to the number of shares issuable
thereunder and the exercise price thereof based on the Exchange Ratio and (ii)
each outstanding purchase right under the Discreet Employee Stock Purchase Plan
will be assumed by Autodesk and will become a purchase right to acquire shares
of Autodesk Common Stock, with certain adjustments to the purchase price of
such shares based on the Exchange Ratio. Autodesk has agreed to file a
registration statement on Form S-8 under the Securities Act covering the shares
of Autodesk Common Stock issuable upon exercise of Discreet Share Options to be
assumed by Autodesk and assumed rights under the Discreet Employee Stock
Purchase Plan. See "Terms of the Transactions--Treatment of Discreet Employee
Plans."
12
No Solicitation
Discreet has agreed that from and after the date of the Acquisition Agreement
until the earlier of the Effective Time or the termination of the Acquisition
Agreement, Discreet will not, directly or indirectly, through any officer,
director, employee, representative or agent of Discreet or any of its
subsidiaries, take any action to initiate, solicit, encourage or participate in
any discussions or negotiations with any persons who are considering or who
have made any inquiries or proposals regarding an acquisition of Discreet or
similar transaction involving Discreet or any of its subsidiaries (an
"Acquisition Proposal"), provided, however, that Discreet may, to the extent
the Discreet Board determines, in good faith, after consultation with outside
legal counsel, that the Discreet Board's fiduciary duties under applicable law
require it to do so, participate in discussions or negotiations with, and
furnish information to, any person, entity or group after such person, entity
or group has delivered to Discreet an unsolicited bona fide Acquisition
Proposal which the Discreet Board in its good faith and reasonable judgment
determines, after consultation with its independent financial advisors, would
result in a transaction more favorable to the Discreet Shareholders than the
Transactions (a "Superior Proposal"). In addition, in connection with a
possible Acquisition Proposal, Discreet may refer any third party to the no
solicitation provisions of the Acquisition Agreement or make a copy of such
provisions available to a third party. The Discreet Board may accept, approve
or recommend a Superior Proposal to the Discreet Shareholders if the Discreet
Board determines in good faith, after consultation with outside legal counsel,
that such action is required by its fiduciary duties under applicable law. In
such case, the Discreet Board may withdraw, modify or refrain from making its
recommendation of the Transactions, and, to the extent it does so, Discreet may
refrain from soliciting proxies and taking such other action as may be
necessary to secure the vote of the Discreet Shareholders, provided, however,
that Discreet shall not accept, approve or recommend to the Discreet
Shareholders, or enter into any agreement concerning, a Superior Proposal for a
period of not less than three Business Days after Autodesk's receipt of a copy
of the Superior Proposal (or a reasonably detailed written description of the
significant terms and conditions thereof, if such proposal is not in writing).
See "Terms of the Transactions--Non-Solicitation by Discreet of Alternative
Transactions."
Conditions to the Transactions
Consummation of the Transactions is subject to the satisfaction of a number
of conditions, including but not limited to: (i) the passage of the Autodesk
Resolution and the Discreet Resolution by the Autodesk Stockholders and the
Discreet Shareholders, respectively; (ii) the absence of any restrictive court
orders or any other legal restraints or prohibitions preventing or making
illegal the consummation of the Transactions; (iii) the truth and accuracy of
the representations and warranties made by each of Discreet and Autodesk in the
Acquisition Agreement on and as of the Effective Time, subject to certain
exceptions; (iv) the performance or compliance with all agreements and
covenants required by the Acquisition Agreement by each of Autodesk, Discreet
and Dutchco; and (v) the receipt by Autodesk and Discreet of certain opinions
and letters regarding tax and accounting matters. See "Terms of the
Transactions--Conditions to the Transactions."
Termination; Fees and Expenses
Notwithstanding approval of the Discreet Resolution by the Discreet
Shareholders, the Acquisition Agreement may be terminated and the Transactions
may be abandoned prior to the Effective Time under certain circumstances
specified in the Acquisition Agreement, including, without limitation, (i) by
mutual written agreement of Autodesk and Discreet, and (ii) by either party, if
the Transactions are not consummated by March 29, 1999 or such later date as is
agreed to by Autodesk, Dutchco and Discreet). See "Terms of the Transactions--
Termination, Amendment and Waiver."
Generally, each party to the Acquisition Agreement will bear its own expenses
in the event the Acquisition Agreement is terminated without consummation of
the Transactions. However, Discreet has agreed that, if the
13
Acquisition Agreement is terminated under certain circumstances, it will pay to
Dutchco an amount equal to $5 million, and, if Discreet then consummates an
Acquisition Proposal within 9 months after the time of payment of such fees and
expenses, it will pay Dutchco a termination fee of $15 million, less any
amounts already paid to Dutchco in connection with the termination of the
Acquisition Agreement. Discreet has also agreed that, if the Acquisition
Agreement is terminated under certain other circumstances and there is not at
that time a Superior Proposal outstanding with respect to Discreet, it will pay
to Dutchco a termination fee of $15 million. Similarly, Dutchco has agreed
that, if the Acquisition Agreement is terminated under certain circumstances,
it will pay to Discreet an amount equal to $5 million, or, if the Autodesk
Board shall have withheld, withdrawn or modified in a manner adverse to
Discreet its recommendation in favor of the Autodesk Resolution and at or prior
to such time there has not been a Material Adverse Effect on Discreet (as
defined in the Acquisition Agreement), Dutchco will pay to Discreet a
termination fee of $15 million. See "Terms of the Transactions--Fees and
Expenses."
Affiliate Agreements
To help ensure that the Transactions will be accounted for as a pooling of
interests and to help ensure compliance with Rule 145 under the Securities Act,
the affiliates of Autodesk and Discreet have executed agreements which, subject
to certain limited exceptions, prohibit such persons from disposing of their
Discreet Common Shares or Autodesk Common Stock, as the case may be, until
Autodesk publicly releases financial results covering at least 30 days of
combined operations of the Combined Company after the Transactions. See "Terms
of the Transactions--Agreements of Autodesk and Discreet Affiliates."
Interests of Certain Persons in the Transactions
In considering the recommendation of the Discreet Board with respect to the
Discreet Resolution and the Transactions, Discreet Shareholders should be aware
that certain officers and directors of Discreet have interests in the
Transactions that present them with potential conflicts of interest. As of
December 31, 1998, directors and executive officers of Discreet and their
affiliates beneficially owned an aggregate of (i) 11,514,490 Discreet Common
Shares, for which they will receive the same consideration as other Discreet
Shareholders, and (ii) unexercised Discreet Share Options to acquire 1,140,000
Discreet Common Shares, which will be treated as described above under "--
Treatment of Discreet Employee Plans," and some of which options will be
subject to full acceleration of vesting restrictions as described below. Based
upon $43.25, which represents the closing price per share of the Autodesk
Common Stock on February 2, 1999, the aggregate dollar value of Autodesk Common
Stock to be received in connection with the Transactions by the directors and
executive officers of Discreet and their affiliates (assuming no New Discreet
Exchangeable Shares are issued) is approximately $180,611,209. The vesting of
shares pursuant to Discreet Share Options granted to certain non-employee
directors is subject to full acceleration as a result of the Transactions. In
addition, pursuant to their current employment agreements with Discreet, the
vesting of Discreet Share Options to purchase 450,000 and 150,000 Discreet
Common Shares held by Richard Szalwinski and Francois Plamondon, respectively,
will accelerate upon consummation of the Transactions.
Messrs. Szalwinski and Plamondon have each entered into agreements with
Autodesk pursuant to which such persons reconfirmed their current employment
arrangements with Discreet and agreed, subject to consummation of the
Transactions, to a minimum one year term of employment with the Combined
Company following the Effective Time and, subject to certain exceptions, to
refrain from competing with the Combined Company or soliciting its customers
and employees. In addition, Autodesk and Dutchco have agreed to maintain or to
cause New Discreet to maintain in effect the policies of directors' and
officers' liability insurance maintained by Discreet and its subsidiaries (or
similar policies) for a period of five years following the Effective Time, and
to provide indemnification to the directors and officers of Discreet against
certain liabilities incurred prior to the Effective Time. See "Approval of the
Transactions--Interests of Certain Persons in the Transactions."
14
Operations of the Combined Company Following the Transactions
Following completion of the Transactions, Autodesk plans to combine the
businesses of Discreet and its Kinetix division. The new organization, the
Discreet business unit of Autodesk, will be headquartered in Montreal, Quebec.
Autodesk's Discreet business unit will focus on developing and marketing tools
for the creation of digital content in the entertainment and creative design
industries. The combined organization will continue to develop and deliver the
existing Discreet and Kinetix product lines to a wide range of creative
professionals including those in the entertainment, design and visualization
industries.
The engineering organizations of Discreet and Kinetix will be combined in
Autodesk's Discreet business unit, and certain general and administrative
functions will be integrated with similar functions at Autodesk. Discreet's
advanced editing and effects systems will continue to be sold by Discreet's
existing direct sales force. These products will be marketed and supported by
the Combined Company's Discreet Advanced Systems division. Discreet's new media
software products and Kinetix products will be sold through Autodesk's
distribution channel and will be marketed and supported by the Combined
Company's New Media division. See "Terms of the Transactions--Operations of the
Combined Company Following the Transactions."
Accounting Treatment
The Transactions are intended to qualify as a pooling-of-interests for
financial reporting purposes in accordance with US GAAP. Consummation of the
Transactions is conditioned upon (i) receipt by Discreet of a letter from its
independent auditors to the effect that Discreet qualifies as an entity that
may be a party to a business combination for which the pooling-of-interests
method of accounting would be available and (ii) receipt by Autodesk of a
letter from its independent auditors regarding concurrence with Autodesk
management's conclusion as to the appropriateness of pooling-of-interests
accounting treatment for the Transactions under Accounting Principles Board
Opinion No. 16, if consummated in accordance with the Acquisition Agreement.
Offering of Autodesk Common Stock
In order to qualify the Transactions for pooling-of-interests accounting
treatment, Autodesk must reissue in one or more transactions certain shares of
Autodesk Common Stock previously repurchased by Autodesk and currently held in
its treasury. Accordingly, Autodesk expects to issue approximately 3 million
shares of Autodesk Common Stock through either a public offering or private
placement to be completed prior to the Effective Time (the "Reissuance
Offering"). If the Reissuance Offering is effected by a public offering, the
offering will be made only by means of a prospectus satisfying the requirements
of the Securities Act. If the Reissuance Offering is effected by a private
placement exempt from the registration requirements of the Securities Act, the
offered shares may not be resold in the United States absent registration or an
applicable exemption from registration under the Securities Act. See "Terms of
the Transactions--Offering of Autodesk Common Stock."
Stock Ownership Following Completion of the Transactions
Based upon the number of Discreet Common Shares outstanding and the number of
Discreet Common Shares issuable upon exercise of outstanding Discreet Share
Options as of December 31, 1998, an aggregate of approximately 9.9 million
shares of Autodesk Common Stock will be issued to Discreet Shareholders in the
Transactions (assuming that no New Discreet Exchangeable Shares are issued),
and Autodesk will assume options exerciseable for up to approximately 3,180,806
additional shares of Autodesk Common Stock. Based upon the number of shares of
Autodesk Common Stock issued and outstanding as of December 31, 1998, and after
giving effect to the issuance of Autodesk Common Stock as described in the
previous sentence and the issuance of 3 million shares of Autodesk Common Stock
pursuant to the Reissuance Offering, the former holders of Discreet Common
Shares would hold approximately 16.5% of Autodesk's total issued and
outstanding
15
Common Stock after completion of the Transactions, and holders of former
Discreet Share Options would hold options to purchase an additional
approximately 5.0% of Autodesk's total issued and outstanding Common Stock
(assuming the exercise of such assumed options, but not others). The foregoing
numbers of shares and percentages are subject to change in the event that the
capitalization of either Autodesk or Discreet changes subsequent to December
31, 1998 and prior to the Effective Time, and there can be no assurance as to
the actual capitalization of Autodesk or Discreet at the Effective Time or of
the Combined Company at any time following the Effective Time. See "Terms of
the Transactions--Offering of Autodesk Common Stock" and "--Stock Ownership
Following Completion of the Transactions."
Material Canadian Federal Income Tax Considerations
Discreet Shareholders should read carefully the detailed information under
"Material Canadian Federal and United States Federal Income Tax Considerations
to Discreet Shareholders--Canadian Federal Income Tax Considerations," which
qualifies the information set forth below. The following summary of Canadian
federal income tax considerations is intended as a general summary and does not
discuss all of the facts and circumstances that may affect the tax liability of
particular Discreet Shareholders. Therefore, Discreet Shareholders are urged to
consult their own tax advisors.
Residents of Canada. A holder of Discreet Common Shares will receive New
Discreet Class B Shares upon the Amalgamation. Unless such holder has elected
to have such New Discreet Class B Shares redeemed in exchange for New Discreet
Exchangeable Shares, such New Discreet Class B Shares will automatically be
converted into New Discreet Units, which will be acquired by Dutchco for shares
of Autodesk Common Stock immediately following such conversion. The holder will
generally realize, in respect of the latter exchange, a capital gain (or
capital loss).
Immediately following the Amalgamation, the New Discreet Class B Shares
received by a Discreet Shareholder who elects to have such New Discreet Class B
Shares redeemed in exchange for New Discreet Exchangeable Shares will be
redeemed by New Discreet in exchange for New Discreet Exchangeable Shares. A
holder who is an Eligible Holder and whose New Discreet Class B Shares are
redeemed for New Discreet Exchangeable Shares will be permitted to elect with
New Discreet in prescribed form pursuant to Section 85 of the Canadian Tax Act
so as generally to be treated as having engaged in a tax-free rollover for
Canadian federal income tax purposes. See "Material Canadian Federal and United
States Federal Income Tax Considerations to Discreet Shareholders--Discreet
Shareholders Resident in Canada." The terms and conditions of the New Discreet
Class B Shares provide that the maximum number of New Discreet Exchangeable
Shares issuable pursuant to the Transactions may not exceed 19.99% of the
number of Discreet Common Shares outstanding immediately prior to the
Amalgamation, multiplied by the Exchange Ratio. In the event the number of New
Discreet Exchangeable Shares otherwise issuable pursuant to the Transactions
exceeds this maximum number, the electing holders of New Discreet Class B
Shares will receive, pro rata, New Discreet Units in lieu of New Discreet
Exchangeable Shares in respect of such excess. Accordingly, holders of New
Discreet Class B Shares may be precluded from engaging in a tax-free rollover
for Canadian federal income tax purposes in respect of some of their New
Discreet Class B Shares. As a result, holders of New Discreet Class B Shares
may be taxable in Canada in respect of the disposition of some of their New
Discreet Class B Shares.
Dividends received on the New Discreet Exchangeable Shares will be treated
for Canadian income tax purposes as ordinary taxable dividends received from a
taxable Canadian corporation. Shareholders that are corporations, other than
specified financial institutions, will be entitled to deduct such dividends in
computing taxable income, subject to certain limitations. Such dividends will
not be subject to tax under Part IV.1 of the Canadian Tax Act, but may be
subject to tax under Part IV.
A holder of New Discreet Exchangeable Shares who receives shares of Autodesk
Common Stock from New Discreet upon a redemption (including a retraction) by
New Discreet of the holder's New Discreet Exchangeable Shares will be deemed to
have received a dividend as a result of such redemption.
16
A holder of New Discreet Exchangeable Shares who exchanges New Discreet
Exchangeable Shares with Dutchco for shares of Autodesk Common Stock upon the
exercise of the Call Rights or the Exchange Rights generally will realize a
capital gain (or capital loss) as a result of such exchange.
Non-Residents of Canada. The New Discreet Class B Shares, Class E Shares and
Class F Shares generally should not be taxable Canadian property to a holder at
any time, provided such shares are listed on a prescribed stock exchange (which
includes the Nasdaq National Market and the WSE).
A non-resident holder of Discreet Common Shares, New Discreet Class B Shares
and New Discreet Units generally should not be subject to tax under the
Canadian Tax Act on the Amalgamation, the redemption of the New Discreet Class
B Shares, the exchange of New Discreet Units for Autodesk Common Stock or the
automatic conversion of New Discreet Class B Shares into New Discreet Units.
Dividends paid (or deemed to be paid) to non-residents on the New Discreet
Exchangeable Shares will be subject to non-resident withholding tax under the
Canadian Tax Act at the rate of 25%, subject to reduction under the provisions
of an applicable income tax treaty. Under the Treaty, the rate is generally
reduced to 15%. A non-resident holder of New Discreet Exchangeable Shares who
receives Shares of Autodesk Common Stock from New Discreet upon a redemption
(including a retraction) of the holder's New Discreet Exchangeable Shares will
be deemed to have received a dividend as a result of such redemption, which
will be subject to non-resident withholding tax under the Canadian Tax Act as
described above.
A non-resident holder of New Discreet Exchangeable Shares who receives shares
of Autodesk Common Stock from Dutchco generally will realize a capital gain (or
a capital loss) as a result of such exchange. In circumstances where a capital
gain arises, such gain will be subject to tax under the Canadian Tax Act.
Relief may be available under the provisions of an applicable income tax
treaty.
Material United States Federal Income Tax Considerations
Discreet Shareholders should read carefully the detailed information under
"Material Canadian Federal and United States Federal Income Tax Considerations
to Discreet Shareholders--Material United States Federal Income Tax
Considerations," which qualifies the information set forth below. The following
disclosure of United States federal income tax considerations is intended as a
general summary and does not discuss all of the facts and circumstances that
may affect the tax liability of particular Discreet Shareholders. Therefore,
Discreet Shareholders are urged to consult their own tax advisors. This summary
discusses United States federal income tax considerations only, and does not
address any United States state or local tax consequences of the Transactions.
The following discussion applies to Discreet Shareholders who are "United
States persons" for United States federal income tax purposes ("US Holders"),
including United States citizens or residents, corporations organized under the
laws of the United States or of any state thereof, any estate the income of
which is includible in its gross income for United States federal income tax
purposes without regard to its source, and any trust if a United States court
is able to exercise primary supervision over the administration of the trust
and one or more United States persons have the authority to control all
substantial decisions of the trust.
US Holders. The exchange of Discreet Common Shares pursuant to the
Transactions generally should constitute a taxable transaction for United
States federal income tax purposes, although US Holders generally will be
exempt from Canadian tax on any income arising out of the Transactions.
US Holders who receive New Discreet Class B Shares, thereafter automatically
converted into New Discreet Units which will be exchanged with Dutchco for
shares of Autodesk Common Stock, generally should recognize a taxable gain or
loss in an amount equal to the difference between (i) the sum of the fair
market value of Autodesk Common Stock received and cash received in lieu of
fractional shares and (ii) the adjusted tax basis of
17
the Discreet Common Shares surrendered. Such gain or loss will be a capital
gain or loss if the Discreet Common Shares exchanged were held as capital
assets, and will be long-term capital gain or loss if the Discreet Common
Shares exchanged have been held for more than one year at the Effective Time.
It is strongly recommended that US Holders who own Discreet Common Shares do
not elect to receive New Discreet Exchangeable Shares since the ownership and
disposition of such shares may have certain adverse tax consequences. Although
the issue cannot be free from doubt, the likely United States federal income
tax considerations of such an election are as follows: US Holders who receive
New Discreet Exchangeable Shares generally should recognize gain or loss in an
amount equal to the difference between (i) the sum of the fair market value of
New Discreet Exchangeable Shares received (including for this purpose the fair
market value of the Voting Rights and the Exchange Rights, if any) and cash
received in lieu of fractional shares and (ii) the adjusted tax basis of the
Discreet Common Shares surrendered. A US Holder of New Discreet Exchangeable
Shares who disposes of such stock pursuant to the exercise of rights granted
under the Articles of Amalgamation (see "Terms of the Transactions--Description
of New Discreet Exchangeable Shares"), including the exercise of rights by New
Discreet and Dutchco, should generally recognize a taxable gain or loss on that
disposition. For Canadian federal income tax purposes, such disposition may be
treated as a deemed distribution on the New Discreet Exchangeable Shares.
Generally, distributions (or deemed distributions) on the New Discreet
Exchangeable Shares will be subject to a Canadian withholding tax at the
current treaty rate of 15%. Subject to certain limitations, a US Holder will be
entitled to claim either a credit against United States federal income tax
liability or a deduction in computing United States taxable income for such
Canadian taxes withheld.
Non-US Holders. The following summary is applicable to holders of Discreet
Common Shares who are not "United States persons" for United States federal
income tax purposes ("Non-US Holders").
A Non-US Holder of Discreet Common Shares generally will not be subject to
United States federal income tax on the gain realized on the receipt of New
Discreet Class B Shares, New Discreet Units, New Discreet Exchangeable Shares,
or Autodesk Common Stock, or upon a subsequent exchange (or sale) of New
Discreet Exchangeable Shares or Autodesk Common Stock, unless such gain is
effectively connected with a United States trade or business or certain other
conditions are satisfied.
Dividends received by a Non-US Holder with respect to Autodesk Common Stock
generally will be subject to United States withholding tax at the rate of 30%,
which rate may be subject to reduction by an applicable income tax treaty in
effect between the United States and the Non-US Holder's country of residence.
Under the Treaty, the rate is generally reduced to 15%. Provided that the
New Discreet Exchangeable Shares are not treated for United States federal
income tax purposes as shares of Autodesk Common Stock, dividends received by a
Non-US Holder on the New Discreet Exchangeable Shares should not be subject to
United States withholding tax.
Regulatory Matters
Under the HSR Act and the rules promulgated thereunder, the Transactions may
not be consummated until notifications have been given and certain information
has been furnished to the FTC and the Antitrust Division, and specified waiting
period requirements have been satisfied or early termination has been granted.
The waiting period for the Transactions will expire at 11:59 pm. on the
thirtieth day following acceptance of the required notifications and
information by the FTC and Antitrust Division, unless such time is extended by
a request for additional information. Expiration of the applicable waiting
periods will not preclude the FTC or the Antitrust Division from taking such
action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the Transactions or seeking the
divestiture of Discreet by Autodesk, in whole or in part, or the divestiture or
compulsory licensing of substantial assets of Autodesk, Discreet or their
respective subsidiaries. See "Terms of the Transactions--Regulatory Matters."
18
MARKET PRICE AND DIVIDEND INFORMATION
Autodesk Common Stock
Autodesk Common Stock has been traded on the Nasdaq National Market under
the symbol "ADSK" since May 1996, and was traded on the Nasdaq National Market
under the symbol "ACAD" from Autodesk's initial public offering in 1985 until
that time. The following table sets forth, for the periods indicated, the high
and low closing sale prices as reported on the Nasdaq National Market for
Autodesk Common Stock for the fiscal periods indicated.
High Low
---- ----
Fiscal Year Ended January 31, 1997
First Quarter............................................. $43 1/4 $29 3/4
Second Quarter............................................ 42 21
Third Quarter............................................. 27 19 5/8
Fourth Quarter............................................ 34 1/8 21 3/8
Fiscal Year Ended January 31, 1998
First Quarter............................................. $36 1/8 $28 3/4
Second Quarter............................................ 42 35
Third Quarter............................................ 50 32 3/4
Fourth Quarter............................................ 41 1/4 32 1/2
Fiscal Year Ending January 31, 1999
First Quarter............................................. $49 7/8 $39
Second Quarter............................................ 48 7/8 31 1/8
Third Quarter............................................. 35 23
Fourth Quarter............................................ 48 1/2 29
Fiscal Year Ending January 31, 2000
First Quarter (through February 2, 1999).................. 43 1/4 43 1/8
The closing price for a share of Autodesk Common Stock as reported on the
Nasdaq National Market on August 20, 1998, the last trading day prior to the
public announcement of the execution of the Original Agreement, was $32.625.
The closing price per share of the Autodesk Common Stock on November 18, 1998,
the last trading day prior to the public announcement of the execution of the
Acquisition Agreement, was $30.625. The closing price per share of Autodesk
Common Stock on January 15, 1999, the last trading day prior to the public
announcement of the revised 0.33 Exchange Ratio, was $45 1/16. On February 2,
1999, the latest practicable trading day for which information was available
before the printing of this Proxy Circular, the closing price per share of
Autodesk Common Stock was $43 1/4.
Autodesk paid quarterly cash dividends of $0.06 per share with respect to
fiscal 1997 and 1998 and the first three quarters of fiscal 1999, and
currently intends to continue paying such cash dividends on a quarterly basis.
19
Discreet Common Shares
Discreet Common Shares have been traded on the Nasdaq National Market under
the symbol "DSLGF" since Discreet's initial public offering in July 1995. The
following table sets forth, for the periods indicated, the range of high and
low closing sale prices reported on the Nasdaq National Market for Discreet
Common Shares (Discreet changed its fiscal year end from July 31 to June 30,
effective beginning with Discreet's second fiscal quarter of 1997 which ended
December 31, 1996).
High Low
---- ---
Fiscal Year Ended June 30, 1997
First Quarter (August 1, 1996 through October 31,
1996)................................................. $ 8 $3 5/8
Second Quarter (November 1, 1996 through December 31,
1996)................................................. 8 1/8 5 3/4
Third Quarter (January 1, 1997 through March 31, 1997). 9 1/2 5 7/8
Fourth Quarter (April 1, 1997 through June 30, 1997)... 18 6 1/2
Fiscal Year Ended June 30, 1998
First Quarter.......................................... $27 7/8 $16
Second Quarter......................................... 26 3/8 15 3/4
Third Quarter.......................................... 25 3/4 16 1/4
Fourth Quarter......................................... 21 9/16 10 19/64
Fiscal Year Ended June 30, 1999
First Quarter.......................................... 15 5/8 10 7/8
Second Quarter ........................................ 19 7 9/16
Third Quarter (through February 2, 1999)............... 19 13/16 10 7/8
The closing price for one Discreet Common Share as reported on the Nasdaq
National Market on August 20, 1998, the last trading day prior to the public
announcement of the execution of the Original Agreement, was $15.625. The
closing price for one Discreet Common Share on November 18, 1998, the last
trading day prior to the public announcement of the execution of the
Acquisition Agreement, was $12.675. The closing price for one Discreet Common
Share on January 15, 1999, the last trading day prior to public announcement
of the revised 0.33 Exchange Ratio, was $19.687. On February 2, 1999, the
closing price per Discreet Common Share the latest practicable trading day for
which information was available before the printing of this Proxy Circular,
was $10.875.
Discreet has never declared or paid any cash dividends and, if the
Transactions are not consummated, does not anticipate paying any cash
dividends in the foreseeable future.
Because the Exchange Ratio is fixed, fluctuations in the market price of the
Autodesk Common Stock will affect the implied value of the consideration to be
received by Discreet Shareholders in connection with the Transactions. Based
on the average closing price of the Autodesk Common Stock for the ten trading
days prior to and including August 20, 1998, the date that the companies
announced the execution of the Original Agreement, the implied value of the
per share consideration to be received by Discreet Shareholders in the
Transactions, based on the current 0.33 Exchange Ratio, was equal to $17.128.
As of February 2, 1999, the latest practicable date prior to the printing of
this Proxy Circular, this implied value was equal to $14.272. As the Effective
Time approaches and the consummation of the Transactions becomes more likely,
the difference between the trading price of the Discreet Common Shares and the
implied value of the per share consideration to be received by Discreet
Shareholders in the Transactions is expected to converge. Discreet
Shareholders are encouraged to obtain current market quotations for Autodesk
Common Stock and Discreet Common Shares prior to the Discreet Meeting. See
"Risk Factors--Risks Relating to the Transactions--Fixed Exchange Ratio
Despite Change in Relative Stock Prices; Risks Relating to Exchangeable Share
Election."
20
SELECTED HISTORICAL AND UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following selected historical financial information of Autodesk and
Discreet has been derived from their respective audited and unaudited
historical consolidated financial statements, and should be read in
conjunction with such audited and unaudited consolidated financial statements
and the notes thereto. The unaudited selected pro forma financial information
of Autodesk and Discreet are derived from the unaudited pro forma condensed
combined financial statements, which give effect to the Transactions as a
pooling-of-interests, and should be read in conjunction with such unaudited
pro forma statements and notes thereto, which are included elsewhere in this
Proxy Circular.
For Autodesk and Discreet pro forma purposes, Autodesk's historical
condensed consolidated statements of income for the three fiscal years ended
January 31, 1996, 1997 and 1998, and Autodesk's unaudited condensed
consolidated statement of income for the nine months ended October 31, 1998
have been combined with the unaudited condensed consolidated statements of
operations of Discreet for the fiscal year ended July 31, 1996, the eleven
months ended June 30, 1997, the twelve months ended December 31, 1997, and the
unaudited condensed consolidated statement of operations of Discreet for the
nine months ended September 30, 1998, respectively. The unaudited pro forma
combined condensed balance sheet assumes the Transactions took place on
October 31, 1998 and combines Autodesk's unaudited condensed consolidated
balance sheet at that date with Discreet's historical condensed consolidated
balance sheet at September 30, 1998. The unaudited selected pro forma combined
financial data should be read in conjunction with the unaudited pro forma
financial statements included elsewhere in this Proxy Circular.
Autodesk paid quarterly dividends of $0.06 per share with respect to fiscal
1996, 1997 and 1998, and in each of the first three quarters of fiscal 1999,
and currently intends to continue paying such cash dividends on a quarterly
basis. Discreet has not paid any cash dividends on the Discreet Common Shares.
Discreet currently intends to retain any earnings for future growth and
therefore does not anticipate paying any cash dividends on the Discreet Common
Shares in the foreseeable future.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Transactions had been consummated at the times
indicated, nor is it necessarily indicative of future operating results or
financial position.
Autodesk Selected Historical Financial Information
(in thousands, except per share data)
Nine Months
Fiscal Year Ended January 31, Ended October 31,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- ----------- -------- --------
Restated(3) Restated(3)
Historical Consolidated
Statement of Operations
Data:
Net revenues............ $405,596 $454,612 $534,167 $496,693 $617,126 $435,275 $551,022
Income from operations
(1)(2)................. 89,703 81,911 129,027 59,817 75,162 33,434 97,494
Net income (1)(2)....... 62,166 56,606 87,788 41,571 45,171 17,681 65,506
Basic net income
per share.............. $ 1.30 $ 1.20 $ 1.86 $ 0.91 $ 0.97 $ 0.38 $ 1.41
Diluted net income
per share.............. $ 1.25 $ 1.14 $ 1.76 $ 0.88 $ 0.91 $ 0.35 $ 1.34
Shares used in computing
basic net income
per share.............. 47,770 47,320 47,090 45,540 46,760 47,050 46,510
Shares used in computing
diluted net income
per share.............. 49,740 49,840 49,800 47,190 49,860 50,350 48,760
Dividends paid per
share.................. $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.18 $ 0.18
As of January 31, As of
----------------------------------------------- October 31,
1994 1995 1996 1997 1998 1998
-------- -------- -------- -------- ----------- -----------
Restated(3) Restated(3)
Historical Consolidated
Balance Sheet Data:
Working capital......... $177,241 $205,735 $190,718 $147,500 $108,215 $251,553
Total assets............ 404,874 482,076 517,929 492,233 563,490 662,545
Long term liabilities... 5,679 3,602 31,306 33,948 31,064 2,619
Put warrants............ -- -- -- 64,500 -- --
Total stockholders'
equity................. 296,879 323,484 342,328 243,614 332,939 432,399
21
- --------
(1) Includes the effect of nonrecurring charges of $25.5 million, $4.7
million, $22.2 million and $22.0 million recorded in fiscal 1995, 1997,
1998 and for the nine months ended October 31, 1998, respectively. The
fiscal 1995 amount represents a federal district court judgment against
Autodesk in a trade secret lawsuit. The charges for fiscal 1997 and 1998
consist of charges relating to the write off of purchased in-process
research and development that had not reached technological feasibility
and had no alternate future use. Nonrecurring charges for the nine months
ended October 31, 1998 consist primarily of a charge relating to the write
off of purchased in-process research and development that had not reached
technological feasibility and had no alternate future use ($13.1 million),
restructuring charges for the consolidation of certain development centers
($1.5 million), the write-off of purchased technologies associated with
these operations ($2.2 million), staff reductions in the Asia Pacific
region ($1.7 million), costs in relation to potential legal settlements
($2.5 million) and the write-down to fair market value of older computer
equipment which Autodesk plans to dispose of ($1.0 million). The
restructurings noted above are expected to be completed during the last
half of Autodesk's fiscal year ended January 31, 1999. See Note 8 of
"Notes to Unaudited Condensed Consolidated Financial Statements."
(2) Income from operations for the nine months ended October 31, 1998 includes
a reversal of a portion of the litigation reserve in the amount of $18.2
million as a result of a favorable decision on appeal of the trade secret
lawsuit (see footnote 1, above). In addition to the $18.2 million, $2.7
million of interest associated with the litigation reserve was reversed
and is reflected in net income for the nine months ended October 31, 1998.
(3) Subsequent to the Securities and Exchange Commission's letter to the AICPA
dated September 9, 1998, regarding its views on in-process research and
development ("IPR&D"), Autodesk re-evaluated its IPR&D charges on the
Softdesk, Inc. and Genius CAD Software GmbH acquisitions, revised the
purchase price allocations and restated its financial statements. Amounts
for fiscal 1998 and the nine months ended October 31, 1998 and 1997 have
been restated to adjust the allocation of the purchase price of these
business combinations occurring in fiscal 1998 and the nine months ended
October 31, 1998. The adjustments had the effect of increasing net income
(diluted net income per share) by $29.8 million, ($0.60), $8 million,
($0.16) and $31.6 million ($0.65) for the fiscal year ended January 31,
1998 and the nine months ended October 31, 1998 and 1997, respectively.
See Autodesk financial statements and the notes thereto for the year ended
January 31, 1998 and the unaudited interim financial statements for the nine-
month period ended October 31, 1998, included elsewhere in this Proxy
Circular.
22
Discreet Selected Historical Financial Information
(in thousands, except per share data)
Eleven
Fiscal Year Ended July 31, Months Fiscal Year Six Months Ended
--------------------------- Ended Ended --------------------------
June 30, June 30, December 31, December 31,
1994 1995 1996 1997 1998 1997 1998
-------- -------- --------- ----------- ----------- ------------- ------------
Restated(2) Restated(2) (Restated)(2)
Historical Consolidated
Statement of Operations
Data:
Revenues................ $ 15,392 $ 64,549 $ 83,997 $101,924 $151,558 $75,673 $55,827
Operating income
(loss)(1).............. 944 13,460 (44,914) 6,175 19,832 7,122 (3,660)
Net income (loss)(1).... 483 7,785 (44,141) 676 11,044 1,913 (2,638)
Basic net income (loss)
per share.............. $ 0.02 $ 0.34 $ (1.64) $ 0.02 $ 0.38 $ 0.07 $ (0.09)
Diluted net income
(loss) per share....... $ 0.02 $ 0.31 $ (1.64) $ 0.02 $ 0.36 $ 0.06 $ (0.09)
Shares used in computing
basic net income (loss)
per share.............. 22,954 23,017 26,837 27,948 29,029 28,746 29,789
Shares used in computing
diluted net income
(loss) per share....... 23,094 24,886 26,837 28,894 30,793 30,608 29,789
Dividends paid per
share.................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
As of July 31, As of June 30, As of December 31,
----------------------- --------------------------- ------------------
1994 1995 1996 1997 1998 1998
------ ------- ------- ------------- ------------- ------------------
(Restated)(2) (Restated)(2)
Historical Consolidated
Balance Sheet Data:
Working capital
(deficit).............. $ (382) $41,847 $24,030 $ 18,536 $ 40,409 $ 46,411
Total assets............ 9,431 76,858 80,148 103,377 136,411 129,383
Long term liabilities... 317 1,261 1,442 713 2,229 4,783
Total shareholders'
equity................. 934 50,124 42,343 44,381 78,654 77,085
- --------
(1) Operating income includes the effect of nonrecurring charges of $1.4
million, $28.5 million, $8.8 million, $4.2 million and $6.9 million
recorded in fiscal 1994, 1996, 1997 and 1998, and the six months ended
December 30, 1997, respectively. The fiscal 1994 amount represents a legal
settlement by Discreet and related fees. The fiscal 1996 charges consist of
the write-off of purchased in-process research and development ($8.5
million) related to the COSS/IMP Acquisition, restructuring charges ($15.0
million), the write down of an investment ($2.5 million), and costs
relating to litigation ($2.5 million). Fiscal 1997 charges consist of the
write-off of amounts relating to purchased in-process research and
development ($2.3 million) related to the Denim Acquisitions and a class
action legal settlement ($6.5 million). The fiscal 1998 charge consists of
amounts for the write-off of purchased in-process research and development
($6.9 million) related to the D-Vision and Lightscape Acquisitions, costs
related to a terminated merger agreement ($1.7 million), a gain on the sale
of an investment ($2.5 million), and the reversal of provisions for
restructuring charges ($1.5 million) and legal accruals no longer required
($0.4 million). The six months ended December 31, 1997 charge consists of
the write-off of purchased in-process research and development related to
the D-Vision and Lightscape acquisitions.
(2) Amounts for fiscal 1998 and 1997 and the six months ended December 31, 1997
have been restated to adjust the allocation of the purchase price for
certain acquisitions occurring in fiscal 1998 and 1997 and the six months
ended December 31, 1997. The adjustments had the effect of increasing net
income by $7.4 million, $11.7 million, and $16.2 million for fiscal 1997,
1998, and the six months ended December 31, 1997, respectively or $0.26,
$0.38, and $0.56 per share on a diluted basis. See Note 2a of Notes to
Discreet's consolidated financial statements).
See Discreet financial statements and notes thereto for the year ended June 30,
1998 and the unaudited interim financial statements for the three and six-month
period ended December 31, 1998, included elsewhere in this Proxy Circular.
23
UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(in thousands, except per share data)
Nine Months Ended
Twelve Months Ended January 31, October 31,
-------------------------------- -----------------
1996 1997 1998 1997 1998
---------- ---------- ---------- -------- --------
Pro Forma Condensed
Combined Statement of
Operations Data:
Net revenues............. $ 618,164 $ 598,617 $ 754,627 $535,508 $654,338
Income from operations... 84,113 65,992 86,237 38,694 108,770
Net income .............. 43,647 42,247 46,608 16,113 73,887
Basic net income per
share................... $ 0.78 $ 0.77 $ 0.83 $ 0.29 $ 1.31
Diluted net income per
share................... $ 0.74 $ 0.74 $ 0.78 $ 0.27 $ 1.25
Shares used in computing
basic net income per
share................... 55,946 54,763 56,041 56,371 56,226
Shares used in computing
diluted net income per
share................... 59,331 56,725 59,664 60,172 58,974
Dividends paid per share. $ 0.24 $ 0.24 $ 0.24 $ 0.18 $ 0.18
October 31, 1998
--------------------------------------
Autodesk Discreet Adjustments Combined
-------- -------- ----------- --------
Pro Forma Condensed Combined Balance
Sheet Data:
Working capital...................... $251,553 $ 45,590 $(15,000) $282,143
Total assets......................... 662,545 133,471 -- 796,016
Long term liabilities................ 2,619 4,677 -- 7,296
Stockholders' equity................. 432,399 78,315 (15,000) 495,714
See Unaudited Pro Forma Combined Condensed Financial Information and
accompanying notes thereto included elsewhere in this Proxy Circular.
24
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Autodesk
and Discreet and combined basic and diluted per share data on an unaudited pro
forma basis after giving effect to the Transactions on a pooling-of-interests
basis under US GAAP, assuming the application of the Exchange Ratio. This data
should be read in conjunction with selected historical financial data, the
unaudited pro forma combined condensed financial statements and the separate
historical financial statements of Autodesk and Discreet and the notes thereto
included elsewhere in this Proxy Circular. The unaudited pro forma combined
financial data are not necessarily indicative of the operating results that
would have been achieved had the Transactions been consummated as of the
beginning of the periods presented and should not be construed as
representative of future operations.
Year Ended January Six Months
31, Ended
-------------------- October 31,
1996 1997 1998 1998
----- ----- -------- -----------
Restated Restated
Historical--Autodesk:
Basic net income per share................... $1.86 $0.91 $0.97 $1.41
Diluted net income per share................. $1.76 $0.88 $0.91 $1.34
Book value per share(1)...................... $7.39 $5.40 $7.32 $9.24
Dividends paid per share..................... $0.24 $0.24 $0.24 $0.18
Fiscal Year Eleven Months Fiscal Year Six Months
Ended Ended Ended Ended
July 31, June 30, June 30, December 31,
1996 1997 1998 1998
----------- ------------- ----------- ------------
Restated Restated
Historical--Discreet:
Basic net income (loss)
per share................ $(1.64) $0.02 $0.38 $(0.09)
Diluted net income (loss)
per share................ $(1.64) $0.02 $0.36 $(0.09)
Book value per share(1)... $ 1.53 $1.58 $2.66 $ 2.57
Dividends paid per share.. $ -- $ -- $ -- $ --
Nine Months
Ended
Year Ended January 31, October 31,
----------------------- -----------
1996 1997 1998 1997 1998
------- ------- ------- ----- -----
Autodesk Pro Forma(2):
Basic net income per share............... $0.78 $0.77 $ 0.83 $0.29 $1.31
Diluted net income per share............. $0.74 $0.74 $ 0.78 $0.27 $1.25
Book value per share(1).................. $6.81 $7.25 $8.75
Dividends paid per share................. $ 0.24 $0.24 $ 0.24 $0.18 $0.18
Discreet Equivalent Pro Forma(3):
Basic net income per share............... $0.26 $0.25 $0.27 $0.10 $0.43
Diluted net income per share............. $0.24 $0.24 $0.26 $0.09 $0.41
Book value per share(1).................. $2.25 $2.39 $2.89
Dividends paid per share................. $0.08 $0.08 $ 0.08 $0.06 $0.06
- --------
(1) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of Autodesk Common Stock outstanding at the
end of each period. Pro forma book value per share is computed by dividing
pro forma stockholders' equity by the pro forma number of shares of
Autodesk Common Stock outstanding at the end of each period.
(2) Refer to Note 1 of Notes to Unaudited Pro Forma Condensed Combined
Financial Statements.
(3) The Discreet equivalent pro forma per share amounts are calculated by
multiplying the Autodesk combined pro forma share amounts by the Exchange
Ratio.
25
RISK FACTORS
The following risk factors should be considered by holders of Discreet
Common Shares in evaluating whether to approve the Discreet Resolution and
thereby become holders of Autodesk Common Stock or of New Discreet
Exchangeable Shares, which are exchangeable for shares of Autodesk Common
Stock, and by holders of Autodesk Common Stock in evaluating whether to
approve the Autodesk Resolution. These factors should be considered in
conjunction with the other information included in this Proxy Circular. This
Proxy Circular contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. Actual results could differ materially from those projected in these
forward-looking statements as a result of a variety of factors, including
those set forth below and elsewhere in this Proxy Circular. Some of these
factors relate directly to the Transactions, while others are present in
Autodesk's, Discreet's and the Combined Company's general business environment
independent of the Transactions.
Risks Relating to the Transactions
Failure to Achieve Beneficial Synergies. Autodesk and Discreet have entered
into the Acquisition Agreement with the expectation that the Transactions will
result in beneficial synergies. See "Approval of the Transactions -- Joint
Reasons for the Transactions," "-- Autodesk's Reasons for the Transactions,"
"-- Discreet's Reasons for the Transactions," "Autodesk Special Meeting --
Recommendation of the Autodesk Board," and "Discreet Special Meeting --
Recommendation of the Discreet Board." These include mutual benefits from
complementary strengths in the 3D modeling and animation tools markets, the
competitive advantages resulting from offering a comprehensive suite of
integrated product offerings, combined industry experience and market
knowledge and shared distribution channels. Achieving these anticipated
synergies will depend on a number of factors including, without limitation,
the successful integration of Autodesk's and Discreet's operations and general
and industry-specific economic factors. Even if Autodesk and Discreet are able
to integrate their operations and economic conditions remain unchanged, there
can be no assurance that the anticipated synergies will be achieved. The
failure to achieve such synergies could have a material adverse effect on the
business, results of operations and financial condition of the Combined
Company.
Integration of Operations and Technologies. Achieving the anticipated
benefits of the Transactions will depend in part upon whether the integration
of the two companies' businesses is accomplished in an efficient and effective
manner, and there can be no assurance as to the extent to which this will
occur, if at all. The combination of the two companies will require, among
other things, integration of the companies' respective operations, products,
technologies, management information systems, distribution channels and key
personnel and the coordination of their sales, marketing and research and
development efforts. In particular, the Combined Company will be required to
integrate Autodesk's sales channel, which consists principally of independent
resellers, with Discreet's sales force, which typically sells product directly
to customers. As a result of these and other factors, the integration may not
be accomplished smoothly or successfully, if at all. If significant
difficulties are encountered in the integration of the existing operations,
products or technologies or the development of new products and technologies,
resources could be diverted from new product development, and delays in new
product introductions could occur. Compared to Autodesk's products, Discreet's
products have traditionally experienced longer, more complex sales cycles.
There can be no assurance that the Combined Company will be able to take full
advantage of the combined sales efforts. In addition, the difficulties of
integrating Autodesk and Discreet may be increased by the necessity of
coordinating organizations with distinct corporate cultures and widely
dispersed operations in two different countries. See "-- Integration of
Operations of a non-US Company." The consummation of the Transactions and the
integration of operations and technologies following the consummation of the
Transactions will constitute a significant challenge to Autodesk's, Discreet's
and the Combined Company's managements and will require substantial effort and
dedication of management and other personnel, which may distract their
attention from the day-to-day business of these entities, the development or
acquisition of new technologies, and the pursuit of other business
opportunities. In addition, certain Discreet systems currently include
computer hardware, which may present business issues as to which Autodesk
management has limited experience. See "--Risks Relating to the Combined
Company--Dependence on Single Workstation Vendor" and "--Reliance on Sole
Source Suppliers." Failure to successfully accomplish the
26
integration of the two companies' operations, technologies and personnel would
likely have a material adverse effect on the Combined Company's business,
financial condition and results of operations. In addition, during the pre-
acquisition and integration phases, aggressive competitors may undertake
initiatives to attract customers or employees through various incentives,
which could have a material adverse effect on the business, results of
operations and financial conditions of Autodesk, Discreet and/or the Combined
Company.
Customers. The present and potential customers of Discreet and Autodesk may
not continue their current buying patterns in light of the Transactions.
Certain customers may defer purchasing decisions as they evaluate the proposed
Transactions, other recent acquisitions and product announcements in the
multimedia and design software industries, the Combined Company's future
product strategy, current and anticipated product offerings of competitors,
and any other outside forces which may affect customer buying patterns.
Customers may ultimately decide to purchase competitors' products in lieu of
the Combined Company's products. Historically, Discreet and Autodesk have had
significantly different types of customers. These different customer types may
evaluate the Combined Company differently. Discreet believes that its results
of operations for the three-month period ended September 30, 1998 were
negatively impacted by what Discreet believed to be temporary customer
concerns regarding the Transactions, including the deferral or alteration of
customer purchasing decisions. While Discreet believes that the negative
effects resulting from customer concerns regarding uncertainty surrounding the
acquisition did not have a significant impact on its results of operations for
the three month period ended December 31, 1998, a significant amount of time
has elapsed since the original announcement of the Transactions on August 20,
1998, and there can be no assurance that certain customers will not choose
again to delay or alter purchasing decisions or that this prolonged period
will not influence customers to delay or alter purchasing decisions (for
example, in favor of one of Discreet's competitors), both of which could have
an adverse effect on Discreet's future operating results. In addition, there
can be no assurances that consummation of the Transactions and the conduct of
the Combined Company's business thereafter will adequately address such
concerns. See "--Integration of Operations and Technologies." Further, the
decision of customers to defer their purchasing decisions or to purchase
products elsewhere could have a material adverse effect on the business,
results of operations and financial condition of the Combined Company.
Dependence on Retention and Integration of Key Employees. The success of the
Combined Company is dependent on the retention and integration of the key
management, sales, marketing, engineering and other technical employees of
Autodesk and Discreet. Competition for qualified personnel in the multimedia
and design software industries is very intense, and competitors often use
aggressive tactics to recruit key employees during the period leading up to an
acquisition and during the integration phase following an acquisition.
Discreet has experienced recent changes in its sales organization leadership
which negatively affected its sales efforts and its results of operations for
the three-month periods ended September 30, 1998 and December 31, 1998.
Discreet has recently hired a new Vice President, Advanced Systems Sales and
Marketing. However, Discreet still has several field vacancies and, further,
the integration of key employees is a time consuming process and there can be
no assurance that this recent addition and Discreet's other efforts will
alleviate in a timely manner the disruptive or negative effect resulting from
the changes in Discreet's sales organization leadership and the lack of
certain key sales employees during the periods. See "--Integration of
Operations and Technologies; Dependence on Retention and Integration of Key
Employers." Stock options, which generally become exercisable only over a
period of several years of employment, serve as an important incentive for
retaining key employees. In accordance with their original terms, certain
stock options held by several key Discreet employees will be fully exercisable
or the vesting thereof will accelerate upon the consummation of the
Transactions, thus potentially reducing the retention incentive provided by
these options. While the Combined Company will endeavor to retain key Discreet
employees, there can be no assurance that key employees will remain with the
Combined Company. The loss of services of any of the key employees of the
Combined Company could materially and adversely affect the Combined Company's
business, financial condition and results of operation. See "Approval of the
Transactions--Interests of Certain Persons in the Transactions."
Integration of Operations of a non-US Company. Cross-border acquisitions
entail certain special risks in addition to those normally encountered in a
domestic acquisition. These include the difficulty of integrating
27
employees from a different corporate culture into the acquiring organization;
the need to understand different incentives that motivate employees in a non-
US company; the greater difficulty of transplanting the acquiring company's
corporate culture to an organization that is physically distant; and the
difficulty and expense of relocating employees from one country to another in
the event of an internal group restructuring following an acquisition. These
factors can reduce the likelihood of the long-term success of a cross-border
acquisition. Although Autodesk derives the majority of its revenues from non-
US sales and has significant operations outside the United States, it has
limited experience integrating the management, sales, product development and
marketing organizations of a significant non-US business with its existing
operations. Although Discreet has sales and marketing operations in the United
States and derives a significant portion of its revenue from US sales, its
management and product development personnel are predominantly based in
Canada. There can be no assurance that Autodesk will be able to successfully
integrate the personnel and operations of Discreet into the existing Autodesk
organization.
Potential Dilutive Effect to Stockholders. Although Autodesk and Discreet
believe that beneficial synergies will result from the Transactions, combining
the two companies' businesses, even if the combination is achieved in an
efficient, effective and timely manner, may not result in combined results of
operations and financial condition superior to what would have been achieved
by each company independently, and may in any event require a longer period
than management of Autodesk or Discreet anticipates. In addition, based on the
capitalization of each of Autodesk and Discreet as of December 31, 1998,
Autodesk will issue approximately 9.9 million new shares of Autodesk Common
Stock (assuming that no New Discreet Exchangeable Shares are issued in the
Transactions). Autodesk will also issue approximately 3 million shares of
Autodesk Common Stock in the Reissuance Offering. The issuance of new shares
of Autodesk Common Stock in connection with the Transactions and the
Reissuance Offering will have the initial effect of reducing Autodesk's net
income per share and could reduce the market price of the Autodesk Common
Stock unless and until revenue growth, cost savings or other business
synergies sufficient to offset the effect of such issuance can be achieved.
There can be no assurance that Autodesk Stockholders and Discreet Shareholders
would not achieve greater returns on investment if Autodesk and Discreet were
to remain independent of each other. See "Terms of the Transactions--Stock
Ownership Following Completion of the Transactions" and "--Offering of
Autodesk Common Stock."
Fixed Exchange Ratio Despite Change in Relative Stock Prices; Risks Relating
to Exchangeable Share Election. Pursuant to the Transactions, Discreet
Shareholders effectively will receive either 0.33 New Discreet Exchangeable
Shares or 0.33 shares of Autodesk Common Stock for each Discreet Common Share.
In turn, each New Discreet Exchangeable Share will be exchangeable after the
Effective Time at the option of the holder into one share of Autodesk Common
Stock. This Exchange Ratio is fixed and will not be adjusted in the event of
any increase or decrease in the market price of either the Autodesk Common
Stock or the Discreet Common Shares. Consequently, the implied value of the
exchange to Discreet Shareholders will change as the market price of the
Autodesk Common Stock fluctuates. The Autodesk Common Stock and Discreet
Common Shares historically have been subject to substantial price volatility.
Variations in the market price of the Autodesk Common Stock may be the result
of changes in the business, operations or prospects of Autodesk or Discreet,
market assessments of the synergistic value of the Transactions or likelihood
that the Transactions will be consummated and the timing thereof, dilutive
issuances of additional shares of Autodesk Common Stock (including the shares
to be issued in the Reissuance Offering), general market and economic
conditions or other factors. No assurance can be given as to the market prices
of Autodesk Common Stock or Discreet Common Shares at any time before the
Effective Time or as to the market price of Autodesk Common Stock at any time
thereafter. The specific dollar value of the consideration to be received by
Discreet Shareholders upon consummation of the Transactions will depend on the
market price of Autodesk Common Stock at the Effective Time. In the event that
the market price of Autodesk Common Stock decreases or increases prior to the
Effective Time, the market value at the Effective Time of the Autodesk Common
Stock to be received by Discreet Shareholders upon consummation of the
Transactions would correspondingly decrease or increase. Discreet Shareholders
are therefore encouraged to obtain current market quotations for the Autodesk
Common Stock and the Discreet Common Shares. As of February 2, 1999, the
market value of the fraction of a share of Autodesk Common Stock to be
received in the Transactions by Discreet Shareholders in exchange for each
Discreet Common Share was equal to $14.27. In
28
addition, Discreet Shareholders who hold New Discreet Exchangeable Shares may
not be able to determine at the time they make a request to exchange such New
Discreet Exchangeable Shares for Autodesk Common Stock the implied value of
the consideration they will receive upon exchange. See "--Risks Relating to
Timing of Exchange of New Discreet Exchangeable Shares for Autodesk Common
Stock," "Market Price and Dividend Information" and "Terms of the
Transactions--Description of New Discreet Exchangeable Shares."
Absence of Trading Market for New Discreet Exchangeable Shares. Autodesk and
New Discreet do not expect a market in the New Discreet Exchangeable Shares to
develop. This is because Autodesk and Discreet have not undertaken to list the
New Discreet Exchangeable Shares on any stock exchange or over-the-counter
market and have no intention of doing so. Moreover, under the terms of the
Amalgamation Agreement, if any holder of New Discreet Exchangeable Shares
attempts to transfer any such shares to any other person or entity (any such
attempt, an "Attempted Transfer") such holder shall, by such action, be deemed
to have made a Retraction Request with respect to those of such holder's New
Discreet Exchangeable Shares that are the object of such Attempted Transfer (a
"Deemed Retraction Request"). Consequently, while the issuance of the New
Discreet Exchangeable Shares in the Transactions is being registered under
applicable US federal securities laws, and the New Discreet Exchangeable
Shares will therefore be freely tradeable (subject to certain restrictions)
under such laws, no market to facilitate such trading is expected to exist and
any attempted transfer of such shares will result in a Deemed Retraction
Request. The absence of such a trading market and the occurrence of a Deemed
Retraction Request in the event of any Attempted Transfer will limit the
liquidity path available to holders of New Discreet Exchangeable Shares.
Rather than selling New Discreet Exchangeable Shares directly, holders of such
shares will be required to exercise their right to exchange such shares for
Autodesk Common Stock, receive such stock and sell it on the Nasdaq National
Market where Autodesk Common Stock is actively traded.
Risks Relating to Exchange of New Discreet Exchangeable Shares. Discreet
Shareholders who receive New Discreet Exchangeable Shares in the Transactions
may not be able to determine at the time they request to receive Autodesk
Common Stock in exchange for their New Discreet Exchangeable Shares (referred
to as a "Retraction Request") what the value of the Autodesk Common Stock they
receive in such exchange will be. This is because it will typically take
between three and ten Business Days after the applicable Retraction Request
for persons who hold New Discreet Exchangeable Shares to receive their
Autodesk Common Stock, depending on the period specified by such holders in
their Retraction Request. During this three to ten Business Day period between
the date of the Retraction Request and the date of actual receipt of Autodesk
Common Stock (referred to as the "Retraction Date"), the market price of
Autodesk Common Stock may increase or decrease. Any such increase or decrease
would affect the value of the consideration to be received by the holder of
New Discreet Exchangeable Shares on the Retraction Date. However, a holder of
New Discreet Exchangeable Shares may be able to sell the Autodesk Common Stock
underlying his New Discreet Exchangeable Shares on the date of his Retraction
Request, and thereby be fully aware of the value of the consideration to be
received on exchange of the New Discreet Exchangeable Shares as of such date,
provided that such holder (i) specifies a Retraction Date which is three
Business Days after the date of such holder's Retraction Request, (ii) ensures
that the Retraction Request is received by New Discreet on the date it is
made, (iii) sells through a broker who is able to ensure that the Autodesk
Common Stock received on the exchange is delivered to the buyer on the
settlement date. Any holder of New Discreet Exchangeable Shares who fails to
satisfy all of the three steps outlined in the prior sentence, including by
failing to specify a particular Retraction Date and therefore receiving
Autodesk Common Stock as late as the tenth Business Day after the Retraction
Request, likely will not be able to effect such a sale, and therefore will not
be able to determine at the time he makes a Retraction Request the value of
the consideration to be received upon the exchange. See "Terms of the
Transactions--Description of New Discreet Exchangeable Shares--Retraction
Rights of Holder and Dutchco Retraction Call Rights."
Volatility Of Stock Prices. The markets for the Autodesk Common Stock and
Discreet Common Shares are highly volatile. The trading price of the Autodesk
Common Stock has in the past been and could in the future be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements following the development or acquisition of technological
innovations or new products by Autodesk or Discreet or their
29
competitors, changes in prices of Autodesk's or Discreet's or their
competitors' products and services, changes in product mix, changes in revenue
and revenue growth rates for Autodesk or Discreet as a whole or for geographic
areas or business units, and other events or factors. Statements or changes in
opinions, ratings or earnings estimates made by brokerage firms or industry
analysts relating to the markets in which Autodesk does business or relating
to Autodesk or Discreet specifically have resulted, and could in the future
result, in an immediate and adverse effect on the market price of the Autodesk
Common Stock. Statements by financial or industry analysts regarding the
impact on Autodesk's net income per share resulting from the Transactions and
the extent to which such analysts expect potential business synergies to
affect reported results in future periods can be expected to contribute to
volatility in the market price of the Autodesk Common Stock. Moreover, the
issuance of significant numbers of additional shares by Autodesk, including
the issuance of approximately 3 million shares in the Reissuance Offering, may
have the effect of reducing the market price of the Autodesk Common Stock. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations which have particularly affected the market price for the
securities of many high-technology companies and which often have been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Autodesk Common
Stock.
Substantial Expenses Resulting from the Transactions. Autodesk, Dutchco and
Discreet estimate they will incur direct transaction costs, relating primarily
to regulatory filing costs, and the fees of financial advisors, attorneys,
accountants, financial printers and proxy solicitors, of approximately $13
million associated with the Transactions, which will be charged to operations
upon consummation of the Transactions. Autodesk and Discreet expect the
Combined Company to incur an additional significant charge to operations,
currently estimated at $6-8 million, to reflect costs associated with
integrating the two companies which will be expensed as incurred. The Combined
Company may also incur additional material charges in subsequent quarters to
reflect additional costs associated with the Transactions.
Risks Relating to the Combined Company
As is true for technology companies generally, Autodesk, Dutchco and
Discreet currently operate, and, following consummation of the Transactions,
the Combined Company will operate, in a rapidly changing environment that
involves a number of risks, some of which are beyond their control.
Competition. The software industry has limited barriers to entry, and the
availability of desktop computers with continually expanding capabilities at
progressively lower prices contributes to the ease of market entry. Because of
these and other factors, competitive conditions in the industry are likely to
intensify in the future. Increased competition could result in price
reductions, reduced revenues and profit margins, and loss of market share, any
of which could adversely affect Autodesk's business, consolidated results of
operations, and financial condition. The design software market, in
particular, is characterized by vigorous competition in each of the vertical
markets in which Autodesk competes. This competition includes the entry of
competitors with innovative technologies and the consolidation of companies
with complementary products and technologies. Autodesk believes that the
principal factors affecting competition in its markets are product
reliability, performance, ease of use, range of useful features, continuing
product enhancements, reputation, price, and training. In addition, the
availability of third-party application software is a competitive factor
within the multimedia and design software markets. Autodesk believes that it
competes favorably in these areas and that its competitive position will
depend, in part, upon its continued ability to enhance existing products, and
to develop and market new products.
The digital imaging software market in which Discreet competes is extremely
competitive and characterized by frequent and rapid changes in technology and
customer preferences. Discreet competes with other software vendors for access
to distribution channels and customers. Competition is generally based on
product features and functionality, ease of use, quality of customer support,
timeliness of product upgrades and price, among other factors. As the market
for the software products of Discreet continues to develop and other software
vendors expand their product lines to include products that compete with those
of Discreet, competition may intensify. A number of Discreet's competitors and
potential competitors possess significantly greater financial, technical,
30
marketing and sales and other resources than Discreet or the Combined Company.
In addition, as desktop computers become more powerful and less expensive, a
broader group of software developers may be able to introduce products for
personal computers that would be competitive with Discreet's products in terms
of price and performance. Accordingly, there can be no assurance that the
future products produced by the Combined Company will be successful or gain
market acceptance.
The ability of the Combined Company to compete will depend on factors both
within and outside its control, including the success and timing of new
product development and product introductions by the Combined Company and its
competitors, product performance and price, distribution and customer support.
There can be no assurance that the Combined Company will be able to compete
successfully with respect to these factors. Although Autodesk and Discreet
believe that the Combined Company will have certain technological and other
advantages over its competitors, maintaining such advantages will require
continued investment by the Combined Company in research and development,
sales and marketing and customer service and support. There can be no
assurance that the Combined Company will have sufficient resources to make
such investment or that the Combined Company will be able to make the
technological advances necessary to maintain such competitive advantages. In
addition, as the Combined Company enters new markets, distribution channels,
technical requirements and levels and bases of competition may be different
from those in the Combined Company's current markets and there can be no
assurance that the Combined Company will be able to compete favorably.
The future financial performance of Autodesk's Discreet business unit as
part of the Combined Company will depend in part on the successful
development, introduction and customer acceptance of existing and new or
enhanced products. In addition, in order for the unit to achieve sustained
growth as part of the Combined Company, the market for its systems and
software must continue to develop and the Combined Company must expand this
market to include additional applications within the film and video industries
and develop or acquire new products for use in related markets. There can be
no assurance that the Combined Company will be successful in marketing its
existing or new or enhanced products. In addition, as the Combined Company
enters new markets, distribution channels, technical requirements and levels
and bases of competition may be different from those in Discreet's current
markets; there can be no assurance that the Combined Company will be able to
compete favorably.
In April 1998, Autodesk received notice that the FTC had undertaken a
nonpublic investigation to determine whether Autodesk or others have engaged
in or are engaging in unfair methods of competition. The FTC has not made any
claims or allegations regarding Autodesk's current business practices or
policies, nor have any charges been filed. Autodesk intends to cooperate fully
with the FTC in its inquiry. Autodesk does not believe that the investigation
will have a material adverse effect on its business or consolidated results of
operations.
Fluctuations in Quarterly Operating Results. From time to time, Autodesk
experiences fluctuations in its quarterly operations as a result of periodic
release cycles, competitive factors and general economic conditions, among
other things. For example, Autodesk's net revenues in the first quarter of
fiscal year 1998 were $119 million as compared to $182 million in the fourth
quarter of fiscal year 1998, with the increase attributable in part to the
introduction of AutoCAD Release 14 in the second fiscal quarter as well as
increased revenues from Autodesk's geographic information systems and AEC
product offerings. In addition, Autodesk has experienced fluctuations in
operating results in interim periods in certain geographic regions due to
seasonality. In particular, Autodesk's operating results in Europe during its
third fiscal quarter are usually impacted by a slow summer period while the
Asia/Pacific region typically experiences seasonal slowing in Autodesk's third
and fourth fiscal quarters.
Autodesk receives and fulfils a majority of its orders within a particular
quarter, with the majority of the sales to distributors and dealers (value-
added resellers or "VARs"). These resellers typically carry inventory of
Autodesk's products and place volume orders equivalent to a few days or a few
weeks of sales. The timing of these orders could have a material impact on
quarterly operating results. Additionally, Autodesk's operating expenses are
based in part on its expectations of future revenues and are relatively fixed
in the short term.
31
Accordingly, any revenue shortfall below expectations could have an immediate
and significant adverse effect on the Combined Company's consolidated results
of operations and financial conditions.
Similarly, shortfalls in Autodesk's and Discreet's revenues or earnings from
levels expected by securities analysts have in the past had an immediate and
significant adverse effect on the trading price of each company's common
stock, and any such shortfalls can be expected to have a similar effect on
Autodesk's stock price following consummation of the Transactions. Moreover,
each of Autodesk's and Discreet's stock price is, and Autodesk's stock price
will be, subject to the volatility generally associated with technology stocks
and may also be affected by broader market trends unrelated to performance in
future periods.
A variety of factors have caused period-to-period fluctuations in Discreet
and Autodesk's operating results, including the integration of operations
resulting from acquisitions of companies, products or technologies, revenues
and expenses related to the introduction of new products or new versions of
existing products, changes in selling prices, delays in purchase in
anticipation of upgrades to existing products, or introduction of new products
(including products of third parties), currency fluctuations, dealer and
distributor order patterns or general economic trends. In addition, in the
future, the Combined Company is more likely to recognize a disproportionate
amount of its revenue for a given fiscal quarter or fiscal year at the end of
such fiscal quarter or fiscal year.
Autodesk and Discreet believe that the operating results of Autodesk's
Discreet business unit could vary significantly from quarter to quarter. A
limited number of system sales may account for a substantial percentage of
Discreet's quarterly revenue because of the high average sales price of such
systems and the timing of purchase orders. Historically, Discreet has
generally experienced greater revenues during the period following the
completion of the NAB trade show, which typically is held in April. In
addition, the timing of revenue is influenced by a number of other factors,
including the timing of individual orders and shipments, other industry trade
shows, competition, seasonal customer buying patterns, changes in customer
buying patterns in response to platform changes and changes in product
development, and sales and marketing expenditures. Because Discreet's
operating expenses are based on anticipated revenue levels and a high
percentage of Discreet's expenses are relatively fixed in the short term,
variations in the timing of recognition of revenue could cause significant
fluctuations in operating results from quarter to quarter and may result in
unanticipated quarterly earnings shortfalls or losses. In addition, Discreet
has recently experienced fluctuation in its operating results for the three
month period ended September 30, 1998 which Discreet believes to be primarily
due to seasonally slower than expected sales in Europe, general market anxiety
in North America causing delays in capital spending, customers deferring
purchase decisions due to confusion over HDTV timing and standards, what
Discreet believes to be temporary concerns in the Advanced Systems customer
base regarding the Transactions which may have led to purchasing delays, and
recent changes in Discreet's sales organization leadership. Discreet has
further experienced fluctuation in its operating results for the three month
period ended December 31, 1998 which Discreet believes to be primarily due to
continued effects from the lack of a sales and marketing senior executive
during the quarter combined with several field vacancies; continued slower
than expected sales in Europe and slower than expected sales in Asia due in
part to Discreet's sales personnel issues noted above in these geographic
areas as well as market conditions in these regions which have affected
customer capital expenditures; and a greater number of turnkey systems sales
through the indirect channel which caused a negative effect on margins. There
can be no assurance that customer purchasing decision deferrals resulting from
market anxiety and a reduction of capital expenditures; confusion over DTV
timing and standards and continued effects from the lack of a sales and
marketing senior executive combined with several field vacancies; continued
slower than expected sales in Europe and Asia; and the mix of systems sales
through Discreet's indirect channel and its related effect on margins will not
continue into the future and have an adverse effect on Discreet's or the
Combined Company's results of operations and financial condition. While
Discreet believes that the negative effects resulting from customer concerns
regarding uncertainty surrounding the acquisition did not have a significant
impact on its results of operations for the three month period ended December
31, 1998, a significant amount of time has elapsed since the original
announcement of the Transactions on August 20, 1998, and there can be no
assurance that certain customers will not choose again to delay or alter
purchasing decisions (for example, in favor of one of Discreet's competitors),
both of which could
32
have an adverse effect on Discreet's future operating results. See "--
Customers," "--Dependence on Retention and Integration of Key Employees" and
"--Rapidly Changing Industry."
Product Concentration. Autodesk derives, and after consummation of the
Transactions is expected to continue to derive, a substantial portion of its
revenues from sales of AutoCAD software, AutoCAD upgrades, and adjacent
products which are interoperable with AutoCAD. As such, any factor adversely
affecting sales of AutoCAD and AutoCAD upgrades, including such factors as
product life cycle, market acceptance, product performance and reliability,
reputation, price competition, the availability of third-party applications or
the introduction of products which substitute for AutoCAD, could have a
material adverse effect on the Combined Company's business and consolidated
results of operations.
Rapidly Changing Industry. The multimedia and design software industries are
characterized by rapid growth and technological change and changes in customer
requirements. The success of the Combined Company in this industry will depend
on many factors, including the continued acceptance of Discreet's current
products, its ability to enhance and support those products, its ability to
create an effective, integrated organization to develop and introduce new
products that address changing customer needs and technological advances by
competitors on a timely basis, and its ability to establish and maintain
effective distribution channels for its products. The Combined Company may not
be successful in these efforts. The future growth of the Combined Company's
revenues for its new media products also depends in part on sustained growth
in the demand for interactive media applications, which in turn depends on a
number of factors including product acceptance, price-point sensitivities,
consumer demand for film and video content and the proliferation of high
definition television. The demand for these applications may not develop at
the pace or in the direction anticipated by the Combined Company.
Discreet believes that market uncertainty and anxiety have negatively
affected Discreet's recent results of operations. Discreet believes that there
is current uncertainty regarding DTV (Digital Television) timing and standards
which may have led to customer purchasing decision deferrals. Further,
Discreet believes that general market anxiety in North America has affected
capital expenditures. For example, Discreet believes reduced advertising
expenditures had a negative impact on capital expenditures by post-production
companies, broadcast companies and prosumers, all of which are important
customers for Discreet's products. Further, while confusion regarding DTV
standards exists, Discreet believes that customers may choose to defer
purchasing decisions until such time as details surrounding DTV timing and
standards become more certain. There can be no assurance that the uncertainty
surrounding DTV and the general market anxiety in North America will not
continue to have an adverse effect on Discreet's results of operations.
Product Development and Introduction. The multimedia and design software
industries are characterized by rapid technological change as well as changes
in customer requirements and preferences. The software products offered by
Autodesk and Discreet are complex and, despite extensive testing and quality
control, may contain errors or defects ("bugs"), especially when first
introduced. For example, in fiscal year 1996, Autodesk experienced quality and
performance issues associated with the release of AutoCAD Release 13 which
were satisfactorily addressed, but did result in a high rate of product
returns in fiscal year 1996. There can be no assurance that defects or errors
will not occur in future releases of AutoCAD, Discreet's products, or other
software products offered by the Combined Company. Such defects or errors
could result in corrective releases to the Combined Company's software
products, damage to the Combined Company's reputation, loss of revenues, an
increase in product returns, or lack of market acceptance of its products, any
of which could have a material and adverse effect on the Combined Company's
business and consolidated results of operations.
Autodesk and Discreet believe that the Combined Company's future results
will depend largely upon its ability to offer products that compete favorably
with respect to, reliability, performance, range of useful features,
continuing product enhancements, reputation, price and training. The discovery
of product defects could result in the delay or cancellation of planned
development projects, and could have a material and adverse effect on the
Combined Company's business and consolidated results of operations. Further,
increased competition in design, mapping or multimedia software products could
also have a negative impact on the Combined Company's
33
business and consolidated results of operations. More specifically, gross
margins may be adversely affected if customers purchase low-end CAD products,
which historically have had lower margins, instead of the Combined Company's
higher-margin products.
Certain of Autodesk's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. Autodesk generally either owns or licenses the
software developed by third parties. Because talented development personnel
are in high demand, there can be no assurance that independent developers,
including those who have developed products for Autodesk in the past, will be
able to provide development support to the Combined Company in the future.
Similarly, there can be no assurance that the Combined Company will be able to
obtain and renew license agreements on favorable terms, if at all, and any
failure to do so could have a material adverse effect on the Combined
Company's business and consolidated results of operations.
The success of Autodesk's Discreet business unit will depend in part upon
the Combined Company's ability to enhance Discreet's existing systems and
software and to develop and introduce new products and features which meet
changing customer requirements and emerging industry standards on a timely
basis. In addition, in connection with Discreet's recent acquisitions, the
Combined Company must fully integrate the edit*, effect*, paint* and light*
products into its product line and operations. Discreet and Autodesk have from
time to time experienced delays in introducing new products and product
enhancements and there can be no assurance that the Combined Company will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products or product
enhancements. In addition, there can be no assurance that such new products or
product enhancements will meet the requirements of the marketplace and achieve
market acceptance. Any such failure could have a material adverse effect on
the Combined Company's business and consolidated results of operations. For
example, during fiscal 1996, Discreet experienced delays in introducing new
products aimed at new market segments and such delay contributed to revenue
shortfall experienced by Discreet during such period. From time to time the
Combined Company or others may announce products, features or technologies
which have the potential to shorten the life cycle of or replace the Combined
Company's then existing products. Such announcements could cause customers to
defer the decision to buy or determine not to buy the Combined Company's
products or cause the Combined Company's distributors to seek to return
products to the Combined Company, any of which could have material adverse
effect on the Combined Company's business and consolidated results of
operations. In addition, product announcements by Silicon Graphics, Inc.
("SGI") and others in the past have caused customers to defer their decision
to buy or determine not to buy Discreet's products. In addition, there can be
no assurance that products or technologies developed by others will not render
the Combined Company's products or technology noncompetitive or obsolete.
Single Market for Discreet's Systems; Risks Associated with Expansion into
New Markets. To date, Discreet's products have been purchased primarily by
creative professionals for use in production and post-production in the film
and video industries. In order for Autodesk's Discreet business unit, to
achieve sustained growth, the market for Discreet's systems and software must
continue to develop and the Combined Company must expand this market to
include additional applications within the film and video industries and
develop new products for use in related markets. Discreet recently announced
its multi-platform software initiative to develop and market software across
Apple Macintosh, Microsoft Windows NT and UNIX operating systems, in addition
to its existing real time turnkey systems solutions, targeted at two new
market segments: institutional customers and prosumer (professional
consumers). While Autodesk and Discreet believe that the market recognition
which Discreet has achieved through sales of flame*, smoke*, effect*, inferno*
and fire* systems to creative professionals will facilitate the Combined
Company's marketing efforts in new markets, there can be no assurance that
Autodesk's Discreet business unit will be able to successfully develop and
market systems and software for other markets, or, if it does so, that such
systems and software will be accepted at a rate, and in levels, sufficient to
maintain growth. Further, the distribution channels, technical requirements
and levels and bases of competition in other markets are different than those
in Discreet's current market and there can be no assurance that the Combined
Company will be able to compete favorably in those markets.
34
International Operations. Revenue from international operations currently
accounts for a significant portion of the consolidated revenues of Autodesk
and Discreet, and such revenue is expected to continue to account for a
significant portion of the Combined Company's consolidated revenues. Risks
inherent in Autodesk's and Discreet's international operations include the
following: unexpected changes in regulatory practices and tariffs;
difficulties in staffing and managing foreign operations; longer collection
cycles; potential changes in tax laws; greater difficulty in protecting
intellectual property; and the impact of fluctuating exchange rates between
the US dollar and foreign currencies in the markets where Autodesk and
Discreet conduct business. In particular, during the first nine months of
Autodesk's fiscal 1999, changes in exchange rates from the same period of the
prior fiscal year adversely impacted Autodesk's revenues by approximately $8.2
million when compared to the same period in the prior year, principally due to
changes in the rate of exchange between the US dollar and the Japanese yen and
the Australian dollar.
Autodesk's international results have been recently impacted by unfavorable
economic and political conditions in the Asian markets, and Autodesk believes
such conditions will continue over the forseeable period to negatively impact
its business. See "Autodesk Management's Discussion and Analysis of Financial
Condition and Results of Operations." There can be no assurance that the
economic crisis and currency issues currently being experienced in the Asian
markets will not have a material adverse effect on the Combined Company's
future international sales and, consequently, on the Combined Company's
business and consolidated results of operations.
Dependence on Distribution Channels. Autodesk sells its software products
primarily to VARs. Autodesk's ability to effectively distribute products
depends in part upon the financial and business condition of its VAR network.
Although Autodesk has not currently experienced any material problems with its
VAR network, computer software dealers and distributors are typically not
highly capitalized and have experienced difficulties during times of economic
contraction and may do so in the future. The loss of or a significant
reduction in business with any one of Autodesk's major international
distributors or large US resellers could have a material adverse effect on the
Combined Company's business and consolidated results of operations in future
periods. Autodesk's largest international distributor is Computer 2000 AG in
Germany. Autodesk's largest resellers and distributors in the United States
are Ingram Micro, Inc., Avatech Solutions, Inc., and DLT Solutions
Incorporated.
Product Returns. With the exception of certain European distributors,
agreements with Autodesk's VARs do not contain specific product-return
privileges. However, Autodesk permits its VARs to return product in certain
instances, generally during periods of product transition and during update
cycles. Although product returns, comparing the first quarter of fiscal 1999
to the same period in the prior year, decreased as a percentage of
consolidated revenues, management anticipates that product returns in future
periods will continue to be impacted by the timing of new product releases, as
well as the quality and market acceptance of new products.
Autodesk establishes reserves, including reserves for stock balancing and
product rotation, based on estimated future returns of product and after
taking into account channel inventory levels, the timing of new product
introductions, and other factors. While Autodesk maintains strict measures to
monitor channel inventories and to provide appropriate reserves, actual
product returns may differ from Autodesk's reserve estimates, and such
differences could be material to the Combined Company's consolidated financial
statements.
Intellectual Property. Each of Autodesk's and Discreet's success is
dependent on its proprietary technology. Autodesk and Discreet rely on a
combination of patent, copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its
proprietary rights. Despite such efforts to protect proprietary rights,
unauthorized parties may attempt to copy aspects of the Combined Company's
software products or to obtain and use information that the Combined Company
regards as proprietary. Policing unauthorized use of Autodesk's and Discreet's
software products is time-consuming and costly. Although neither company is
able to measure accurately the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. There can
be no assurance that the Combined Company's means of protecting its
proprietary rights will be adequate or that its competitors will not
independently develop similar technology.
35
Autodesk and Discreet expect that software product developers will be
increasingly subject to infringement claims as the number of products and
competitors in its market grows and the functionality of products in different
market segments overlap. From time to time, infringement claims have been
asserted against Autodesk and Discreet, and there can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting
from infringement claims) will not be asserted against the Combined Company in
the future or that any such assertions will not have a material adverse effect
on the Combined Company's business and consolidated results of operations. Any
such claims, whether with or without merit, could be time-consuming, result in
costly litigation and diversion of resources, cause product shipment delays,
or require the Combined Company to enter into royalty or licensing agreements.
Such royalty or license agreements, if required, may not be available on
acceptable terms, if at all, which could have a material adverse effect on the
Combined Company's business and consolidated results of operations. If
infringement is alleged by any third party, the Combined Company may be
required to discontinue the use of certain software codes or processes, to
cease the manufacture, use and sale of infringing products, to incur
significant litigation costs and expenses and to develop non-infringing
technology or to obtain licenses to use the allegedly infringed technology.
There can be no assurance that the Combined Company would be able to develop
alternative technologies or to obtain such licenses or, if a license were
obtainable, that the terms would be commercially reasonable or acceptable to
the Combined Company.
In addition, Autodesk, and in some cases Discreet, also relies on certain
software that is licensed from third parties, including software that is
integrated with internally developed software and used in its products to
perform key functions. There can be no assurance that these third-party
software licenses will continue to be available on commercially reasonable
terms, or that the software will be appropriately supported, maintained, or
enhanced by the licensors. The loss of licenses, or inability to support,
maintain, and enhance any such software, could result in increased costs, or
in delays or reductions in product shipments until equivalent software could
be developed, identified, licensed, and integrated, which could have a
material adverse effect on the Combined Company's business and consolidated
results of operations.
Discreet generally seeks to enter into confidentiality agreements with its
employees and license agreements with its distributors and to limit access to
and distribution of its systems, software, documentation and other proprietary
information. Until fiscal 1996, substantially all of Discreet's systems were
sold without written license agreements. There can be no assurance that the
Combined Company will not be involved in litigation with respect thereto or
that the outcome of any such litigation might not be more unfavorable to the
Combined Company as a result of such omissions. Discreet uses both software
and hardware keys with respect to its systems and software but otherwise does
not copy-protect its systems and software. It may be possible for unauthorized
third parties to copy Discreet's products or to reverse engineer or obtain and
use information that Discreet regards as proprietary. There can be no
assurance that the Combined Company's competitors will not independently
develop technologies that are substantially equivalent or superior to
Discreet's technologies.
Risks Associated with Recent Acquisitions and Investments; Restatement of
Financial Statements. Each of Autodesk and Discreet periodically acquires or
invests in businesses, software products and technologies which are
complementary to its business through acquisitions, strategic alliances, debt
and equity investments, joint ventures and the like. For example, on March 31,
1997, Autodesk acquired Softdesk, Inc. ("Softdesk"), a leading supplier of
AutoCAD-based software for the architecture, engineering and construction
market, and on May 4, 1998, acquired the mechanical applications business of
Genius CAD Software GmbH ("Genius"), a German limited liability company. In
addition, Discreet in fiscal 1997 and 1998 completed three acquisitions: the
assets of Denim Software L.L.C., D-Vision Systems, Inc. and Lightscape
Technologies, Inc. The risks associated with these and other potential
acquisitions or investments include, among others, the difficulty of
integrating the operations and personnel of the companies, the failure to
realize anticipated synergies and the diversion of management's time and
attention. In addition, such investments and acquisitions may involve
significant transaction-related costs. There can be no assurance that Autodesk
or Discreet will be successful in overcoming such risks or that such
investments and acquisitions will not have a material adverse impact upon the
Combined Company's business, financial condition or consolidated results of
operations. In addition, such investments and acquisitions may contribute to
potential fluctuations in quarterly results of operations due to
36
acquisition-related costs and charges associated with eliminating redundant
expenses or write-offs of impaired assets recorded in connection with
acquisitions, any of which could negatively impact results of operations for a
given period or cause lack of linearity quarter to quarter in the Combined
Company's operating results or financial condition.
Both the Softdesk and Genius acquisitions were accounted for by Autodesk as
business combinations using the purchase method of accounting. In accordance
with Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations," the costs of these acquisitions were allocated to the assets
acquired and the liabilities assumed (including in-process research and
development) based on their estimated fair values using valuation methods
believed to be appropriate at the time. The amounts allocated to in-process
research and development of $55.1 and $28.8 million for Softdesk and Genius,
respectively, were expensed in the periods in which the acquisitions were
consummated in accordance with FASB Interpretation No. 4, "Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method." Subsequent to the Securities and Exchange Commission's letter to the
AICPA dated September 9, 1998, regarding its views on in-process research and
development ("IPR&D"), Autodesk re-evaluated its IPR&D charges on the Softdesk
and Genius acquisitions, revised the purchase price allocations and restated
its financial statements. As a result, Autodesk made adjustments to decrease
the amounts previously expensed as IPR&D and increase the amounts capitalized
as goodwill and other intangibles relating to the Softdesk and Genius
acquisitions by $35.9 and $15.7 million, respectively. See "Autodesk
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Attraction and Retention of Employees. The continued growth and success of
the Combined Company depends significantly on the continued service of highly
skilled employees. In particular, Discreet's success to date has depended to a
significant extent upon a number of key management and technical employees,
the loss of any of whom could have a material adverse effect on Discreet's
business and results of operations. Competition for these employees in today's
marketplace, especially in the technology industries, is intense. The Combined
Company's ability to attract and retain employees is dependent on a number of
factors including its continued ability to grant stock incentive awards. There
can be no assurance that the Combined Company will be successful in continuing
to recruit new personnel and to retain existing personnel. The loss of one or
more key employees or the Combined Company's inability to maintain existing
employees or recruit new employees could have a material adverse impact on the
Combined Company. In addition, the Combined Company may experience increased
compensation costs to attract and retain skilled personnel.
Impact of Year 2000. Some of the computer programs used by Autodesk and
Discreet in their internal operations rely on time-sensitive software that was
written using two digits rather than four to identify the applicable year.
These programs may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process including, among other transactions, send invoices, or
engage in similar normal business activities. Autodesk is currently in the
remediation or fourth phase of a six-phase year 2000 compliance program
related to information technology ("IT") systems and expects to complete this
phase by the end of fiscal year 1999. The remaining two phases are expected to
be virtually complete by the end of Autodesk's fiscal year 1999 with minor
testing and risk mitigation activities being performed through the end of
calendar year 1999. As of October 31, 1998, Autodesk had spent approximately
$4 million on the IT year 2000 project, of which approximately $300,000 had
been capitalized. Autodesk expects to spend an additional $2 million to $3
million to complete this project. All expenditures to date have been captured
either in prior year or current year budgets. Autodesk believes that the key
components of the IT year 2000 project have either been replaced or
remediated. Further, Autodesk estimates that if any component of the current
systems fail due to year 2000 related issues, Autodesk would be able to divert
people and systems traffic, causing delays of between one to three days in
service interruptions and processing Autodesk information. Autodesk has a
contingency plan in place in order to prevent the loss of critical data which
includes the back up of all critical data processing interactions and a
disaster recovery plan. There can be no assurance, however, that there will
not be a delay in the completion of these procedures or that the cost of such
procedures will not exceed original estimates, either of which could have a
material adverse effect on future results of operations.
37
In addition to correcting the business and operating systems used by
Autodesk in the ordinary course of business as described above, Autodesk has
also reviewed its non-IT systems to determine year 2000 compliance of these
systems. Autodesk is in a monitoring program that continually checks the
status of all non-IT systems and does not anticipate an adverse impact on
service and business capabilities with regard to these non-IT systems.
Expenditures related to these monitoring procedures have been minimal and are
not expected to be significant in future periods.
Autodesk has also tested and continues to test all products it currently
produces internally for sale to third parties to determine year 2000
compliance. As of October 31, 1998, Autodesk has spent approximately $300,000
on the first two phases of a three-phase-year 2000 compliance testing program
related to its products and expects to spend an additional $1.2 to $1.7
million to complete this project. Products currently sold by Autodesk either
have been found to be substantially compliant or are currently being tested
for compliance. However, many Autodesk products run on operating systems or
hardware produced and sold by third-party vendors. There can be no assurance
that these operating systems or hardware will be converted in a timely manner,
or at all, and any failure in this regard may cause Autodesk products not to
function as designed. Autodesk will continue to evaluate each product in the
currently supported inventory.
Discreet has made preliminary assessments of its products and information
systems and has determined that they are Year 2000 compliant, or that only a
limited effort will be required to achieve compliance. Discreet is currently
proceeding with detailed reviews of every application used. It is expected
that some will have to be upgraded to Year 2000 compliant applications. 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 Discreet technical
support department. Any future costs associated with ensuring that Autodesk's
products or the products of Autodesk's Discreet business unit are compliant
with the Year 2000 are not expected to have a material impact on the Combined
Company's results of operations or financial position. Commentators have
stated that a significant amount of litigation may arise out of year 2000
compliance issues, and Autodesk and Discreet are aware of a growing number of
lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain whether and to what extent Autodesk and
Discreet may be affected by it.
Single European Currency. Autodesk and Discreet are in the process of
addressing the issues raised by the introduction of the Single European
Currency ("Euro") as of January 1, 1999 and during the transition period
ending January 1, 2002. Autodesk and Discreet will continue to modify the
internal systems that will be affected by this conversion during fiscal year
2000, and do not expect the costs of further system modifications to be
material. There can be no assurance, however, that Autodesk and Discreet will
be able to complete such modifications to comply with Euro requirements, which
could have a material adverse effect on Autodesk's and Discreet's operating
results. Autodesk is currently evaluating the impact of the introduction of
the Euro on its foreign exchange and hedging activities, functional currency
designations, and pricing strategies in the new economic environment. In
addition, Autodesk and Discreet face risks to the extent that banks and
vendors upon whom they rely and their suppliers are unable to make appropriate
modifications to support Autodesk's and Discreet's operations with respect to
Euro transactions. While Autodesk and Discreet will continue to evaluate the
impact of the Euro, management does not believe its introduction will have a
material adverse effect upon Autodesk's and Discreet's results of operations
or financial condition.
Dependence on Single Workstation Vendor. Discreet's flame*, effect*,
inferno*, fire*, smoke* and frost* systems currently include workstations
manufactured by Silicon Graphics, Inc. ("SGI"). There are significant risks
associated with this reliance on SGI, and the Combined Company may be impacted
by the timing of the development and release of products by SGI, as was the
case during fiscal 1996 when the announcement by SGI of a new Onyx workstation
caused Discreet to offer substantial discounts and other favorable terms
regarding its then current inventory of SGI workstations. 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
38
termination by SGI for cause. The agreement with SGI has been extended through
March 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, there can be
no assurance that the Combined Company will continue to be able to procure
such workstations in sufficient quantities or on a timely basis or that SGI
will continue to recognize the Combined Company as a master VAR. The success
of Autodesk's Discreet business unit also depends, in part, on the continued
market acceptance of SGI workstations by consumers in general, and by the
professional film and video industries, in particular. Although the Combined
Company intends to continue to evaluate new hardware platforms and may adapt
its products as technological advances and market demands dictate, Discreet
and Autodesk believe that Autodesk's Discreet business unit will continue to
derive a substantial portion 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 the Autodesk Discreet business unit's then
available products or systems, could have an adverse effect upon the Combined
Company's business and results of operations, as was the case with respect to
Discreet for the three month period ended January 31, 1996. 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 the
Combined Company were unable to obtain such advance access, it could have an
adverse impact on the Combined Company's business and results of operations.
Reliance on Sole Source Suppliers. Discreet is dependent on SGI as
Discreet's sole source for video input/output cards used in Discreet's
systems. Discreet is also dependent on a single workstation vendor. See "--
Dependence on Single Workstation Vendor." Discreet also purchases electronic
tablets manufactured by Wacom Technology Corporation and believes that while
alternative suppliers are available, there can be no assurance that
alternative electronic tablets would be functionally equivalent or be
available on a timely basis or on similar terms. Discreet generally purchases
sole source or other components pursuant to purchase orders placed from time
to time in the ordinary course of business and has no written agreements or
guaranteed supply arrangements with its sole source suppliers. Discreet has
experienced quality control problems and supply shortages for sole source
components in the past and there can be no assurance that the Combined Company
will not experience significant quality control problems or supply shortages
for these components in the future. Discreet does not maintain an extensive
inventory of these components, and an interruption in supply could have a
material adverse effect on Discreet's business and results of operations.
Because of Discreet's reliance on these suppliers, Discreet may also be
subject to increases in component costs which could adversely affect the
Combined Company's business and results of operations.
39
AUTODESK SPECIAL MEETING
Date, Time and Place of Autodesk Meeting
The Autodesk Meeting will be held at The Executive Briefing Center,
Autodesk, Inc., 111 McInnis Parkway, San Rafael, California, on March 10, 1999
at 10:00 a.m. local time.
Purpose
The purpose of the Autodesk Meeting is consider and vote on the Autodesk
Resolution and to transact such further or other business as may properly come
before the meeting or any adjournment or postponement thereof, including a
proposal to adjourn the Autodesk Meeting, if necessary, to permit further
solicitation of proxies in the event there are not sufficient votes at the
time of the Autodesk Meeting to approve the Autodesk Resolution.
Record Date and Outstanding Shares
Only Autodesk Stockholders of record at the close of business on the
Autodesk Record Date are entitled to notice of and to vote at the Autodesk
Meeting. As of the Autodesk Record Date, there were 1,098 Autodesk
Stockholders of record holding an aggregate of 47,327,000 shares of Autodesk
Common Stock.
On or about February 8, 1999, a notice meeting the requirements of Delaware
law was mailed to all Autodesk Stockholders of record as of the Autodesk
Record Date.
Vote Required
Under Delaware law and Nasdaq National Market rules, approval of the
Autodesk Resolution requires the affirmative vote of a majority of the total
votes cast regarding such proposal at a meeting at which a quorum is present
or represented by proxy. Each Autodesk Stockholder of record on the Autodesk
Record Date is entitled to cast one vote per share, exercisable in person or
by properly executed proxy, on each matter properly submitted for the vote of
the Autodesk Stockholders at the Autodesk Meeting.
The required quorum for the transaction of business at the Autodesk Meeting
is a majority of the shares of Autodesk Common Stock outstanding on the
Autodesk Record Date. Shares of Autodesk Common Stock that are voted "FOR,"
"AGAINST" or "WITHHELD" from a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as being
entitled to vote on the subject matter (the "Votes Cast") with respect to such
matter.
While abstentions (votes "withheld") will be counted for purposes of
determining both the presence or absence of a quorum for the transaction of
business and the total number of Votes Cast with respect to a particular
matter, broker non-votes with respect to proposals set forth in this Proxy
Circular will not be considered Votes Cast and, accordingly, will not affect
the determination as to whether the requisite majority of Votes Cast has been
obtained with respect to a particular matter once a quorum is present.
Proxies. Each of the persons named as proxies in the proxy is an officer of
Autodesk. All shares of Autodesk Common Stock that are entitled to vote and
are represented at the Autodesk Meeting either in person or by properly
executed proxies received prior to or at the Autodesk Meeting and not duly and
timely revoked will be voted at the Autodesk Meeting in accordance with the
instructions indicated on such proxies. If no such instructions are indicated,
such proxies will be voted for the approval of the Autodesk Resolution.
The Autodesk Board knows of no other matter to be presented at the Autodesk
Meeting. If any other matters are properly presented for consideration at the
Autodesk Meeting (or any adjournments or postponements thereof) including,
among other things, consideration of a motion to adjourn or postpone the
Autodesk Meeting to another time and/or place (including, without limitation,
for the purpose of soliciting additional proxies), the persons named in the
enclosed forms of proxy and voting thereunder will have the discretion to vote
on such matters in accordance with their best judgment.
40
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Autodesk at or before the taking of the vote at the
Autodesk Meeting, a written notice of revocation bearing a later date than the
proxy; (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of Autodesk before the taking of the vote at
the Autodesk Meeting or (iii) attending the Autodesk Meeting and voting in
person. Any written notice of revocation or subsequent proxy should be sent so
as to be delivered to Autodesk, Inc. at 111 McInnis Parkway, San Rafael,
California 94903, Attention: Secretary, or hand-delivered to the Secretary of
Autodesk, in each case at or before the taking of the vote at the Autodesk
Meeting.
Voting Agreements
All executive officers and directors of Autodesk have entered into voting
agreements with Discreet (each an "Autodesk Voting Agreement"), pursuant to
which each such holder has agreed to vote in favor of the Autodesk Resolution.
In addition, each such holder has agreed, pursuant to the Autodesk Voting
Agreement, to grant to Discreet's management an irrevocable proxy to vote such
holder's shares as aforesaid. The Autodesk Voting Agreements will terminate
upon termination of the Acquisition Agreement or the Effective Time, whichever
occurs earlier. The outstanding shares of Autodesk Common Stock held by
parties to the Autodesk Voting Agreements represent approximately 0.20% of the
votes entitled to be cast at the Autodesk Meeting. The following members of
the Autodesk Board, comprising the entire Autodesk Board, have entered into
Autodesk Voting Agreements: Carol A. Bartz, Mark A. Bertelsen, Crawford W.
Beveridge, J. Hallam Dawson, Paul S. Otellini, Mary Alice Taylor and Morton
Topfer. The following Autodesk executive officers have entered into Autodesk
Voting Agreements: Eric B. Herr, Joseph H. Astroth, Carl Bass, Steve
Cakebread, Dominic J. Gallello, Stephen McMahon, Marcia K. Sterling, Godfrey
R. Sullivan and Michael E. Sutton.
Solicitation of Proxies; Expenses
The cost of the solicitation of proxies from Autodesk Stockholders will be
borne by Autodesk. In addition, Autodesk may reimburse brokerage firms and
other persons representing beneficial owners of shares for their expenses in
forwarding solicitation materials to such beneficial owners. Proxies may also
be solicited by certain Autodesk directors, officers and regular employees
personally or by telephone, telegram, letter, e-mail or facsimile. Such
persons will not receive additional compensation, but may be reimbursed for
reasonable out-of-pocket expenses incurred in connection with such
solicitation. Autodesk has retained Georgeson & Company, Inc. to assist in the
solicitation of proxies at an estimated fee of $10,000 plus reimbursement of
reasonable expenses.
No Appraisal Rights
Autodesk Stockholders are not entitled to appraisal or similar rights under
the DGCL in connection with the Transactions.
Recommendation of the Autodesk Board
The Autodesk Board has unanimously approved the Acquisition Agreement and
the transactions contemplated thereby and has determined that the Transactions
are fair and in the best interests of Autodesk and its stockholders. After
careful consideration, the Autodesk Board unanimously recommends a vote FOR
the Autodesk Resolution. See "Approval of the Transactions--Joint Reasons for
the Transactions," "--Autodesk's Reasons for the Transactions" and "--
Discreet's Reasons for the Transactions."
41
DISCREET SPECIAL MEETING
Date, Time and Place of Discreet Meeting
The Discreet Meeting will be held at the Ritz-Carlton Hotel, 1228 Sherbrooke
Street West, Montreal, Quebec, Canada, on March 10, 1999 at 1:00 p.m. local
time.
Purpose
The purpose of the Discreet Meeting is to consider and vote upon the
Discreet Resolution and to transact such further or other business as may
properly come before the Discreet Meeting or at any adjournment or
postponement thereof, including a proposal to adjourn the Discreet Meeting, if
necessary, to permit further solicitation of proxies in the event there are
not sufficient votes at the Discreet Meeting to approve the Discreet
Resolution.
Record Date and Outstanding Shares
Only Discreet Shareholders at the close of business on the Discreet Record
Date are entitled to notice of, and to vote at, the Discreet Meeting. As of
the Discreet Record Date, there were 153 Discreet Shareholders of record
holding an aggregate of 29,949,629 Discreet Common Shares.
On or about February 8, 1999, a notice satisfying the requirements of Quebec
law was mailed to all Discreet Shareholders of record as of the Discreet
Record Date.
Vote Required
Pursuant to the Quebec Act and the articles of incorporation of Discreet, as
amended, the affirmative vote of the holders of not less than sixty-six and
two-thirds percent (66 2/3%) of the votes cast by holders of the Discreet
Common Shares present or represented by proxy at the Discreet Meeting is
required to approve the Discreet Resolution. Each Discreet Shareholder of
record on the Discreet Record Date will be entitled to cast one vote per share
on each matter to be acted upon at the Discreet Meeting.
The required quorum for the transaction of business at the Discreet Meeting
is two persons present in person, each being a shareholder entitled to vote
thereat or a duly appointed proxyholder for an absent shareholder so entitled,
and together holding or representing by proxy not less than a majority of the
outstanding Discreet Common Shares entitled to vote at the Discreet Meeting. A
Discreet Shareholder who attends or is represented by proxy at the Discreet
Meeting and who abstains from voting on any or all proposals will be included
in the number of shareholders present at the Discreet Meeting for the purpose
of determining the presence of a quorum. However, such an abstention will not
be taken into account in the votes cast at the Discreet Meeting. Under the
rules of the National Association of Securities Dealers, Inc., brokers holding
shares for the accounts of their clients may not vote their clients' proxies
for the Discreet Resolution without specific voting instructions. Any shares
not so instructed will be counted for determining the presence of a quorum but
will not be counted for any other purposes.
Proxies
Unless another person is identified on the form of proxy by the Discreet
Shareholder, each of the persons named as proxies in the form of proxy is an
officer of Discreet. All Discreet Common Shares that are entitled to vote and
are represented at the Discreet Meeting either in person or by properly
executed proxies received prior to or at the Discreet Meeting and not duly and
timely revoked will be voted at the Discreet Meeting in accordance with the
instructions indicated on such proxies. If no such instructions are indicated,
such proxies will be voted for the approval and adoption of the Discreet
Resolution.
The Discreet Board knows of no other matter to be presented at the Discreet
Meeting. If any other matter upon which a vote may properly be taken should be
presented at the Discreet Meeting, including, among other
42
matters, consideration of a motion to adjourn the Discreet Meeting (including
without limitation for purposes of soliciting additional proxies) to another
time and/or place, shares represented by all proxies received by Discreet will
be voted with respect thereto in accordance with the judgment of the persons
named as proxies in the proxies.
Execution of a proxy does not in any way affect a shareholder's right to
attend the Discreet Meeting and vote in person. Any proxy may be revoked by a
shareholder at any time before it is exercised by delivering a written
revocation or a later-dated proxy to the Chairman of the Discreet Board, or by
attending the meeting and voting in person. Any written notice of revocation
or subsequent proxy should be sent so as to be delivered to Discreet Logic
Inc. at 10 Duke Street, Montreal, Quebec H3C 2L7, Attention: Chairman, or
hand-delivered to the Chairman of the Discreet Board, in each case at or
before the taking of the vote at the Discreet Meeting.
Voting Agreements
The executive officers and certain directors of Discreet have entered into
voting agreements with Autodesk and Dutchco (each, a "Discreet Voting
Agreement"), pursuant to which each such person has agreed to vote his
Discreet Common Shares in favor of the Discreet Resolution. In addition, each
such holder has agreed pursuant to the Discreet Voting Agreements to grant to
Autodesk's management an irrevocable proxy to vote such holder's shares as
aforesaid. The Discreet Voting Agreements will terminate upon termination of
the Acquisition Agreement or the Effective Time, whichever occurs earlier. The
outstanding Discreet Common Shares subject to the Discreet Voting Agreements
represent approximately 38% of the votes entitled to be cast at the Discreet
Meeting. The following members of the Discreet Board have entered into
Discreet Voting Agreements: Richard J. Szalwinski, Gary G. Tregaskis and
Thomas Cantwell. The following Discreet executive officers have entered into
Discreet Voting Agreements: Francois Plamondon and Winston Rodrigues.
Solicitation of Proxies; Expenses
The cost of the solicitation of proxies from Discreet Shareholders will be
borne by Discreet. Brokers, custodians and fiduciaries will be requested to
forward proxy soliciting material to the owners of shares held in their names,
and Discreet will reimburse them for their reasonable out-of-pocket costs. In
addition, proxies may also be solicited by certain directors, officers and
employees of Discreet personally or by mail, telephone, telegraph, facsimile
or e-mail following the original solicitation. Such persons will not receive
additional compensation for such solicitation. Discreet has retained Georgeson
& Company, Inc. to assist in soliciting proxies at an estimated fee of $6,500
plus reimbursement of reasonable expenses.
No Appraisal Rights
Discreet Shareholders are not entitled to appraisal or similar rights
pursuant to the Quebec Act in connection with the Transactions. See
"Description of Capital Stock--Comparison of Shareholders' Rights--Dissenters'
Rights."
Recommendation of the Discreet Board
After careful consideration, based on the unanimous recommendation of the
Discreet Special Committee, the Discreet Board has approved the Acquisition
Agreement by the unanimous vote of all non-interested directors and believes
that the Transactions are fair and in the best interests of Discreet and its
shareholders and recommends a vote FOR the Discreet Resolution. See "Approval
of the Transactions--Joint Reasons for the Transactions," "--Autodesk's
Reasons for the Transactions" and "--Discreet's Reasons for the Transactions."
43
APPROVAL OF THE TRANSACTIONS
The terms of the Acquisition Agreement and the Transactions are the result
of arm's length negotiations between representatives of Discreet, Autodesk and
Dutchco. The following is a summary of the background of these negotiations
and the review of the Transactions undertaken by the Discreet Special
Committee, the Discreet Board, the Autodesk Board and the Dutchco Board and
the parties' reasons for the Transactions. The following discussion of the
background of the Transactions and the parties' reasons for the Transactions
and the potential benefits that could result from the Transactions contains
forward-looking statements which involve risks and uncertainties. Readers are
cautioned not to place undue reliance on these forward-looking statements. The
actual results of Autodesk, Discreet and the Combined Company could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Proxy Circular.
Background of the Transactions
As a public company, from time to time, Discreet has received inquiries from
third parties relating to potential strategic transactions, including certain
preliminary discussions and exchanges of information conducted in June and
July 1998 which did not lead to any formal acquisition proposal.
During the summer and the fall of 1997, the management of Discreet and of
Kinetix, a division of Autodesk, had meetings and telephone conversations
during which they explored the possibility of a cooperative business
relationship to pursue joint marketing opportunities.
Beginning in February 1998, pursuant to a mutual nondisclosure and
confidentiality agreement, the companies began sharing certain product
development information in an effort to determine the feasibility of enhancing
the interoperability of Kinetix's 3D Studio Max product with Discreet's
effect* and paint* products for future releases of these products.
On March 6, 1998, the senior management of Autodesk and Kinetix met with the
senior management of Discreet to discuss the ongoing relationship between
Discreet and Kinetix and explore the possibility of creating a formal joint
venture or other form of strategic alliance between Autodesk and Discreet
which would combine certain activities and products of both Kinetix and
Discreet.
On March 23, 1998, Discreet and Autodesk announced a cooperative
relationship whereby 3D Studio MAX would be integrated with Discreet's paint*
and effect* products. The first integrated versions of the products were
demonstrated at the NAB trade show in April 1998.
During the month of April 1998, various telephone conversations occurred
between management of Discreet and Kinetix, and on May 1, 1998, members of the
senior management of Kinetix and Steve Cakebread, Vice President and Chief
Financial Officer of Autodesk, met with Timothy Getz, Vice President-Corporate
Development, and Francois Plamondon, Executive Vice President and Chief
Financial Officer of Discreet, to review possible structures of a formalized
joint venture between the parties and related business issues. Subsequent
conversations were held between Kinetix and Discreet management during May.
During the week of May 26, 1998, and later on June 10, 1998, Mr. Cakebread
and Mr. Plamondon held discussions to further explore the joint venture
proposal and ultimately determined not to pursue a formal joint venture at
such time, but to continue joint development efforts pursuant to the March 23
agreement.
On June 29, 1998, at the request of Autodesk, Autodesk's financial advisor,
Piper Jaffray, called Discreet suggesting a meeting with Autodesk to explore
the possibility of a strategic combination between the two companies. Shortly
thereafter, this discussion was followed up by a conversation between Carol
Bartz, Chairman of the Board and Chief Executive Officer of Autodesk, and
Richard Szalwinski, Chairman of the Board, President and Chief Executive
Officer of Discreet.
44
On July 8, 1998, Eric Herr, President and Chief Operating Officer of
Autodesk, Mr. Cakebread and a representative from Piper Jaffray met in
Montreal, Quebec with Mr. Szalwinski, Mr. Plamondon, Mr. Getz and a
representative from Volpe Brown Whelan, financial advisor to Discreet, to
discuss the possibility of a strategic transaction or strategic combination
between the two companies.
On July 10, 1998, Discreet and Autodesk executed a new mutual nondisclosure
and confidentiality agreement in anticipation of further discussions and
mutual exchange of information in connection with a possible business
transaction or strategic relationship. At this time, each party commenced its
due diligence investigation of the other party, which continued until the
execution of the Acquisition Agreement.
Between July 10 and July 27, 1998, the financial advisors of both companies
reviewed the confidential material exchanged by the parties and various
discussions occurred between management of both companies regarding such
information.
During the last two weeks of July 1998, Volpe Brown Whelan conferred with
Piper Jaffray regarding the preliminary discussions between Discreet and
Autodesk and appropriate transaction valuation ranges and potential deal
terms.
On July 28, 1998, representatives from Piper Jaffray met with Ms. Bartz, Mr.
Herr and other members of Autodesk's management to present the preliminary
results of their due diligence and to discuss valuation, deal structure and
related issues.
Between July 27, 1998 and July 31, 1998, telephone conversations were held
among Ms. Bartz, Mr. Herr, Mr. Szalwinski and Mr. Plamondon and on July 31,
1998, such individuals met in Chicago, Illinois along with Mr. Getz of
Discreet and discussed various aspects of the possible business combination,
including how the combined entity might be structured following a transaction,
the growth objectives of Autodesk, the role of the Discreet business unit in a
combined organization, the growth potential of Discreet as part of the
combined entity, the management structure of the combined entity, the
potential roles of certain key management personnel and potential deal terms.
On August 4, 1998, the Autodesk Board met by teleconference to discuss,
among other matters, the potential business combination with Discreet, which
meeting was also attended by Mr. Herr, Marcia Sterling, Autodesk's Vice
President of Business Development and General Counsel, Christine Tsingos,
Autodesk's Vice President and Treasurer, as well as representatives from Piper
Jaffray. The representatives from Autodesk's management described the then
current relationship between the Kinetix division and Discreet and the
potential for synergies from the combination of Discreet's high-end and mid-
range new media software product offerings with Kinetix's products.
Representatives from Piper Jaffray provided information concerning Discreet's
products and target markets, and reviewed the written documentation containing
preliminary valuation analyses and related financial information which had
been provided to the Autodesk Board prior to the meeting. The Autodesk Board
asked questions and discussed the strategy underlying the proposed
transaction, the risks inherent in the proposed transaction, and the
implications of the proposed transaction with regard to long term Autodesk
Stockholder value. Following significant discussion and review, the Autodesk
Board authorized management to continue its discussions and to undertake in-
depth due diligence to determine whether the proposed transaction was in the
best interests of Autodesk and its stockholders, and whether the proposed
combination could be effectively integrated and managed.
On August 4 and 5, 1998, the Discreet Board met to discuss, among other
matters, a potential transaction with Autodesk. Representatives of Volpe Brown
Whelan were also present and made a presentation to the Discreet Board, which
included materials outlining economic and other issues for consideration in
weighing the attractiveness of the potential combination with Autodesk. The
Discreet Board reviewed the qualifications and expertise of Volpe Brown Whelan
and its representatives. The Discreet Board reviewed the industry in which
Autodesk operates, and the relative strengths, weaknesses and operating
history of Autodesk in such industry. The Discreet Board reviewed with Volpe
Brown Whelan a preliminary analysis of the relevant costs, benefits and risks
of the proposed transaction and a preliminary analysis of acceptable pricing
models. The Discreet Board
45
discussed the state of the industry in which Discreet operates, including
recent consolidations and other matters. The Discreet Board, following
significant discussion and review, decided that discussions with Autodesk
should be pursued. The Discreet Board determined that a special committee of
the Discreet Board should be constituted to review the proposed transaction
and to make an appropriate recommendation with regard thereto.
Between August 5 and 7, 1998, members of Autodesk's and Dutchco's executive
management, legal, financial and technical staffs and representatives from
Piper Jaffray conducted legal, financial, business and technical due diligence
in Montreal, Quebec. Autodesk conducted a detailed review of Discreet's
operations, financial outlook, legal agreements and commitments, technical
processes and development efforts and met with senior management and members
of Discreet's legal, financial and technical staff.
Commencing at this time, Discreet's outside United States legal counsel,
Testa, Hurwitz & Thibeault, LLP, conducted legal due diligence on Autodesk.
On August 8, 9 and 10, 1998, Volpe Brown Whelan conferred with Piper Jaffray
regarding appropriate transaction valuation.
On August 9, 1998, Ms. Sterling and Mr. Cakebread of Autodesk, Mr. Plamondon
of Discreet and Mark J. Macenka of Testa, Hurwitz and Thibeault, LLP held a
telephonic meeting during which a number of general and specific terms of the
proposed transaction were proposed and discussed, including the various
structural alternatives for any transaction and the tax and accounting aspects
of such alternatives.
On August 11, 1998, a draft acquisition agreement and other transaction
documents were circulated by Wilson Sonsini Goodrich & Rosati, outside United
States legal counsel to Autodesk and Dutchco, and Aird & Berlis, outside
Canadian legal counsel to Autodesk and Dutchco.
During the period between August 11 and 14, 1998, members of Discreet's
senior management, financial and technical staff, along with representatives
from Discreet's financial advisor, Volpe Brown Whelan, and attorneys from
Discreet's outside United States legal counsel, Testa, Hurwitz & Thibeault,
LLP, conducted a due diligence investigation of Autodesk in San Rafael,
California. In addition, Discreet's internal legal staff continued their due
diligence investigation of Autodesk. Discreet's due diligence team performed a
detailed review of Autodesk's operations and financial outlook, reviewed
Autodesk's legal documents and met with members of Autodesk's senior
management, financial, technical and legal staff. Additionally, discussions
continued regarding the transaction terms, possible integration plans and
transaction communication strategy. Discreet's legal, financial, technical and
business due diligence of Autodesk continued until August 20, 1998.
During the period between August 11 and 20, 1998, management of Autodesk,
Dutchco and Discreet, together with their respective legal and financial
advisers, continued their extensive negotiations of the terms and conditions
of the definitive agreements relating to the transaction.
On August 18, 1998, Autodesk held a meeting of the Autodesk Board, which was
also attended by Mr. Herr, Ms. Sterling, Mr. Cakebread, Jim Guerard,
Autodesk's Vice President of Kinetix, and representatives from Piper Jaffray.
The Autodesk Board reviewed the material terms of the draft acquisition
agreement and related agreements in detail. Representatives from Piper Jaffray
made a presentation to the Autodesk Board, which included an in-depth analysis
of the financial implications of the transaction, historical financial data,
comparable industry combinations and the potential effect of achieving all,
some or none of the expected synergies from the proposed business combination
with Discreet. The Autodesk Board asked a number of questions, and there was
extensive discussion concerning: (i) the results of legal, financial and
technical due diligence, (ii) the potential for achieving synergies from the
proposed business combination, (iii) the material terms of the agreement,
including financial disincentives for termination of the transaction by
Discreet after signing of a definitive agreement, (iv) the future strategic
direction of Autodesk's Kinetix division absent the proposed business
combination with Discreet, (v) historical information concerning the
businesses, prospects, financial performance and condition, operations,
technology management and competitive position of both Autodesk and Discreet,
46
including most recent quarterly and annual filings with the SEC, (vi) the
financial condition and results of operations for Autodesk and Discreet before
and after the proposed business combination, (vii) current financial market
conditions and historical market prices, volatility and trading information
with respect to the Discreet Common Shares and Autodesk Common Stock, (viii)
the potential for other third parties to propose or enter into strategic
relationships with Discreet or Autodesk's Kinetix division, (ix) trends within
the multimedia and design software industries which might impact the decision
to proceed with the proposed business combination with Discreet, (x) the
impact of the proposed business combination upon Autodesk's customers,
partners and employees, and (xi) the opinion of Piper Jaffray as to the
fairness, from a financial point of view, of the proposed exchange ratio to
Autodesk. At the conclusion of the meeting, the Autodesk Board unanimously
approved the proposed transaction with Discreet, authorized management to
execute and deliver the acquisition agreement, and adopted several other
resolutions necessary to enable the mechanics of the transaction.
On the evening of August 18, 1998, the Discreet Board held a special meeting
with all directors participating by telephone. At such meeting, members of
Discreet's senior management and representatives from Volpe Brown Whelan and
Testa, Hurwitz & Thibeault, LLP discussed with the Discreet Board, and
responded to numerous questions from the Discreet Board members about, (i) the
status of the ongoing negotiations with Autodesk, (ii) the strategic rationale
for the transaction, potential synergies and benefits to Discreet and the
competitive landscape facing Discreet on a stand-alone basis, (iii) the then-
currently proposed principal terms of the acquisition agreement, the Voting
and Exchange Trust Agreement, the Autodesk Affiliate Agreement and related
documents, including the continued desire of Autodesk and Dutchco to have an
option to purchase a certain amount of Discreet Common Shares (the "Discreet
Stock Option"), the nonsolicitation provisions, the termination rights
relating to the transaction, the conditions upon which any break-up fees would
be payable and the amount of such fees, and the representations, warranties
and covenants to be made, (iv) the results of the business, financial and
legal due diligence conducted on Autodesk, (v) the financial condition and
results of operations of both Autodesk and Discreet, (vi) the future prospects
of Autodesk after consummation of the proposed Transactions, (vii) current
financial market conditions and historical market prices, volatility and
trading information with respect to the Autodesk Common Stock and Discreet
Common Shares, and (viii) the financial analyses performed by management.
Volpe Brown Whelan then reviewed, among other things, the strategic rationale
for, and certain financial analyses related to the proposed transaction. The
presentation covered a number of matters relating to both Discreet's and
Autodesk's businesses and potential business combination of Discreet and
Autodesk and the fairness opinion to be delivered by Volpe Brown Whelan,
including various financial analyses performed by them and reviewed the
financial due diligence conducted by them concerning Autodesk. Testa, Hurwitz
& Thibeault, LLP and Stikeman, Elliott, outside Canadian legal counsel to
Discreet, discussed the Discreet Board's fiduciary duties in considering a
strategic combination. After careful consideration, the Discreet Board
determined that, because of, among other things, the terms proposed by
Autodesk (including the course of discussions concerning the proposed exchange
ratio) and the perceived strategic advantages to such a combination, senior
management should pursue a combination between Discreet and Autodesk, and the
Discreet Board authorized and instructed senior management to continue
negotiations and due diligence review of Autodesk. Additionally, the Discreet
Board established a committee of independent directors of the Discreet Board
(the "Discreet Special Committee") to review the proposed business combination
and to determine whether it would be in the best interests of Discreet and the
Discreet Shareholders.
On August 18, 1998, following the meeting of the full Discreet Board, the
Discreet Special Committee held a meeting to review the status of negotiations
with Autodesk regarding the proposed business combination with Autodesk. The
Discreet Special Committee discussed the proposed terms of the transaction and
their fiduciary duties in relation to the proposed business combination with
Autodesk.
On the evening of August 19, 1998, the Discreet Special Committee held a
telephonic meeting with Discreet's US legal counsel to discuss the status of
negotiations with Autodesk regarding the proposed business combination. The
Discreet Special Committee reviewed and discussed various issues in relation
to the proposed business combination, including certain legal aspects of the
proposed combination, the fairness opinion to be rendered by Volpe Brown
Whelan, the business, financial and legal due diligence performed by Discreet
and its
47
advisors, and the principal terms of the draft acquisition agreement and
related documents, including their continued concerns with regard to the
Discreet lock-up stock option proposed by Autodesk and Dutchco.
On the morning of August 20, 1998, the Discreet Special Committee held a
telephonic meeting, with Discreet's US and Canadian legal counsel joining
after the meeting had commenced. The Discreet Special Committee discussed the
withdrawal by Autodesk and Dutchco of the Discreet Stock Option and reviewed
with counsel the specific terms of the proposed acquisition agreement between
the parties, including the nonsolicitation provisions, the termination rights
relating to the agreement, the conditions upon which any break-up fees would
be payable to Dutchco, and the amount of such fees. Discreet's Canadian legal
counsel, Stikeman, Elliott, discussed the Discreet Special Committee's and the
Discreet Board's fiduciary duties in considering a strategic combination.
On the afternoon of August 20, 1998, the Discreet Special Committee held a
telephonic meeting with legal counsel and representatives of Volpe Brown
Whelan to discuss the status of negotiations with Autodesk and Dutchco
regarding the proposed business combination with Autodesk and to further
review and discuss the fairness opinion to be delivered by Volpe Brown Whelan
and the related analyses in connection with the proposed business combination.
Volpe Brown Whelan presented a review of the proposed exchange ratio,
financial analysis and pro forma and other information regarding the two
companies and then discussed with the Discreet Special Committee the opinion
of Volpe Brown Whelan to be delivered to the Discreet Special Committee and
the Discreet Board that the consideration to be received in the transaction by
the Discreet Shareholders was fair from a financial point of view to the
Discreet Shareholders as of such date. At the conclusion of the presentation
by Volpe Brown Whelan, the Discreet Special Committee agreed that, based on
the fairness opinion and all other relevant factors in relation to the
proposed business combination with Autodesk, it would recommend that the Board
of Directors approve the transaction as in the best interests of Discreet and
the Discreet Shareholders.
On the afternoon of August 20, 1998, the Discreet Board held a special
meeting with all directors participating by telephone, with members of
Discreet's senior management and representatives from Volpe Brown Whelan and
Discreet's United States legal counsel participating. The Discreet Special
Committee informed the Discreet Board that Autodesk and Dutchco had withdrawn
the Discreet Stock Option. The Discreet Special Committee presented to the
Discreet Board its review of the terms and conditions of the business
combination with Autodesk and the related agreements, and discussed the
results of due diligence and negotiations conducted by and on behalf of
Discreet. At the conclusion of the presentation, the Discreet Special
Committee recommended that the Discreet Board approve the business combination
proposal as presented. Legal counsel then reviewed the terms of the various
agreements, particularly the proposed acquisition agreement, and discussed the
Discreet Board's fiduciary duties in reviewing and approving the business
combination. Then, Volpe Brown Whelan summarized the presentation it had
delivered to the Discreet Special Committee preceding the meeting of the full
Discreet Board regarding the proposed exchange ratio and the financial
analysis and pro forma and other information regarding the two companies and
then delivered to the Discreet Special Committee and the Discreet Board the
opinion, stating that the consideration to be received in the transaction by
Discreet Shareholders was fair from a financial point of view to the Discreet
Shareholders as of such date. Senior management of Discreet then reviewed with
the Discreet Board a summary describing the due diligence investigation that
had been conducted by management and on behalf of Discreet in relation to the
proposed transaction. At the conclusion to these discussions and upon
recommendation of the Discreet Special Committee, the Discreet Board voted to
approve the acquisition agreement and related transaction documents (with
Mr. Szalwinski abstaining in order to avoid the appearance of a conflict of
interest in light of his interests in the proposed business combination,
including future employment with the Combined Company and the acceleration of
the vesting of certain of his options upon consummation of the Transactions).
Following the Discreet Board meeting, Autodesk's and Discreet's senior
management and US and Canadian legal counsel continued the final negotiations
of the transaction documents. The Original Agreement, which contemplated an
exchange ratio of 0.525 shares of Autodesk Common Stock for each Discreet
Common Share, was executed in the afternoon of August 20, 1998, and a joint
press release was issued by the parties announcing the proposed business
combination.
48
On September 23, 1998, in order to implement certain technical amendments to
the proposed transaction structure, the parties executed an Amended and
Restated Agreement of Acquisition and Amalgamation, which superseded in its
entirety the Original Agreement. The changes effected by the September 23,
1998 agreement did not amend the then-current 0.525 exchange ratio or
otherwise affect the economic terms of the transaction to either Autodesk's or
Discreet's respective stockholders. Further, on such date, Autodesk's and
Discreet's respective financial advisors confirmed that such changes would not
have affected their respective opinions.
On Wednesday, October 7, 1998, Mr. Szalwinski notified Ms. Bartz that
Discreet was in the process of conducting a preliminary review of its
financial results for the quarter ended September 30, 1998, and that it
appeared likely that such results would fall short of analysts' consensus
expectations.
On Tuesday, October 13, 1998, Discreet issued a press release announcing
preliminary results for the quarter ended September 30, 1998 of revenues in
the range of $25 million to $27 million and earnings per share between $0.03
and $0.08 and cited a number of factors it believed was responsible for such
results and which could affect Discreet's business outlook, including
seasonally slower than expected sales in Europe; general market anxiety in
North America causing delays in capital spending; recent changes in Discreet's
sales organization leadership; what Discreet believed to be temporary concerns
in the Advanced Systems customer base regarding the acquisition of Discreet by
Autodesk which may have led to purchasing delays; and the confusion over DTV
(digital television) timing and standards.
During the last two weeks of October, Autodesk obtained additional
information about Discreet's preliminary financial results and business
outlook, including due diligence inquiries by telephone, a meeting in Montreal
on October 15, 1998, which included Mr. Herr and Mr. Szalwinski, as well as
other Discreet personnel, and meetings in Montreal on October 21 and 22, 1998,
which included Ms. Bartz, Mr. Herr and Mr. Cakebread and Mr. Szalwinski, Mr.
Plamondon and Mr. Getz.
On October 29, 1998, Discreet announced actual results for the quarter ended
September 30, 1998 of $27.4 million in revenue and earnings per share of
$0.05.
During the first two weeks of November 1998, financial due diligence
continued, including meetings at Autodesk's headquarters in San Rafael,
California on November 10 and 11 that included Mr. Plamondon and Mr. Getz of
Discreet and Mr. Herr, Mr. Cakebread and Ms. Sterling of Autodesk.
Representatives of Piper Jaffray and Volpe Brown Whelan participated in the
financial due diligence meetings and discussed the reasons underlying
Discreet's first quarter results and their impact on Discreet's business
outlook. Ms. Bartz and Mr. Szalwinski held several telephone conferences
during this period to discuss these matters.
On November 11, 1998, two members of the Discreet Special Committee held a
telephone conference call with representatives from Volpe Brown Whelan and
with Discreet's legal counsel to discuss the reasons underlying Discreet's
first quarter results and their impact on Discreet's business outlook, and
requested that Discreet's management, with the assistance of Volpe Brown
Whelan, continue to conduct further financial due diligence on Autodesk.
Later on November 11, 1998, Mr. Szalwinski arrived in San Francisco and,
with Mr. Plamondon and Volpe Brown Whelan, met with Ms. Bartz, Mr. Herr and
Mr. Cakebread at Autodesk's headquarters. At this meeting, Autodesk's
management and Discreet's management, along with Volpe Brown Whelan, discussed
the factors that Discreet believed to be primarily responsible for Discreet's
quarterly results and the degree to which such factors could impact Discreet's
business outlook. The parties discussed the general market anxiety affecting
capital spending and the confusion over DTV timing and standards, and that
such factors are outside of the control of both Discreet and Autodesk and
could affect customer purchasing decisions and purchasing patterns beyond the
current period and could therefore continue to have a negative impact on
Discreet's future results of operations. Discreet expressed its belief that
lower advertising expenditures in particular were having a negative impact on
capital expenditures by post-production companies, broadcast companies and
prosumers, all of which are important customers for Discreet. The parties also
discussed that, as frequently occurs during the pendancy
49
of merger transactions, it appeared that customer purchasing patterns and
decisions were negatively impacted as a result of the uncertainty and
disruption which typically accompany transactions of this nature and it was
acknowledged that customers could continue to delay or alter purchasing
decisions even after consummation of the transaction. Further, it was
discussed that while Discreet believes the seasonally slower sales in Europe
may be temporary, it could not be certain whether the factors discussed above
could also have impacted the European market and therefore possibly have a
further impact on Discreet's business outlook in Europe.
The parties discussed the recent changes in Discreet's sales organization
leadership and acknowledged that, while Discreet was attempting to address
such changes through executive searches, it had not yet identified a qualified
candidate or hired new senior sales staff to fill open positions and could not
be certain that it would be successful in doing so in a timely manner, and
that the negative impact of the recent changes in the sales organization could
be felt even after Discreet had filled the open positions with new hires. The
parties discussed the fact that the success of each company depends in part on
the retention and integration of key sales employees, that competition for
such individuals in the multimedia and design software industries is very
intense and that it was unclear how the announcement of the Transactions and
other recent events would affect Discreet or the Combined Company. The parties
also discussed Autodesk's concern that the slower than expected sales in
Europe could be part of a larger trend rather than merely a seasonal pattern,
and that the disruptive effect of the changes in Discreet's sales organization
leadership could continue into the future. Autodesk and Discreet acknowledged
that the market anxiety and customer concerns regarding both DTV and the
Transactions also represented factors that could continue to impact Discreet's
business into the future. In light of all of these negative factors, which had
already had an effect on Discreet and which Autodesk's management believed
were likely to have additional effects in the future, Autodesk's management
believed that the original exchange ratio no longer appropriately corresponded
to the then-current estimated value of Discreet. Accordingly, at this meeting,
Autodesk proposed revising the exchange ratio.
Both Discreet and Autodesk management continued to believe that the
strategic reasons for the Transactions would serve the interests of the
stockholders of both companies in the future. However, because Discreet's
fiscal first quarter results were materially different from the expectations
of both parties at the time the agreement was entered into, it was mutually
agreed that the boards of directors of both companies would meet to consider
the factors discussed by management on November 11, 1998 and to consider
whether a change in the exchange ratio was appropriate.
On November 16, 1998, the Discreet Board met throughout the day and into the
early evening to discuss the transaction and its fiduciary duties in
considering the revised terms proposed by Autodesk, review the additional
financial due diligence of Autodesk and weigh the merits of the combination
under the revised terms proposed by Autodesk. The Discreet Board directed Mr.
Szalwinski to continue negotiations with Autodesk and indicated its
willingness under certain terms and conditions to consider an exchange ratio
below 0.525. During an adjournment of this meeting, the Discreet Special
Committee met separately to discuss the transaction and weigh the merits of
the combination under the revised terms proposed by Autodesk.
On the night of November 16, 1998, Mr. Szalwinski called Ms. Bartz to
discuss the updated financial information regarding each of the companies and
the results of each party's due diligence regarding the other. Ms. Bartz and
Mr. Szalwinski discussed possible revised financial and other terms of the
transaction. After considerable discussion of the financial impact of the
proposed transaction on the shareholders of both companies, Ms. Bartz and Mr.
Szalwinski agreed that each would present to their respective boards of
directors a proposal that the acquisition agreement between the parties be
amended in order to reduce the exchange ratio from 0.525 to 0.48 and to make
reciprocal increases in certain termination fees.
On November 17, 1998, the Autodesk Board held a meeting to consider the
proposed amendments, which was also attended by Mr. Herr, Ms. Sterling, Mr.
Cakebread and representatives from Piper Jaffray. At the meeting, Autodesk
management provided the Autodesk Board with additional information regarding
Discreet's business and operating results from the date the Transactions were
announced and in particular Discreet's results for the quarter ended September
30, 1998 and the factors discussed at the November 11, 1998 meeting. The
Autodesk Board asked a number of questions, and there was discussion
concerning (i) the results of the
50
additional financial and business due diligence, (ii) the factors that
Discreet believed to be primarily responsible for Discreet's operating results
for the quarter ended September 30, 1998, (iii) efforts undertaken by Discreet
to address certain of these factors, (iv) the degree to which certain of such
factors would continue to impact Discreet's business outlook, (v) Discreet's
sales force financial incentives, product pricing and competitive factors,
(vi) the financial condition and results of operations for Autodesk and
Discreet both before and after the proposed combination, and (vii) current
financial market conditions and historical market prices. The Autodesk Board
determined that the factors negatively impacting Discreet's results for the
quarter ended September 30, 1998 were likely to have a continuing impact on
Discreet's business, including slower than expected sales in Europe, reduced
capital spending and turnover and changes in the sales organization. Due to
Discreet's operating results and because Autodesk believed that these factors
were likely to impact Discreet's revenues and earnings, the Autodesk Board
concluded that the 0.525 exchange ratio did not accurately reflect of the
current operating performance of Discreet and, in light of the Board's
fiduciary duty, could not be favorably recommended to the Autodesk
Shareholders. As a result of these discussions and analyses, the Autodesk
Board concluded that the original exchange ratio no longer accurately
reflected the then-current value of Discreet and therefore should be revised
downward. Representatives from Piper Jaffray made a presentation to the
Autodesk Board, which included an analysis of the financial implications of
the proposed 0.48 exchange ratio. Piper Jaffray then delivered to the Autodesk
Board its oral opinion, which opinion subsequently was confirmed in writing,
that, as of November 17, 1998, the proposed 0.48 exchange ratio was fair from
a financial point of view to Autodesk. At the conclusion of the meeting, the
Autodesk Board unanimously approved the proposed revisions to the Transactions
and authorized management to execute and deliver the Acquisition Agreement.
On November 18, 1998, the Discreet Special Committee held a telephonic
meeting to discuss the proposed revision of the exchange ratio from 0.525 to
0.48 and an increase in certain reciprocal termination fees. Representatives
of Volpe Brown Whelan and Discreet's legal counsel also participated in such
meeting. Volpe Brown Whelan presented a review of the proposed exchange ratio,
financial analysis and pro forma and other information regarding the two
companies and then discussed with the Discreet Special Committee the opinion
of Volpe Brown Whelan to be delivered to the Discreet Special Committee and
the Discreet Board that the consideration to be received under the revised
terms of the Transactions by Discreet Shareholders was fair from a financial
point of view to the Discreet Shareholders as of such date. At the conclusion
of the presentation by Volpe Brown Whelan, the Discreet Special Committee
agreed that, based on all relevant factors, it would recommend that the
Discreet Board approve the revised terms of the Transactions as in the best
interests of Discreet and the Discreet Shareholders.
On the afternoon of November 18, 1998, the Discreet Board held a telephonic
special meeting with all directors participating, with members of Discreet's
senior management and representatives from Volpe Brown Whelan and Discreet's
United States legal counsel also participating. The Discreet Board discussed
the factors discussed by management of both companies at the November 11, 1998
meeting, and the risk that such factors would continue to impact Discreet's
business outlook. In view of the risks such factors presented to Discreet
future operating results, the Discreet Board determined that a revised
exchange ratio was appropriate and would continue to be in the best interests
of the Discreet Shareholders. The Discreet Special Committee presented to the
Discreet Board its review of the proposed revised terms and the results of the
negotiations conducted by and on behalf of Discreet. At the conclusion of the
presentation, the Discreet Special Committee recommended that the Discreet
Board approve the revised terms of the Transactions as proposed. Legal counsel
then reviewed the proposed amendment to the acquisition agreement. Then, Volpe
Brown Whelan summarized the presentation it had delivered to the Discreet
Special Committee preceding the meeting of the full Discreet Board regarding
the proposed exchange ratio and the financial analysis and pro forma and other
information regarding the two companies and then delivered to the Discreet
Special Committee and the Discreet Board their opinion, stating that the
consideration to be received under the revised terms of the Transactions by
Discreet Shareholders was fair from a financial point of view to the Discreet
Shareholders as of such date. Senior management of Discreet then reviewed with
the Discreet Board the updated Autodesk financial due diligence conducted by
management. At the conclusion of these discussions and upon recommendation of
the Discreet Special Committee, the Discreet Board voted to approve the
Acquisition Agreement and related transaction documents (with Mr. Szalwinski
51
abstaining from the vote in order to avoid the appearance of a conflict of
interest in light of his interests in the proposed business combination,
including future employment with the Combined Company and the acceleration of
the vesting of certain of his options upon consummation of the Transactions).
On November 18, 1998, the Acquisition Agreement was executed in its revised
form and Autodesk and Discreet issued a joint press release announcing the
revised terms of the Transactions.
On December 18, 1998, the parties amended the Acquisition Agreement to
extend certain dates relating to the payment of termination fees.
Throughout this time, the SEC continued the process of review of the
registration statement and the companies continued to respond to comments
raised by the SEC.
On January 13, 1999, Ms. Bartz and Mr. Herr met in Montreal with Discreet
management to discuss, among other things, matters relating to the integration
of the two companies. During that meeting, Mr. Szalwinski indicated that,
based on information then available to Discreet's management, it appeared
revenue and earnings for the December quarter would fall short of analysts'
consensus expectations. Members of Autodesk and Discreet management then
discussed in detail the range of revenue, gross margin and earnings which were
likely to be reported once Discreet's internal financial procedures were
completed and the reasons which Discreet management believed contributed to
these results. These factors included continued effects from the lack of a
senior sales and marketing executive and several other vacancies in the sales
organization, continued slower than expected sales in Europe and slower than
expected sales in Asia in part due to Discreet's lack of key sales personnel
in these geographic areas, as well as market conditions in these regions which
had affected customer capital expenditures, and a greater number of turnkey
systems sales through the indirect channel, which caused a negative effect on
margins. Other reasons Discreet management cited for the lower than expected
gross margins were the geographic mix of revenues, with lower margins
typically associated with sales in North America, and efforts to build an
indirect channel (which also tends to produce lower margins than direct sales)
for advanced system products.
Following this initial meeting, on January 13, 1999 and January 14, 1999,
Autodesk obtained additional information about Discreet's preliminary
financial results for the second fiscal quarter and its business outlook,
including continued discussions and meetings with Discreet's management
regarding the factors discussed above and related matters.
Upon return to Autodesk on January 15, 1999, Ms. Bartz and Mr. Herr met with
other key members of Autodesk management and Autodesk's outside legal and
financial advisors to evaluate the impact of Discreet's anticipated December
quarter results, and the factors underlying such results, on the impending
combination. In light of these negative factors, many of which had now
affected Discreet's results for two quarters and which Autodesk management
believed were likely to affect future results, Autodesk management once again
became concerned that the then-current exchange ratio of 0.48 no longer
accurately reflected Autodesk's then-current valuation of Discreet. On January
15, 1999, Ms. Bartz called Mr. Szalwinski and proposed revising the Exchange
Ratio downward from 0.48 to 0.33 in light of the recent developments and the
continuing negative effects from previously discussed factors affecting
Discreet's business.
Following Mr. Szalwinski's discussion with Ms. Bartz, the members of the
Discreet Board held a telephonic meeting at which Discreet management reviewed
the preliminary financial results for the quarter ended December 31, 1998, and
the reasons therefor and informed the Discreet Board of the proposal of
Autodesk to revise the exchange ratio. The Discreet Board discussed the
preliminary financial results for the quarter ended December 31, 1998, the
reasons therefor and the impact on Discreet's business outlook. The Discreet
Board then discussed the proposal received by Autodesk and weighed the merits
of the transactions under a revised exchange ratio. The Discreet Board
discussed their fiduciary duty in considering a revised exchange ratio. The
Discreet Board directed Mr. Szalwinski to continue negotiations with Autodesk
and indicated its willingness to consider an exchange ratio below 0.48. At the
end of this meeting, the Discreet Special Committee met separately to discuss
the transaction and weigh the merits of the combination under the revised
terms proposed by Autodesk.
52
From January 15 through January 18, 1999, Volpe Brown Whelan participated in
meetings with Discreet management and discussed the reasons underlying
Discreet's operating results for the quarter ended December 31, 1998 and their
impact on Discreet's business outlook.
Throughout the day on January 16, 1999, Discreet management and Autodesk
management continued to discuss Discreet's recent financial results and to
exchange updated information regarding each company. In addition,
representatives from Volpe Brown Whelan spoke with management of Autodesk to
obtain information regarding Autodesk.
As each company considered the possibility of revising the exchange ratio
for a second time, the factors which Discreet believed contributed to its
December results were evaluated, particularly to the extent the combined
September and December results could be viewed as indicative of financial
performance in the several quarters to come. In particular, both Discreet and
Autodesk acknowledged that lack of highly skilled and well integrated sales
personnel can only be corrected by careful hiring and training over time. In
addition, Autodesk believed gross margin results for the September and
December quarters should give some indication of margins to be expected in the
near term. Discreet acknowledged that product, geographic and channel mix
could significantly impact gross margins, but that such trends are difficult
to accurately predict, particularly when Discreet is building its indirect
sales channel and given the lack of a senior sales executive during the past
two quarters. Both companies also agreed that development of an indirect sales
channel for Discreet's advanced systems would require both time and financial
investment. Both Discreet and Autodesk concluded that Discreet's recent
operating results, along with these factors would be viewed by analysts,
investors and other stockholders as continuing to impact Discreet's business
outlook and therefore diminishing Discreet's market value. Both companies also
took into account the importance of presenting a proposal which was fair to
both Autodesk's and Discreet's stockholders and which would likely be approved
by both Autodesk's and Discreet's stockholders.
On the morning of January 17, 1999, the Discreet Special Committee held a
meeting to discuss the proposed revision of the exchange ratio from 0.48 to
0.33. Representatives from Volpe Brown Whelan also participated in such
meeting. The parties discussed the reasons underlying Discreet's December
quarter results and their impact on Discreet's business outlook and to discuss
in detail the recent proposal. Volpe Brown Whelan presented a review of the
proposed exchange ratio, financial analysis and pro forma and other
information regarding the two companies and then discussed with the Discreet
Special Committee the opinion of Volpe Brown Whelan to be delivered to the
Discreet Special Committee and the Discreet Board that the consideration to be
received under the revised terms of the Transactions by Discreet Shareholders
was fair from a financial point of view to the Discreet Shareholders as of
such date. At the conclusion of the presentation by Volpe Brown Whelan, the
Discreet Special Committee agreed that the combination continued to be in the
best interests of the shareholders of the company and that they would consider
the proposal and reconvene on January 18, 1999.
On the morning of January 18, 1999, the Discreet Board met to discuss the
transaction and its fiduciary duties in considering the revised terms proposed
by Autodesk and weigh the merits of the combination under the revised terms
proposed by Autodesk. Representatives of Volpe Brown Whelan and Discreet's
U.S. legal counsel also participated in such meeting. The Discreet Special
Committee presented to the Discreet Board its review of the proposed revised
terms and Mr. Szalwinski presented the results of the negotiations conducted
by and on behalf of Discreet. Legal counsel then reviewed the proposed
amendment to the Acquisition Agreement. Then, Volpe Brown Whelan presented a
review of the proposed exchange ratio and the financial analysis and pro forma
and other information regarding the two companies and then delivered to the
Discreet Special Committee and the Discreet Board their opinion, stating that
the consideration to be received under the revised terms of the Transactions
by Discreet Shareholders was fair from a financial point of view to the
Discreet Shareholders as of such date. At the conclusion of the presentation
by Volpe Brown Whelan, the Discreet Special Committee agreed that, based on
all relevant factors, it would recommend that the Discreet Board approve the
revised terms of the Transactions as in the best interests of Discreet and the
Discreet Shareholders. At the conclusion of these discussions and upon
recommendation of the Discreet Special Committee, the Discreet Board voted to
approve the amendment to the Acquisition Agreement and related transaction
documents (with Mr. Szalwinski abstaining from the vote in order to avoid the
appearance of a conflict of interest in light of his interests in the proposed
53
business combination, including the acceleration of the vesting of certain of
his options upon consummation of the Transactions).
On January 18, 1999, Autodesk's Board of Directors was provided an opinion
from Piper Jaffray that the revised terms of the agreement were fair to
Autodesk and unanimously approved the amendment. On the evening of January 18,
1999, Ms. Bartz and Mr. Szalwinski spoke again by telephone and reached
agreement on this amendment.
On the morning of January 19, 1999, Autodesk and Discreet issued a joint
press release announcing the revised terms of the Transactions. Simultaneously
on January 19, 1999, Discreet issued a press release announcing preliminary
results for the quarter ended December 31, 1998, of revenues in the range of
$27-$29 million, and earnings per share ranging from a loss of $0.01 to
earnings of $0.01 per share, and a number of factors it believed to be
responsible for such results and which could affect Discreet's business
outlook, including continued effects from the lack of a sales and marketing
senior executive during the quarter combined with several field vacancies;
continued slower than expected sales in Europe and slower than expected sales
in Asia due in part to Discreet's sales personnel issues noted above in these
geographic areas as well as market conditions in these regions which have
affected customer capital expenditures; and a greater number of turnkey
systems sales through the indirect channel which caused a negative effect on
margins.
Joint Reasons for the Transactions
In reaching their decision to approve the Acquisition Agreement and the
Transactions, the Autodesk Board and the Discreet Board consulted with their
respective management teams and advisors and independently considered the
proposed Acquisition Agreement and the Transactions. Based upon their
respective independent reviews of the proposed Transactions and the business
and operations of the other party, the Autodesk Board and the Discreet Board
each approved the Acquisition Agreement and the Transactions. The Boards of
Directors of Autodesk and Discreet each believe that the Combined Company has
the potential to realize long-term improved operating and financial results
and to achieve a competitive position which is stronger than each company on a
standalone basis. There can be no assurance, however, that these results or
any of the efficiencies or opportunities described in the sections "--
Autodesk's Reasons for the Transactions" and "--Discreet's Reasons for the
Transactions," will be achieved through the consummation of the Transactions.
See "Risk Factors--Risks Relating to the Transactions."
Autodesk and Discreet also believe that the Transactions will provide
greater opportunities to develop business relationships, license technology
and engage in other strategic combinations and transactions involving their
respective products and technologies than would be the case if the companies
otherwise independently engaged in these activities. In this way, the
Transactions could provide the Combined Company with the range of products and
services required to play a defining role in the market for multimedia content
creation and manipulation software products for the entertainment and design
conceptualization and visualization industries.
The Autodesk Board and the Discreet Board have both identified several
potential benefits of the Transactions which they believe will contribute to
the success of the Combined Company. These potential benefits include the
following:
. Shared Strategic Vision. The management teams of Autodesk and Discreet
share a common strategic vision for the Combined Company: to be the premier
total solutions provider of digital content design, creation and
manipulation tools for the creation of imagery to customers within the
multimedia industry by offering a comprehensive suite of products at a
variety of price points and configurations.
. Complementary Markets and Distribution Channels. Autodesk and Discreet each
have a strong presence in a different but complementary market. Autodesk's
Kinetix division is a leading provider of PC-based 3D modeling and
animation tools, including its award winning product 3D Studio Max, which
are delivered through a well established network of distribution partners
throughout the world. Discreet is a leading supplier of turnkey systems for
creating, editing and compositing imagery for film, video, the Web, HDTV,
54
broadcast and interactive games, which systems are sold through Discreet's
high-end direct sales channel. Moreover, Discreet and Autodesk believe that
the Combined Company will be able to successfully distribute Discreet's
mid-range new media software products through the Kinetix distribution
channel.
. Improved Ability to Compete. Autodesk and Discreet believe that the
Combined Company will be able to offer its customers a comprehensive suite
of integrated product offerings, including digital content design, creation
and manipulation tools for the creation of moving images, and to bring to
bear a substantial amount of industry experience, sales and marketing
capability and financial and other resources, which will allow the Combined
Company to compete more effectively in a rapidly evolving and highly
competitive market, as well as to respond more effectively to technological
change and evolving customer needs.
. Complementary Technology. The strength of the combined development teams,
and the presence of substantial industry experience, as well as technical
and product vision which has been exhibited by the technical personnel and
management of Discreet and Autodesk's Kinetix division, may allow the
Combined Company to develop higher quality products containing features and
functionality which should allow the Combined Company to address customer
needs more quickly and effectively than each company on a stand-alone
basis. The breadth of technical expertise and market knowledge of the
Combined Company may allow the Combined Company to compete more effectively
in the multimedia marketplace.
Discreet's Reasons for the Transactions
In addition to the anticipated joint benefits described above, the Discreet
Board (i) believes that the following are additional reasons why the
Transactions will be beneficial to Discreet and the Discreet Shareholders
and/or (ii) considered such factors in reaching its decision to approve the
transaction documents and to recommend the Transactions to the Discreet
Shareholders:
. The Transactions are expected to result in an ability to expand the
research and development resources of Discreet by combining, where
appropriate, its research and development programs and personnel with those
of Autodesk to improve and increase product development and introduction.
. The combination will afford Discreet access to a respected and experienced
executive leadership team and better enable current Discreet management to
focus on the design, development, marketing and sale of content creation
and manipulation tools.
. Autodesk's extensive distribution network and expertise is expected to aid
efforts already underway at Discreet to develop a worldwide distribution
channel for its new media software products.
. The resources of the Combined Company are expected to enable it to respond
more effectively to technological change and increased competition.
. The Combined Company is expected to have an improved competitive position
when compared to that of either company standing alone in the content
creation and manipulation tools market, which Discreet believes will be
characterized by increased competition, industry consolidation, rapid
technological change and increasingly larger competitors with substantially
greater resources.
. Autodesk products now exclusively address Windows/NT operating
environments. Access to Autodesk's research and development expertise in
Windows/NT operating environment is expected to benefit Discreet's research
and development efforts as Discreet continues to broaden its product and
customer base by expanding its product portfolio to Windows/NT
environments.
. The Transactions are expected to increase the ability of the Combined
Company to support the extension of new product development efforts, in
particular as a result of the integration of Autodesk's Kinetix unit into
ongoing operations of Discreet. The expanded 3-D featuring of current and
future Discreet products is expected to provide greater benefits to
customers and may enable the Combined Company to respond more effectively
to increased competition in an industry increasingly characterized by
consolidation.
55
. The Kinetix installed base of customers may provide an additional market
opportunity for certain of Discreet's products.
. The premium cited by Volpe Brown Whelan in its premium analysis presented
to the Discreet Board with respect to the per share consideration for the
Discreet Common Shares to be acquired by Autodesk in connection with the
Transactions; however, because the Exchange Ratio is fixed, the implied
value of the exchange to Discreet Shareholders will change as the market
price of the Autodesk Common Stock fluctuates. For example, as of February
2, 1999, the implied value of a Discreet Common Share was equal to $14.27,
based on the closing price of the Autodesk Common Stock as of such date.
. Discreet Shareholders are expected to have the opportunity to participate
in the potential growth of the Combined Company after the Transactions and
the increased investment liquidity that the Transactions will provide
through the larger market capitalization of the Combined Company.
The Discreet Board also considered the following information in concluding
that the Transactions are fair and in the best interests of Discreet and its
shareholders: (i) the effect on shareholder value of a combination, in light
of the business, operations, property, assets, financial condition, operating
results and prospects of Discreet and Autodesk and other possible strategic
alternatives for Discreet, including potential business combinations with
companies other than Autodesk, and in light of Discreet management's view as
to the prospects of Discreet as an independent company; (ii) current industry,
economic and market conditions and trends and its informed expectations of the
future of the industry in which Discreet operates; (iii) the results of the
due diligence investigations by Discreet's management and its legal, financial
and accounting advisors; (iv) the terms and conditions of the Acquisition
Agreement including the termination fees, nonsolicitation provisions,
conditions to closing and termination provisions, which terms were arrived at
through extensive arm's-length negotiations, and the Discreet Board's
conclusion that these provisions were reasonable under the circumstances and
provided the ability for the Discreet Board to exercise its fiduciary duties;
(v) the impact of the structure and accounting and tax treatment of the
Transactions; (vi) the compatibility of the business philosophies and
strategies of Discreet and Autodesk, which the Discreet Board believes is
important for the successful integration of the companies; (vii) historical
information concerning Discreet's and Autodesk's respective businesses,
prospects, financial performance and condition, operations, technology,
management and competitive position, including public reports concerning
results of operations during the most recent fiscal year and fiscal quarter
for each company (including Discreet's results of operations for the quarterly
periods ended September 30, 1998 and December 31, 1998 and the reasons
therefor); (viii) the opinion of Volpe Brown Whelan rendered at the November
18, 1998 meeting of the Discreet Board (and subsequently confirmed in writing)
that, as of the date of such opinion, the consideration to be received by
Discreet Shareholders pursuant to the Transactions is fair to such holders
from a financial point of view; (ix) current financial market conditions and
historical market prices, volatility and trading information with respect to
Autodesk Common Stock and Discreet Common Shares; (x) the consideration to be
received by Discreet Shareholders in connection with the Transactions and the
relationship between the market value of the Autodesk Common Stock to be
issued in exchange for each Discreet Common Share and a comparison of
comparable merger transactions; and (xi) the impact of the Transactions on
Discreet's customers, suppliers and employees.
In addition, the Discreet Board noted that the Transactions are expected to
be accounted for as a pooling-of-interests and that no goodwill is expected to
be created on the books of the Combined Company as a result thereof.
The Discreet Board also identified and considered a number of potentially
negative factors in its deliberations concerning the Transactions, including,
but not limited to:
(i) the risk that the potential benefits sought in the Transactions might
not be realized fully, if at all;
(ii) the possibility that the Transactions would not be consummated and
the effect of the public announcement of the Transactions on (a) Discreet's
sales and operating results and (b) Discreet's ability to attract and
retain key management, sales, marketing and technical personnel;
56
(iii) the risk that, despite the efforts of the Combined Company, key
technical, marketing and management personnel might choose not to remain
employed by the Combined Company;
(iv) the difficulty of managing separate operations at different
geographic locations;
(v) the potential dilutive effect of the issuance of Autodesk Common
Stock in connection with the Transactions;
(vi) the substantial charges to be incurred, primarily in the quarter in
which the Transactions are consummated, including costs of integrating the
business and transaction expenses arising from the Transactions; and
(vii) the other risks associated with Discreet's, Autodesk's and the
Combined Company's business and the Transactions described under "Risk
Factors" herein.
The Discreet Board believes that the potential benefits of the Transactions
outweigh these risks.
The foregoing discussion of the information and factors considered by the
Discreet Board is not intended to be exhaustive but is believed to include all
material factors considered by the Discreet Board. In view of the variety of
factors considered in connection with its evaluation of the Transactions, the
Discreet Board did not find it practicable to and did not quantify or
otherwise assign relative weight to the specific factors considered in
reaching its determination. In addition, individual members of the Discreet
Board may have given different weight to different factors.
Autodesk's Reasons for the Transactions
Autodesk believes that the business combination with Discreet will enhance
its position as a leading technology supplier to the entertainment and design
industries. The entertainment industry, encompassing movies, film, animation,
music, and interactive games, represents a significant opportunity for
increased growth and diversification. Autodesk believes that the growth of
this industry is likely to accelerate in the coming years with the increasing
availability of powerful, cost-effective digital solutions. Integrated, high-
performance digital media authoring solutions will be a key enabler for this
growth. The design industry, encompassing architecture, civil engineering,
mechanical engineering, geographic information systems, industrial design, and
graphic design represents a large market adjacent to Discreet's in which
Autodesk has a significant presence. As this market increasingly adopts
digital media, significant opportunities exist for Autodesk to sell new
digital design tools to this industry. Integrated, cost-effective desktop
digital content production tools will be a key enabler for this growth.
The strategy of the Combined Company will be to deliver complete,
integrated, solutions that allow filmmakers, entertainment professionals and
other authors to create multimedia content in less time, at lower costs, and
in a format that can easily be deployed to other interactive media such as CD-
ROM. Autodesk also expects to deliver significant benefits for design users.
The objective of the combined business is to deliver cost-effective, desktop
content creation tools, integrated with design tools, which enable design
users to create compelling presentations and digital content. Discreet, with
its established technical expertise, products and distribution channel is well
positioned to provide customer solutions that complement Autodesk's
multimedia, design, and visualization products.
Specific factors the Autodesk Board considered in determining that the
combination will be beneficial to Autodesk and its stockholders include the
following:
. The combination is expected to further Autodesk's strategy of
diversification into high-growth businesses and markets that are
complementary to its core design markets. Further, it is expected to
provide Autodesk with a significant new revenue stream that is not
dependent upon the AutoCAD-based family of products.
. The combination is expected to enhance Autodesk's technical leadership in
the design and multimedia markets. Discreet's products and development
staff are recognized for their technical excellence and are
57
expected to strengthen Autodesk's product portfolio, presence and
reputation in the multimedia and design markets.
. Discreet's direct sales force is expected to complement Autodesk's indirect
sales channels and help diversify Autodesk's sales and distribution model.
. The product lines of Discreet and Autodesk are complementary. The
combination is expected to allow Autodesk to market an integrated family of
multimedia and design visualization products that provide customers with a
more complete solution. The combined product lines are also expected to
enable Autodesk to offer customer solutions at a variety of price points
and levels of functionality.
. The Combined Company is expected to have an improved competitive position
when compared to that of either company standing alone in the multimedia
and design markets, which Autodesk believes will be characterized by
increased competition, industry consolidation, rapid technological change
and increasingly larger companies with substantially greater resources
seeking to meet customer needs by providing an extensive integrated set of
products and features.
. Certain of Discreet's products can address customer needs in Autodesk's
core design markets. Autodesk anticipates being able to market certain
Discreet products, either in their current form or with modifications, to
address the needs of a particular market segment, into its existing core
design markets.
. The Transactions are expected to allow the Combined Company to keep pace
with changes in the multimedia industry in general, which has been
characterized by increased competition, industry consolidation, rapid
technological change and increasingly larger companies with substantially
greater resources than those of the Combined Company.
. The combination allows Autodesk to combine Kinetix and Discreet's strong
and complementary research and development organizations, which is expected
to expand and extend its capacity to develop innovative products.
. Discreet's new media software products are well situated to be sold through
Autodesk's established indirect distribution channel.
The Autodesk Board also considered the following information in concluding
that the Transactions are fair to Autodesk and its stockholders: (i) the
anticipated effect of the combination on short and long term stockholder
value, taking into account the business, operations, property, assets,
financial condition, operating results and prospects of Autodesk and Discreet,
trends in the design and multimedia industries, including the consolidation
occurring therein, other potential business combinations in the multimedia
industry and in other markets addressed by Autodesk, as well as the
alternative prospects of continuing to address the multimedia industry solely
through the product offerings of Kinetix; (ii) current industry, economic and
market conditions and trends and the Autodesk Board's informed expectations of
the future of the industry in which Autodesk operates; (iii) the results of
the due diligence investigations by Autodesk's management and its legal,
financial and accounting advisors; (iv) the terms and conditions of the
Acquisition Agreement and related agreements, including the fact that two
members of Discreet's executive management, Richard Szalwinski and Francois
Plamondon, have agreed to modify their current employment agreements with
Discreet to provide that each will remain with New Discreet for a period of
not less then one year following consummation of the Transactions, thereby
ensuring continuity of management during the integration period following the
consummation of the Transactions; (v) the impact of the structure, tax
treatment and accounting treatment of the Transactions; (vi) factors which
affect the potential for success in integration of the Combined Company,
including continuity of management and senior technical staff, the cultural
compatibility of the organizations, and the minimal level of redundancy in
personnel, products and functions; (vii) historical information concerning
Autodesk's and Discreet's respective businesses, prospects, financial
performance and condition, operations, technology, management and competitive
position, including public reports concerning result of operations during the
most recent fiscal year and fiscal quarter for each company; (viii) the
opinion of Piper Jaffray, rendered on January 18, 1999, that the Exchange
Ratio is fair to Autodesk from a financial point of view; (ix) current
financial market conditions and historical market prices, volatility and
trading information with respect to Autodesk Common
58
Stock and Discreet Common Shares; (x) the consideration to be paid to the
Discreet Shareholders in connection with the Transactions and the relationship
between the market value of the Autodesk Common Stock to be issued in exchange
for each Discreet Common Share and a comparison of comparable merger
transactions; (xi) the impact of the Transactions on Autodesk's customers,
suppliers and employees.
The Autodesk Board also identified and considered the following potentially
negative factors in its deliberations concerning the Transactions, including
the following:
(i) the risk that the potential benefits sought in the Transactions might
not be fully realized, if at all;
(ii) the greater volatility of the multimedia industry as compared to the
traditional design industry, which heretofore has been the primary focus of
Autodesk's business;
(iii) the risk that financial analysts, investment bankers and other
industry analysts who provide commentary and advice concerning Autodesk's
business will react negatively to the Transactions as constituting an
extension of the Autodesk's business outside of its traditional focus on
the design industry;
(iv) the risk represented by Discreet's direct sales model, including the
heavy concentration of sales which occur at the end of each fiscal quarter
and the end of each fiscal year;
(v) the difficulties inherent in the management and integration of
geographically diverse locations and development sites, particularly in a
cross border, multi-lingual transaction;
(vi) the potential difficulty in attracting additional software
development personnel to Montreal;
(vii) the potentially dilutive effect of the transaction of the issuance
of Autodesk Common Stock pursuant to the Transactions;
(viii) the risk that the majority of software licensed to end users by
Discreet is licensed for operation with SGI hardware on the Unix platform,
and that SGI is a key sole source supplier for Discreet's business but also
sells products which compete with certain of Discreet's product offerings.
In addition, many industry analysts believe that the industry trend is away
from Unix and towards the Windows and Windows NT operating systems. If this
trend were to accelerate, there would be a risk that the market for
Discreet's high-end Unix-based software products would shrink dramatically,
particularly if such products were not migrated to Windows NT in a timely
way, and that Discreet's high-end Unix based software products would
experience more intense competition;
(ix) the risk that the rapid pace of technological innovation in the
multimedia industry may serve to render some or all of Discreet's product
offerings obsolete in a short period of time;
(x) the risk that despite the efforts of the Combined Company, key
technical, marketing and management personnel may choose not to remain with
the Combined Company;
(xi) the risk that consolidation in the multimedia industry may result in
competitors which have significantly greater revenue and resources than the
Combined Company; and
(xii) the other risks associated the Combined Company, Discreet and
Autodesk as described under "Risk Factors" herein.
The Autodesk Board believed that these risks were outweighed by the
potential benefits of the Transactions.
Interests of Certain Persons in the Transactions
In considering the recommendation of the Discreet Board with respect to the
Transactions, Discreet Shareholders should be aware that certain officers and
directors of Discreet have potential conflicts of interests with respect to
the Transactions. The Discreet Board and the Discreet Special Committee were
aware of these potential conflicts and considered them along with the other
matters described in "--Discreet's Reasons for the Transactions."
59
As of December 31, 1998, directors and executive officers of Discreet and
their affiliates beneficially owned an aggregate of (i) 11,514,490 Discreet
Common Shares, for which they will receive the same consideration as other
Discreet Shareholders, and (ii) unexercised Discreet Share Options to acquire
1,140,000 Discreet Common Shares, which will be treated as described below
under "Terms of the Transactions--Treatment of Discreet Employee Plans--
Discreet Stock Option Plans." Based upon $43.25, which represents the last
reported sales price of the Autodesk Common Stock on February 2, 1999, the
aggregate dollar value of the shares of Autodesk Common Stock to be received
in connection with the Transactions by the directors and executive officers of
Discreet and their affiliates (assuming no New Discreet Exchangeable Shares
are issued) is approximately $180,611,209.
The vesting of shares pursuant to options issued to certain non-employee
directors under the Discreet 1995 Non-Employee Director Stock Option Plan and
1997 Special Limited Non-Employee Director Stock Option Plan is subject,
pursuant to the terms of such plans and the option agreements issued pursuant
thereto, to full acceleration as a result of the Transactions. In addition,
Messrs. Szalwinski and Plamondon are each parties to separate employment
agreements with Discreet. Each of these employment agreements provides for the
acceleration of vesting of certain of such executive officer's outstanding
Discreet Share Options upon a change in control. Upon consummation of the
Transactions, the vesting of Discreet Share Options to purchase 450,000 and
150,000 Discreet Common Shares held by Messrs. Szalwinski and Plamondon,
respectively, will accelerate. None of such provisions were amended in
connection with the negotiation of the Original Agreement or the Acquisition
Agreement.
The executive officers and certain directors of Autodesk holding in the
aggregate approximately 0.20% of the Autodesk Common Stock outstanding as of
the Autodesk Record Date have entered into Voting Agreements with Discreet,
pursuant to which each has agreed to vote his or her shares of Autodesk Common
Stock in favor of the Autodesk Resolution and related matters. The executive
officers and certain directors of Discreet holding in the aggregate
approximately 38.4% of the Discreet Common Shares outstanding as of the
Discreet Record Date have entered into Voting Agreements pursuant to which
each has agreed to vote his or her Discreet Common Shares in favor of the
Discreet Resolution and related matters. See "Terms of the Transactions--
Autodesk and Discreet Voting Agreements."
Messrs. Szalwinski and Plamondon have each entered into agreements with
Autodesk in which such individuals reconfirmed their current employment
arrangements with Discreet and agreed, subject to consummation of the
Transactions, to a minimum one year term of employment with the Combined
Company following the Effective Time and, in the event their employment
relationship with the Combined Company is terminated, to refrain (subject to
certain limited exceptions) from competing with the Combined Company and from
soliciting customers and employees of the Combined Company for a specified
period after such termination.
Pursuant to the Acquisition Agreement, Autodesk and Dutchco are required to
continue to provide, for an indefinite period of time, indemnification to the
directors and officers of Discreet against certain liabilities. In addition,
Autodesk has agreed to maintain or cause New Discreet to maintain in effect
the policies of directors' and officers' liability insurance maintained by
Discreet and its subsidiaries, or policies with at least the same coverage and
amounts and terms no less advantageous to the insured parties, for a period of
five years following the Effective Time. See "Terms of the Transactions--
Indemnification."
As a result of the foregoing transactions and agreements, certain directors
and executive officers of Autodesk and Discreet may have personal interests in
the Transactions which are not identical to the interests of other Autodesk
Stockholders and Discreet Shareholders.
Opinion of Autodesk's Financial Advisor
On June 30, 1998, Autodesk and Piper Jaffray executed an engagement letter
(the "Piper Jaffray Engagement Letter") pursuant to which Piper Jaffray was
engaged to act as Autodesk's financial advisor in connection with the proposed
business combination with Discreet. Pursuant to the Piper Jaffray Engagement
60
Letter, Autodesk retained Piper Jaffray to provide financial advisory and
investment banking services in connection with a possible acquisition of
Discreet and to render an opinion as to the fairness, from a financial point
of view, of any such transaction to Autodesk. See "--Background of the
Transactions."
On August 4, 1998, the Autodesk Board met (with certain directors
participating by telephone) to evaluate the proposed transaction with
Discreet, at which time representatives from Piper Jaffray provided
information concerning Discreet's products and target markets, and reviewed
the written documentation containing preliminary valuation analyses and
related financial information which had been provided to the Autodesk Board
prior to the meeting. On August 18, 1998, the Autodesk Board met (with certain
directors participating by telephone) again and approved the proposed business
combination with Discreet. At this meeting, Piper Jaffray delivered to the
Autodesk Board its oral opinion, which opinion was subsequently confirmed in
writing, that, as of August 18, 1998 and based on the matters described
therein, the original 0.525 exchange ratio was fair, from a financial point of
view, to Autodesk. On November 17, 1998, the Autodesk Board met again and
approved the proposed business combination with Discreet under the revised
transaction terms, including the amended 0.48 Exchange Ratio. At this meeting,
Piper Jaffray delivered to the Autodesk Board its oral opinion, which opinion
was subsequently confirmed in writing that, as of November 17, 1998, and based
on the matters described therein, the 0.48 Exchange Ratio was fair from a
financial point of view to Autodesk. On January 18, the Autodesk Board
approved the proposed business combination with Discreet under the further
revised transaction terms, including the amended 0.33 Exchange Ratio. Also on
January 18, Piper Jaffray delivered its opinion (the "Piper Jaffray Opinion")
that, as of January 18, and based on the matters described therein, the 0.33
Exchange Ratio was fair from a financial point of view to Autodesk. The
Exchange Ratio was determined through negotiations between the respective
members of management of Autodesk and Discreet. Although Piper Jaffray did
assist the management of Autodesk in the negotiations, Piper Jaffray was not
asked by, and did not recommend to, Autodesk that any specific exchange ratio
constituted the appropriate exchange ratio for Autodesk in connection with the
proposed business combination with Discreet. In furnishing the Piper Jaffray
Opinion, Piper Jaffray was not engaged as an agent or fiduciary of Autodesk's
stockholders or any other third party.
The Piper Jaffray Opinion was one of a number of factors considered by the
Autodesk Board in reaching its determination that the proposed combination
with Discreet is in the best interests of the Autodesk Stockholders. See
"Autodesk's Reasons for the Transactions" above. Although, as is customary,
the Piper Jaffray Opinion specifically states that the Exchange Ratio is fair
from a financial point of view to Autodesk, the Autodesk Board believes that
it logically follows from this conclusion that the Exchange Ratio is fair to
Autodesk Stockholders as well. Autodesk believes that in an acquisition
transaction, the interests of the company acting as buyer and its stockholders
are virtually identical. In contrast to the interests of Discreet
Shareholders, the principal economic interest of Autodesk Stockholders as a
group in the Transactions is the indirect cost or benefit to them that results
from future increases or decreases in the value of the Autodesk Common Stock
following consummation of the Transactions. Consequently, Autodesk believes
that, based on the Piper Jaffray Opinion and a number of other factors
considered by the Autodesk Board, the proposed combination with Discreet at
the present 0.33 Exchange Ratio is in the best interests of the Autodesk
Stockholders. See "Autodesk's Reasons for the Transactions" above.
The full text of the Piper Jaffray Opinion, which sets forth, among other
things, assumptions made, matters considered and limitations on the review
undertaken, is attached hereto as Appendix F and is incorporated herein by
reference. Autodesk Stockholders are urged to read the Piper Jaffray Opinion
in its entirety. The Piper Jaffray Opinion was prepared for the benefit and
use of the Autodesk Board in its consideration of the proposed business
combination with Discreet and does not constitute a recommendation to Autodesk
Stockholders as to how they should vote at the Autodesk Meeting on the
Autodesk Resolution. The Piper Jaffray Opinion does not address the relative
merits of the proposed business combination with Discreet or any other
transactions or business strategies discussed by the Autodesk Board as
alternatives to the proposed business combination with Discreet or the
underlying business decision of the Autodesk Board to proceed with or effect
the proposed business combination with Discreet. The summary of the Piper
Jaffray Opinion set forth in this Proxy Circular is qualified in its entirety
by reference to the full text of the Piper Jaffray Opinion.
61
In connection with the preparation of the Piper Jaffray Opinion, Piper
Jaffray, among other things, (i) reviewed the Second Amended and Restated
Agreement and Plan of Acquisition and Amalgamation among the parties dated
September 23, 1998, as amended on December 18, 1998, and as further amended on
January 18, 1999, (ii) reviewed financial and other information, including
business plans, budgetary and other data, that was publicly available or
furnished to Piper Jaffray by Autodesk and Discreet, (iii) met with the
respective members of management of Autodesk and Discreet to discuss the
business and prospects of Autodesk and Discreet, (iv) considered certain
publicly available financial and stock market data of Discreet and compared
those data with similar data for other publicly held companies in businesses
similar to Discreet, (v) considered the financial terms of certain other
business combinations and other transactions which have recently been
effected, and (vi) performed such other analyses and considered such other
information as Piper Jaffray deemed necessary and appropriate under the
circumstances.
In conducting its review and arriving at the Piper Jaffray Opinion, Piper
Jaffray relied upon and assumed the accuracy and completeness of the
information it reviewed for purposes of its opinion and did not assume
responsibility for independently verifying such information. Piper Jaffray
further relied upon the assurances of Autodesk's and Discreet's management
that the information provided was prepared on a reasonable basis in accordance
with industry practice and, with respect to financial planning data, reflected
the good faith judgments of Autodesk's and Discreet's management, and that
such parties were not aware of any information or facts that would make the
information provided to Piper Jaffray incomplete or misleading. Piper Jaffray
also relied upon, without independent verification, the assessment by the
management of each of Autodesk and Discreet of the strategic and other
benefits expected to result from the proposed business combination with
Discreet, as well as the assessment by Autodesk's management of Discreet's
products and the timing and risks associated with the integration of Discreet
with Autodesk. Without limiting the generality of the foregoing, for the
purpose of the Piper Jaffray Opinion, Piper Jaffray assumed that neither
Autodesk nor Discreet was a party to any pending transaction, including
external financing, recapitalizations, acquisitions or merger discussions,
other than the Transactions or in the ordinary course of business. Piper
Jaffray also assumed that the proposed business combination with Discreet
would result in certain United States federal tax income benefits to Autodesk,
would be taxable to certain holders of Discreet Common Shares and would be
accounted for as a pooling of interests under US GAAP. In arriving at the
Piper Jaffray Opinion, Piper Jaffray assumed that all the necessary regulatory
approvals and consents required for the proposed business combination with
Discreet would be obtained in a manner that would not change the purchase
price for Discreet.
In arriving at the Piper Jaffray Opinion, Piper Jaffray did not perform any
appraisals or valuations of specific assets or liabilities of Autodesk or
Discreet and was not furnished with any such appraisals or valuations. Without
limiting the generality of the foregoing, Piper Jaffray did not undertake any
independent analysis of any pending or threatened litigation, possible
unasserted claims or other contingent liabilities, to which Autodesk, Discreet
or any of their respective affiliates was a party or may be subject, and, at
Autodesk's direction and with its consent, the Piper Jaffray Opinion made no
assumption concerning, and therefore did not consider, the possible assertion
of claims, outcomes or damages arising out of any such matters. Although
developments following the date of the Piper Jaffray Opinion may affect the
Piper Jaffray Opinion, Piper Jaffray assumed no obligation to update, revise
or reaffirm the Piper Jaffray Opinion.
The following is a summary of the material financial analyses performed by
Piper Jaffray in connection with rendering the Piper Jaffray Opinion:
Comparable Company Analysis. Piper Jaffray compared certain financial
information and valuation ratios relating to Discreet to corresponding
publicly-available data and ratios from a group of selected publicly traded
companies deemed comparable to Discreet. The comparable companies selected
included five publicly traded companies in the computer graphics imaging
market with market capitalizations greater than $100 million which Piper
Jaffray deemed comparable to Discreet: Adobe Systems, Avid Technology,
Macromedia, Metacreations Corp. and Pinnacle Systems.
The analysis with respect to Discreet produced multiples of selected
valuation data based upon closing stock prices of the comparable companies as
of January 15, 1999, which were then compared to the equity value of
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Discreet of $14.87 per share implied by the Exchange Ratio. The multiples
included in the analysis were: (i) market price per share to earnings per
share recorded over the latest twelve months of the comparable companies
ranging from negative to 25.9x, with a mean and median of 23.9x and 25.7x,
respectively, and a ratio of 22.8x for Discreet; (ii) market price per share
to 1998 calendar earnings per share estimates of the comparable companies
ranging from negative to 26.2x, with a mean and median of 24.9x and 25.7x,
respectively, and a ratio of 34.0x for Discreet; (iii) market price per share
to 1999 calendar earnings per share estimates of the comparable companies
ranging from 19.4x to 56.5x, with a mean and median of 32.4x and 21.4x,
respectively, and a ratio of 40.2x for Discreet; (iv) market capitalization of
the selected company, plus such company's debt, less such company's cash
("Company Value"), to revenue recorded over the latest twelve months for
comparable companies ranging from 1.1x to 10.9x, with a mean and median of
4.1x and 2.8x, respectively, and a ratio of 3.0x for Discreet; (v) Company
Value to calendar 1998 revenue estimates for comparable companies ranging from
1.1x to 9.9x, with a mean and median of 3.9x and 3.0x, respectively, and a
ratio for Discreet of 3.2x; and (vi) Company Value to calendar 1999 revenue
estimates for comparable companies ranging from 1.0x to 7.7x, with a mean and
median of 3.2x and 2.6x, respectively, and a ratio for Discreet of 2.8x.
Company Value for Discreet was based upon the implied purchase price per share
multiplied by the number of fully-diluted shares outstanding, plus outstanding
debt, less cash held. Earnings estimates for comparable companies were based
on consensus earnings per share estimates taken from First Call, an investor
service that monitors earnings estimates for publicly traded companies and for
Discreet from current analysis by Autodesk management based on Discreet's
historic results. Piper Jaffray noted that, in every case, except the market
price to 1998 calendar earnings, the multiples for the Transactions implied by
the Per Share Consideration of $14.87 fell within the range of the respective
multiples of the Comparable Companies.
Comparable Transactions Analysis. Using publicly available information,
Piper Jaffray analyzed the ratio of Company Value to revenue recorded over the
last twelve months, and the ratio of the product of the total number of
Discreet Common Shares outstanding, on a fully diluted basis, multiplied by
the implied value of $14.87 per share (the "Equity Value") to net income over
the last twelve months, in 35 selected transactions involving companies in the
software industry and in a focus group of five selected transactions involving
publicly traded computer graphics imaging software companies which Piper
Jaffray deemed comparable to the Transactions. The five selected transactions
analyzed by Piper Jaffray were the following: (i) the acquisition by Avid
Technology, Inc. ("Avid") from Microsoft Corporation ("Microsoft") of
Softimage Inc. ("Softimage"), effected on August 3, 1998; (ii) the acquisition
by Silicon Graphics, Inc. ("SGI") of Wavefront Technologies, Inc., effected on
June 15, 1995; (iii) the acquisition by SGI of Alias Research, Inc., effected
on June 15, 1995; (iv) the acquisition by Avid of DigiDesign Inc., effected on
January 5, 1995; (v) and the acquisition by Microsoft of Softimage, effected
on February 28, 1994. An analysis of the comparable transactions produced
multiples of selected valuation data with respect to the 35 purchased
companies in the larger group as follows: Company Value to revenues recorded
over the last twelve months ranging from 1.1x to 16.2x, with a mean and a
median of 5.2x and 4.5x, respectively, and a multiple for the Transactions of
3.0x, and Equity Value to net income over the last twelve months ranging from
negative to 83.5x, with a mean and median of 41.3x and 39.4x, respectively,
and a multiple for the Transactions of 23.1x. An analysis of the comparable
transactions produced multiples of selected valuation data with respect to the
five purchased companies in the focus group as follows: Company Value to
revenues recorded over the last twelve months ranging from 4.0x to 6.5x, with
a mean and a median of 5.1x and 5.2x, respectively, and a multiple for the
Transactions of 3.0x and Equity Value to net income over the last twelve
months ranging from negative to 46.0x, with a mean and median of 38.5x and
37.7x, respectively, and a multiple for the Transactions of 23.1x. Piper
Jaffray noted that, in every case, the multiples for the Transactions implied
by the Per Share Consideration of $14.87 fell below both the respective mean
and median multiples of the Comparable Transactions. Piper Jaffray also noted
that the acquisition of Softimage by Avid Technology, which Piper Jaffray
deemed to be the most comparable transaction, was completed at a Company Value
to revenues recorded over the latest 12 months multiple of 6.5x, which is
above the 3.0x multiple for the Transactions. Estimated multiples paid in the
comparable transactions were based on information obtained from public
filings, public company disclosures, press releases, industry and popular
press reports, databases and other sources.
No company, transaction or business used in the Comparable Company Analysis
or Comparable Transactions Analysis as a comparison is identical to Discreet
or the Transactions. Accordingly, an analysis of
63
the results of the foregoing is not entirely mathematical; rather it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading and other values of the comparable companies, comparable
transactions or the business segment, company or transactions to which they
are being compared.
Premiums Paid Analysis. Piper Jaffray reviewed the comparable transactions
described above, as well as certain other transactions to determine the
premiums paid, represented by the difference between the transaction values
and the market prices for the target companies one day, one week and one month
prior to the announcement (each, an "Announcement") of such comparable
transaction. This analysis indicated premiums as follows: (i) one day before
the Announcement, premiums ranging from -2.8% to 92.0%, with a mean and a
median of 33.9% and 29.5%, respectively, and a premium for the Transactions of
9.1%. Piper Jaffray noted that the premium for the Transactions is within the
range of values for such one day premiums, and below the mean and median one
day premiums; (ii) one week before the Announcement, premiums ranging from -
5.8% to 93.6%, with a mean and a median of 38.8% and 38.2%, respectively, and
a premium for the Transactions of 33.7% Piper Jaffray noted that the premium
for the Transactions is within the range of values for such one week premiums,
and below the mean and median one week premiums; and (iii) one month before
the Announcement, premiums ranging from 1.0% to 117.1%, with a mean and a
median of 48.7% and 42.9%, respectively and a premium for the Transactions of
32.2%. Piper Jaffray noted that the premium for the Transactions is within the
range of values for such one month premiums, and below the mean and median one
month premiums. Estimated premiums paid in the comparable transactions were
based on information obtained from public filings, public company disclosures,
press releases, industry and popular press reports, databases and other
sources.
Pro Forma Earnings Analysis. Piper Jaffray analyzed pro forma effects
resulting from the impact of the Transactions on the estimated earnings per
share ("EPS") of the Combined Company. This Analysis was based on publicly
available research analyst estimates for Autodesk and current analysis by
Autodesk management based on Discreet's historical results and included the
dilutive effect of a three million share public offering and a range of
assumed pre-tax synergies. The results of the pro forma earnings analysis
suggested that, assuming $6 million of pre-tax synergies, the Transactions
could be approximately 9.3% dilutive for fiscal 2000. The actual results
achieved by the Combined Company after the Transactions may vary from
estimated results, and the variations may be material.
Contribution Analysis. Piper Jaffray analyzed the respective contributions
of Autodesk and Discreet to the estimated total sales, operating income,
pretax income and net income of the Combined Company for the fiscal years
2000. The analysis indicated that, in fiscal year 2000, Autodesk would
contribute approximately 85.5% of total sales, approximately 92.1% of
operating income, approximately 91.6% of pretax income and approximately 91.9%
of net income of the Combined Company, and Discreet would contribute
approximately 14.5% of total sales, approximately 7.9% of operating income,
approximately 8.4% of pretax income and approximately 8.1% of net income of
the Combined Company. Based on capitalizations of Autodesk and Discreet as of
January 18, 1999, stockholders of Autodesk and Discreet would own
approximately 83.6% and 16.4%, respectively, of the Combined Company upon
consummation of the Transactions. Piper Jaffray noted that, based on the
Exchange Ratio, Discreet Shareholders' approximately 16.4% ownership in the
Combined Company will be above Discreet's percentage contribution to fiscal
year 2000 total sales, operating income, pretax income and net income.
Discounted Cash Flow Analysis. Piper Jaffray estimated the present value of
the estimated future cash flows of Discreet on a stand-alone basis for the
fiscal years ending June 30, 1999 through June 30, 2002. Piper Jaffray applied
terminal value multiples of forecasted 2002 operating income of 11.0x, 12.0x
and 13.0x. In all cases, Piper Jaffray used a range of discount rates from
16% to 20%. This analysis yielded a range of estimated present values of
Discreet's equity value from $12.95 per share to $16.40 per share, compared to
the Discreet's equity value of $14.87 per share implied by the Exchange Ratio
based on the closing price of Autodesk Common Stock on January 15, 1999. Piper
Jaffray noted that the equity value per share implied by the Exchange Ratio is
within the estimated range derived from the discounted cash flow analysis.
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Historical Exchange Ratio Analysis. Piper Jaffray reviewed the ratios of
closing stock prices per share of the Autodesk Common Stock and Discreet
Common Shares over various periods ending August 20, 1998, one day prior to
the Announcement. Piper Jaffray observed that the average of the ratios of
closing stock prices of the Autodesk Common Stock and Discreet Common Shares
for the various periods ending August 20, 1998 were 0.3790x for the previous
180 days, 0.3322x for the previous 90 days, 0.3638x for the previous 30 days
and 0.3585x for the previous ten days. Piper Jaffray noted that, in all cases,
the historical exchange ratios were higher than the current .3300x Exchange
Ratio.
Other Factors and Comparative Analyses. In rendering its opinion, Piper
Jaffray considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of: (i) the
history of trading prices and volume for the Discreet Common Shares and
Autodesk Common Stock from January 15, 1998 through January 15, 1999; and (ii)
selected published analysts' reports on each of Discreet and Autodesk,
including analysts' estimates as to the earnings growth potential of Discreet
and Autodesk.
While the foregoing summary describes certain analyses and factors that
Piper Jaffray deemed material in its presentation to the Autodesk Board, it is
not a comprehensive description of all analyses and factors considered by
Piper Jaffray. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances, and, therefore, such an opinion is not readily
susceptible to a summary description. Piper Jaffray believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
of the factors considered by it, without considering all analyses and factors,
would create an incomplete view of the evaluation process underlying the Piper
Jaffray Opinion. Several analytical methodologies were employed, and no one
method of analysis should be regarded as critical to the overall conclusion
reached by Piper Jaffray. Each analytical technique has inherent strengths and
weaknesses, and the nature of the available information may further affect the
value of particular techniques. The conclusions reached by Piper Jaffray are
based on all analyses and factors taken as a whole and also on application of
Piper Jaffray's own experience and judgment. Such conclusions may involve
significant elements of subjective judgment and qualitative analysis. Piper
Jaffray therefore gives no opinion as to the value or merit of any one or more
parts of the analysis it performed standing alone. In performing its analyses,
Piper Jaffray considered general economic, market and financial conditions and
other matters, many of which are beyond the control of Autodesk and Discreet.
The analyses performed by Piper Jaffray are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than those suggested by such analyses. Accordingly, analyses
relating to the value of a business do not purport to be appraisals or to
reflect the prices at which the business actually may be purchased.
Furthermore, no opinion is being expressed as to the prices at which shares of
Autodesk Common Stock may trade at any future time.
Autodesk engaged Piper Jaffray pursuant to the Piper Jaffray Engagement
Letter. The Piper Jaffray Engagement Letter provides that, for its services,
Piper Jaffray is entitled to receive a non-refundable retainer of $100,000
and, contingent upon consummation of the Transactions, an amount equal to
0.75% of the total transaction value (less the amounts paid as a retainer and
for the opinion described below) (the "Piper Jaffray Fee"). A payment of
$750,000 (which constitutes part of the Piper Jaffray Fee) became due and
payable to Piper Jaffray upon delivery of its August 18, 1998 fairness opinion
to the Autodesk Board. The remainder of the Piper Jaffray Fee is due and
payable upon consummation of the Transactions. Based on the closing price of
the Autodesk Common Stock and the capitalization of Discreet on August 20,
1998, the last trading day prior to announcement of the execution of the
Original Agreement, and assuming the Transactions were consummated as of such
date at the original 0.525 exchange ratio, the Piper Jaffray Fee would have
been $4,030,473. Based on the closing price of the Autodesk Common Stock on
February 2, 1999, the latest practicable date prior to the printing of this
Proxy Circular, and assuming the Transactions were consummated as of such date
at the current 0.33 Exchange Ratio, the Piper Jaffray Fee would have been
$3,352,381. Autodesk also agreed to reimburse Piper Jaffray, regardless of
whether the Transactions are consummated, for its out of pocket expenses and
to indemnify and hold harmless Piper Jaffray and its affiliates and any
person, director, employee or agent acting on behalf of Piper Jaffray or any
of its affiliates, or any person controlling Piper Jaffray or its affiliates,
for certain
65
losses, claims, damages, expenses and liabilities relating to or arising out
of services provided by Piper Jaffray as financial advisor to Autodesk. In
addition, following consummation of the Transactions, Autodesk and Dutchco
will cause New Discreet to issue 112,500 New Discreet Class D Shares to Piper
Jaffray in payment of the fees incurred by a predecessor of New Discreet in
connection with the Transactions. The terms of the fee arrangement with Piper
Jaffray, which Autodesk and Piper Jaffray believe are customary in
transactions of this nature, were negotiated at arm's length between Autodesk
and Piper Jaffray, and the Autodesk Board was aware of such fee arrangements.
Piper Jaffray was retained based on Piper Jaffray's experience as a
financial advisor in connection with mergers and acquisitions and in
securities valuations generally, as well as Piper Jaffray's investment banking
relationship and familiarity with Autodesk.
Piper Jaffray is a nationally recognized investment banking firm. As part of
its investment banking business, Piper Jaffray is frequently engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and other purposes. Piper Jaffray may actively trade the
equity securities of Autodesk and Discreet for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities. Piper Jaffray maintains a market in
Autodesk Common Stock and Discreet Common Shares and regularly publishes
research reports regarding the business and securities of Autodesk, Discreet
and other publicly traded companies in the industry.
Opinion of Discreet's Financial Advisor
Discreet retained Volpe Brown Whelan to render an opinion to the Discreet
Special Committee and the Discreet Board as to the fairness, from a financial
point of view, of the consideration to be received in connection with the
proposed business combination by the Discreet Shareholders. On August 20,
1998, Volpe Brown Whelan rendered its opinion to the Discreet Special
Committee and the Discreet Board to the effect that, as of such date and based
on and subject to the matters stated in the opinion, the original
consideration to be received by the Discreet Shareholders in connection with
the Transactions is fair, from a financial point of view, to the Discreet
Shareholders. Because they were considering a revised exchange ratio, the
Discreet Board and the Discreet Special Committee requested that Volpe Brown
Whelan render a new opinion to the Discreet Special Committee and the Discreet
Board as to the fairness, from a financial point of view, of the revised
consideration to be received by the Discreet Shareholders in connection with
the proposed combination. The analyses performed were the same as those
performed in connection with the August 20, 1998 fairness opinion. On November
18, 1998, Volpe Brown Whelan rendered its opinion to the Discreet Special
Committee and the Discreet Board to the effect that, as of such date and based
on and subject to the matters stated in the opinion, the revised consideration
to be received by the Discreet Shareholders in connection with the
Transactions is fair, from a financial point of view, to the Discreet
Shareholders. Because they were considering a revised exchange ratio, the
Discreet Board and the Discreet Special Committee requested that Volpe Brown
Whelan render a new opinion to the Discreet Special Committee and the Discreet
Board as to the fairness, from a financial point of view, of the revised
consideration to be received by the Discreet Shareholders in connection with
the proposed combination. The analyses performed were the same as those
performed in connection with the August 20, 1998 and November 18, 1998
fairness opinions. On January 18, 1999, in connection with the second revision
to the exchange ratio, Volpe Brown Whelan rendered its opinion to the Discreet
Special Committee and the Discreet Board to the effect that, as of such date
and based on and subject to the matters stated in the opinion, the revised
consideration to be received by Discreet Shareholders in connection with the
Transactions is fair, from a financial point of view, to the Discreet
Shareholders.
The full text of Volpe Brown Whelan's written opinion, dated January 18,
1999, which sets forth the assumptions made, matters considered and
limitations on the review undertaken, is attached to this Proxy Circular as
Appendix G and is incorporated herein by reference. This summary is qualified
in its entirety by reference to the full text of such opinion. Discreet
Shareholders are encouraged to, and should, read this opinion
66
carefully in its entirety. The engagement of Volpe Brown Whelan and its
opinion are for the benefit of the Discreet Special Committee and the Discreet
Board. Volpe Brown Whelan's opinion addresses only the fairness of the
consideration to be received by the Discreet Shareholders from a financial
point of view to the Discreet Shareholders and does not address any other
aspect of the Transactions, nor does it constitute a recommendation to any
Discreet Shareholder as to how to vote their shares with respect to the
Discreet Resolution.
In arriving at its opinion, Volpe Brown Whelan: (i) reviewed the Acquisition
Agreement; (ii) interviewed management of Discreet and Autodesk concerning
their respective business prospects, financial outlook and operating plans as
stand-alone concerns and as a combined enterprise; (iii) reviewed certain
Discreet and Autodesk financial statements and other relevant financial and
operating data of Discreet and Autodesk provided to Volpe Brown Whelan by
Discreet and Autodesk management teams respectively; (iv) reviewed the
historical stock trading patterns of both Autodesk and Discreet and analyzed
implied historical exchange ratios; (v) reviewed the premium of the per share
consideration (which, for purposes of the written analysis, was based on the
closing price of Autodesk Common Stock on August 14, 1998) in relation to
selected merger and acquisition transactions that Volpe Brown Whelan deemed
relevant and comparable to the Transactions; (vi) reviewed the valuation of
selected publicly traded companies Volpe Brown Whelan deemed comparable and
relevant to Discreet; (vii) reviewed, to the extent publicly available, the
financial terms of selected merger and acquisition transactions that Volpe
Brown Whelan deemed comparable and relevant to the Transactions;
(viii) performed a valuation based upon Discreet's relative contribution,
adjusted to reflect the difference in capital structures of the two companies,
to Autodesk in terms of revenue, profitability and book value; (ix) performed
a discounted cash flow analysis of Discreet as a stand-alone entity based upon
the preliminary financial information regarding business prospects provided by
Discreet management through December 2000, and as extrapolated by Volpe Brown
Whelan thereafter; (x) performed a pro forma financial impact analysis of the
combined entity, based upon, in the case of Discreet, preliminary financial
information regarding business prospects (including with respect to both
potential financial performance and potential cost savings resulting from the
proposed business combination) provided by Discreet management through
December 2000 and as extrapolated by Volpe Brown Whelan thereafter, and, in
the case of Autodesk, preliminary financial information regarding business
prospects provided by Autodesk management through January 2000 and as
extrapolated by Volpe Brown Whelan thereafter; and (xi) performed such other
studies, analyses and inquiries and considered such other information as Volpe
Brown Whelan deemed relevant.
In rendering its opinion, Volpe Brown Whelan relied without independent
verification upon the accuracy and completeness of all of the information it
reviewed for purposes of its opinion and relied upon the assurances of
Discreet that, to the best of its knowledge, all such information is complete
and accurate in all material respects and that there is no additional material
information known to Discreet that would make any of the information made
available to Volpe Brown Whelan either incomplete or misleading. Discreet
retained outside legal, accounting and tax advisors to advise on matters
relating to the proposed business combination. Accordingly, Volpe Brown Whelan
relied on their advice and did not review and expressed no opinion on such
matters. Volpe Brown Whelan was not asked to, and did not, conduct a market
survey to determine the interest of other potential acquirors in the Company.
With respect to data and discussions relating to business prospects,
financial outlook and operating plans of Discreet and Autodesk, Volpe Brown
Whelan relied upon the assurances of Discreet and Autodesk that such data,
including the preliminary financial information regarding business prospects,
were prepared in good faith on a reasonable basis reflecting the best
currently available estimates and judgments of Discreet and Autodesk
management as to the prospects of Discreet and Autodesk separately and as a
combined enterprise, and assumed that it was reasonable to extrapolate such
estimates for periods after those periods for which estimates were provided.
Volpe Brown Whelan expressed no opinion and made no investigation with respect
to the validity, accuracy or completeness of the information provided to it
and did not and does not warrant any forecasts included in such information.
Actual results that Discreet or Autodesk might achieve in the future as stand-
alone entities or as a combined company may vary materially from those used in
Volpe Brown Whelan's analysis. Volpe Brown Whelan, furthermore, did not make
any independent appraisals or valuations of any assets of
67
Discreet or Autodesk, nor was Volpe Brown Whelan furnished with any such
appraisals or valuations. Volpe Brown Whelan's opinion is necessarily based
upon market, economic and other conditions that exist and can be evaluated as
of the date of the opinion.
For purposes of its analysis, Volpe Brown Whelan assumed that the proposed
business combination will be consummated in accordance with the terms of the
Acquisition Agreement without waiver of any of the conditions to the parties'
obligations thereunder, that there will be no material changes to the
Acquisition Agreement and that the ratio of shares of Autodesk Common Stock to
be received for each Discreet Common Share will be 0.33. Although developments
following the date of the Volpe Brown Whelan opinion may affect the opinion,
Volpe Brown Whelan assumed no obligation to update, revise or reaffirm the
opinion.
The following is a brief summary of the material analyses performed by Volpe
Brown Whelan in rendering its opinion to the Discreet Board:
Stock Trading and Exchange Ratio Analysis. Volpe Brown Whelan analyzed the
stock trading patterns of both Discreet and Autodesk over various periods of
time and compared them historically to one another. For purposes of this
analysis Volpe Brown Whelan assumed that the per share consideration to be
received by Discreet Shareholders in connection with the Transactions would be
$14.87 (the "Per Share Consideration") which was based on the closing price of
Autodesk Common Stock of $45.06 on January 15, 1999 (one day prior to the
announcement of the repricing of the exchange ratio) and the Exchange Ratio of
0.33. On January 18, 1999, Volpe Brown Whelan confirmed that the changes in
the per share consideration between January 15 and January 18 did not affect
its opinion as to the fairness of the consideration to be received by Discreet
Shareholders. From June 30, 1995 to August 14, 1998, the closing price of
Discreet Common Shares ranged from $32.00 during the week of November 6, 1995
to $3.63 on September 11, 1996, with a median daily closing price of $16.00.
The last time the stock price exceeded the level of the Per Share
Consideration was June 9, 1998. On a volume basis, 51.3% of Discreet's trades
from June 30, 1995 to August 14, 1998 were below the Per Share Consideration,
and 36.8% of trades from January 2, 1998 to August 14, 1998 were below the Per
Share Consideration. The exchange ratio implied from dividing historical
Discreet share prices by Autodesk share prices was below the Exchange Ratio
prior to May 7, 1997 and was generally above the Exchange Ratio between May 7,
1997 and August 14, 1998. From January 2, 1997 to August 14, 1998, the implied
exchange ratio ranged from 0.1761 to 0.6688 with a mean of 0.4123. The implied
exchange ratio was 0.3740 and 0.3644 on August 14, 1998 and one month prior to
that date, respectively. The Exchange Ratio is within the range of the implied
exchange ratios but below the mean.
Premium Analysis. Volpe Brown Whelan analyzed the premiums paid in select
digital media transactions and in merger and acquisition transactions
generally, and compared them to the premium represented by the Per Share
Consideration. The Per Share Consideration represents a premium of 25.2%
compared to Discreet's share price on August 14, 1998. For digital media
transactions deemed comparable by Volpe Brown Whelan, one day premiums ranged
from 9.7% to 45.9% with a mean of 26.1%, and one month premiums ranged from
22.8% to 58.1% with a mean of 38.0%. These values would imply share prices
based on one day premiums ranging from $13.03 to $17.33 with a mean of $14.98,
and share prices based on one month premiums ranging from $14.58 to $18.78 as
with a mean of $16.39. Volpe Brown Whelan noted that the premium represented
by the Per Share Consideration is below the mean of one day premiums, below
the mean of one month premiums, and within both ranges. For merger and
acquisition transactions between $200 million and $1 billion in value that
involved premiums and that were announced from January 1, 1997 through January
15, 1999, one day premiums ranged from 0.7% to 173.7% with a mean of 28.6%,
and one month premiums ranged from 0.2% to 185.9% with a mean of 38.4%. These
values would imply share prices based on one day premiums ranging from $11.96
to $32.50 with a mean of $15.28, and share prices based on one month premiums
ranging from $11.89 to $33.95 with a mean of $16.44. Volpe Brown Whelan noted
that the premium represented by the Per Share Consideration is below the mean
of one day premiums, below the mean of one month premiums, and within both
ranges.
Comparable Publicly-Traded Company Analysis. Volpe Brown Whelan prepared a
range of values of selected publicly-traded companies it deemed comparable to
Discreet. As few companies are perfectly
68
comparable to Discreet, the range of comparable companies was somewhat broad
and included Adobe Systems, Inc., Avid Technology, Inc., Macromedia, Inc.,
Engineering Animation, Inc., Pinnacle Systems, Inc., MetaCreations
Corporation, Chyron Corporation, Media 100 Inc., Videonics, Inc. and Accom,
Inc. Volpe Brown Whelan noted that it is difficult to apply revenue multiples
for valuation purposes in industries where the hardware and software revenue
mixes are inconsistent. Volpe Brown Whelan indicated that in these instances
it believes that it is more relevant to use gross profit as the key "topline"
value indicator. The analysis of comparable companies yielded a wide range of
per share values for Discreet of $1.43 to $48.82 with a median of $7.14. Volpe
Brown Whelan noted that the Per Share Consideration is within this range of
values and above the median. An analysis of Avid Technology, Inc. ("Avid"),
which Volpe Brown Whelan deemed to be the most comparable company in the
digital media sector, yielded a range of per share values from $4.44 to $7.38
with a median of $5.93. Volpe Brown Whelan noted that the Per Share
Consideration is above this range of values.
Comparable Merger and Acquisition Transaction Analysis. Volpe Brown Whelan
prepared a valuation of Discreet based upon merger and acquisition
transactions of target companies in the digital media industry. Volpe Brown
Whelan also prepared a valuation of Discreet based upon merger and acquisition
transactions of target companies in the digital media industry that, in the
view of Volpe Brown Whelan, are most directly comparable to Discreet. These
transactions included Microsoft's acquisition of SOFTIMAGE, Silicon Graphics'
acquisitions of Alias Research and Wavefront Technologies, and Avid's recent
acquisition of SOFTIMAGE. The analysis of target companies involved in the
Digital Media industry yielded a wide range of per share values for Discreet
of $2.18 to $86.88 with a median of $11.81. Volpe Brown Whelan noted that the
Per Share Consideration is within this range of values and above the median.
When Discreet is compared to those target companies Volpe Brown Whelan
believes are most comparable, the analysis yields a range of per share values
for Discreet of $5.12 to $82.25 with a median of $11.81. Volpe Brown Whelan
noted that the Per Share Consideration is within this range of values and
above the median. Volpe Brown Whelan observed that this analysis is skewed
toward applying a high valuation to profitability metrics such as earnings
before income tax, depreciation and amortization, and net income, since the
applied multiples are derived from targets that had very small profitability
margins. Volpe Brown Whelan placed less weight on this analysis because
Discreet is a more mature, profitable company than the comparable targets. In
addition, Volpe Brown Whelan noted that many of the transactions analyzed
occurred in 1995 or earlier when market values in the digital media industry
were particularly high, and placed less weight on this analysis in light of
such market timing differences.
Relative Contribution Analysis. Volpe Brown Whelan performed a valuation
analysis of Discreet based on Autodesk's and Discreet's relative contributions
to various measures of operational activity. This analysis was based on
historical financial data as well as the preliminary financial information
regarding business prospects for each respective business as if each were
operating independently. Volpe Brown Whelan also calculated certain
contribution percentages on an adjusted basis to reflect the differences in
the capital structures of the two companies. The analysis generated a range of
implied values for Discreet as well as a range of implied Discreet ownership
levels of the combined company. The analysis yielded a range of per share
values for Discreet of $4.77 to $18.15 with a median of $8.13. Volpe Brown
Whelan noted that the Per Share Consideration is within this range of values
and above the median. The analysis also yields a range of implied Discreet
ownership levels of the Combined Company from 5.7% to 21.2% with a median of
10.3%. Volpe Brown Whelan noted that, based on the Exchange Ratio, Discreet
Shareholders' approximately 17% ownership in the Combined Company will be
within this range of ownership levels and above the median.
Discounted Cash Flow Analysis. Volpe Brown Whelan prepared a valuation of
Discreet based on the value of its projected future cash flows, discounted to
the present ("DCF"). The DCF analysis was prepared using preliminary financial
information regarding business prospects provided by Discreet management
through December 2000 and extrapolated by Volpe Brown Whelan thereafter. Using
the capital asset pricing model, Volpe Brown Whelan calculated a weighted
average cost of capital ("WACC") for Discreet of 16.2%. Volpe Brown Whelan
believes that this WACC is in the middle of a range of relevant WACCs given
Discreet's historical and projected profitability. As such, Volpe Brown Whelan
used a range of discount rates from 14.2%
69
to 18.2%. Given that Discreet's current 1998 price/earnings multiple before it
was affected by news of the transaction was 14.3x, Volpe Brown Whelan employed
a range of exit multiples of 12.3x to 16.3x. The DCF analysis yielded a range
of per share values for Discreet from $11.78 to $14.99. Volpe Brown Whelan
noted that the Per Share Consideration is within this range. Volpe Brown
Whelan placed less weight on this analysis because it assumes Discreet's
preliminary financial information regarding business prospects through
December 1999, and Volpe Brown Whelan's extrapolations thereafter, will be
achieved.
Price Payable No Dilution. Volpe Brown Whelan analyzed the maximum price it
estimated Autodesk could pay without diluting its estimated 1999 and 2000 EPS.
Based on this analysis, Volpe Brown Whelan estimated that Autodesk could pay
up to $3.47 per share without diluting 1999 EPS if no synergies were factored
into the analysis, and up to $6.36 per share if synergies are factored into
the analysis. Also based on this analysis, Autodesk could pay up to $10.59 per
share without diluting 2000 EPS if no synergies were factored into the
analysis, and up to $12.93 per share if synergies are factored into the
analysis. Volpe Brown Whelan noted that the Per Share Consideration is above
these levels.
Pro Forma Financial Impact Analysis. Volpe Brown Whelan performed a pro
forma financial impact analysis of the combined entity, based upon, in the
case of Discreet, preliminary financial information regarding business
prospects (including with respect to both potential financial performance and
potential cost savings resulting from the proposed business combination)
provided by Discreet management through December 2000 and as extrapolated by
Volpe Brown Whelan thereafter, and, in the case of Autodesk, preliminary
financial information regarding business prospects provided by Autodesk
management through January 2000 and as extrapolated by Volpe Brown Whelan
thereafter. Estimates of projected cost savings resulting from the
Transactions were provided by the management team of Discreet. Volpe Brown
Whelan expressed no opinion as the whether the potential financial performance
and cost savings would actually be obtained. Volpe Brown Whelan noted that,
based on preliminary financial information regarding business prospects, the
Transactions would negatively impact Autodesk's overall EPS.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Volpe Brown Whelan considered the results of all of
its analyses as a whole and did not attribute any particular weight to any
analysis or factor considered by it. Furthermore, selecting portions of the
analysis, without considering all of the analyses, would create an incomplete
view of the process underlying its opinion. In addition, Volpe Brown Whelan
may have given various analyses and factors more or less weight than other
analyses and factors, and may have deemed various assumptions more of less
probable than other assumptions, so that the ranges of valuations resulting
from any particular analysis described above should not be taken to be Volpe
Brown Whelan's view of the actual value of Discreet.
The analyses performed by Volpe Brown Whelan are not necessarily indicative
of actual value, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
Volpe Brown Whelan's analysis of the fairness of the consideration from a
financial point of view to Discreet. The analyses do not purport to be
appraisals or to reflect the prices at which Discreet might actually be sold.
Because such estimates are inherently subject to uncertainty, there can be no
assurances or guarantees as to their accuracy. Consequently, the Volpe Brown
Whelan analyses described herein should not be viewed as determinative of the
opinion of the Discreet Board with respect to the value of Discreet or of
whether the Autodesk Board or the Discreet Board would have been willing to
agree to a different level of consideration.
Volpe Brown Whelan is a nationally recognized investment banking firm and
was selected by Discreet based on Volpe Brown Whelan's experience and
expertise. Volpe Brown Whelan, as a customary part of its investment banking
business, engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and valuations for corporate
and other purposes. In the ordinary course of its business, Volpe Brown Whelan
and its affiliates may actively trade the equity securities of Autodesk or
Discreet for its and their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
70
The engagement letter between Volpe Brown Whelan and Discreet pursuant to
which Volpe Brown Whelan was engaged provides that, for its services, Volpe
Brown Whelan is entitled to receive, contingent upon consummation of the
proposed business combination, an amount equal to 0.75% of the total
transaction value (less the amounts for the opinion described below) (the
"Volpe Brown Whelan Fee"). A payment of $250,000 (which constitutes part of
the Volpe Brown Whelan Fee) became due and payable to Volpe Brown Whelan upon
delivery of its initial fairness opinion dated August 20, 1998 to the Discreet
Special Committee and the Discreet Board. A payment of an additional $250,000
(which does not constitute part of the Volpe Brown Whelan fee) became due and
payable to Volpe Brown Whelan upon delivery of its fairness opinion dated
November 18, 1998 to the Discreet Special Committee and the Discreet Board.
Subsequently, a payment of an additional $250,000 (which does not constitute
part of the Volpe Brown Whelan fee) became due and payable to Volpe Brown
Whelan upon delivery of its fairness opinion dated January 18, 1999 to the
Discreet Special Committee and the Discreet Board. The remainder of the Volpe
Brown Whelan Fee is due and payable upon consummation of the proposed business
combination. Based on the closing price of the Autodesk Common Stock and the
capitalization of Discreet on August 20, 1998, the last trading day prior to
announcement of the execution of the Original Agreement, and assuming the
Transactions were consummated as of such date at the original 0.525 exchange
ratio, the Volpe Brown Whelan Fee would have been $3,670,832. Based on the
closing price of the Autodesk Common Stock and the Discreet Common Shares on
February 2, 1999, the latest practicable date prior to the printing of this
Proxy Circular, and assuming the Transactions were consummated as of such date
at the current 0.33 Exchange Ratio, the Volpe Brown Whelan Fee would have been
$3,704,212. Discreet has also agreed to reimburse Volpe Brown Whelan,
regardless of whether the proposed business combination are consummated, for
its out-of-pocket expenses, and to indemnify and hold harmless Volpe Brown
Whelan and its affiliates and any person, director, employee or agent acting
on behalf of Volpe Brown Whelan or any of its affiliates, or any person
controlling Volpe Brown Whelan or its affiliates for certain losses, claims,
damages, expenses and liabilities relating to or arising out of services
provided by Volpe Brown Whelan as financial advisor to Discreet. The terms of
the fee arrangement with Volpe Brown Whelan, which Discreet and Volpe Brown
Whelan believe are customary in transactions of this nature, were negotiated
at arm's length between Discreet and Volpe Brown Whelan, and the Discreet
Board was aware of such fee arrangements. Volpe Brown Whelan and its
affiliates have provided financial advisory services to Discreet during the
past two years and have received fees of approximately $1,106,825 from
Discreet for the rendering of such services.
Proposed Market Purchases of Discreet Common Shares
Each of Autodesk and Dutchco currently intend to purchase for cash in the
open market a limited number of Discreet Common Shares (having an aggregate
value in no event greater than $1,000) prior to the Effective Time, but are
under no obligation to do so.
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TERMS OF THE TRANSACTIONS
The following is a brief summary of the material terms of the Acquisition
Agreement and the various agreements related thereto. This summary is
qualified in its entirety by reference to the Acquisition Agreement. Discreet
Shareholders and Autodesk Stockholders are urged to read the Acquisition
Agreement in its entirety for a more complete description of the Transactions.
A copy of the Acquisition Agreement is attached as Appendix A to this Proxy
Circular. Capitalized terms used, but not otherwise defined, herein shall have
the meaning ascribed to such terms in the Acquisition Agreement. In the case
of any conflict between the Acquisition Agreement and the summary set forth
herein, the Acquisition Agreement will control.
General
Upon consummation of the Transactions, Discreet Shareholders will have
received, depending upon the prior election of each Discreet Shareholder and
subject to proration, for each of their Discreet Common Shares, either 0.33
shares of Autodesk Common Stock or 0.33 New Discreet Exchangeable Shares. It
is strongly recommended that US Holders (as defined below) who own Discreet
Common Shares do not elect to receive New Discreet Exchangeable Shares since
the ownership and disposition of such shares may have certain adverse tax
consequences. See "Material Canadian Federal and United States Federal Income
Tax Considerations to Discreet Shareholders."
Holders of New Discreet Exchangeable Shares will have economic and voting
rights substantially identical to those possessed by holders of Autodesk
Common Stock. New Discreet Exchangeable Shares generally may be received by
Canadian residents on a tax-deferred rollover basis (provided appropriate
elections are filed with the relevant tax authorities), will be qualified
investments, and will be "foreign property" under the Canadian Tax Act. See
"Material Canadian Federal and United States Federal Income Tax Considerations
to Discreet Shareholders--Discreet Shareholders Resident in Canada--Redemption
of New Discreet Class B Shares in Exchange for New Discreet Exchangeable
Shares--Rollover Transaction."
The Transactions will be completed by way of an amalgamation under the
Quebec Act and certain related transactions described below. Pursuant to the
Articles of Amalgamation, Discreet will be amalgamated with Autodesk Quebec
and Amalgamation Sub, both Quebec companies and indirect wholly owned
subsidiaries of Autodesk, to form New Discreet. Each holder of Discreet Common
Shares will receive upon the Amalgamation one New Discreet Class B Share for
each Discreet Common Share then held by such holder. Immediately following the
Amalgamation, each such New Discreet Class B Share will automatically, based
upon the prior election of the holder thereof, either (i) be converted into
one New Discreet Unit, which will immediately thereafter be acquired by
Dutchco in exchange for 0.33 shares of Autodesk Common Stock, or (ii) subject
to proration, be redeemed by New Discreet for 0.33 New Discreet Exchangeable
Shares, in either case without any further required action on the part of the
holder. Pursuant to the Acquisition Agreement, the maximum number of Discreet
Common Shares which ultimately may be exchanged for New Discreet Exchangeable
Shares may not exceed 19.99% of the number of Discreet Common Shares
outstanding immediately prior to the Effective Time. If, based upon the
elections of Discreet Shareholders, the percentage of Discreet Common Shares
to be exchanged for New Discreet Exchangeable Shares would exceed 19.99% of
the Discreet Common Shares outstanding immediately prior to the Effective
Time, such electing Discreet Shareholders will receive, pro rata, New Discreet
Units in lieu of New Discreet Exchangeable Shares in respect of such excess,
which New Discreet Units will immediately be acquired by Dutchco in exchange
for 0.33 shares of Autodesk Common Stock.
The New Discreet Exchangeable Shares will be exchangeable at any time at the
option of the holder for Autodesk Common Stock on a one-for-one basis plus the
Dividend Amount, and will be automatically exchanged on the eleventh
anniversary of the Effective Time or earlier upon the occurrence of certain
events, including the liquidation, dissolution or winding-up of Autodesk or
New Discreet. Dividends will be payable on New Discreet Exchangeable Shares at
the same time and in the economically equivalent amounts per share as
dividends on Autodesk Common Stock. See "--Description of New Discreet
Exchangeable Shares."
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Effective Time of the Amalgamation
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Acquisition Agreement, the parties thereto will
cause Discreet to be amalgamated with Autodesk Quebec and Amalgamation Sub to
form New Discreet by filing Articles of Amalgamation and related documents as
contemplated by Section 123.118 of the Quebec Act with the Inspector General
of Financial Institutions of the Province of Quebec. The Amalgamation will
become effective at the Effective Time. New Discreet will continue as the
surviving entity following the Amalgamation and will become a subsidiary of
Dutchco and an indirect subsidiary of Autodesk.
Conversion of Discreet Common Shares; Fractional Shares
Upon consummation of the Transactions, Discreet Shareholders will receive,
depending upon the election of each Discreet Shareholder and the effects of
proration, that number of shares of Autodesk Common Stock or New Discreet
Exchangeable Shares equal to the Exchange Ratio in exchange for each of their
Discreet Common Shares. If any holder of Discreet Common Shares would be
entitled to receive a number of shares of Autodesk Common Stock or New
Discreet Exchangeable Shares that includes a fraction, then, in lieu of a
fractional share, such holder will be entitled to receive an amount of cash
equal to the product of (i) such fraction, multiplied by (ii) the average of
the closing price for the Autodesk Common Stock on the Nasdaq National Market
for the 30 consecutive trading days immediately preceding the Effective Time.
See "--Procedures for Election and Exchange of Share Certificates by Discreet
Shareholders--Fractional Shares."
Treatment of Discreet Employee Plans
Discreet Stock Option Plans. At the Effective Time, each outstanding
Discreet Share Option under the Discreet Stock Option Plans, whether vested or
unvested, will be assumed by Autodesk, and, on such assumption, the rights to
acquire Discreet Common Shares under the Discreet Stock Option Plans shall be
exchanged for the right to acquire Autodesk Common Stock under such plans.
Each Discreet Share Option assumed by Autodesk under the Acquisition Agreement
will continue to have, and be subject to, the same terms and conditions set
forth in the Discreet Stock Option Plan pursuant to which such option was
granted immediately prior to the Effective Time, except with respect to the
number of shares of Autodesk Common Stock for which such option is exercisable
and the per share exercise price of such option, as discussed below. Each
Discreet Share Option will be exercisable for that number of shares of
Autodesk Common Stock that the holder of such Discreet Share Option would have
been entitled to receive had such holder exercised such Discreet Share Option
in full immediately prior to the Effective Time, multiplied by the Exchange
Ratio and rounded down to the nearest whole number of shares of Autodesk
Common Stock. The per share exercise price for the shares of Autodesk Common
Stock issuable upon exercise of such assumed Discreet Share Option will be
equal to the quotient determined by dividing the exercise price per share at
which such option was exercisable immediately prior to the Effective Time by
the Exchange Ratio and rounding the resulting exercise price up to the nearest
whole cent.
After the Effective Time, Autodesk will issue to each holder of an
outstanding Discreet Share Option a document evidencing Autodesk's assumption
of such Discreet Share Option. It is the intention of Autodesk and Discreet
that the Discreet Share Options assumed by Autodesk qualify following the
Effective Time as incentive stock options as defined in Section 422 of the
Code to the extent (and only to the extent) such Discreet Share Options
qualified as incentive stock options prior to the Effective Time.
Employee Stock Purchase Plan. At the Effective Time, each outstanding
purchase right (each, an "Assumed Purchase Right" and, collectively, the
"Assumed Purchase Rights") under the Discreet Employee Stock Purchase Plan
will be deemed to constitute a purchase right to acquire, on the same terms
and conditions as were applicable under the Discreet Employee Stock Purchase
Plan immediately prior to the Effective Time, a number of shares of Autodesk
Common Stock determined as provided in the Discreet Employee Stock Purchase
Plan, except that the per share purchase price of such shares of Autodesk
Common Stock under each Assumed Purchase Right will be the lower of (i) the
quotient determined by dividing 85% of the fair market value of a Discreet
Common Share on the first day of the current offering period by the Exchange
Ratio and (ii) 85% of the
73
fair market value of a share of Autodesk Common Stock on the last day of the
current offering period. This adjustment to the per share purchase price is
designed to preserve the economic rights of participants under the Discreet
Employee Stock Purchase Plan following the Transactions after giving effect to
the Exchange Ratio. Employees of Discreet as of the Effective Time will be
eligible to participate in Autodesk's Employee Qualified Stock Purchase Plan
for a special 2 month offering period commencing on August 1 and thereafter
commencing on the next enrollment date, subject to compliance with the
eligibility requirements of Autodesk's Employee Qualified Stock Purchase Plan
(with Discreet employees receiving credit, for purposes of such eligibility,
for service with Discreet).
Registration Statement on Form S-8. Autodesk has agreed to file with the SEC
a registration statement on Form S-8 to register shares of Autodesk Common
Stock issuable as the result of the assumption of the Discreet Share Options
and Assumed Purchase Rights.
Procedures for Election and Exchange of Share Certificates by Discreet
Shareholders
The Letter of Transmittal and Election Form (on green paper) will be
provided separately to each Discreet Shareholder for use by each such
shareholder (i) to elect to receive New Discreet Exchangeable Shares (for
which New Discreet Class B Shares held by such electing Discreet Shareholders
will immediately be redeemed) and (ii) for transmittal of certificates
representing Discreet Common Shares, should such Discreet Shareholders wish to
receive Autodesk Common Stock or New Discreet Exchangeable Shares. Additional
copies of the green Letter of Transmittal and Election Form may be obtained
from the Depositary. The details of the procedures for the making of
elections, the exchange of certificates representing Discreet Common Shares
and the deposit of such certificates with the Depositary and the addresses of
the offices of the Depositary will be set out in the Letter of Transmittal and
Election Form.
Discreet Shareholders who wish to receive New Discreet Exchangeable Shares
must use the Letter of Transmittal and Election Form (on green paper) to
deposit their Discreet Common Shares with the Depositary on or before the
Election Deadline. See "--Election to Receive New Discreet Exchangeable
Shares," below. Discreet Shareholders wishing to receive Autodesk Common Stock
rather than New Discreet Exchangeable Shares are advised not to surrender
their certificates representing Discreet Common Shares at this time. As soon
as practicable after the Effective Time, the Depositary will send additional
letters of transmittal to former Discreet Shareholders who did not elect to
receive New Discreet Exchangeable Shares and who did not deposit their
certificates prior to the Election Deadline, in order to allow them to
exchange their Discreet Common Share certificates for certificates
representing shares of Autodesk Common Stock.
If the Transactions are completed, no certificates will be issued
representing New Discreet Class B Shares or the New Discreet Class E Shares or
New Discreet Class F Shares comprising New Discreet Units, all of which shares
will be exchanged for Autodesk Common Stock or New Discreet Exchangeable
Shares, as the case may be, immediately after issuance. If the Transactions
are not completed, all deposited certificates will be returned promptly to the
registered holders.
The procedures for receiving certificates representing New Discreet
Exchangeable Shares and shares of Autodesk Common Stock are described
immediately below.
Receipt of Autodesk Common Stock. Discreet Shareholders who wish to receive
Autodesk Common Stock are not required to make any formal election at this
time, since they will be deemed to have elected to receive Autodesk Common
Stock unless they affirmatively elect to receive New Discreet Exchangeable
Shares. However, following the Effective Time, holders wishing to receive
Autodesk Common Stock rather than New Discreet Exchangeable Shares must
nonetheless surrender their certificates representing Discreet Common Shares
to the Depositary in order to obtain certificates representing the appropriate
number of shares of Autodesk Common Stock. The letters of transmittal to be
sent by the Depositary following the Effective Time will specify the terms of
the exchange effected by the Transactions and the procedure for surrendering
certificates formerly representing Discreet Common Shares to the Depositary.
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As soon as practicable after the surrender of certificates representing
Discreet Common Shares, the Depositary will deliver certificates for Autodesk
Common Stock in accordance with the instructions set forth in the letter of
transmittal. Pending the surrender of certificates formerly representing
Discreet Common Shares and in respect of which the election to receive New
Discreet Exchangeable Shares was not duly made, such certificates will,
subject to the provisions set out under "--Failure to Deliver Certificates
Representing Discreet Common Shares" below, be deemed to represent the right
to receive the number of shares of Autodesk Common Stock to which the holder
of such certificates is entitled pursuant to the Transactions.
Election to Receive New Discreet Exchangeable Shares. Discreet Shareholders
who wish to receive New Discreet Exchangeable Shares following conversion of
their Discreet Common Shares into New Discreet Class B Shares must complete
the green Letter of Transmittal and Election Form (which is being provided
separately to each Discreet Shareholder), indicate their election to receive
New Discreet Exchangeable Shares in Box B thereof and return it, together with
the certificate(s) representing the Discreet Common Shares in respect of which
the election is made, to the Depositary prior to the Election Deadline. The
maximum number of New Discreet Exchangeable Shares issuable in the
Transactions may not exceed a number equal to 19.99% of the number of Discreet
Common Shares outstanding immediately prior to the Amalgamation, multiplied by
the Exchange Ratio. In the event that the number of New Discreet Exchangeable
Shares otherwise issuable to holders of Discreet Common Shares pursuant to the
Transactions exceeds this maximum number, such Discreet Shareholders will
receive, pro rata, New Discreet Units in lieu of New Discreet Exchangeable
Shares in respect of such excess. Holders of former Discreet Common Shares in
respect of which an election to receive New Discreet Exchangeable Shares has
not been duly made (which shares, at the Effective Time, will have been
automatically converted into New Discreet Class B Shares) will be deemed to
have elected to receive New Discreet Units.
Each Discreet Shareholder may elect to receive New Discreet Exchangeable
Shares in respect of all or any portion of the Discreet Common Shares held.
Where a shareholder desires to receive New Discreet Exchangeable Shares in
respect of only a part of the Discreet Common Shares represented by a single
share certificate, he or she must deposit such certificate with the Depositary
upon making such election, and the Depositary will, after the consummation of
the Transactions, (i) instruct the New Discreet Transfer Agent to forward to
such shareholder the appropriate number of New Discreet Exchangeable Shares,
and (ii) forward to such shareholder certificates representing the appropriate
number of shares of Autodesk Common Stock which such shareholder is entitled
to receive by virtue of not electing to receive New Discreet Exchangeable
Shares for part of the shares represented by the deposited certificate. See
"Material Canadian Federal and United States Federal Income Tax Considerations
to Discreet Shareholders" for a description of the material Canadian federal
and United States federal income tax consequences of electing to receive New
Discreet Exchangeable Shares.
As soon as practicable following the Effective Time, the Depositary will
instruct the New Discreet Transfer Agent to deliver certificates for New
Discreet Exchangeable Shares in accordance with the instructions set forth on
the Letter of Transmittal and Election Form.
Fractional Shares. No certificates or scrip representing fractional New
Discreet Exchangeable Shares or shares of Autodesk Common Stock will be
issued. In lieu of any such fractional interests, each person entitled to a
fractional interest in New Discreet Exchangeable Shares or Autodesk Common
Stock will receive an amount in cash from New Discreet or Dutchco, as the case
may be, equal to the product of (i) such fraction, multiplied by (ii) the
average of the closing price for the Autodesk Common Stock on the Nasdaq
National Market for each of the thirty (30) consecutive trading days
immediately preceding the Effective Time.
Failure to Deliver Certificates Representing Discreet Common Shares. Any
certificate formerly representing Discreet Common Shares not delivered with
all other necessary documents to the Depositary prior to the seventh
anniversary of the Effective Time shall cease to represent a claim or interest
of any kind or nature against New Discreet, Dutchco or Autodesk. On such date,
the Autodesk Common Stock to which the former registered holder of such
certificate was entitled shall be deemed to have been surrendered to Autodesk
together with all dividends, distributions and interests held for such former
registered holder.
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Operations of the Combined Company Following the Transactions
Following consummation of the Transactions, Autodesk plans to combine the
businesses of Discreet and its Kinetix division. The new organization, the
Discreet business unit of Autodesk, will be headquartered in Montreal, Quebec.
Autodesk's Discreet business unit will focus on developing and marketing tools
for the creation of digital content in the entertainment and creative design
industries. The combined organization will continue to develop and deliver the
existing Discreet and Kinetix product lines to a wide range of creative
professionals including those in the entertainment, and design and
visualization industries.
The engineering organizations of Discreet and Kinetix will be combined in
Autodesk's Discreet business unit, and certain general and administrative
functions will be integrated with similar functions at Autodesk. Discreet's
advanced editing and effects systems will continue to be sold by Discreet's
existing direct sales force. These products will be marketed and supported by
the Combined Company's Discreet Advanced Systems division. Discreet's New
Media Software products and Kinetix products will be sold through Autodesk's
distribution channel and will be marketed and supported by the Combined
Company's Discreet New Media Division.
Transaction Mechanics
The Amalgamation and Resulting Share Exchanges. Pursuant to the terms of the
Acquisition Agreement, the Amalgamation Agreement and the provisions attaching
to the shares in the share capital of New Discreet, the following events will
occur:
(a) Discreet, Autodesk Quebec and Amalgamation Sub will amalgamate to
form New Discreet by filing the Articles of Amalgamation;
(b) Each holder of Discreet Common Shares will receive upon the
Amalgamation one New Discreet Class B Share for each Discreet Common Share
then held by such holder;
(c) Immediately following the Effective Time of the Amalgamation, the New
Discreet Class B Shares held by persons who have elected to receive New
Discreet Exchangeable Shares will be redeemed by New Discreet for 0.33 New
Discreet Exchangeable Shares, without any required action on the part of
the holder, provided that if the aggregate percentage of New Discreet
Exchangeable Shares otherwise issuable pursuant to the Transactions exceeds
19.99% of the number of Discreet Common Shares outstanding immediately
prior to the Effective Time, multiplied by the Exchange Ratio, the holders
of such New Discreet Class B Shares will receive, pro rata, New Discreet
Units in respect of such excess in lieu of New Discreet Exchangeable
Shares;
(d) Immediately following the redemption by New Discreet of New Discreet
Class B Shares for New Discreet Exchangeable Shares, each New Discreet
Class B Shares which has not been redeemed will be converted into one New
Discreet Unit which will immediately thereafter be acquired by Dutchco
(pursuant to the exercise of its right to purchase such units) in exchange
for 0.33 shares of Autodesk Common Stock, without any required action on
the part of the holder;
(e) Dutchco will receive one New Discreet Class A Share for each
outstanding common share of Amalgamation Sub it holds prior to the
Effective Time. Such New Discreet Class A Shares will not be further
converted or exchanged after the Effective Time; and
(f) ACI will receive one New Discreet Class C Share for each outstanding
common share of Autodesk Quebec it holds prior to the Effective Time.
Pursuant to the Voting and Exchange Trust Agreement, (i) New Discreet has
made a covenant in favor of the holders of New Discreet Units, enforceable by
the Trustee, that it will redeem the New Discreet Class E
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Shares and New Discreet Class F Shares, and (ii) Dutchco has made a covenant
in favor of the holders of New Discreet Units, enforceable by the Trustee,
that, upon the proposed exercise by New Discreet of its redemption right with
respect to the New Discreet Units, Dutchco will exercise its right to purchase
the New Discreet Units.
Former Discreet Shareholders will not receive separate share certificates in
respect of the New Discreet Class B Shares, or of the New Discreet Class E
Shares and New Discreet Class F Shares which comprise New Discreet Units.
Share certificates receivable by former Discreet Shareholders will, on the
shareholder's election and subject to proration, be for either (i) shares of
Autodesk Common Stock or (ii) New Discreet Exchangeable Shares.
The Exchange Ratio will be proportionally adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any
dividend or distribution of securities convertible into Autodesk Common Stock
or Discreet Common Shares), reorganization, recapitalization or other change
with respect to Autodesk Common Stock or Discreet Common Shares prior to the
Effective Time. Following the Effective Time, the rate at which New Discreet
Exchangeable Shares may be exchanged for Autodesk Common Stock is subject to
adjustment or modification in the event of stock splits or other changes to
the capital structure of Autodesk so as to maintain the initial relationship
between the New Discreet Exchangeable Shares and the Autodesk Common Stock.
Immediately following consummation of the Transactions and pursuant to pre-
existing binding obligations, New Discreet will issue 150,000 New Discreet
Class D Shares in payment of a portion of the fees incurred by a predecessor
of New Discreet in connection with the Transactions. 112,500 of such shares
will be issued to Piper Jaffray, financial advisor to Autodesk and ACI, and
the remaining 37,500 shares will be issued to Aird & Berlis, Canadian legal
counsel to Autodesk, Dutchco and ACI.
In addition, immediately after the Effective Time, Autodesk, Dutchco (or a
subsidiary to which Dutchco may assign its rights under the Acquisition
Agreement) and New Discreet will enter into the Support Agreement and
(together with the Trustee) the Voting and Exchange Trust Agreement. See
"Terms of the Transactions--Support Agreement" and "--Voting and Exchange
Trust Agreement."
Stock Ownership Following Completion of the Transactions
Upon completion of the Transactions, Dutchco will be the beneficial owner of
all of the issued and outstanding New Discreet Class A Shares, New Discreet
Class E Shares and New Discreet Class F Shares, and ACI will be the beneficial
owner of all of the issued and outstanding New Discreet Class C Shares. The
New Discreet Class A Shares and the New Discreet Class E Shares will be the
only classes of voting securities of New Discreet. Based upon the number of
Discreet Common Shares outstanding and the number of Discreet Common Shares
issuable upon exercise of outstanding Discreet Share Options as of December
31, 1998, an aggregate of approximately 9.9 million shares of Autodesk Common
Stock will be issued to Discreet Shareholders in the Transactions (assuming
that no New Discreet Exchangeable Shares are issued), and Autodesk will assume
options exerciseable for up to approximately 3,180,806 additional shares of
Autodesk Common Stock. Based upon the number of shares of Autodesk Common
Stock issued and outstanding as of December 31, 1998, and after giving effect
to the issuance of Autodesk Common Stock as described in the previous sentence
and the issuance of 3 million shares of Autodesk Common Stock pursuant to the
Reissuance Offering, the former holders of Discreet Common Shares would hold
approximately 16.5% of Autodesk's total issued and outstanding Common Stock
after completion of the Transactions, and holders of former Discreet Share
Options would hold options to purchase an additional approximately 5.0% of
Autodesk's total issued and outstanding Common Stock (assuming the exercise of
such assumed options, but not others). The foregoing numbers of shares and
percentages are subject to change in the event that the capitalization of
either Autodesk or Discreet changes subsequent to December 31, 1998 and prior
to the Effective Time, and there can be no assurance as to the actual
capitalization of Autodesk or Discreet at the Effective Time or of the
Combined Company at any time following the Effective Time. See "--Offering of
Autodesk Common Stock."
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Accounting Treatment
The Transactions are expected to be treated by Autodesk as a "pooling-of-
interests" for accounting purposes under US GAAP. This accounting method
permits the recorded assets and liabilities of both Autodesk and Discreet to
be carried forward on a consolidated basis to Autodesk, after giving effect to
the Transactions, at their recorded historical amounts. No recognition of
goodwill will be required as a result of the Transactions and consequently,
there will be no amortization of goodwill from the Transactions reflected in
Autodesk's future financial periods.
Consummation of the Transactions is conditioned upon (i) receipt by Discreet
of a letter from its independent auditors to the effect that Discreet
qualifies as an entity that may be a party to a business combination for which
the pooling-of-interests method of accounting would be available and (ii)
receipt by Autodesk of a letter from its independent auditors regarding
concurrence with Autodesk management's conclusion as to the appropriateness of
pooling-of-interests accounting treatment for the Transactions under
Accounting Principles Board Opinion No. 16, if consummated in accordance with
the Acquisition Agreement.
Offering of Autodesk Common Stock
In order to qualify the Transactions for pooling-of-interests accounting
treatment, Autodesk must reissue in one or more transactions certain shares of
Autodesk Common Stock previously repurchased by Autodesk and currently held in
its treasury. Accordingly, Autodesk expects to issue approximately 3 million
shares of Autodesk Common Stock through the Reissuance Offering. If the
Reissuance Offering is effected by a public offering, the offering will be
made only by means of a prospectus satisfying the requirements of the
Securities Act. If the Reissuance Offering is effected by a private placement
exempt from the registration requirements of the Securities Act, the offered
shares may not be resold in the United States absent registration or an
applicable exemption from registration under the Securities Act.
Description of New Discreet Exchangeable Shares
Voting Rights. Holders of New Discreet Exchangeable Shares will generally
not be permitted to vote at meetings of the shareholders of New Discreet
(except, where required by law, as a separate class). Autodesk (or a
subsidiary of Autodesk) and Dutchco will be the only voting shareholders of
New Discreet.
As of the Effective Time, Autodesk, New Discreet, Dutchco and the Trustee
will enter into the Voting and Exchange Trust Agreement under which Autodesk
will issue the Special Voting Share to the Trustee for the benefit of the
holders of the New Discreet Exchangeable Shares (the "Beneficiaries"). The
Special Voting Share will carry the number of votes, exercisable at any
meeting at which Autodesk Stockholders are entitled to vote, equal to the
number of votes that the outstanding New Discreet Exchangeable Shares not
owned by Autodesk or its subsidiaries and affiliates would be entitled to vote
if exchanged for Autodesk Common Stock. The Voting Rights attaching to Special
Voting Share will be similarly exercisable with respect to any written consent
sought from the Autodesk Stockholders.
Each Beneficiary on the record date for any meeting at which Autodesk
Stockholders are entitled to vote will be entitled to instruct the Trustee to
exercise that number of the votes attached to the Special Voting Share for
each New Discreet Exchangeable Share held by such Beneficiary equal to the
number of votes that such New Discreet Exchangeable Share would be entitled to
if exchanged for Autodesk Common Stock. The Trustee will exercise each vote
attached to the Special Voting Share only as directed by the relevant
Beneficiary and, in the absence of instructions from a Beneficiary as to
voting, will not exercise such votes. Each Beneficiary may, upon instructing
the Trustee, obtain a proxy from the Trustee entitling the Beneficiary to vote
directly at the relevant meeting the votes attached to the Special Voting
Share to which the Beneficiary is entitled.
The Trustee will send to the Beneficiaries the notice of each meeting at
which Autodesk Stockholders are entitled to vote, together with the related
meeting materials and a statement as to the manner in which the Beneficiary
may instruct the Trustee to exercise the votes attaching to the Special Voting
Share, at the same time
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as Autodesk sends such notice and materials to the Autodesk Stockholders. The
Trustee will also send to the Beneficiaries copies of all information
statements, interim and annual financial statements, reports and other
materials sent by Autodesk to the Autodesk Stockholders at the same time as
such materials are sent to the Autodesk Stockholders. To the extent such
materials are provided to the Trustee by Autodesk, the Trustee will also send
to the Beneficiaries all materials sent by third parties to Autodesk
Stockholders, including dissident proxy circulars and tender and exchange
offer circulars, as soon as possible after such materials are first sent to
Autodesk Stockholders or received by Autodesk.
All rights of a Beneficiary to exercise or cause to be exercised votes
attached to the Special Voting Share will cease upon the exchange, redemption
or other cancellation of New Discreet Exchangeable Shares for Autodesk Common
Stock.
Dividend Rights. Under the share provisions of the New Discreet Exchangeable
Shares, holders of New Discreet Exchangeable Shares will be entitled to
receive dividends which are intended, so far as possible, to be functionally
and economically equivalent to those declared on Autodesk Common Stock as
follows:
(i) in the case of a cash dividend declared on Autodesk Common Stock,
holders of each New Discreet Exchangeable Share will be entitled to receive
the Canadian Dollar Equivalent of the dividend declared on each share of
Autodesk Common Stock;
(ii) in the case of a stock dividend declared on Autodesk Common Stock
which is payable in Autodesk Common Stock, holders of each New Discreet
Exchangeable Share will be entitled to receive such number of New Discreet
Exchangeable Shares as is equal to the number of shares of Autodesk Common
Stock to be paid as a dividend on each share of Autodesk Common Stock; and
(iii) in the case of a dividend declared on Autodesk Common Stock in
property other than in cash or Autodesk Common Stock, holders of each New
Discreet Exchangeable Share will be entitled to receive such type and
amount of property as is the same or economically equivalent to (as
determined by the board of directors of New Discreet) the type and amount
of property declared as a dividend on each share of Autodesk Common Stock.
The record date for the determination of the holders of New Discreet
Exchangeable Shares entitled to receive payment of, and the payment date for,
any dividend declared on New Discreet Exchangeable Shares shall be the same
dates as the record date and payment date, respectively, for the corresponding
dividend on Autodesk Common Stock.
Retraction Rights of Holder and Dutchco Retraction Call Rights. Pursuant to
the share provisions of the New Discreet Exchangeable Shares, subject to
applicable law and the overriding Retraction Call Right of Dutchco described
below, holders of New Discreet Exchangeable Shares shall be entitled at any
time to require New Discreet to retract any or all such New Discreet
Exchangeable Shares and to receive, for each New Discreet Exchangeable Share,
an amount equal to the market price of a share of Autodesk Common Stock as of
the last Business Day immediately preceding the Retraction Date (as defined
below), plus an additional amount equal to the Dividend Amount, which shall be
satisfied by New Discreet causing to be delivered to such holder one share of
Autodesk Common Stock for each such New Discreet Exchangeable Share and paying
to such holder the Dividend Amount.
Holders of New Discreet Exchangeable Shares may effect such retraction by
presenting a certificate or certificates to New Discreet or its transfer agent
representing the number of New Discreet Exchangeable Shares the holder desires
to retract, together with a written request (a "Retraction Request")
specifying the number of New Discreet Exchangeable Shares the holder wishes
New Discreet to retract and the date upon which the holder desires to receive
shares of Autodesk Common Stock (which date shall be not less than three
Business Days nor more than ten Business Days after the date on which such
Retraction Request is received by New Discreet, provided that in the event
that no such Business Day is specified in the Retraction Request, the
Retraction Date shall be the tenth Business Day after receipt of the
Retraction Request by New Discreet) (the "Retraction Date"), and such other
documents as may be required to effect the retraction of the New Discreet
Exchangeable
79
Shares. As a result, holders of New Discreet Exchangeable Shares should be
aware that they may not know the value of the shares of Autodesk Common Stock
they will receive in fulfillment of their Retraction Request in the event they
specify a Retraction Date which falls later than three business days after
they make the Retraction Request, fail to specify a Retraction Date or fail to
ensure that their Retraction Request is received by New Discreet on the date
it is made. This is because such holders may not be able to sell the Autodesk
Common Stock underlying their New Discreet Exchangeable Shares on the date of
their Retraction Request, since they will not be able to ensure that shares of
Autodesk Common Stock will be available for delivery to the buyer on the
settlement date. The value of the shares of Autodesk Common Stock delivered to
such holders on the Retraction Date may be higher or lower than the value of
such shares on the date of their Retraction Request. See "Risk Factors--Risks
Relating to Exchange of New Discreet Exchangeable Shares."
In addition, in the event that, on or prior to the Redemption Date, any
holder of the New Discreet Exchangeable Shares attempts to transfer any such
shares to any other person or entity (any such attempt, an "Attempted
Transfer"), then such holder shall, by such action, be deemed to have made a
Retraction Request with respect to those of such holder's New Discreet
Exchangeable Shares that are the object of such Attempted Transfer as of the
date of the Attempted Transfer and, subject to applicable law and the
overriding Redemption Call Right of Dutchco described above, New Discreet
shall, upon notification of such Retraction Request, deliver shares of
Autodesk Common Stock in satisfaction of such request within three Business
Days of such notification.
Upon receipt of a Retraction Request, New Discreet shall immediately notify
Autodesk and Dutchco of such request. Autodesk or Dutchco shall thereafter
have two Business Days in which to notify New Discreet that Dutchco intends to
exercise its overriding Retraction Call Right to purchase all, but not less
than all, of the New Discreet Exchangeable Shares submitted by the holder
thereof for retraction. The purchase price for each such New Discreet
Exchangeable Share purchased by Dutchco shall be the amount equal to the
market price of a share of Autodesk Common Stock as of the last Business Day
immediately preceding the Retraction Date, plus an additional amount equal to
the Dividend Amount, and shall be satisfied by Dutchco causing to be delivered
to such holder one share of Autodesk Common Stock for each such New Discreet
Exchangeable Share and paying to such holder the Dividend Amount.
Redemption Rights of New Discreet and Dutchco Redemption Call
Rights. Pursuant to the share provisions of the New Discreet Exchangeable
Shares, subject to applicable law, certain limited exceptions and the
overriding Redemption Call Right of Dutchco described below, on a date eleven
years from the Effective Time (the "Final Redemption Date"), New Discreet
shall redeem all, but not less than all, of the then outstanding New Discreet
Exchangeable Shares by payment of an amount equal to the market price of a
share of Autodesk Common Stock as of the last Business Day immediately
preceding the Final Redemption Date, plus an additional amount equal to the
Dividend Amount for each New Discreet Exchangeable Share so redeemed, which
shall be satisfied by New Discreet causing to be delivered to such holder one
share of Autodesk Common Stock for each such New Discreet Exchangeable Share
and paying to such holder the Dividend Amount.
Dutchco shall have the overriding redemption call right, notwithstanding any
proposed redemption of the New Discreet Exchangeable Shares by New Discreet as
outlined above, to purchase on the Final Redemption Date all, but not less
than all, of the outstanding New Discreet Exchangeable Shares by payment of an
amount equal to the market price of a share of Autodesk Common Stock as of the
last Business Day immediately preceding the Final Redemption Date, plus an
additional amount equal to the Dividend Amount for each New Discreet
Exchangeable Share so redeemed, which shall be satisfied by Dutchco causing to
be delivered to such holder one share of Autodesk Common Stock for each such
New Discreet Exchangeable Share and paying to such holder the Dividend Amount.
New Discreet shall, at least 120 days before the Final Redemption Date,
provide Autodesk, Dutchco and each holder of New Discreet Exchangeable Shares
with written notice of New Discreet's intended redemption of the New Discreet
Exchangeable Shares and/or Dutchco's exercise of Dutchco's Redemption Call
Right, as the case may be.
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Liquidation Exchange Rights of Holders and Dutchco Liquidation Call
Rights. Pursuant to the Voting and Exchange Trust Agreement, upon the
occurrence and during the continuance of an "Insolvency Event" with respect to
New Discreet, a Beneficiary may instruct the Trustee to require Dutchco to
purchase any or all of the New Discreet Exchangeable Shares held by the
Beneficiary. "Insolvency Event" will be defined to include (i) any insolvency
or bankruptcy proceeding instituted by or against New Discreet, including any
such proceeding under the Companies Creditors' Arrangement Act (Canada) and
the Bankruptcy and Insolvency Act (Canada), (ii) the admission in writing by
New Discreet of its inability to pay its debts generally as they become due
and (iii) the inability of New Discreet, as a result of solvency requirements
of applicable law, to redeem any New Discreet Exchangeable Shares tendered for
retraction. Immediately upon the occurrence of an Insolvency Event or any
event which may, with the passage of time or the giving of notice, become an
Insolvency Event, New Discreet, Autodesk and/or Dutchco, will give written
notice thereof to the Trustee. As soon as practicable thereafter, the Trustee
will then notify each Beneficiary of such event or potential event and will
advise the Beneficiary of its rights as described above.
Under the terms of the Articles of Amalgamation, Dutchco will be granted the
overriding right, in the event of and notwithstanding the proposed voluntary
or involuntary liquidation, dissolution or winding-up of New Discreet, to
purchase all, but not less than all, of the New Discreet Exchangeable Shares
then outstanding and, upon the exercise by Dutchco of such right, the holders
of New Discreet Exchangeable Shares will be obligated to sell such shares to
Dutchco. The purchase by Dutchco of all the outstanding New Discreet
Exchangeable Shares upon the exercise of such right will occur on the
effective time of the voluntary or involuntary liquidation, dissolution or
winding-up of New Discreet. The purchase price payable by Dutchco for each New
Discreet Exchangeable Share will be equal to the market price of a share of
Autodesk Common Stock as of the last Business Day immediately prior to the
effective time of such voluntary or involuntary liquidation, dissolution or
winding up of New Discreet, plus an additional amount equal to the Dividend
Amount, and shall be satisfied by Dutchco causing to be delivered to such
holder one share of Autodesk Common Stock for each such New Discreet
Exchangeable Share and paying to such holder the Dividend Amount.
If, as a result of solvency provisions of applicable law, New Discreet is
unable to redeem all New Discreet Exchangeable Shares specified in a
Retraction Request and provided that Dutchco has not exercised its Retraction
Call Right with respect to such shares and the Beneficiary has not revoked the
Retraction Request, the Beneficiary will be deemed to have exercised its right
to instruct the Trustee to require Dutchco to purchase the unredeemed New
Discreet Exchangeable Shares and Dutchco will be required to purchase such
shares from the Beneficiary in the manner set forth above.
Automatic Exchange Rights in the Event of the Insolvency of Autodesk. Under
the Voting and Exchange Trust Agreement, in the event of the voluntary or
involuntary liquidation, dissolution or winding-up of Autodesk, Dutchco will
be required to purchase each outstanding New Discreet Exchangeable Share for a
purchase price equal to the market price of a share of Autodesk Common Stock
as of the last Business Day immediately prior to the effectiveness of such
voluntary or involuntary liquidation, dissolution or winding up of Autodesk,
plus an additional amount equal to the Dividend Amount, which shall be
satisfied by Dutchco causing to be delivered to such holder one share of
Autodesk Common Stock for each such New Discreet Exchangeable Share and paying
to such holder the Dividend Amount.
Representations and Warranties
In the Acquisition Agreement, Discreet, on the one hand, and each of
Autodesk, Dutchco, ACI, Autodesk Quebec and Amalgamation Sub, on the other
hand, have made customary representations and warranties to the other
regarding, among other things, (i) its due incorporation and qualification and
the due incorporation and qualification of each of its subsidiaries; (ii) its
capitalization; (iii) its articles of incorporation and by-laws; (iv) its
corporate power and authority to enter into, and its due authorization,
execution and delivery of, the Acquisition Agreement; (v) receipt of required
governmental approvals; (vi) the absence of any material adverse changes in
its business or condition; (vii) its securities laws filings; (viii) the
performance of its obligations under the Acquisition Agreement and the
consummation of the Transactions not violating its articles and by-laws,
81
applicable law and certain material agreements (and the current compliance
therewith); (ix) its financial statements; (x) its intellectual property; (xi)
its insurance; (xii) absence of material litigation; (xiii) its tax returns
and the payment of certain taxes; (xiv) the possession of and compliance with
certain governmental licenses; (xv) the material accuracy of this Proxy
Circular and the Form S-3 and Form S-4; (xvi) the absence of certain
restrictions on material business practices; (xvii) the absence of undisclosed
brokers; (xviii) the absence of certain transactions with officers and
directors; (xix) the absence of any actions taken which would affect the
treatment of the Transactions as a pooling transaction for accounting
purposes; and (xx) the votes required to approve the Transactions. In
addition, Discreet has made representations and warranties to Autodesk with
respect to title to its properties and assets, labor and employment relations,
employee benefit plans, the binding nature of its material contracts and
certain environmental matters. Autodesk has additionally made representations
and warranties to Discreet with respect to the Autodesk Board's recommendation
to the Autodesk Stockholders with respect to the Autodesk Resolution. Each of
the parties has also agreed to give the other prompt notice of any
inaccuracies in its representations and warranties, as well as notice of any
events that may result in the failure of any conditions or covenants under the
Acquisition Agreement to be satisfied. Such representations and warranties
will not survive consummation of the Transactions.
Business of Autodesk Pending Consummation of the Transactions
During the period from the date of the Original Agreement until the
termination of the Acquisition Agreement or the Effective Time, except as
otherwise consented to by Discreet in writing, which consent shall not be
unreasonably withheld, Autodesk has agreed that Autodesk will, among other
things, operate its business in accordance in the ordinary course, pay debts
and Taxes when due subject to good faith disputes over such debts or Taxes and
perform other obligations when due, except to the extent failure to do any of
the foregoing would not have a Material Adverse Effect (as such term is
defined in the Acquisition Agreement and in "--Conditions to the
Transactions," below).
Business of Discreet Pending Consummation of the Transactions
Under the terms of the Acquisition Agreement, for a period from the date of
the Original Agreement and continuing until the earlier of the termination of
the Acquisition Agreement or the Effective Time, and except for certain
disclosed actions and otherwise agreed to by Dutchco in writing, Discreet has
agreed that Discreet and its subsidiaries will, among other things, conduct
their businesses in accordance with their ordinary course of business or in
accordance with the provisions of the Acquisition Agreement and in a manner
consistent with past practices, and use commercially reasonable efforts to
preserve substantially intact their respective business organizations, to keep
available the services of their present officers, employees and consultants,
to take all commercially reasonable action necessary to prevent the loss,
cancellation, abandonment, forfeiture or expiration of any Discreet
intellectual property and to preserve their present relationships with
customers, suppliers and other persons with whom they have significant
business relations, except in each case where the failure to do so could not
reasonably be expected to have a "Material Adverse Effect" (as such term is
defined in the Acquisition Agreement and in "--Conditions to the
Transactions," below) on the business of Discreet or its subsidiaries.
In particular, subject to certain exceptions set forth in a disclosure
schedule provided by Discreet to Autodesk and Dutchco, Discreet and its
subsidiaries have agreed, among other things, not to take any of the following
actions without the prior written consent of Dutchco, which shall not be
unreasonably withheld: (i) amend or otherwise change Discreet's articles of
incorporation (the "Discreet Articles") or by-laws (the "Discreet By-laws");
(ii) issue, sell, pledge, dispose of or encumber, or authorized the issuance,
sale, pledge, disposition or encumbrance of any class of shares in the share
capital of Discreet, or any options, warrants convertible securities or other
rights of any kind to acquire any shares of Discreet's share capital, or any
other ownership interest of Discreet, subject to certain exceptions;
(iii) sell, pledge, dispose of or encumber material assets except in the
ordinary course of business and in a manner consistent with past practice and
dispositions of obsolete or worthless assets; (iv) amend or change the period
(or permit any acceleration, amendment or change) of exercisability of options
or restricted stock granted under the Discreet Stock Option Plans or the
Discreet Employee Stock Purchase Plan or authorize cash payments in exchange
for any options granted under such plans;
82
(v) declare, set aside, make or pay any dividend or other distribution with
respect to any shares in the share capital of Discreet, except that a wholly
owned subsidiary may declare and pay a dividend to its parent; (vi) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock; (vii) amend the terms of,
repurchase, redeem or otherwise acquire any of its securities; (viii) dispose
of any intellectual property of Discreet or its subsidiaries, or amend or
modify any existing agreements with respect to any such intellectual property
or third party intellectual property rights, other than nonexclusive object
and source code licenses in the ordinary course of business consistent with
past practice or industry standards for such licensing or distribution; (ix)
acquire any business organization or material amount of assets; (x) incur any
material indebtedness or liability for indebtedness except in the ordinary
course of business consistent with past practice; (xi) authorize any capital
expenditures or purchase of fixed assets which are, in the aggregate, in
excess of US$6,000,000 for Discreet and its subsidiaries, taken as a whole;
(xii) increase the compensation payable to its officers or employees, except
for increases in accordance with past practice, or grant severance or
termination pay to, or enter into any employment or severance agreement with,
any director, officer or other Discreet employee, or establish, adopt, enter
into or amend any employee plan of Discreet or its subsidiaries, except as may
be required by applicable law; (xiii) take any action to change material Tax
or accounting policies or procedures, other than as required by law or US
GAAP; (xiv) make any material Tax election inconsistent with past practices or
settle or compromise a material federal, state, local or foreign Tax liability
or agree to an extension of a statute of limitations, except to the extent the
amount of any such settlement has been reserved for on the Discreet balance
sheet; (xv) pay, discharge or satisfy any material claims, liabilities or
obligations, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the Discreet financial statements or incurred
in the ordinary course of business and consistent with past practice; (xvi)
take any action to amend or terminate any of its employee plans, except as may
be required by law (xvii) take or allow to be taken or fail to take any act or
omission which would jeopardize the treatment of the Transactions as a pooling
of interests for accounting purposes under US GAAP; (xviii) modify, amend or
terminate any Covered Agreement, other than in the ordinary course of business
consistent with past practice; or (xix) take, or agree in writing or otherwise
to take, any of the actions described in clauses (i) through (xviii) above, or
that would make any of the representations or warranties of Discreet contained
in the Acquisition Agreement untrue or incorrect or prevent Discreet from
performing or cause Discreet not to perform its covenants thereunder or result
in any of the conditions to the Transactions not being satisfied.
Non-Solicitation By Discreet of Alternative Transactions
Discreet has agreed that from and after the date of the Original Agreement
until the earlier of the Effective Time or the termination of the Acquisition
Agreement, Discreet shall not, directly or indirectly, through any officer,
director, employee, representative or agent of Discreet or any of its
subsidiaries, take any action to initiate, solicit or encourage (including by
way of furnishing any person any non-public information, except as permitted
in Section 4.2(e) of the Acquisition Agreement) or, subject to the terms of
the immediately following sentence, participate in any discussions or
negotiations with any persons who are considering or who have made any
inquiries or proposals regarding any merger, amalgamation, take-over bid, sale
of substantial assets, sale of shares of capital stock (including without
limitation by way of a tender offer) or similar transactions involving
Discreet or any of its subsidiaries (any of the foregoing inquiries or
proposals being referred to herein as an "Acquisition Proposal").
Notwithstanding anything to the contrary contained in Section 4.2(a) of the
Acquisition Agreement or in any other provision of the Acquisition Agreement,
Discreet may, to the extent the Discreet Board determines, in good faith,
after consultation with outside legal counsel, that the Discreet Board's
fiduciary duties under applicable law require it to do so, participate in
discussions or negotiations with, and, subject to the requirements of Section
4.2(d) of the Acquisition Agreement furnish information to any person, entity
or group after such person, entity or group has delivered to Discreet an
unsolicited bona fide Acquisition Proposal which the Discreet Board in its
good faith and reasonable judgment determines, after consultation with its
independent financial advisors, would result in a transaction more favorable
to the Discreet Shareholders than the transactions contemplated by the
Acquisition Agreement (a "Superior Proposal"). In addition, notwithstanding
any other provision of the Acquisition Agreement, in connection with a
possible Acquisition Proposal, Discreet may refer
83
to any third party to Section 4.2 of the Acquisition Agreement or make a copy
of the No Solicitation provisions of the Acquisition Agreement available to a
third party. In the event Discreet receives a Superior Proposal, nothing
contained in the Acquisition Agreement (but subject to the terms of the No
Solicitation provisions of the Acquisition Agreement) will prevent the
Discreet Board from accepting, approving or recommending such Superior
Proposal to the Discreet Shareholders, if the Discreet Board determines in
good faith, after consultation with outside legal counsel, that such action is
required by its fiduciary duties under applicable law. In such case, the
Discreet Board may withdraw, modify or refrain from making its recommendation
of the Transactions and, to the extent it does so, Discreet may refrain from
making soliciting proxies and taking such other action necessary to secure the
vote of the Discreet Shareholders; provided, however, that Discreet shall not
accept, approve or recommend to the Discreet Shareholders, or enter into any
agreement concerning, a Superior Proposal for a period of not less than three
Business Days after Autodesk's receipt of a copy of the Superior Proposal (or
a reasonably detailed written description of the significant terms and
conditions thereof, if such proposal is not in writing).
Notwithstanding the foregoing, nothing contained in the Acquisition
Agreement will prohibit Discreet from complying with Rules 14d-9 and 14e-2
under the Securities Exchange Act; provided, however, that, in complying with
such rules, Discreet has agreed that it will not make or authorize any
recommendation of any Acquisition Proposal unless such proposal constitutes a
Superior Proposal.
Discreet has agreed that it will immediately (and no later than 24 hours)
notify Autodesk and Dutchco after receipt of any written Acquisition Proposal
or any request for nonpublic information relating to Discreet in connection
with an Acquisition Proposal or for access to the properties, books or records
of Discreet or any subsidiary by any person or entity that informs the
Discreet Board of such subsidiary that it is considering making, or has made,
an Acquisition Proposal. Such notice to Autodesk and Dutchco must be made
orally and in writing and must indicate in reasonable detail the terms and
conditions of such proposal, inquiry or contact.
If the Discreet Board receives a request for material nonpublic information
by a party who makes a bona fide Acquisition Proposal and the Discreet Board
determines that such proposal is a Superior Proposal, then, and only in such
case, Discreet may, subject to the execution of a confidentiality agreement
substantially similar to that then in effect between Discreet and Autodesk,
provide such party with access to information regarding Discreet, which access
shall be no more extensive than that provided to Autodesk.
Discreet has agreed to immediately cease and cause to be terminated any
existing discussions or negotiations with any parties (other than Autodesk,
Dutchco, and Amalgamation Sub) conducted prior to execution of the Acquisition
Agreement with respect to any of the foregoing. Discreet agrees not to release
any third party from any confidentiality or standstill agreement with respect
to any of the foregoing to which Discreet is a party.
Discreet has agreed to ensure that the officers, directors, employees and
agents of Discreet and its subsidiaries, and any investment bankers or other
agents, advisors, or representatives retained by Discreet, are aware of the no
solicitation restrictions, and shall be responsible for any breach of Section
4.2 of the Acquisition Agreement by such bankers, officers, directors,
employees, agents, advisors or representatives.
Indemnification
From and after the Effective Time, (i) New Discreet and Autodesk will
fulfill and honor in all respects the obligations of Discreet and its
subsidiaries pursuant to the indemnification provisions in the Discreet
Articles and the Discreet By-laws existing as in effect on the date of the
Acquisition Agreement with respect to Discreet's directors and officers
(including without limitation advancement of legal and other expenses to the
extent provided for in the Discreet Articles and Discreet By-Laws), and (ii)
in the event any of Discreet's directors or officers is or becomes involved in
any capacity in any action, proceeding or investigation in connection with any
matter relating to the Acquisition Agreement or the transactions contemplated
thereby occurring on or prior to the Effective Time, Autodesk will, or will
cause New Discreet to, pay as incurred such reasonable legal and
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other expenses (including the cost of any investigation and preparation)
incurred in connection therewith, subject to an undertaking to repay such
amounts as required by applicable law.
Autodesk and New Discreet will indemnify each present director, officer,
employee, fiduciary and agent of Discreet or any of its subsidiaries
(collectively, the "Indemnified Parties"), to the fullest extent permitted
under applicable law or under Autodesk's or New Discreet's, as the case may
be, Bylaws, against any costs or expenses (including attorneys' fees),
judgments, fines, losses, claims, damages, liabilities and amounts paid in
settlement in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to any action or omission occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by the Acquisition Agreement), and to pay as incurred such legal
and other expenses (including the costs of any investigation and preparation)
incurred in connection therewith, subject to an undertaking to repay such
amounts as required by applicable law.
For a period of five years after the Effective Time, Autodesk and Dutchco
will, or will cause New Discreet to, provide officers' and directors'
liability insurance in respect of acts or omissions occurring on or prior to
the Effective Time covering each person covered by Discreet's officers' and
directors' liability insurance policy prior to the Effective Time on terms
substantially similar to those of the policy in effect as of the date of the
Acquisition Agreement.
Conditions to the Transactions
General Conditions to the Transactions. Consummation of the Transactions is
subject to the satisfaction of various conditions, including (i) the
effectiveness of the Form S-4, (ii) if no exemption from registration under
the Securities Act is available, the effectiveness of the Form S-3 (iii) the
absence of any stop order or proceedings seeking a stop order initiated or
threatened by the SEC or any provincial securities regulatory authority in
Canada or any similar proceedings relating to the Form S-4 or Form S-3, if
any, or this Proxy Circular; (iv) the approval and adoption of theAutodesk
Resolution and the Discreet Resolution by the requisite affirmative vote of
the Autodesk Stockholders and the Discreet Shareholders, respectively; (v) the
waiting period under the HSR Act applicable to the consummation of the
Transactions having expired or having been terminated; (vi) the receipt by
each of Autodesk, Dutchco and Discreet of a notice (if required) from the
responsible Minister under the Investment Canada Act (Canada) that he is
satisfied or deemed to be satisfied that the Transactions are likely to be of
net benefit to Canada; (vii) the filing by Autodesk, Dutchco and Discreet of a
notice and information (if required) under the Competition Act (Canada) and
the expiration of the applicable waiting period; (viii) the absence of any
temporary restraining order, preliminary or permanent injunction or other
legal restraints, or prohibitions, statutes, rules, regulations or orders
preventing consummation of the Transactions, and the absence of any
proceedings brought by any governmental authority making consummation of the
Transactions illegal; (ix) the approval for listing, subject to notice of
issuance, of the Autodesk Common Stock to be issued in the Transactions and
any additional shares of Autodesk Common Stock to be issued as a result of the
exercise of rights attaching to the New Discreet Exchangeable Shares; (x) the
receipt by Autodesk, Dutchco and Discreet of written opinions of their
respective Canadian tax counsel to the effect that, provided that (i) the
adjusted cost base to a holder of New Discreet Class B Shares that are
redeemed by New Discreet for New Discreet Exchangeable Shares in connection
with the Transactions exceeds the aggregate of (A) the fair market value of
the Voting Rights and Exchange Rights received by the holder in respect of
such holder's New Discreet Exchangeable Shares and (B) any cash received by
such holder in lieu of a fraction of a New Discreet Exchangeable Share and
(ii) the holder files the appropriate elections with the relevant tax
authorities within the required time such that the holder's proceeds of
disposition do not exceed the adjusted cost base to the holder of such New
Discreet Class B Shares, such holder will not realize a capital gain or a
capital loss for purposes of the Canadian Tax Act on the Amalgamation or on
the redemption of such New Discreet Class B Shares; (xi) New Discreet being a
"public corporation" under the Canadian Tax Act; (xii) the receipt by
Autodesk, Dutchco and Discreet of the Affiliate Agreements (as defined below)
(xiii) Autodesk shall have received a letter from Autodesk's independent
auditors regarding concurrence with Autodesk management's conclusion as to the
appropriateness of pooling-of-interests accounting treatment for the
Transactions and Discreet shall have
85
received a letter from Discreet's independent auditors to the effect that
Discreet qualifies as an entity that may be a party to a business combination
for which the pooling-of-interests method of accounting would be available
(xiv) the representations and warranties made by each of Autodesk and Discreet
being true and correct in all respects on and as of the Effective Time, except
(A) for changes contemplated in the Acquisition Agreement, (B) for those
representations and warranties which address matters only as of a particular
date (which shall remain true as of that date), or (C) where the failure to be
true and correct would not have and could not reasonably be expected to have a
Material Adverse Effect (as defined below) on the party making such
representation, and each of Autodesk, Dutchco and Discreet have received of an
officer's certificate from the other party to this effect; (xv) all agreements
and covenants required by the Acquisition Agreement to have been performed or
complied with prior to or on the Effective Date having been so performed or
complied with in all material respects, and each of Autodesk, Dutchco and
Discreet having received an officer's certificate from the other party to this
effect; (xvi) the obtaining by Autodesk, Dutchco and Discreet of all material
consents, waivers, approvals, authorizations or orders required to be obtained
and filings required to be made for the authorization, execution and delivery
of the Acquisition Agreement and the Ancillary Documents (to the extent they
are parties thereto) and the consummation of the transactions contemplated
thereby; and (xvii) the absence of any temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal regulatory restraint provision,
materially limiting or restricting Autodesk's conduct or operation of the
business of Discreet following consummation of the Transactions or any of the
other transactions contemplated by the Acquisition Agreement, the absence of
any investigation or other inquiry that is reasonably likely to result in the
foregoing and the absence of any pending or threatened proceeding of an
administrative agency or commission or other governmental entity, domestic, or
foreign, seek the foregoing.
Any of the conditions in the Acquisition Agreement may be waived by the
party benefitted thereby.
Definition of Material Adverse Effect. The term Material Adverse Effect is
defined in the Acquisition Agreement to mean any change or effect that,
individually or when taken together with all other such changes or effects
that have occurred prior to the date of determination of the occurrence of the
Material Adverse Effect, is or is reasonably likely to be materially adverse
to the business, assets (including intangible assets), financial condition or
results of operations of Discreet and its subsidiaries or Autodesk and its
subsidiaries, as the case may be, in each case taken as a whole. None of the
following shall be deemed to constitute a Material Adverse Effect with respect
to either party: (a) any change in the market price or trading volume of the
Discreet Common Shares or Autodesk Common Stock, as appropriate; (b) any
adverse effect on the bookings, revenues or earnings of Discreet or Autodesk,
or any delay in or reduction or cancellation of such party's product orders,
following the execution of the Original Agreement or the Acquisition Agreement
which is reasonably attributable to the announcement of the execution of the
Original Agreement or the Acquisition Agreement and the transactions
contemplated thereby; (c) any change arising out of conditions affecting the
economy or industry of such party in general; (d) the failure, in and of
itself, to meet analysts' expectations (it being understood that the
underlying causes of such failure will not be excluded from the definition of
Material Adverse Effect except as otherwise provided in this definition); or
(e) employee attrition under certain circumstances.
Termination, Amendment and Waiver
The Acquisition Agreement may be terminated and the Transactions may be
abandoned prior to the Effective Time, notwithstanding the obtaining of
requisite approval by the Autodesk Stockholders and the Discreet Shareholders,
under the following circumstances: (i) by mutual written consent duly
authorized by the boards of directors of Autodesk, Discreet and Dutchco (ii)
by any of Autodesk, Discreet or Dutchco, if the Transactions shall not have
been consummated by March 29, 1999 or such later date as is agreed to by
Discreet, Autodesk and Dutchco (the "Final Date") and if the terminating party
has not caused the failure of the Transactions to be consummated by its own
failure to fulfill any of its obligations under the Acquisition Agreement and
the Amalgamation Agreement to occur on or before such date; (iii) by any of
Autodesk, Discreet or Dutchco if a court of competent jurisdiction or a
governmental, regulatory or administrative agency or commission shall have
issued a non-appealable final order, decree, ruling or any other action
permanently
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prohibiting the Transactions, provided that the terminating party has complied
with its obligations regarding access to information and confidentiality under
the Acquisition Agreement; (iv) by any of Autodesk, Discreet or Dutchco, if
the Discreet Stockholders or the Autodesk Shareholders fail to approve the
Autodesk Resolution or the Discreet Resolution, respectively, provided that
the terminating party has complied with its obligations regarding this Proxy
Circular and such party's shareholders' meeting; (v) by Autodesk or Dutchco if
the Discreet Board withdraws, modifies or changes its recommendation of the
Transactions in a manner adverse to Autodesk or Dutchco, or has recommended to
the Discreet Shareholders or publicly announced a "neutral" position with
respect to an Acquisition Proposal or shall have failed to reject as
inadequate or shall have failed to reaffirm its recommendation of the
Acquisition Agreement and the Transactions within ten Business Days of
announcement or commencement of an Acquisition Proposal; (vi) by Discreet, if
the Autodesk Board or the Board of Directors of Dutchco withdraws, modifies or
changes its recommendation in favor of issuance of the Autodesk Resolution or
shall have resolved to do so; (vii) by Autodesk, Dutchco or Discreet, as the
case may be, in the event of a breach by Discreet, on the one hand, or
Autodesk, Amalgamation Sub, ACI, Autodesk Quebec and/or Dutchco, on the other
hand, respectively, of any representation or warranty, or failure to perform
any covenant, term or provision of the Acquisition Agreement (provided that if
such breach or failure to perform is curable prior to the expiration of 30
days from its occurrence (but in no event later than the Final Date),
Autodesk, Dutchco and Discreet may not terminate the Acquisition Agreement on
this basis as long as Discreet, on the one hand, or Autodesk, Amalgamation
Sub, ACI, Autodesk Quebec and/or Dutchco, on the other hand, respectively,
continue to exercise reasonable efforts to cure such breach or failure unless
and until the earlier of the Final Date and the date such 30 day period
expires without such breach having been cured); and (viii) by any of Autodesk,
Discreet or Dutchco if the Discreet Board shall have recommended, resolved to
accept or accepted a Superior Proposal.
The Acquisition Agreement may be amended by an agreement in writing among
the parties thereto at any time prior to the Effective Time; provided,
however, that, after approval of the Discreet Resolution, no amendment may be
made which by law requires further approval of the Discreet Shareholders,
without such further approval. At any time prior to the Effective Time, any
party to the Acquisition Agreement may with respect to any other party
thereto, (a) extend the time for the performance of any of the obligations or
other acts, (b) waive any inaccuracies in the representations and warranties
contained in the Acquisition Agreement or in any document delivered pursuant
thereto and (c) waive compliance with any of the agreements or conditions
contained in the Acquisition Agreement. Any such extension or waiver shall be
valid if set forth in an instrument in writing signed by the party or parties
to be bound thereby.
Fees and Expenses
Except as set forth below, all fees and expenses incurred in connection with
the Acquisition Agreement and the Amalgamation Agreement and the transactions
contemplated thereby shall be paid by the party incurring such expenses,
whether or not the Transactions are consummated.
Payments by Discreet to Dutchco. Discreet has agreed to pay Dutchco (i) an
amount equal to $5,000,000 within one Business Day of the earlier to occur of
termination of the Acquisition Agreement under Section 7.1(b) of the
Acquisition Agreement, as a result of Discreet's failure to consummate the
Transactions by the Final Date, Section 7.1(e) of the Acquisition Agreement,
as a result of the Discreet Board withdrawing, modifying or changing its
recommendation of the Transactions, recommending to the Discreet Shareholders,
or taking a "neutral" position with respect to, an Acquisition Proposal or
failing to reject as inadequate, or failing to reaffirm its recommendation of
the Transactions, within ten Business Days after public announcement or
commencement of such Acquisition Proposal or Section 7.1(h), as a result of
the Discreet Board's recommendation, resolution to accept, or acceptance of a
Superior Proposal, or a Discreet Negative Vote (as defined below), plus
(ii) $15,000,000 less any termination fees paid pursuant to the preceding
clause (i), in the event any Acquisition Proposal is consummated within nine
months of the payment referred to in clause (i), if the Acquisition Agreement
is terminated because: (a) the Discreet Board shall have withheld, withdrawn
or modified in a manner adverse to Autodesk its recommendation in favor of
adoption and approval of the Acquisition Agreement and approval of the
Transactions, and at or prior to the time of such action by the
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Discreet Board (x) there shall not have occurred a Material Adverse Effect on
Autodesk and (y) there shall have occurred a Superior Proposal which shall
have been publicly disclosed and not withdrawn; (b) the Discreet Board shall
have recommended a Superior Proposal (other than Autodesk's) to the Discreet
Shareholders; (c) Discreet shall have failed to convene the Discreet Meeting
by March 23, 1999 and there is an Acquisition Proposal outstanding at such
time; or (d) the vote of the Discreet Shareholders approving and adopting the
Discreet Resolution shall not have been obtained by reason of the failure to
obtain the required vote at the Discreet Meeting (a "Discreet Negative Vote"),
and prior to such Discreet Negative Vote there shall have occurred an
Acquisition Proposal with respect to Discreet which shall have been publicly
disclosed and not withdrawn.
If no payment shall have been required by the circumstances described in the
previous paragraph and the Discreet Board shall have withheld, withdrawn or
modified in a manner adverse to Autodesk its recommendation in favor of
adoption and approval of the Acquisition Agreement and approval of the
Transactions, and at or prior to the time of such action by the Discreet Board
there shall not have occurred a Material Adverse Effect on Autodesk and there
shall not be a Superior Proposal at that time outstanding, then Discreet shall
pay to Dutchco $15,000,000 following the earlier of termination of the
Acquisition Agreement pursuant to Section 7.1(e) of the Acquisition Agreement,
as a result of the Discreet Board withdrawing, modifying or changing its
recommendation of the Transactions, recommending to the Discreet Shareholders,
or taking a "neutral" position with respect to, an Acquisition Proposal or
failing to reject as inadequate, or failing to reaffirm its recommendation of
the Transactions, within ten Business Days after public announcement or
commencement of such Acquisition Proposal, or a Discreet Negative Vote.
If no payment shall have been required by the circumstances described in the
previous two paragraphs and (i) there shall be a Discreet Negative Vote and at
or prior to the time of such vote there shall not have occurred a Material
Adverse Effect with respect to Autodesk or (ii) the Acquisition Agreement is
terminated by Dutchco pursuant to Section 7.1(g) of the Acquisition Agreement
upon a breach of any representation, warranty, covenant or agreement by
Discreet, and such breach is not cured within the earlier of 30 days or the
Final Date, then Discreet shall pay to Dutchco an amount equal to $5,000,000
within one Business Day following the earlier to occur of termination of the
Acquisition Agreement pursuant to Section 7.1(g) of the Acquisition Agreement
or a Discreet Negative Vote.
Payments by Dutchco to Discreet. If the Autodesk Board shall have withheld,
withdrawn or adversely modified its recommendation in favor of the Autodesk
Resolution, and at or prior to the time of such action by Autodesk there shall
not have occurred a Material Adverse Effect on Discreet, then Dutchco shall
pay Discreet $15,000,000 within one Business Day following the earlier of (i)
the date of termination of the Acquisition Agreement pursuant to Section
7.1(f) of the Acquisition Agreement due to such withholding, withdrawal or
adverse modification or (ii) the failure to obtain the required vote of
Autodesk Stockholders in favor of the Autodesk Resolution upon a vote taken at
the Autodesk Meeting (an "Autodesk Negative Vote").
If (i) at or prior to the time of the Autodesk Negative Vote there shall not
have occurred a Material Adverse Effect with respect to Discreet, (ii) the
Acquisition Agreement is terminated by Discreet pursuant to Section 7.1(f) of
the Acquisition Agreement upon a breach of any representation, warranty,
covenant or agreement on the part of any of Autodesk, Dutchco, ACI, Autodesk
Quebec or Amalgamation Sub, and such breach is not cured within the earlier of
30 days or the Final Date or (iii) Autodesk shall have failed to convene the
Autodesk Meeting by March 23, 1999, then Dutchco shall pay to Discreet an
amount equal to $5,000,000 within one Business Day following the earlier to
occur of termination of the Acquisition Agreement or an Autodesk Negative
Vote.
Payment of the amounts described above shall not be in lieu of damages
incurred by a party for breach of the Acquisition Agreement.
Assignment
Each of Autodesk, ACI, Amalgamation Sub, Autodesk Quebec and Dutchco may
assign any of its respective rights under the Acquisition Agreement to any
other subsidiary of Autodesk, provided that no such
88
assignment will relieve the assigning party of its obligations under the
Acquisition Agreement. Accordingly, Dutchco may assign certain of its rights
under the Acquisition Agreement to an existing or newly formed subsidiary of
Autodesk.
Confidentiality Agreement
Autodesk and Discreet has each agreed to keep confidential, pursuant to the
confidentiality agreement between the two parties dated July 10, 1998 (the
"Confidentiality Agreement"), information provided to the other party with
respect to the business, properties and personnel of the party furnishing such
information. The Confidentiality Agreement contains terms restricting the
disclosure and use of confidential information exchanged between the two
parties in evaluating the Transactions and otherwise.
Agreements of Autodesk and Discreet Affiliates
Discreet Affiliate Agreements. Rule 145 promulgated under the Securities Act
regulates the disposition of securities of "affiliates" of Discreet in
connection with the Transactions. Discreet has delivered to Autodesk a letter
(the "Affiliate Letter") identifying all persons who are or may be deemed to
be, at the time of the Discreet Meeting, "affiliates" of Discreet for purposes
of Rule 145 under the Securities Act (each such person, a "Discreet
Affiliate"). Discreet has also agreed to use its best efforts to cause each
person who is identified as a Discreet Affiliate in the Affiliate Letter to
deliver to Autodesk, as promptly as possible but in no event later than the
date of this Proxy Circular, a written agreement (a "Discreet Affiliate
Agreement"). Under such Discreet Affiliate Agreements, each Discreet Affiliate
will represent that he or she has been advised that he or she may not sell,
transfer or otherwise dispose of Autodesk Common Stock or New Discreet
Exchangeable Shares issued to the Discreet Affiliate in connection with the
Transactions unless such sale, transfer or other disposition (i) has been
registered under the Securities Act, (ii) is made in compliance with the
requirements of Rule 145 under the Securities Act, or (iii) in the opinion of
counsel reasonably acceptable to Autodesk, is otherwise exempt from
registration under the Securities Act. Every Discreet Affiliate will also
agree to restrict sales of such shares prior to and following the consummation
of the Transactions to comply with the requirements of pooling-of-interests
accounting treatment.
Autodesk Affiliate Agreements. Autodesk has also agreed to use its best
efforts to cause each of its affiliates ("Autodesk Affiliates"), as promptly
as possible but in no event later than the date of this Proxy Circular, an
agreement in which each Autodesk Affiliate will agree to restrict sales of
shares of Autodesk Common Stock held by such Autodesk Affiliate prior to and
following the consummation of the Transactions to comply with the requirements
of pooling-of-interests accounting treatment.
Autodesk and Discreet Voting Agreements
Certain directors and executive officers of Autodesk and Discreet, subject
to such directors' and executive officers' fiduciary duties and
responsibilities to their respective corporation, have agreed to vote or cause
to be voted all of their shares of Autodesk Common Stock or Discreet Common
Shares in favor of the adoption of the Autodesk Resolution and the Discreet
Resolution, respectively, and in favor of any other matter that could
reasonably be expected to facilitate the transaction contemplated by the
Acquisition Agreement and have granted proxies to certain officers of the
other corporation to vote their shares as aforesaid.
Support Agreement
In connection with the Transactions, Autodesk, Dutchco and New Discreet will
enter into the Support Agreement. The Support Agreement provides that no
dividends will be declared or paid on the Autodesk Common Stock unless New
Discreet simultaneously declares and pays an economically equivalent dividend
(after appropriate adjustments for currency translations) on the New Discreet
Exchangeable Shares. The Support Agreement also provides that Autodesk and
Dutchco will do all things necessary to ensure that New Discreet will be able
to make all payments on the New Discreet Exchangeable Shares required in the
event of (a) the
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liquidation, dissolution or winding-up of New Discreet, (b) the retraction of
New Discreet Exchangeable Shares by a holder or (c) the redemption of the New
Discreet Exchangeable Shares by New Discreet.
The Support Agreement also provides that, without the prior approval of New
Discreet and the holders of the New Discreet Exchangeable Shares, Autodesk
will not distribute additional Autodesk Common Stock or rights to subscribe
therefor or other assets or evidences of indebtedness to all or substantially
all holders of Autodesk Common Stock nor change the Autodesk Common Stock nor
effect any reorganization or other transaction affecting the Autodesk Common
Stock, unless the same or an economically equivalent distribution on, or
change to, the New Discreet Exchangeable Shares (or in the rights of the
holders thereof) is made simultaneously. The Board of Directors of New
Discreet is conclusively empowered to determine in good faith and in its sole
discretion whether any corresponding distribution on or change to the New
Discreet Exchangeable Shares is the same as or economically equivalent to any
proposed distribution on or change to the Autodesk Common Stock.
The Support Agreement also provides that so long as there remain outstanding
any New Discreet Exchangeable Shares not owned by Autodesk or any of its
Affiliates, Autodesk will be and remain the direct or indirect beneficial
owner of all outstanding shares of New Discreet other than New Discreet
Exchangeable Shares and the New Discreet Class D Shares.
With the exception of administrative changes for the purposes of adding
covenants for the protection of the holders of the New Discreet Exchangeable
Shares, making certain necessary amendments or curing ambiguities or clerical
errors (in each case provided that the board of directors of each of Autodesk,
Dutchco and New Discreet is of the opinion that such amendments are not
prejudicial to the interests of the holders of the New Discreet Exchangeable
Shares), the Support Agreement may not be amended without the approval of the
holders of the New Discreet Exchangeable Shares.
Autodesk has agreed that it will not, and it will cause its subsidiaries and
affiliates not to, exercise any voting rights attached to New Discreet
Exchangeable Shares owned by it or any of its subsidiaries or Affiliates on
any matter considered at meetings of holders of New Discreet Exchangeable
Shares (including any approval sought from such holders in respect of matters
arising under the Support Agreement.)
Voting and Exchange Trust Agreement
In connection with the Acquisition Agreement, Autodesk, Dutchco, New
Discreet and the Trustee will enter into the Voting and Exchange Trust
Agreement, pursuant to which the Trustee will be granted, for and on behalf
of, and for the use and benefit of, the holders of New Discreet Exchangeable
Shares (i) voting rights with respect to matters presented to Autodesk
Stockholders and (ii) rights relating to the exchange of New Discreet
Exchangeable Shares for shares of Autodesk Common Stock. See "--Description of
New Discreet Exchangeable Shares." The Trustee will also be granted, for and
on behalf of the holders of New Discreet Units, the right to enforce New
Discreet's covenant to redeem such units following the Amalgamation and the
right to enforce Dutchco's covenant to purchase such units following the
Amalgamation for shares of Autodesk Common Stock. See "--Transaction
Mechanics."
Stock Exchange Listings
New Discreet Securities. Autodesk has made application to the WSE to list
the New Discreet Class B Shares, the New Discreet Class E Shares and the New
Discreet Class F Shares, subject to notice of issuance. Such shares will be
delisted immediately upon consummation of the Transactions.
There is no current intention to list the New Discreet Class B Shares, the
New Discreet Class E Shares, New Discreet Class F Shares or the New Discreet
Exchangeable Shares on any other stock exchange in Canada or the United
States.
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Autodesk Common Stock. The Nasdaq National Market has indicated that it will
approve the listing of the additional shares of Autodesk Common Stock issuable
in connection with the Transactions and upon the exchange of New Discreet
Exchangeable Shares in the future, subject to notice of issuance.
There is no current intention to list the shares of Autodesk Common Stock on
any other stock exchange in Canada or the United States.
Eligibility for Investment in Canada
New Discreet Exchangeable Shares, Voting Rights and Exchange Rights. So long
as New Discreet remains a "public corporation" for purposes of the Canadian
Tax Act, the New Discreet Exchangeable Shares will be qualified investments
for trusts governed by registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans. The New Discreet
Exchangeable Shares will be foreign property to such trusts and certain other
tax exempt persons. Such holders should consult their own tax advisors as to
the timing of including the cost of the New Discreet Exchangeable Shares in
the holder's cost of foreign property. The Voting Rights and the Exchange
Rights will not be qualified investments and will be foreign property under
the Canadian Tax Act. However, as indicated under "Material Canadian Federal
and United States Federal Income Tax Considerations to Discreet Shareholders--
Canadian Federal Income Tax Considerations--Discreet Shareholders Resident in
Canada--Redemption of New Discreet Class B Shares in exchange for New Discreet
Exchangeable Shares," Autodesk and Discreet are of the view that the fair
market value of these rights is nominal.
Autodesk Common Stock. The Autodesk Common Stock will be a qualified
investment under the Canadian Tax Act for trusts governed by registered
retirement savings plans, registered retirement income funds and deferred
profit sharing plans so long as such shares remain listed on the Nasdaq
National Market or another prescribed stock exchange. The Autodesk Common
Stock will be foreign property under the Canadian Tax Act.
Regulatory Matters
Under the HSR Act and the rules promulgated thereunder by the FTC, certain
acquisition transactions may not be consummated unless notice has been given
and certain information has been furnished to the Antitrust Division and to
the FTC and specified waiting period requirements have been satisfied.
Autodesk and Discreet each filed with the Antitrust Division and the FTC an
HSR Notice with respect to the Transactions on August 26, 1998. The waiting
periods for the Transactions expired at 11:59 p.m. on the thirtieth day
following the day on which Autodesk's and Discreet's HSR Notices were accepted
by the Antitrust Division and the FTC. Expiration of the applicable waiting
periods will not preclude the FTC or the Antitrust Division from taking such
action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the Transactions or seeking the
divestiture of Discreet by Autodesk, in whole or in part, or the divestiture
or compulsory licensing of substantial assets of Autodesk, Discreet or their
respective subsidiaries. State attorneys general and private parties may also
bring legal actions under the federal or state antitrust laws under certain
circumstances.
Resale of Shares Received in Connection with the Transactions
Canada. Autodesk and Discreet have applied for a ruling of certain
provincial securities regulatory authorities in Canada (the "Commissions")
permitting Canadian residents who are recipients of Autodesk Common Stock
(including those issuable upon exchange of New Discreet Exchangeable Shares),
to resell such securities without being required to file a prospectus with the
Commissions if any such first trade is executed (i) through the facilities of
a stock exchange outside of their province of residence or (ii) on the Nasdaq
National Market. The resale of the New Discreet Exchangeable Shares or the
Autodesk Common Stock within these provinces of Canada is subject to certain
restrictions. Canadian residents who are holders of such securities should
refer to applicable provisions of the securities legislation of their
respective province or consult with their legal advisor.
91
United States. The Autodesk Common Stock issued upon exchange of the New
Discreet Units will be registered under the Securities Act on the Form S-4.
The shares of Autodesk Common Stock issued from time to time upon exchange of
New Discreet Exchangeable Shares will be registered on the Form S-3 pursuant
to Rule 415 under the Securities Act.
All Autodesk Common Stock received by Discreet Shareholders in connection
with the Transactions and from time to time upon exchange of the New Discreet
Exchangeable Shares will be freely transferable under the United States
federal securities laws, except as set forth below. Autodesk Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of Discreet may be resold by such affiliates only in
transactions permitted by the resale provisions of Rule 145(d)(1), (2) or (3)
promulgated under the Securities Act (or Rule 145(d)(1) alone in the case of
such persons who become affiliates of Autodesk upon the completion of the
Transactions) or as otherwise permitted under the Securities Act. Rule
145(d)(1) generally provides that the "affiliates" of a combining company may
not sell securities of the issuer unless pursuant to an effective registration
statement or unless pursuant to the volume, current public information, manner
of sale and timing limitations of Rule 144 (excluding the holding period
requirements of Rule 144). These limitations generally require that (a) any
sales made by an affiliate in any three month period not exceed the greater of
(i) 1% of the outstanding shares of the issuer or (ii) the average weekly
reported volume of trading in such shares on all national securities exchanges
and/or reported through an automated quotation system of a registered
securities association over a four week period and (b) that such sales be made
in unsolicited, open market "brokers transactions" or in transactions directly
with a market maker. Rules 145(d)(2) and (3) generally provide that the
foregoing limitations lapse for non-affiliates of the issuer after a period of
one or two years has elapsed since the date the securities were acquired from
the issuer, respectively. Persons who may be deemed to be affiliates of an
issuer generally include individuals or entities that directly or indirectly
control, are controlled by, or are under common control with, such issuer and
generally include certain officers and directors of such issuer as well as
principal stockholders of such issuer. See "Terms of the Transactions--
Agreements of Autodesk and Discreet Affiliates." Autodesk Common Stock
received by persons who become affiliates of Autodesk upon completion of the
Transactions will also be subject to the requirements of Rule 144, which as to
such stock, will include the requirements of Rule 145(d)(1) listed above in
addition to the requirement of delivery of a Notice of Proposed Sale as set
forth in paragraph (h) of Rule 144. The Form S-4 does not cover any resales of
Autodesk Common Stock received by Discreet affiliates in the Transactions.
All New Discreet Exchangeable Shares received by Discreet Shareholders in
connection with the Transactions will be freely transferable under the United
States federal securities laws, except for shares received by persons who are
deemed "affiliates" of Autodesk or Discreet, which shares will be subject to
the restrictions set forth in the preceding paragraph. Although the New
Discreet Exchangeable Shares are freely tradeable under the United States
federal securities laws as described above, any Attempted Transfer will
constitute a Deemed Retraction Request. See "Description of New Discreet
Exchangeable Shares." Moreover, neither Autodesk nor Discreet has undertaken
to list such shares on any stock exchange or over-the-counter market, and
neither company has any intention of doing so. Accordingly, in order to gain
liquidity for their New Discreet Exchangeable Shares, holders of such shares
must follow the procedures required to exchange their New Discreet
Exchangeable Shares for shares of Autodesk Common Stock, which may be sold on
the Nasdaq National Market. See "Risk Factors--Absence of Trading Market for
New Discreet Exchangeable Shares" and "--Description of New Discreet
Exchangeable Shares."
92
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
give effect to the combination of Autodesk and Discreet on a pooling of
interests basis. The unaudited pro forma combined condensed balance sheet
assumes the Transactions took place on October 31, 1998 and combines
Autodesk's unaudited condensed consolidated balance sheet at that date with
Discreet's historical condensed consolidated balance sheet at September 30,
1998. The unaudited pro forma combined condensed statements of operations
assume that the Transactions took place as of the beginning of each of the
periods presented and combine Autodesk's unaudited condensed statements of
operations for the nine months ended October 31, 1998 and 1997 and the
historical consolidated statements of income for the three fiscal years ended
January 31, 1998, 1997 and 1996 and Discreet's unaudited condensed statements
of operations for the nine months ended September 30, 1998 and 1997 and the
twelve months ended December 31, 1997 and the historical condensed statements
of operations for the eleven months ended June 30, 1997, and the fiscal year
ended July 31, 1996, respectively. Autodesk has not yet determined which
period will be combined for inclusion in its audited consolidated statement of
income after consummation of the Transactions.
The unaudited pro forma combined condensed statements of operations are not
necessarily indicative of operating results which would have been achieved had
the Transactions been consummated as of the beginning of such periods and
should not be construed as representative of future operations.
Autodesk paid quarterly dividends of $0.06 per share with respect to fiscal
years 1996, 1997 and 1998, and in each of the first three quarters of fiscal
year 1999, and currently intends to continue paying such cash dividends on a
quarterly basis. Discreet has never paid any cash dividends on its Common
Shares. Discreet currently intends to retain any earnings for future growth
and therefore does not anticipate paying any cash dividends on its Common
Shares in the foreseeable future.
These unaudited pro forma combined condensed financial statements should be
read in conjunction with the respective audited historical consolidated
financial statements, the unaudited interim financial statements and the notes
thereto of Autodesk and Discreet which are included elsewhere in this Proxy
Circular.
Following the Transactions, the Combined Company will have cash, cash
equivalents, and marketable securities, consisting primarily of high-quality
municipal bonds, tax-advantaged money market instruments, and US treasury
bills, totaling $384.5 million, based on the pro forma combined balance sheets
of Autodesk and Discreet as at October 31, 1998. Autodesk believes that
existing cash and cash from operations will be sufficient to meet present and
anticipated working capital requirements and other cash needs of the Combined
Company for the next twelve months.
93
AUTODESK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
October 31, 1998
(In thousands)
Autodesk Discreet Pro Forma Pro Forma
October 31, 1998 September 30, 1998 Adjustments Combined
---------------- ------------------ ----------- ---------
ASSETS Restated Restated
Current assets:
Cash and cash
equivalents.......... $ 76,640 $ 46,838 $ -- $123,478
Marketable securities. 261,032 -- -- 261,032
Accounts receivable,
net.................. 89,603 27,346 -- 116,949
Inventories........... 6,667 15,474 -- 22,141
Deferred income taxes. 25,296 -- -- 25,296
Prepaid expenses and
other current assets. 19,842 6,411 -- 26,253
-------- -------- -------- --------
Total current
assets............. 479,080 96,069 -- 575,149
Computer equipment,
furniture, and
leasehold improvements,
net.................... 39,160 8,970 -- 48,130
Purchased technologies
and capitalized
software, net.......... 34,640 4,669 -- 39,309
Goodwill, net........... 72,946 17,599 -- 90,545
Deferred income taxes... 14,063 752 -- 14,815
Other assets............ 22,656 5,412 -- 28,068
-------- -------- -------- --------
$662,545 $133,471 $ -- $796,016
======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line
of credit............ $ -- $ 2,803 $ -- $ 2,803
Accounts payable...... 29,660 28,332 -- 57,992
Accrued compensation.. 37,940 4,936 -- 42,876
Accrued income taxes.. 92,685 7,338 -- 100,023
Deferred revenues..... 16,735 6,593 -- 23,328
Other accrued
liabilities.......... 50,507 477 15,000 65,984
-------- -------- -------- --------
Total current
liabilities........ 227,527 50,479 15,000 293,006
Government loan......... -- 1,834 -- 1,834
Deferred income taxes... 499 2,843 -- 3,342
Other liabilities....... 2,120 -- -- 2,120
Stockholders' equity:
Common stock.......... 345,735 108,862 -- 454,597
Retained earnings
(deficit)............ 87,266 (24,914) (15,000) 47,352
Deferred compensation. -- (699) -- (699)
Foreign currency
translation
adjustment........... (602) (4,934) -- (5,536)
-------- -------- -------- --------
Total stockholders'
equity............. 432,399 78,315 (15,000) 495,714
-------- -------- -------- --------
$662,545 $133,471 $ -- $796,016
======== ======== ======== ========
See accompanying notes to unaudited pro forma condensed combined financial
statements.
94
AUTODESK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(In thousands, except per share data)
Autodesk
Fiscal Discreet
Year Ended Twelve Months
January Ended Pro Forma Pro Forma
31, 1998 December 31, 1997 Adjustments Combined
---------- ----------------- ----------- ---------
Restated Restated
Net revenues................ $617,126 $137,501 $ -- $754,627
Costs and expenses:
Cost of revenues.......... 71,338 58,109 -- 129,447
Marketing and sales....... 237,107 28,419 -- 265,526
Research and development.. 122,432 12,868 -- 135,300
General and
administrative........... 88,900 11,352 -- 100,252
Nonrecurring charges, net. 22,187 15,678 -- 37,865
-------- -------- ----- --------
Total costs and
expenses............... 541,964 126,426 -- 668,390
-------- -------- ----- --------
Income from operations...... 75,162 11,075 -- 86,237
Interest and other income,
net........................ 9,644 761 -- 10,405
-------- -------- ----- --------
Income before income taxes.. 84,806 11,836 -- 96,642
Provision for income taxes.. 39,635 10,399 -- 50,034
-------- -------- ----- --------
Net income.................. $ 45,171 $ 1,437 $ -- $ 46,608
======== ======== ===== ========
Basic net income per share.. $ 0.97 $ 0.05 $ -- $ 0.83
======== ======== ===== ========
Diluted net income per
share...................... $ 0.91 $ 0.05 $ -- $ 0.78
======== ======== ===== ========
Shares used in computing
basic net income per share. 46,760 28,125 56,041
======== ======== ========
Shares used in computing
diluted net income per
share...................... 49,860 29,709 59,664
======== ======== ========
See accompanying notes to unaudited pro forma condensed combined financial
statements.
95
AUTODESK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(In thousands, except per share data)
Discreet
Autodesk Eleven Months
Fiscal Year Ended Ended Pro Forma Pro Forma
January 31, 1997 June 30, 1997 Adjustments Combined
----------------- ------------- ----------- ---------
Restated
Net revenues............. $496,693 $101,924 $ -- $598,617
Costs and expenses:
Cost of revenues....... 64,217 47,571 -- 111,788
Marketing and sales.... 199,939 23,206 -- 223,145
Research and
development........... 93,702 9,708 -- 103,410
General and
administrative........ 74,280 6,501 -- 80,781
Nonrecurring charges... 4,738 8,763 -- 13,501
-------- -------- ----- --------
Total costs and
expenses............ 436,876 95,749 -- 532,625
-------- -------- ----- --------
Income from operations... 59,817 6,175 -- 65,992
Interest and other
income, net............. 6,695 990 -- 7,685
-------- -------- ----- --------
Income before income
taxes................... 66,512 7,165 -- 73,677
Provision for income
taxes................... 24,941 6,489 -- 31,430
-------- -------- ----- --------
Net income............... $ 41,571 $ 676 $ -- $ 42,247
======== ======== ===== ========
Basic net income per
share................... $ 0.91 $ 0.02 $ -- $ 0.77
======== ======== ===== ========
Diluted net income per
share................... $ 0.88 $ 0.02 $ -- $ 0.74
======== ======== ===== ========
Shares used in computing
basic net income
per share............... 45,540 27,948 54,763
======== ======== ========
Shares used in computing
diluted net income
per share............... 47,190 28,894 56,725
======== ======== ========
See accompanying notes to unaudited pro forma condensed combined financial
statements.
96
AUTODESK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(In thousands, except per share data)
Autodesk Discreet Pro
Fiscal Year Ended Fiscal Year Ended Pro Forma Forma
January 31, 1996 July 31, 1996 Adjustments Combined
----------------- ----------------- ----------- --------
Net revenues............ $534,167 $ 83,997 $ -- $618,164
Costs and expenses:
Cost of revenues....... 66,812 49,333 -- 116,145
Marketing and sales.... 183,550 26,088 -- 209,638
Research and
development........... 78,678 14,402 -- 93,080
General and
administrative........ 76,100 10,582 -- 86,682
Nonrecurring charges... -- 28,506 -- 28,506
-------- -------- ----- --------
Total costs and
expenses............. 405,140 128,911 -- 534,051
-------- -------- ----- --------
Income (loss) from
operations............. 129,027 (44,914) -- 84,113
Interest and other
income, net............ 9,253 2,208 -- 11,461
-------- -------- ----- --------
Income (loss) before
income taxes........... 138,280 (42,706) -- 95,574
Provision for income
taxes.................. 50,492 1,435 -- 51,927
-------- -------- ----- --------
Net income (loss)....... $ 87,788 $(44,141) $ -- $ 43,647
======== ======== ===== ========
Basic net income (loss)
per share.............. $ 1.86 $ (1.64) $ -- $ 0.78
======== ======== ===== ========
Diluted net income
(loss) per share....... $ 1.76 $ (1.64) $ -- $ 0.74
======== ======== ===== ========
Shares used in computing
basic net income (loss)
per share.............. 47,090 26,837 55,946
======== ======== ========
Shares used in computing
diluted net income
(loss) per share....... 49,800 26,837 59,331
======== ======== ========
See accompanying notes to unaudited pro forma condensed combined financial
statements.
97
AUTODESK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(In thousands, except per share data)
Autodesk Discreet
Nine Months Ended Nine Months Ended Pro Forma Pro Forma
October 31, 1998 September 30, 1998 Adjustments Combined
----------------- ------------------- ----------- ---------
Restated Restated
Net revenues............ $551,022 $103,316 $ -- $654,338
Costs and expenses:
Cost of revenues...... 56,648 43,965 -- 100,613
Marketing and sales... 194,608 26,394 -- 221,002
Research and
development.......... 107,769 11,184 -- 118,953
General and
administrative....... 90,718 13,193 -- 103,911
Nonrecurring charges.. 21,985 (2,696) -- 19,289
Litigation accrual
reversal............. (18,200) -- -- (18,200)
-------- -------- ----- --------
Total costs and
expenses........... 453,528 92,040 -- 545,568
-------- -------- ----- --------
Income from operations.. 97,494 11,276 -- 108,770
Interest and other
income, net............ 10,986 2,950 -- 13,936
-------- -------- ----- --------
Income before income
taxes.................. 108,480 14,226 -- 122,706
Provision for income
taxes.................. 42,974 5,845 -- 48,819
-------- -------- ----- --------
Net income.............. $ 65,506 $ 8,381 $ -- $ 73,887
======== ======== ===== ========
Basic net income per
share.................. $ 1.41 $ 0.28 $ -- $ 1.31
======== ======== ===== ========
Diluted net income per
share.................. $ 1.34 $ 0.27 $ -- $ 1.25
======== ======== ===== ========
Shares used in computing
basic net income per
share.................. 46,510 29,442 56,226
======== ======== ========
Shares used in computing
diluted net income per
share.................. 48,760 30,952 58,974
======== ======== ========
See accompanying notes to unaudited pro forma condensed combined financial
statements.
98
AUTODESK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
(In thousands, except per share data)
Discreet
Autodesk, Inc. Nine Months Ended
Nine Months Ended September 30, Pro Forma Pro Forma
October 31, 1997 1997 Adjustments Combined
----------------- ----------------- ----------- ---------
Restated Restated
Net revenues............ $435,275 $100,233 $ -- $535,508
Costs and expenses:
Cost of revenues...... 52,614 44,561 -- 97,175
Marketing and sales... 171,571 20,012 -- 191,583
Research and
development.......... 91,085 8,967 -- 100,052
General and
administrative....... 64,384 7,401 -- 71,785
Nonrecurring charges.. 22,187 14,032 -- 36,219
-------- -------- ----- --------
Total costs and
expenses........... 401,841 94,973 -- 496,814
-------- -------- ----- --------
Income from operations.. 33,434 5,260 -- 38,694
Interest and other
income, net............ 7,391 474 -- 7,865
-------- -------- ----- --------
Income before income
taxes.................. 40,825 5,734 -- 46,559
Provision for income
taxes.................. 23,144 7,302 -- 30,446
-------- -------- ----- --------
Net income (loss)....... $ 17,681 $ (1,568) $ -- $ 16,113
======== ======== ===== ========
Basic net income (loss)
per share.............. $ 0.38 $ (0.06) $ -- $ 0.29
======== ======== ===== ========
Diluted net income
(loss) per share....... $ 0.35 $ (0.06) $ -- $ 0.27
======== ======== ===== ========
Shares used in computing
basic net income (loss)
per share.............. 47,050 28,244 56,371
======== ======== ========
Shares used in computing
diluted net income
(loss) per share....... 50,350 28,244 60,172
======== ======== ========
See accompanying notes to unaudited pro forma condensed combined financial
statements.
99
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1)Periods Combined
The Autodesk condensed consolidated statements of income for the three years
ended January 31, 1998 have been combined with the Discreet condensed
consolidated statements of operations for the fiscal year ended July 31, 1996,
the eleven months ended June 30, 1997 and the unaudited twelve months ended
December 31, 1997, respectively. Additionally, the Autodesk unaudited
condensed consolidated statements of operations for the nine months ended
October 31, 1998 and 1997 have been combined with the Discreet unaudited
condensed consolidated statements of operations for the nine months ended
September 30, 1998 and 1997.
Autodesk's October 31, 1998 unaudited condensed consolidated balance sheet
has been combined with Discreet's September 30, 1998 condensed consolidated
balance sheet.
Operating results for the period from January 1, 1997 to June 30, 1997 for
Discreet are duplicated in the pro forma condensed consolidated statement of
income of the Combined Company for the years ended January 31, 1998 and 1997
and for the nine months ended October 31, 1997. Net revenues, net loss and
basic and diluted net loss per share for the six month period January 1, 1997
through June 30, 1997 for Discreet were $61.8 million, $0.5 million and $0.02,
respectively.
(2)Pro Forma Basis of Presentation
These unaudited pro forma condensed combined financial statements reflect
the issuance of 9,851,000 shares of Autodesk Common Stock in exchange for an
aggregate of 29,852,000 of Discreet Common Shares (outstanding as of September
30, 1998) in connection with the Transactions, assuming an Exchange Ratio of
0.33 as set forth in the following table (in thousands, except Exchange
Ratio):
Discreet Common Shares outstanding as of September 30, 1998.......... 29,852
Exchange Ratio....................................................... 0.33
------
Number of shares of Autodesk Common Stock exchanged.................. 9,851
Number of shares of Autodesk Common Stock outstanding as of October
31, 1998............................................................ 46,774
------
Number of shares of Autodesk Common Stock outstanding upon
consummation of the Transactions.................................... 56,625
======
The actual number of shares of Autodesk Common Stock to be issued (including
shares issuable upon exchange of New Discreet Exchangeable Shares) will be
determined at the Effective Time by multiplying the Exchange Ratio (0.33) by
the number of Discreet Common Shares outstanding on that date.
(3)Transaction Costs and Related Expenses
Autodesk and Discreet estimate they will incur direct transaction costs of
approximately $7-$9 million and $6-$8 million, respectively, associated with
the Transactions consisting of transaction fees for investment bankers,
attorneys, accountants, financial printing and other related charges. These
nonrecurring transaction costs will be charged to operations in the quarter in
which they are incurred.
It is expected that following consummation of the Transactions, the Combined
Company will incur an additional charge to operations, currently estimated at
$8-$10 million, to reflect costs associated with integrating the two
companies, which will be expensed as incurred. There can be no assurance that
the Combined Company will not incur additional charges to reflect costs
associated with the Transactions, or that management will be successful in its
efforts to integrate the two companies.
The unaudited pro forma condensed combined balance sheet gives effect to
estimated direct transaction costs totaling $15 million, as if such costs and
expenses had been incurred as of October 31, 1998. These costs and expenses
are not reflected in the unaudited pro forma condensed combined statement of
income.
(4)Conforming Adjustments
No adjustments have been made to conform the accounting policies of the
combined companies. The nature and extent of such adjustments, if any, will be
based upon further study and analysis and are not expected to be significant.
100
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--
(Continued)
(5)Nonrecurring Transactions
(a) Nonrecurring Transactions of Autodesk
Included in Net Income for Autodesk are nonrecurring charges of $4.7
million, $22.2 million and $22.0 million recorded in fiscal years 1997 and
1998 and for the nine months ended October 31, 1998, respectively. The charges
for fiscal 1997 and 1998 consist of charges relating to the write off of
purchased in-process research and development that had not reached
technological feasibility and had no alternate future use. Nonrecurring
charges for the nine months ended October 31, 1998 consist primarily of a
charge relating to the write off of purchased in-process research and
development that had not reached technological feasibility and had no
alternate future use ($13.1 million), restructuring charges for the
consolidation of certain development centers ($1.5 million), the write-off of
purchased technologies associated with these operations ($2.2 million), staff
reductions in the Asia Pacific region ($1.7 million), costs in relation to
potential legal settlements ($2.5 million) and the write-down to fair market
of older computer equipment which Autodesk plans to dispose of ($1.0 million).
The restructurings noted above are expected to be completed during the last
half of Autodesk's fiscal year ended January 31, 1999.
(b) Nonrecurring Transactions of Discreet
Included in net income for Discreet are nonrecurring charges of $15.7
million, $8.8 million, $28.5 million, and 14.0 million recorded for the twelve
month period ended December 31, 1997, eleven month period ended June 30, 1997,
fiscal year ended July 31, 1996, and the nine months ended September 30, 1997,
respectively. Included in net income for Discreet is a nonrecurring credit of
$2.7 million recorded for the nine months ended September 30, 1998.
Nonrecurring charges for the twelve month period ended December 31, 1997
consist of the write-off of amounts related to purchased in-process research
and development related to the Denim acquisition ($2.3 million), the
Lightscape acquisition ($1.6 million), the D-Vision acquisition ($5.3
million), and a class action legal settlement ($6.5 million). Fiscal 1997
charges consist of the write-off of amounts relating to purchased in-process
research and development related to the Denim acquisition ($2.3 million) and a
class action legal settlement ($6.5 million). Fiscal 1996 charges consist of
the write-off of purchased in-process research and development ($8.5 million)
related to the COSS/IMP acquisition, restructuring charges ($15.0 million),
the write down of an investment ($2.5 million), and costs relating to
litigation ($2.5 million). Nonrecurring charges for the nine month period
ended September 30, 1997 consist of the write-off amounts related to purchased
in-process research and development related to the Denim acquisition ($2.3
million) and the D-Vision acquisition ($5.3 million), and a class action legal
settlement ($6.5 million). The nonrecurring credit for the nine months ended
September 30, 1998 consists of amounts related to a terminated merger
agreement ($1.7 million), a gain on the sale of an investment ($2.5 million),
and the reversal of provisions for restructuring charges ($1.5 million) and
legal accruals no longer required ($0.4 million).
(6)Restated Historical Autodesk Financial Statements
Subsequent to the Securities and Exchange Commission's letter to the AICPA
dated September 9, 1998, regarding its views on in-process research and
development ("IPR&D"), Autodesk re-evaluated its IPR&D charges on the Softdesk
and Genius acquisitions, revised the purchase price allocations and restated
its financial statements. Specifically, amounts for fiscal 1998 and the nine
months ended October 31, 1998 and 1997 have been restated to adjust the
allocation of the purchase price of these business combinations occurring in
fiscal 1998 and the nine months ended October 31, 1998. The adjustments had
the effect of increasing net income (diluted net income per share) by $29.8
million, ($0.60), $8 million, ($0.16) and $31.6 million, ($0.65) for the
fiscal year ended January 31, 1998 and the nine months ended October 31, 1998
and 1997, respectively.
(7)Restated Historical Discreet Financial Statements
Amounts for fiscal 1998 and 1997 and the six months ended December 31, 1997
have been restated to adjust the allocation of the purchase price for certain
acquisitions occurring in fiscal 1998 and 1997 and the six months ended
December 31, 1997. The adjustments had the effect of increasing net income by
$7.4 million, $11.7 million and $16.2 million for fiscal 1997, 1998, and the
six months ended December 31, 1997, respectively, or $0.26, $0.38 and $0.56
per share on a diluted basis.
101
MATERIAL CANADIAN FEDERAL AND UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS TO DISCREET SHAREHOLDERS
Canadian Federal Income Tax Considerations
In the opinion of Stikeman, Elliott, Canadian legal counsel to Discreet, the
following are the material Canadian federal income tax considerations
generally applicable to Discreet Shareholders who deal at arm's length with
Discreet, Autodesk, Dutchco, Autodesk Quebec and Amalgamation Sub, and hold
their Discreet Common Shares and will hold their New Discreet Exchangeable
shares and/or Autodesk Common Stock as capital property. Discreet Common
Shares will generally be considered to be capital property to a holder unless
the holder holds the shares in the course of carrying on a business or
acquired them in a transaction or transactions considered to be an adventure
in the nature of trade. Certain holders whose Discreet Common Shares might not
otherwise qualify as capital property may be able to qualify them as such by
making the irrevocable election permitted by subsection 39(4) of the Canadian
Tax Act. This summary does not apply to a Discreet Shareholder with respect to
whom Autodesk is or will be a foreign affiliate within the meaning of the
Canadian Tax Act nor does it apply to a Discreet Shareholder that is a
"financial institution" within the meaning of subsection 142.2(1) of the
Canadian Tax Act as such definition is proposed to be amended by the Proposed
Amendments (as defined below).
This summary is based upon the current provisions of the Canadian Tax Act,
the regulations thereunder and counsel's understanding of the current
published administrative practices and policies of Revenue Canada Customs,
Excise and Taxation ("Revenue Canada"). The summary also takes into account
all specific proposals to amend the Canadian Tax Act publicly announced prior
to the date hereof (the "Proposed Amendments"), and assumes that the Proposed
Amendments will be enacted substantially as proposed. This summary does not
otherwise take into account or anticipate any changes in law, whether by way
of legislative, judicial or governmental action or interpretation, nor does it
address any provincial or foreign income tax considerations.
For purposes of the Canadian Tax Act, all amounts must be expressed in
Canadian dollars, including dividends, adjusted cost base and proceeds of
disposition; amounts denominated in US dollars must be converted into Canadian
dollars based on the prevailing United States dollar exchange rate generally
at the time such amounts arise.
THIS SUMMARY IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL
OR TAX ADVICE TO ANY PARTICULAR DISCREET SHAREHOLDER. DISCREET SHAREHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE INCOME TAX
CONSEQUENCES TO THEM OF THE TRANSACTIONS.
Discreet Shareholders Resident in Canada
The following portion of the summary is applicable to a Discreet Shareholder
who is a Canadian resident and who will continue to be a Canadian resident for
purposes of the Canadian Tax Act at all times while such Shareholder holds New
Discreet Exchangeable Shares or Autodesk Common Stock.
Amalgamation of Discreet, Autodesk Quebec and Amalgamation Sub. On the
Amalgamation, Discreet Shareholders will be deemed to dispose of their
Discreet Common Shares for proceeds of disposition equal to their adjusted
cost base to the holder and to have acquired New Discreet Class B Shares for a
cost equal to such proceeds of disposition.
Redemption of New Discreet Class B Shares in exchange for New Discreet
Exchangeable Shares
Non-Rollover Transaction. A holder of New Discreet Class B Shares whose
Class B Shares are redeemed by New Discreet in exchange for New Discreet
Exchangeable Shares, Voting Rights and Exchange Rights may, unless such holder
makes a joint election under subsection 85(1) or 85(2) of the Canadian Tax Act
as discussed
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below, be considered to have disposed of such New Discreet Class B Shares for
proceeds of disposition equal to the sum of (i) any cash received by such
holder in respect of a fractional New Discreet Exchangeable Share, (ii) the
fair market value of the New Discreet Exchangeable Shares acquired by such
holder on the redemption, and (iii) the fair market value of the Voting Rights
and Exchange Rights acquired by such holder on the redemption and, as a
result, the holder will in general realize a capital gain (or capital loss) to
the extent that such proceeds of disposition, less any reasonable costs of
disposition, exceed (or are less than) the adjusted cost base to the holder of
such New Discreet Class B Shares. The cost to a holder of New Discreet
Exchangeable Shares, Voting Rights and Exchange Rights acquired on the
redemption will be equal to the fair market value of such shares and rights at
the time of the redemption. Holders of New Discreet Class B Shares who do not
make a joint election under section 85 of the Canadian Tax Act should consult
with their own tax advisors as to the possible application of other rollover
provisions contained in the Canadian Tax Act.
Rollover Transaction. An Eligible Holder of New Discreet Class B Shares
whose Class B Shares are redeemed by New Discreet in exchange for New Discreet
Exchangeable Shares, Voting Rights and Exchange Rights may make a joint
election with New Discreet pursuant to subsection 85(1) of the Canadian Tax
Act (or, in the case of an Eligible Holder that is a partnership, pursuant to
subsection 85(2) of the Canadian Tax Act) and thereby obtain a full or partial
tax deferred "rollover" for Canadian income tax purposes, depending on the
Elected Amount and the adjusted cost base to the Eligible Holder of its New
Discreet Class B Shares at the time of the redemption. So long as, at the time
of the redemption, the adjusted cost base to the Eligible Holder of the
Eligible Holder's New Discreet Class B Shares equals or exceeds the sum of (i)
any cash received in respect of a fractional New Discreet Exchangeable Share
and (ii) the fair market value of the Voting Rights and the Exchange Rights
acquired by such holder on the redemption, the Eligible Holder may elect so as
to not realize a capital gain for the purposes of the Canadian Tax Act on the
redemption. The terms and conditions of the New Discreet Class B Shares
provide that the maximum number of New Discreet Exchangeable Shares issuable
upon redemption of the New Discreet Class B Shares is equal to 19.99% of the
Discreet Common Shares outstanding immediately prior to the Amalgamation,
multiplied by the Exchange Ratio. Accordingly, holders of New Discreet Class B
Shares may be precluded from engaging in a tax-free rollover for Canadian
federal income tax purposes in respect of some of their New Discreet Class B
Shares.
In order to make an election, an Eligible Holder must provide to Montreal
Trust Company of Canada, on behalf of New Discreet, at 6th Floor, 1800 McGill
College Avenue, Montreal, Quebec, H3A 3K9, two signed copies of the necessary
election forms on or before 90 days after the Effective Time, duly completed
with the details of the number of New Discreet Class B Shares transferred and
the applicable Elected Amount for the purposes of the election. Subject to the
election forms complying with the provisions of the Canadian Tax Act (or
applicable provincial income tax law), the forms will be returned to such
holders, signed by New Discreet, for filing by the Eligible Holder with
Revenue Canada (or the applicable provincial tax authority).
The relevant tax election form is Revenue Canada form T2057 (or, in the
event that the New Discreet Class B Shares are held as partnership property,
Revenue Canada form T2058). For Eligible Holders required to file in Quebec,
Quebec form TP-518V (or, in the event that the New Discreet Class B Shares are
held as partnership property, Quebec form TP-529V) will also be required. A
tax election package, consisting of the relevant tax election forms and a
letter of instructions, may be obtained from New Discreet. An Eligible Holder
interested in making an election should so indicate on the Letter of
Transmittal and Election Form (on green paper) accompanying this Proxy
Circular in the space provided therein and a tax election package will be sent
to such holder.
Where New Discreet Class B Shares are held in joint ownership and two or
more of the co-owners wish to elect, one of the co-owners designated for such
purpose should file the designation and a copy of the Revenue Canada election
form T2057 (and where applicable, the corresponding Quebec form) for each co-
owner along with a list of all co-owners electing, which list should contain
the address and social insurance number or tax account number of each co-
owner. Where the New Discreet Class B Shares are held as partnership property,
a
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partner designated by the partnership must file one copy of Revenue Canada
election form T2058 on behalf of all members of the partnership (and where
applicable, the corresponding form in duplicate with the Quebec taxation
authorities). Such Revenue Canada election form T2058 (and Quebec form, if
applicable) must be accompanied by a list containing the name, address, social
insurance number or tax account number of each partner as well as the letter
signed by each partner authorizing the designated partner to complete and file
the form.
In general, where an election is made, the Elected Amount must comply with
the following rules:
1. The Elected Amount may not be less than the sum of (i) any cash received
in respect of a fractional New Discreet Exchangeable Share and (ii) the fair
market value of the Voting Rights and the Exchange Rights acquired on the
redemption.
2. The Elected Amount may not be less than the lesser of the adjusted cost
base to the Eligible Holder of the Eligible Holder's New Discreet Class B
Shares redeemed, determined immediately before the time of the redemption, and
the fair market value of the New Discreet Class B Shares at that time.
3. The Elected Amount may not exceed the fair market value of the New
Discreet Class B Shares at the time of the redemption.
Where an Eligible Holder and New Discreet make an election, the tax
treatment to the Eligible Holder generally will be as follows:
1. The Eligible Holder's New Discreet Class B Shares will be deemed to have
been disposed of for proceeds of disposition equal to the Elected Amount.
2. If the proceeds of disposition of the New Discreet Class B Shares are
equal to the aggregate of the adjusted cost base to the Eligible Holder of the
Eligible Holder's shares, determined immediately before the redemption, and
any costs of disposition, no capital gain or capital loss will be realized by
the Eligible Holder.
3. To the extent that the proceeds of disposition of the New Discreet Class
B Shares exceed (or are less than) the aggregate of the adjusted cost base
thereof to the Eligible Holder and any costs of disposition, the Eligible
Holder will in general realize a capital gain (or capital loss).
4. The cost to an Eligible Holder of the Voting Rights and the Exchange
Rights received on the redemption will be equal to the fair market value
thereof at that time and the cost to an Eligible Holder of New Discreet
Exchangeable Shares received on the redemption will be equal to the amount by
which the proceeds of disposition of the New Discreet Class B Shares redeemed
from the Eligible Holder exceeds the amount of any cash received in respect of
a fractional New Discreet Exchangeable Share and the fair market value of the
Voting Rights and the Exchange Rights received on the redemption.
New Discreet will make an election under section 85 of the Canadian Tax Act
(and the corresponding provisions of any provincial tax legislation) at the
amount selected by the Eligible Holder subject to the limitations set out in
the Canadian Tax Act (and any applicable provincial tax legislation). New
Discreet will not be responsible for the proper completion or filing of any
election and the Eligible Holder will be solely responsible for the payment of
any late filing penalty. New Discreet agrees only to execute any properly
completed election and to forward such election by mail (within 60 days after
the receipt thereof) to the Eligible Holder. With the exception of execution
of the election by New Discreet, compliance with the requirements for a valid
election will be the sole responsibility of the Eligible Holder making the
election. Accordingly, New Discreet will not be responsible or liable for
taxes, interest, penalties, damages or expenses resulting from the failure by
anyone to properly complete any election or to properly file it within the
time prescribed and in the form prescribed under the Canadian Tax Act (or the
corresponding provisions of any applicable provincial legislation).
In order for Revenue Canada (and where applicable, the Ministere du Revenu
du Quebec) to accept a tax election without a late filing penalty being paid
by an Eligible Holder, the election must be received by such
104
revenue authorities on or before the day that is the earliest of the days on
or before which either New Discreet or the Eligible Holder is required to file
an income tax return for the taxation year in which the redemption occurs. New
Discreet's taxation year has not yet been determined. Instructions setting
forth the applicable deadline will be included in the tax election package to
be delivered to all Eligible Holders who elect to receive New Discreet
Exchangeable Shares and who indicate they wish to receive the tax election
package. Eligible Holders other than individuals are urged to consult their
own advisors as soon as possible respecting the deadlines applicable to their
own particular circumstances. However, regardless of such deadline, the tax
election forms of an Eligible Holder must be received by New Discreet no later
than the 90th day after the Effective Time. Because New Discreet has agreed to
execute and return the election to the Eligible Holder within 60 days of its
receipt, to avoid late filing penalties certain Eligible Holders may be
required to forward their tax election forms to New Discreet earlier than the
90th day after the Effective Time.
Any Eligible Holder who does not ensure that New Discreet has received a
duly completed election on or before the 90th day after the Effective Time
will not be able to benefit from the rollover provisions contained in section
85 of the Canadian Tax Act. Accordingly, all Eligible Holders who wish to
enter into an election with New Discreet should give their immediate attention
to this matter. The instructions for requesting a tax election package are set
out in the Letter of Transmittal and Election Form. Eligible Holders are
referred to Information Circular 76-19R3 and Interpretation Bulletin IT-291R2
issued by Revenue Canada for further information respecting the election.
Eligible Holders wishing to make the election should consult their own tax
advisors. The comments herein with respect to such election are provided for
general assistance only. The law in this area is complex and contains numerous
technical requirements.
A Discreet Shareholder who receives New Discreet Class B Shares that are
redeemed in exchange for New Discreet Exchangeable Shares will be required to
determine the fair market value of the Voting Rights and Exchange Rights on a
reasonable basis for purposes of the Canadian Tax Act. Autodesk and Discreet
are of the view and have advised counsel that the Voting Rights and Exchange
Rights have only nominal value. The tax election forms will be executed by New
Discreet on the basis that the fair market value of the Voting Rights and
Exchange Rights is a nominal amount per New Discreet Exchangeable Share issued
on the redemption of the New Discreet Class B Shares. Such determination of
value is not binding on Revenue Canada, and counsel can express no opinion on
matters of factual determination such as this.
Exchange of New Discreet Units for Autodesk Common Stock. A holder who, in
connection with the Transactions, receives New Discreet Units upon the
conversion of New Discreet Class B Shares which Units are acquired by Dutchco
for Autodesk Common Stock will be considered to have disposed of the New
Discreet Class E Shares and New Discreet Class F Shares comprising such New
Discreet Units for total proceeds of disposition equal to the fair market
value of the Autodesk Common Stock plus any cash received by such holder in
respect of a fractional interest in Autodesk Common Stock, and will realize a
capital gain (or capital loss) equal to the amount by which such proceeds of
disposition exceed (or are less than) the aggregate adjusted cost base to the
holder of the New Discreet Class E Shares and New Discreet Class F Shares
comprising such New Discreet Units. Generally, the aggregate adjusted cost
base to the holder of New Discreet Class E Shares and New Discreet Class F
Shares comprising such New Discreet Units will be equal to the adjusted cost
base of the holder's New Discreet Class B Shares that were converted into such
New Discreet Units pursuant to the Transactions. The cost to a holder of
Autodesk Common Stock acquired on the exchange will be equal to the fair
market value of such shares at the time of the exchange, and will be averaged
with the adjusted cost base of any other Autodesk Common Stock held by the
holder as capital property.
Call Rights. Autodesk and Discreet are of the view and have advised counsel
that no amount has been allocated to the value of the Call Rights. In
particular, Autodesk and Discreet are of the view that the Liquidation Call
Right, the Redemption Call Right and the Retraction Call Right and the call
rights contained in the New Discreet Class E Share Provisions and the New
Discreet Class F Share Provisions have nominal value. On this basis, no
Discreet Shareholder or New Discreet Shareholder should realize a capital gain
at the time that any of such rights are granted to Dutchco. Such determination
of value is not binding on Revenue Canada and counsel can express no opinion
on matters of factual determination such as this.
105
Dividends on New Discreet Exchangeable Shares. In the case of a holder who
is an individual, dividends received or deemed to be received on the New
Discreet Exchangeable Shares will be included in computing the holder's
income, and will be subject to the gross-up and dividend tax credit rules
normally applicable to taxable dividends received from taxable Canadian
corporations.
The New Discreet Exchangeable Shares will be "taxable preferred shares" and
"short-term preferred shares" for purposes of the Canadian Tax Act. Dividends
received or deemed to be received on New Discreet Exchangeable Shares will not
be subject to the 10% tax under Part IV.1 of the Canadian Tax Act applicable
to certain corporations.
In the case of a holder that is a corporation, other than a "specified
financial institution" as defined in the Canadian Tax Act, dividends received
or deemed to be received on the New Discreet Exchangeable Shares will normally
be deductible in computing the holder's taxable income.
In the case of a holder that is a specified financial institution, such
dividends will be deductible in computing the holder's taxable income only if
either:
(a) the holder did not acquire the New Discreet Exchangeable Shares in
the ordinary course of its business; or
(b) at the time of the receipt of the dividend by the holder, the New
Discreet Exchangeable Shares are listed on a prescribed stock exchange in
Canada and the holder, either alone or together with persons with whom it
does not deal at arm's length, does not receive (and is not deemed to
receive) dividends in respect of more than 10% of the issued and
outstanding New Discreet Exchangeable Shares. At the present time, there is
no intention to list the New Discreet Exchangeable Shares on a prescribed
stock exchange in Canada.
A holder that is a "private corporation" (as defined in the Canadian Tax
Act) or any other corporation resident in Canada and controlled by or for the
benefit of an individual or a related group of individuals may be liable under
Part IV of the Canadian Tax Act to pay a refundable tax of 33 1/3% on
dividends received or deemed to be received on the New Discreet Exchangeable
Shares to the extent such dividends are deductible in computing the holder's
taxable income. A holder that is a Canadian-controlled private corporation may
be liable to pay an additional refundable tax of 6 2/3% on dividends or deemed
dividends that are not deductible in computing taxable income.
Dividends on Autodesk Common Stock. Dividends on Autodesk Common Stock will
be included in the recipient's income for purposes of the Canadian Tax Act.
Such dividends received by an individual holder will not be subject to the
gross-up and dividend tax credit rules in the Canadian Tax Act. A holder that
is a corporation will include such dividends in computing its income and
generally will not be entitled to deduct the amount of such dividends in
computing its taxable income. A holder that is a Canadian-controlled private
corporation may be liable to pay an additional refundable tax of 6 2/3% on
such dividends. United States non-resident withholding tax on such dividends
will be eligible for foreign tax credit or deduction treatment where
applicable under the Canadian Tax Act.
Redemption or Exchange of New Discreet Exchangeable Shares. Because of the
existence of the Retraction Call Right, a holder exercising the right of
retraction in respect of a New Discreet Exchangeable Share cannot control
whether such holder will receive a share of Autodesk Common Stock by way of
redemption of the New Discreet Exchangeable Share by New Discreet or by way of
purchase of the New Discreet Exchangeable Share by Dutchco. As described
below, the Canadian federal income tax consequences of a redemption differ
from those of a purchase. A holder who exercises the right of retraction will
be notified if the Retraction Call Right will not be exercised by Dutchco, and
if such holder does not wish to proceed, such holder may cancel the notice of
retraction and retain such holder's New Discreet Exchangeable Share.
106
On the redemption (including a retraction) of a New Discreet Exchangeable
Share by New Discreet (as described under "Terms of the Transactions--
Description of New Discreet Exchangeable Shares"), the holder will be deemed
to have received a dividend equal to the amount by which the redemption
proceeds (i.e. the fair market value at the time of the redemption of the
Autodesk Common Stock received by the holder from New Discreet on the
redemption plus the Dividend Amount) exceeds the paid-up capital (for purposes
of the Canadian Tax Act) at that time of the New Discreet Exchangeable Share
so redeemed. The amount of any such deemed dividend will be subject to the
normal tax treatment accorded to dividends described above under "--Dividends
on New Discreet Exchangeable Shares." In the case of a holder that is a
corporation, the amount of any such deemed dividend, in certain circumstances,
may be required to be treated as proceeds of disposition in computing a
capital gain from the disposition of the New Discreet Exchangeable Share, and
not as a dividend.
On the redemption, the holder will also be considered to have disposed of
the New Discreet Exchangeable Share for proceeds of disposition equal to the
redemption proceeds less the amount of such deemed dividend, and will realize
a capital gain (or capital loss) equal to the amount by which such proceeds of
disposition exceed (or are less than) the adjusted cost base of such New
Discreet Exchangeable Share to the holder.
On the exchange of a New Discreet Exchangeable Share by the holder thereof
with Dutchco for a share of Autodesk Common Stock as described under "Terms of
the Transactions--Description of New Discreet Exchangeable Shares," the holder
generally will realize a capital gain (or capital loss) equal to the amount by
which the holder's proceeds of disposition (i.e., the fair market value at the
time of the exchange of the Autodesk Common Stock received by the holder plus
the Dividend Amount received by the holder as part of the exchange
consideration), net of any reasonable costs of disposition, exceed (or are
less than) the adjusted cost base of the New Discreet Exchangeable Share to
the holder.
Any capital gain or capital loss realized by the holder on the redemption
(including a retraction) or exchange of a New Discreet Exchangeable Share will
be subject to the tax treatment described below under "--Taxation of Capital
Gains and Capital Losses."
The cost of a share of Autodesk Common Stock received on the redemption
(including a retraction) or exchange of a New Discreet Exchangeable Share will
be equal to the fair market value of such share of Autodesk Common Stock at
the time of such event and will be averaged with the adjusted cost base of any
other Autodesk Common Stock held at that time by the holder as capital
property.
A disposition or deemed disposition of Autodesk Common Stock by a holder
will generally result in a capital gain (or capital loss) to the extent that
the proceeds of disposition, net of reasonable costs of disposition, exceed
(or are less than) the adjusted cost base to the holder of Autodesk Common
Stock immediately before the disposition. Any such capital gain or capital
loss will be subject to the tax treatment described below under "--Taxation of
Capital Gains and Capital Losses."
Taxation of Capital Gains and Capital Losses. In general, three-quarters of
any capital gain (the "taxable capital gain") must be included in the holder's
income for the year in which the disposition occurs and three-quarters of any
capital loss (the "allowable capital loss") may be deducted by the holder from
taxable capital gains realized in that taxation year. Any excess of allowable
capital losses over taxable capital gains of the holder for the year of
disposition may be carried back up to three taxation years or forward
indefinitely and deducted against net taxable capital gains in those other
taxation years to the extent and in the circumstances described in the
Canadian Tax Act. A holder that is a "Canadian-controlled private corporation"
(as defined in the Tax Act) may be liable to pay an additional refundable tax
of 6 2/3% on taxable capital gains.
Capital gains realized by an individual or a trust other than certain
specified trusts, may give rise to alternative minimum tax under the Canadian
Tax Act.
In the case of a holder that is a corporation, any capital loss realized on
the disposition of a New Discreet Class E Share, a New Discreet Class F Share
or a New Discreet Exchangeable Share will be reduced by the
107
amount of dividends received or deemed to have been received by the holder on
such shares to the extent and under the circumstances prescribed by the
Canadian Tax Act. Similar rules may apply where a corporation is a member of a
partnership or a beneficiary of a trust that owns any such shares or where a
trust or partnership of which a corporation is a beneficiary or a member is a
member of a partnership or a beneficiary of a trust that owns any such shares.
Foreign Property. The New Discreet Exchangeable Shares and Autodesk Common
Stock will be foreign property under the Canadian Tax Act for trusts governed
by registered pension plans, registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans or for certain other
tax-exempt persons. Such holders should consult their own tax advisors as to
the timing of including the cost of the New Discreet Exchangeable Shares in
the holder's cost of foreign property. The Voting Rights and Exchange Rights
will also be foreign property under the Canadian Tax Act. However, as
indicated above, Discreet and Autodesk are of the view that the fair market
value of these rights is nominal.
Qualified Investments. So long as New Discreet remains a "public
corporation" for purposes of the Canadian Tax Act, the New Discreet
Exchangeable Shares will be qualified investments under the Canadian Tax Act
for trusts governed by registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans. Autodesk Common
Stock will be a qualified investment under the Canadian Tax Act for such plans
so long as such shares remain listed on the Nasdaq National Market (or are
listed on certain other exchanges). The Voting Rights and Exchange Rights will
not be qualified investments under the Canadian Tax Act. However, as indicated
above, Discreet and Autodesk are of the view that the fair market value of
these rights is nominal.
Discreet Shareholders Not Resident in Canada
The following summary is applicable to Discreet Shareholders who, for
purposes of the Canadian Tax Act, have not been and will not be resident or
deemed to be resident in Canada at any time while they have held Discreet
Common Shares or will hold Autodesk Common Stock and to whom such shares are
not "taxable Canadian property" (as defined in the Canadian Tax Act) and who
do not use or hold and are not deemed to use or hold such shares in carrying
on a business in Canada. The Discreet Common Shares will not constitute
taxable Canadian property to a holder at any time provided the holder does not
use or hold, and is not deemed to use or hold, such shares in carrying on a
business in Canada and the holder, persons with whom the holder does not deal
at arm's length, or the holder and such persons, has not owned (or had under
option) 25% or more of the issued shares of any class or series of the capital
stock of Discreet at any time within the five years preceding that time.
The New Discreet Class B Shares, New Discreet Class E Shares and the New
Discreet Class F Shares generally should not be taxable Canadian property to a
holder at any time provided such shares are listed on a prescribed stock
exchange (which includes the Nasdaq National Market and the WSE).
As a result, a holder of Discreet Common Shares, New Discreet Class B shares
and New Discreet Units generally should not be subject to tax under the
Canadian Tax Act on the Amalgamation, the conversion of New Discreet Class B
Shares into New Discreet Units, the exchange of New Discreet Units with
Dutchco for Autodesk Common Stock or the redemption of New Discreet Class B
Shares for New Discreet Exchangeable Shares.
Dividends paid or deemed to be paid on the New Discreet Exchangeable Shares
to non-residents will be subject to non-resident withholding tax under the
Canadian Tax Act at the rate of 25%, subject to reduction under the provisions
of an applicable income tax treaty. Under the Treaty, the rate is generally
reduced to 15% in respect of dividends paid to a person who is a beneficial
owner thereof and who is a resident of the United States for the purposes of
the Treaty.
108
A holder whose New Discreet Exchangeable Shares are redeemed by New Discreet
(including pursuant to the exercise by the holder of the retraction right)
will be deemed to receive a dividend as described above under "--Discreet
Shareholders Resident in Canada--Redemption or Exchange of New Discreet
Exchangeable Shares," which deemed dividend will be subject to withholding tax
as described in the preceding paragraph.
A holder whose New Discreet Exchangeable Shares are redeemed by New Discreet
(including pursuant to the exercise by the holder of the retraction right) or
exchanged with Dutchco for Autodesk Common Stock may realize a capital gain as
described above under "--Discreet Shareholders Resident in Canada--Redemption
or Exchange of New Discreet Exchangeable Shares." The New Discreet
Exchangeable Shares will constitute taxable Canadian property and, therefore,
any capital gain so realized will be subject to tax under the Canadian Tax Act
subject to the availability of an exemption under the provisions of an
applicable income tax treaty.
Under the provisions of the Treaty, holders resident in the United States
would be exempt from Canadian tax provided that the New Discreet Exchangeable
Shares do not derive their value principally from real property situated in
Canada. However, whether or not the holder is entitled to relief under the
provisions of an applicable income tax convention, the holder is required to
provide the acquiror of the New Discreet Exchangeable Shares (either New
Discreet or Dutchco) with a certificate under section 116 of the Canadian Tax
Act on or prior to the time of the disposition with a certificate limit at
least equal to the proceeds of disposition of the New Discreet Exchangeable
Shares. If a holder does not provide the acquiror with such a certificate at
or prior to the time of disposition, the acquiror will withhold 33 1/3% of the
cost to the acquiror of the New Discreet Exchangeable Shares and will remit
such amount to the Government of Canada on behalf of the holder.
In order to obtain a certificate pursuant to Section 116 of the Canadian Tax
Act, the holder will be required to provide notice of the disposition of the
New Discreet Exchangeable Shares to Revenue Canada either prior to, or within
ten days following, the disposition of such shares. The notice must set out
the name and address of the person to whom the holder proposes to dispose, or
disposed of, the shares, a description of the shares, the estimated amount of
the proceeds of disposition to be received by the holder or, if the
disposition has already occurred, a statement of the proceeds of disposition
of the shares and the amount of the adjusted cost base to the holder of the
shares. A pre-printed form of a notice (referred to as Form T2062) which
contains the necessary information may be obtained from Revenue Canada. In
order to obtain the certificate, the holder must also provide Revenue Canada
with payment of an amount equal to 33 1/3% of the difference between the
holder's proceeds of disposition and the adjusted cost base to the holder of
the New Discreet Exchangeable Shares or acceptable security for such payment.
If any gain realized by a holder resident in the United States is exempt from
Canadian tax under the provisions of the Treaty, such holder may not be
required to make a payment to Revenue Canada or provide Revenue Canada with
security for such payment if the holder provides evidence satisfactory to
Revenue Canada of its entitlement to the exemption.
Material United States Federal Income Tax Considerations
In the opinion of Wilson Sonsini Goodrich & Rosati, US legal counsel for
Autodesk, the following are the material United States federal income tax
consequences of the Transactions to Discreet Shareholders ("Holders"). This
summary does not discuss all US federal income tax considerations that may be
relevant to Holders in light of their particular circumstances (including but
not limited to Holders who own or have owned 10% or more of the Discreet
Common Shares, directly, indirectly or by attribution) or to Holders that may
be subject to special treatment under US federal income tax laws (for example,
insurance companies, regulated investment companies, real estate investment
trusts, tax-exempt entities, financial institutions, dealers in securities,
persons who hold Discreet Common Shares as part of a straddle, hedging,
constructive sale or conversion transaction, persons whose functional currency
is not the US dollar, Holders who are subject to the alternative minimum tax
provisions of the Code, and Holders who acquired such shares through exercise
of employee stock options or otherwise as compensation for services).
Furthermore, this summary does not discuss aspects of United States federal
income taxation that may be applicable to holders of Discreet Options as a
result of the Transactions, nor does it address any aspects of foreign, state
or local taxation. Furthermore, this summary
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does not address certain of the United States federal income tax consequences
of the receipt of Autodesk Rights or of owning Autodesk Common Stock or
Autodesk Rights, including but not limited to the United States federal income
tax consequences of selling or otherwise disposing of shares of Autodesk
Common Stock or Autodesk Rights. This summary is based on interpretations of
current provisions of the Code, existing, temporary and proposed regulations
promulgated thereunder and administrative and judicial interpretations
thereof, all of which are subject to change, possibly with retroactive effect.
No advance income tax ruling has been sought or obtained from the United
States Internal Revenue Service ("IRS") regarding the tax consequences of the
transactions described herein and the IRS is not precluded from successfully
asserting a contrary result.
For purposes of this discussion, it is assumed that: (i) Holders hold
Discreet Common Shares as capital assets within the meaning of Section 1221 of
the Code; (ii) stock received by Discreet Holders pursuant to the Transactions
(including New Discreet Class E Shares, New Discreet Class F Shares, New
Discreet Class B Shares, Autodesk Common Stock and New Discreet Exchangeable
Shares) will be held as capital assets within the meaning of Section 1221 of
the Code; (iii) some Holders will choose to receive New Discreet Exchangeable
Shares; (iv) the exchange of New Discreet Class B Shares for New Discreet
Exchangeable Shares will occur immediately following the Effective Time; (v)
the exchange of New Discreet Units for Autodesk Common Stock will occur
immediately following the Effective Time; (vi) neither Autodesk nor Discreet
are or will be United States real property holding corporations, as defined in
the Code; (vii) the fair market value of the New Discreet Units equals the
fair market value of the Autodesk Common Stock and any cash for which they are
exchanged; (viii) the fair market value of the New Discreet Class B Shares
equals the fair market value of the New Discreet Exchangeable Shares and any
cash for which they are exchanged; (ix) Discreet is not and has not been, and
New Discreet will not be, a "passive foreign investment company," as defined
in Section 1297 of the Code; (x) Discreet is not and has not been, and New
Discreet will not be, a "controlled foreign corporation," as defined in
Section 957 of the Code; (xi) Discreet is not and has not been, and New
Discreet will not be, a "foreign personal holding company," as defined in
Section 552 of the Code; (xii) Discreet is not and has not been, and New
Discreet will not be, a "foreign investment company," as defined in Section
1246 of the Code; and (xiii) Discreet is not and has not been, and New
Discreet will not be, a "collapsible corporation," as defined in Section 341
of the Code.
THIS SUMMARY IS NOT INTENDED TO ADDRESS ALL OF THE UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS THAT MAY APPLY TO A PARTICULAR DISCREET SHAREHOLDER.
DISCREET SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
TRANSACTIONS.
US Holders
The following discussion summarizes the material US federal income tax
consequences of the Transactions to Holders who are US persons ("US Holders").
For purposes of this discussion, a "US Holder" is a beneficial owner of
Discreet Common Shares who is (a) citizen or resident of the United States,
(b) a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or any political
subdivision thereof, (c) an estate the income of which is includible in its
gross income for US federal income tax purposes without regard to its source,
or (d) a trust if a US court is able to exercise primary supervision over the
administration of the trust and one or more US persons have the authority to
control all the substantial decisions of the trust.
The exchange of Discreet Common Shares pursuant to the Transactions should
constitute a taxable transaction for United States federal income tax
purposes. As a result, US Holders should recognize income, gain or loss as
described below. US Holders will generally be exempt from Canadian tax on any
gain arising from the exchange of New Discreet Units for Autodesk Common
Stock. See "Material Canadian Federal and United States Federal Income Tax
Considerations to Discreet Shareholders--Discreet Shareholders not Resident in
Canada."
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Discreet Shareholders Who Receive New Discreet Units. Discreet Shareholders
who do not choose to receive New Discreet Exchangeable Shares will receive one
New Discreet Unit for each Discreet Common Share. Immediately thereafter, each
New Discreet Unit owned by a Discreet Shareholder will be exchanged for a
number of shares of Autodesk Common Stock determined according to the Exchange
Ratio; cash will be paid in lieu of fractional shares. A US Holder who
receives New Discreet Units and exchanges such units for shares of Autodesk
Common Stock should recognize taxable gain or loss in an amount equal to the
difference between (i) the sum of the fair market value of Autodesk Common
Stock received and the amount of cash received in lieu of fractional shares of
Autodesk Common Stock, and (ii) the adjusted tax basis of the Discreet Common
Shares surrendered in the exchange. Such gain or loss will be capital gain or
loss and will be long-term capital gain or loss if the Discreet Common Shares
exchanged have been held for more than one year at the time of the
Transactions.
A US Holder who receives Autodesk Common Stock in exchange for New Discreet
Units will take a tax basis in such Autodesk Common Stock equal to the fair
market value of the Autodesk Common Stock at the Effective Time. The holding
period of the Autodesk Common Stock will begin on the day after the time of
the Transactions.
Cash distributions on the shares of Autodesk Common Stock paid out of
current or accumulated earnings and profits as determined under United States
federal income tax principles will be subject to tax as ordinary dividend
income. Cash distributions paid by Autodesk in excess of its current or
accumulated earnings and profits will be treated as a tax-free return of
capital to the extent of the US Holder's adjusted tax basis in the US Holder's
shares of Autodesk Common Stock, and thereafter as gain from the sale or
exchange of a capital asset.
On the sale or other disposition of Autodesk Common Stock, a US Holder will
recognize gain or loss equal to the difference between the amount realized on
such sale and the US Holder's adjusted tax basis in such Autodesk Common
Stock. Gain or loss will be capital gain or loss if the Autodesk Common Stock
were held by such US Holder as a capital asset, and will be long-term capital
gain or loss if the US Holder had held the Autodesk Common Stock for more than
one year.
Discreet Shareholders Who Receive New Discreet Exchangeable Shares. There
may be Canadian federal income tax disadvantages for a US Holder who receives
New Discreet Exchangeable Shares in that Canadian withholding tax will be
imposed at the rate of 15% on dividends distributed to US Holders with respect
to the New Discreet Exchangeable Shares. In addition, as more fully described
above, a U.S. Holder may be subject to Canadian withholding tax on the
redemption of such New Discreet Exchangeable Shares by New Discreet. See
"Material Canadian Federal and United States Federal Income Tax Consideration
to Discreet Shareholders--Canadian Federal Income Tax Considerations" and "--
Discreet Shareholders Not Resident in Canada." It is strongly recommended that
US Holders who own Discreet Common Shares do not elect to receive New Discreet
Exchangeable Shares since the ownership and disposition of such shares may
have certain adverse tax consequences. Although the issue is not free from
doubt, if a US Holder receives New Discreet Exchangeable Shares, the likely
United States federal income tax consequences should be as described below.
Receipt of New Discreet Exchangeable Shares. US Holders who wish to receive
New Discreet Exchangeable Shares will elect to do so with respect to their New
Discreet Class B Shares. Immediately thereafter, each Electing Discreet Class
B Share owned by a Discreet Shareholder will be exchanged for a number of New
Discreet Exchangeable Shares determined according to the Exchange Ratio; cash
will be paid in lieu of fractional shares. Although the issue cannot be free
from doubt, a US Holder who receives New Discreet Class B Shares and exchanges
such shares for New Discreet Exchangeable Shares should recognize gain or loss
in an amount equal to the difference between (i) the sum of the fair market
value of New Discreet Exchangeable Shares received and the amount of cash
received in lieu of fractional New Discreet Exchangeable Shares, and (ii) the
adjusted tax basis of Discreet Common Shares surrendered in the exchange. Such
gain or loss should be capital gain or loss and should be long-term capital
gain or loss if the Discreet Common Shares exchanged are held as capital
assets and have been held for more than one year at the time of the
Transactions.
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US Holders who receive New Discreet Exchangeable Shares will be entitled to
the benefit of certain rights granted pursuant to the provisions of the
Transactions (including, but not limited to, rights under the Voting and
Exchange Trust Agreement). Autodesk and Discreet believe that the value of
such rights is nominal. If such rights are determined to have value in excess
of a nominal value, such value will constitute additional consideration that a
US Holder will be required to take into account in determining gain or loss
upon the receipt of New Discreet Class B Shares and the exchange of such
shares into New Discreet Exchangeable Shares.
Although the issue is not free from doubt, a US Holder who receives New
Discreet Exchangeable Shares should take as its tax basis in such shares the
fair market value of the New Discreet Exchangeable Shares at the time of the
Transactions. The holding period of the New Discreet Exchangeable Shares
should begin on the day after the time of the Transactions.
Distributions on the New Discreet Exchangeable Shares. A US Holder of New
Discreet Exchangeable Shares generally will be required to include in gross
income as ordinary dividend income the amount of distributions received on the
New Discreet Exchangeable Shares to the extent paid out of current or
accumulated earnings and profits of New Discreet, as determined under United
States federal income tax principles. Distributions in excess of current or
accumulated earnings and profits will be treated as a tax-free return of
capital to the extent of the US Holder's adjusted tax basis, and thereafter as
gain from the sale or exchange of a capital asset. If a US Holder receives a
dividend in Canadian dollars, the amount of the dividend for US federal income
tax purposes will be the US dollar value of the dividend (determined at the
spot rate on the date of such payment) regardless of whether the payment is
later converted into US dollars. In such case, US Holders may recognize
ordinary income or loss as a result of currency fluctuations between the date
on which the dividend is paid and the date the dividend amount is converted
into US dollars. Such dividends generally will be treated as foreign source
dividend income and generally will be either "passive" or "financial services"
income, depending on the US Holder's particular circumstances. Under the
Treaty, such distributions generally will be subject to a Canadian withholding
tax at a rate of 15%. Subject to certain limitations of United States federal
income tax law, a US Holder will be entitled to claim either a credit against
United States federal income tax liability or a deduction in computing United
States taxable income for Canadian taxes withheld from distributions with
respect to the New Discreet Exchangeable Shares. Dividends on New Discreet
Exchangeable Shares generally will not be eligible for the dividends received
deduction allowed to corporations.
Exchange or Redemption of the New Discreet Exchangeable Shares. Although the
issue is not free from doubt, upon the disposition by a US Holder of New
Discreet Exchangeable Shares pursuant to the exercise of rights described
under "Terms of the Transactions--Description of New Discreet Exchangeable
Shares" (including the exercise of rights granted to New Discreet and
Dutchco), such US Holder generally should recognize taxable gain or loss in an
amount equal to the difference between (i) the sum of the fair market value of
Autodesk Common Stock received and cash received, if any, and (ii) such US
Holder's adjusted tax basis in the New Discreet Exchangeable Shares
surrendered. Any such gain or loss should be long-term capital gain or loss if
the holding period of the New Discreet Exchangeable Shares is more than one
year at the date such shares are exchanged for shares of Autodesk Common
Stock. The US Holder should take as its tax basis in the Autodesk Common Stock
the fair market value of the Autodesk Common Stock at the time of the
exchange. The holding period for the Autodesk Common Stock received should
begin on the day after the date on which the New Discreet Exchangeable Shares
are exchanged for Autodesk Common Stock.
If the disposition of the New Discreet Exchangeable Shares results in a
deemed dividend for Canadian tax purposes, such deemed dividend generally will
be subject to a Canadian withholding tax at the Treaty rate of 15%. The amount
of the deemed dividend will be treated as United States source gain to a US
Holder. A US Holder may be entitled to claim a credit against United States
federal income tax liability for Canadian taxes withheld on the deemed
dividend. The use of such a credit may be limited or precluded entirely if the
US Holder has no income which is treated as non-US source income for United
States federal income tax purposes. In lieu of claiming a tax credit, a US
Holder may claim a deduction for Canadian taxes paid in computing United
States taxable income.
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Holders who are considering making an election to receive New Discreet
Exchangeable Shares are urged to take into account all applicable tax
considerations prior to making such election.
Non-US Holders
The following summary is applicable to holders of Discreet Common Shares who
are not US Holders ("Non-US Holders").
A Non-US Holder of Discreet Common Shares generally will not be subject to
United States federal income tax on gain realized on the receipt of the New
Discreet Units, the New Discreet Class B Shares, the New Discreet Exchangeable
Shares, the Autodesk Common Stock or upon a subsequent exchange (or sale) of
the New Discreet Exchangeable Shares or the Autodesk Common Stock, unless such
gain is effectively connected with a United States trade or business; or, in
the case of gain recognized by an individual Non-US Holder, such individual is
present in the United States for 183 days or more during the taxable year and
certain other conditions are satisfied.
Dividends received by a Non-US Holder with respect to Autodesk Common Stock
generally will be subject to United States withholding tax at the rate of 30%,
which rate may be subject to reduction by an applicable income tax treaty in
effect between the United States and the Non-US Holder's country of residence.
However, such a dividend will be taxed at ordinary US Federal income tax rates
(i) if the dividend is effectively connected with the conduct of a trade or
business of the Non-US Holder within the United States or (ii) if a tax treaty
applies and the dividend is attributable to a United States permanent
establishment of the Non-US Holder. If the Non-US Holder is a corporation,
such effectively connected dividend may also be subject to an additional
"branch profits tax." Under the Treaty, the rate of withholding tax is
generally reduced to 15% in respect of dividends paid to a person who is the
beneficial owner thereof and who is a resident of Canada for the purposes of
the Treaty. A Non-US Holder may be required to satisfy certain certification
requirements to claim treaty benefits or otherwise claim a reduction of, or
exemption from, the withholding obligation described above.
Provided that the New Discreet Exchangeable Shares are not treated as
Autodesk Common Stock for US federal income tax purposes, dividends received
by a Non-US Holder with respect to the New Discreet Exchangeable Shares should
not be subject to United States withholding tax and Discreet and Autodesk do
not intend that New Discreet will withhold any United States withholding tax
from such dividends. The possibility remains, however, that the IRS may assert
that United States withholding tax is payable with respect to dividends paid
on New Discreet Exchangeable Shares to Non-US Holders, in which case Non-US
Holders of New Discreet Exchangeable Shares could be subject to United States
withholding tax at a rate of 30%, subject to reduction by an applicable income
tax treaty.
Backup Withholding
United States federal backup withholding may apply to amounts received by a
Holder in the Transactions, amounts received by a Holder on the disposition of
New Discreet Exchangeable Shares or shares of Autodesk Common Stock, or
dividends paid to a Holder on New Discreet Exchangeable Shares (if the New
Discreet Exchangeable Shares are treated as Autodesk Common Stock for United
States federal income tax purposes) or the shares of Autodesk Common Stock.
Backup withholding will apply to a US Holder only if the US Holder fails to
furnish its taxpayer identification number or otherwise fails to comply with
the applicable requirements of the backup withholding rules. Backup
withholding will apply to a Non-US Holder only if the Non-US Holder fails to
certify that it is not subject to backup withholding or otherwise fails to
comply with the applicable requirements of the backup withholding rules. Any
amounts withheld under these backup withholding rules will be creditable
against the Holder's United States federal income tax liability.
In 1997, the IRS issued final regulations relating to withholding,
information reporting and backup withholding that unify certain certification
procedures and forms and clarify reliance standards (the "Final Regulations").
The Final Regulations will be effective with respect to payments made after
December 31, 1999.
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The Final Regulations eliminate the general prior legal presumption that
dividends paid to an address in a foreign country are paid to a resident of
that country. In addition, the Final Regulations impose certain certification
and documentation requirements on Non-US Holders claiming the benefit of a
reduced withholding tax rate with respect to dividends under a tax treaty or
otherwise claiming a reduction of, or exemption from, the withholding
obligations described above. Non-US Holders are urged to consult their own tax
advisors as to the effect, if any, of the Final Regulations on their ownership
and disposition of New Discreet Exchangeable Shares and Autodesk Common Stock.
Federal Estate Tax Treatment
Shares of stock issued by a domestic corporation (within the meaning of
Section 7701(a) of the Code) which are owned and held by an individual who is
not a citizen or resident alien of the United States are subject to United
States federal estate tax. Accordingly, Autodesk Common Stock held by an
individual Non-US Holder generally will be subject to United States federal
estate tax, except as may otherwise by provided by an applicable income tax or
estate tax treaty with the United States.
The New Discreet Exchangeable Shares should not be treated as shares of
stock of a domestic corporation for purposes of United States federal estate
tax law. However, as there is no direct authority addressing the proper
treatment of the New Discreet Exchangeable Shares for United States federal
estate tax purposes, this conclusion is subject to uncertainty, and there can
be no assurance that the IRS would not take a contrary position.
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AUTODESK
BUSINESS
Background
Autodesk was incorporated in California in April 1982 and was reincorporated
in Delaware in May 1994. Its principal executive offices are located at 111
McInnis Parkway, San Rafael, California 94903 and its telephone number is
(415) 507-5000. Autodesk's two-dimensional ("2D") and three-dimensional ("3D")
products are used across industries and in the home for architectural design,
mechanical design, spatial data management and mapping, animation, and
visualization applications. Autodesk's flagship product, AutoCAD, is one of
the world's leading computer-aided design ("CAD") tools, with an installed
base of more than 2 million units worldwide. Autodesk's software products are
sold worldwide, primarily through a network of dealers and distributors.
In February 1995, Autodesk realigned its internal marketing and development
organizations around key market groups that most closely match Autodesk's
customer base. During fiscal year 1998, Autodesk defined a new market group,
the Personal Solutions Group ("PSG"), whose products are targeted to
individual users as well as professionals. Each market group incorporates
product development, quality assurance, technical publications, and product
industry marketing. Autodesk's market groups are discussed below.
Architecture, Engineering, and Construction ("AEC"). The architecture,
engineering, construction, and facilities management industries utilize
software from Autodesk and third-party developers to manage every phase of a
building's life cycle--from conceptual design through construction,
maintenance, and renovation. During fiscal year 1998, Autodesk expanded its
product offerings for the AEC Market Group by acquiring Softdesk, Inc. in
March 1997. AEC products include AutoCAD + S8 Architectural Suite, Softdesk 8
AEC Tools, and AEC Professional Suite.
Mechanical Computer-Aided Design ("MCAD"). Autodesk's Mechanical CAD Market
Group is dedicated to providing mechanical engineers, designers, and drafters
with advanced, value-based software solutions that are designed to solve their
professional design challenges. Autodesk's premier MCAD product is Mechanical
Desktop. In May 1998, Autodesk expanded its mechanical CAD products through
the purchase of various software technologies and applications from Genius CAD
Software GmbH, a German limited liability company.
Geographic Information Systems ("GIS"). Autodesk's GIS Market Group strategy
is to provide easy-to-use mapping and GIS technology to help businesses and
governments manage their assets and infrastructure. The GIS Market Group is
assisting automated mapping/facilities managers, as well as GIS and CAD users,
to share mapping, GIS, and associated information in a corporate environment.
Autodesk's current GIS products include AutoCAD Map, Autodesk MapGuide, and
Autodesk World.
Personal Solutions Group ("PSG"). The PSG Market Group develops easy-to-use,
affordable tools for professionals, occasional users, or consumers who design,
draft, and diagram, thus expanding Autodesk's traditional customer base of
architects and engineers. PSG products include AutoCAD LT and AutoSketch.
Kinetix. The Kinetix division of Autodesk is devoted to bringing powerful 3D
content-creation software to computer-industry professionals focused on two
markets: entertainment (film, broadcast video, and interactive games) and
design conceptualization and visualization. Kinetix provides two core platform
products--3D Studio MAX and 3D Studio VIZ, that specifically focus on these
markets.
Products
Autodesk has aligned its market groups into three segments: the Design
Solutions segment (which includes the AEC, MCAD, and GIS market groups, as
well as AutoCAD products), the Personal Solutions segment, and Kinetix (the
multimedia segment). Autodesk's Design Solutions segment includes the
following products:
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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 Windows 95, Windows 98, and
Windows 3.1. Because AutoCAD software's DWG files are portable across many
platforms and operating systems, it is a viable solution for customers with
multiple computer systems who need to exchange drawing files in such an
environment.
The most current version, AutoCAD Release 14, was introduced in May 1997.
Built for speed and efficiency, AutoCAD Release 14 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.
Sales of AutoCAD and AutoCAD upgrades accounted for approximately 70 percent
of Autodesk's revenues in fiscal years 1998 and 1997 as compared to
approximately 80 percent in fiscal year 1996. During fiscal year 1998,
approximately 244,000 new AutoCAD licenses were added worldwide, compared to
207,000 licenses and 233,000 licenses added during fiscal years 1997 and 1996,
respectively.
AutoCAD OEM
AutoCAD OEM ("Original Equipment Manufacturer") for Windows-based operating
systems is a selectively licensed CAD engine offering a complete application-
development environment for creating and delivering targeted or niche
solutions with scaled feature sets. It is for developers, system integrators,
and commercial software developers who require an embeddable CAD system which
gives them the ability to scale and control the application feature set.
AutoCAD OEM provides developers with a complete toolkit of AutoCAD features
and APIs including ObjectARX capabilities, a full suite of drawing and editing
functions as well as AutoLISP, a LISP API, and the AutoCAD Development System,
a C programming interface. These capabilities enable development of new
products for new markets untapped by traditional CAD products and solutions.
Mechanical Desktop
Mechanical Desktop software is an integrated software application that
unites advanced 2D and 3D mechanical design capabilities for PCs. The
Mechanical Desktop contains integrated modules for fully parametric feature-
based solid modeling, surface modeling, and assembly modeling; 2D
design/drafting and bidirectional 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 2.0, which was released in December 1997, includes an Express
User Interface, Edit-in-Place assembly functionality, and improved integration
with Autodesk's AutoCAD Release 14 for mechanical drafting, and 3D Studio MAX
for 3D photorealistic rendering and animation. Advanced ordinate dimensioning,
editing and display of crosshatch patterns, surface scaling, section view, and
associative bill-of-materials generation are among the features included in
the latest release of Mechanical Desktop software.
AutoCAD Map
AutoCAD Map software is the first AutoCAD-based automated-mapping product
for professional planners, utility managers, and technicians who create and
maintain their own maps and use their data for engineering-
based analysis and planning. Built with AutoCAD software, AutoCAD Map focuses
on five key areas: digital map creation, analysis, maintenance of up-to-date
maps, data exchange, and publishing. The API in AutoCAD
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Map lets developers build vertical applications for industries such as
telecommunications, utilities, oil and gas, state and local government, and
natural resource and environmental engineering. AutoCAD Map also contains
ObjectARX capabilities.
Autodesk MapGuide
MapGuide is a Web-based GIS technology that is designed to allow corporate
customers and developers to use the Internet and business intranets to rapidly
deploy decision support systems with a geographic component. Suited for a wide
range of users--from GIS professionals to the casual computer user--MapGuide
software enables users to access and query digital maps and permits users to
display and analyze geographic data for applications that include tracking
customers, allocating resources, and managing facilities infrastructure.
Autodesk World
Autodesk World allows for the management of geographic-based data. It offers
capture, edit, analysis, integration, and presentation functionality for
spatial data, including raster, vector (CAD and GIS), and attributes. It also
includes Object Linking and Embedding ("OLE"), which allows users to link
drawings to other Windows applications such as Microsoft Word or Excel,
application programming interfaces, and an integrated Visual Basic for
Applications 5.0 scripting environment for easy customization and application
development.
AEC Professional Suite
Autodesk AEC Professional Suite 2.0, introduced in June 1997, is an
integrated set of design tools created for professionals in the fields of
Architecture, Engineering, Construction, Facility Management, and Plant Design
and Management. It includes AutoCAD Release 14 software, specialized AEC
AutoCAD enhancements, Architectural Symbols, Autodesk WalkThrough,
DesignBlocks, and Autodesk View. The AEC Professional Suite Release 2.0 serves
a variety of needs of the AEC professional via improved customization and
ease-of-use, integration of visualization tools into the design process and
CAD applications, access to standard manufacturer data, and a lower cost for
the overall design solution. Enhancements to the Suite enable the user to
detect and mend lines and arcs that are coincident or overlapping, create and
control perspective view with Camera Object, and provide access to more than
300 ready-made textures from multiple AEC-specific materials libraries.
Softdesk 8 Civil/ Survey Special Edition
The Softdesk 8 Civil/Survey Special Edition is a focused set of programs for
professionals in the Civil Engineering, Land Planning, and Surveying
industries. These products extend AutoCAD Release 14 or AutoCAD Map 2.0 by
addressing common surveying requirements such as Surface Modeling and
Contouring, Point Manipulation, Data Input and Analysis, Base Map Creation,
and the incorporation of raster imagery. The solution also offers design and
analysis capabilities for site and transportation, storm and sanitary drain
systems, grading, parking, and landscape design.
AutoCAD + S8 Architectural Suite
The AutoCAD + S8 Architectural Suite includes other AEC products such as S8
Architectural Professional Special Edition, AEC Tools, and Auto-Architect.
Auto-Architect includes landscape tools and utilities to generate structural
foundation/framing plans and elevations in addition to space planning, walls,
doors and windows, roofs and stairs. In this suite, AEC Tools is used to
manage project and office standards and to create and manage details and other
productive utilities.
Autodesk's Personal Solutions segment includes the following products:
AutoCAD LT
AutoCAD LT 97 is a low-cost 2D CAD application intended for CAD managers,
designers, and engineers who need a powerful, stand-alone CAD tool, but who do
not require the advanced feature set in AutoCAD.
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AutoCAD LT 97 software contains an extensive 2D drafting toolset as well as 3D
lines and polylines with quick shading and hidden-line removal. Other features
include a Start-Up dialog box and Drawing Set-Up wizards to help the user
create or open a drawing quickly; real-time pan and zoom; a Drag-and-Drop
Content Explorer featuring hundreds of industry-standard symbols; and
Integrated Internet Tools to open or save drawings directly to the Internet.
AutoCAD LT operates in the Windows environment with pull-down menus,
customizable toolbar, toolbox, menus, and scripts, as well as dialog boxes and
icons. It supports the Windows Clipboard, as well as OLE. AutoCAD LT 97 is
fully compatible with Windows 95 and Windows NT 4.0 and has built-in Microsoft
Office 97 compatibility.
AutoSketch
AutoSketch Release 95 is a precision drawing program that can be used for
creating technical diagrams, architectural layouts, electrical drawings,
mechanical plans, information graphics, and presentations. The Application
Wizards customize their interfaces based on the type of drawing to allow for
the creation of drawings, diagrams, and sketches.
The principal product offerings from the Kinetix segment are discussed
below:
3D Studio MAX
3D Studio MAX R2 software, which began shipping in the third quarter of
fiscal year 1998, 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 allows 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, a powerful character-animation and
skinning plug-in software product offered by Kinetix.
3D Studio VIZ
3D Studio VIZ, introduced in May 1997, is a design tool that enables users
to express ideas on-screen, in full 3D. Architectural models, engineering
samples, and construction-site previews all become a quick reality with this
new Kinetix software tool. Real-world feedback can be incorporated into the
design, and users can explore more options with their customers more cost-
effectively. 3D Studio VIZ and AutoCAD files are easily exchanged and allow
for the development of advanced engineering or architectural visualizations.
3D Studio VIZ animates, so clients can take a simulated walkthrough of a site,
understand a structure, or view a part as it will operate in the final
assembly. The VIZ user interface employs CAD-like creation tools including
fillets, trims, and chamfers.
Product Development and Enhancement
The computer industry is characterized by rapid technological change in
computer hardware, operating systems, and software. To keep pace with this
change, Autodesk maintains an aggressive program of new product development.
Autodesk dedicates considerable resources to research and development to
further enhance its existing products and to create new products and
technologies. During fiscal years 1998, 1997, and 1996, Autodesk incurred
$122,432,000, $93,702,000, and $78,678,000, respectively, for software design,
development, product localization, and project-management activities
(excluding capitalized software development costs of
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approximately $2,200,000 in fiscal year 1998; no software development costs
were capitalized during fiscal years 1997 and 1996).
The majority of Autodesk's basic research and product development has been
performed in the United States, while translation and localization of foreign-
market versions are generally performed by development teams or contractors in
the local markets. Autodesk's product-related functions in Europe, including
software development, localization, quality assurance, and technical
publications, are centralized in Neuchatel, Switzerland. Production in Europe
is centralized in Ireland, and production in Asia Pacific is centralized in
Singapore.
Autodesk intends to continue recruiting and hiring experienced software
developers and to consider the licensing and acquisition of complementary
software technologies and businesses. In addition, Autodesk will continue to
actively collaborate with and support independent software developers who
offer products that enhance and complement AutoCAD software and other products
offered by Autodesk.
The software products offered by Autodesk are internally complex. Despite
extensive testing and quality control, these products may contain errors or
defects ("bugs"), especially when first introduced. In fiscal year 1996,
Autodesk experienced quality and performance issues associated with AutoCAD
Release 13, including issues related to compatibility with certain hardware
platforms and peripheral equipment, interoperability problems with products
designed to work in conjunction with AutoCAD Release 13, and other issues
associated with the software's object-oriented design. These factors resulted
in a high rate of product returns in fiscal year 1996. There can be no
assurance that defects or errors will not occur in future releases of AutoCAD
or other software products offered by Autodesk. Such defects or errors could
result in corrective releases to Autodesk's software products, damage to
Autodesk's reputation, loss of revenues, an increase in product returns, or
lack of market acceptance of its products, any of which could have a material
and adverse effect on Autodesk's business and consolidated results of
operations.
Autodesk believes that its future results will depend largely upon its
ability to offer products that compete favorably with respect to price,
reliability, performance, range of useful features, continuing product
enhancements, reputation, and training. Delays or difficulties may result in
the delay or cancellation of planned development projects, and could have a
material and adverse effect on Autodesk's business and consolidated results of
operations. Further, increased competition in the market for design, mapping,
or multimedia software products could also have a negative impact on
Autodesk's business and consolidated results of operations. More specifically,
gross margins may be adversely affected if sales of low-end CAD products,
which historically have had lower margins, grow at a faster rate than
Autodesk's higher-margin products.
Certain of Autodesk's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. Autodesk generally either owns or licenses the
software developed by third parties. Because talented development personnel
are in high demand, there can be no assurance that independent developers,
including those who have developed products for Autodesk in the past, will be
able to provide development support to Autodesk in the future. Similarly,
there can be no assurance that Autodesk will be able to obtain and renew
existing license agreements on favorable terms, if at all, which could have a
material and adverse effect on Autodesk's business and consolidated results of
operations.
Autodesk's business strategy has historically depended in large part on its
relationships with third-party developers, who provide products that expand
the functionality of Autodesk's design software. There can be no assurance
that certain developers will not elect to support other products or otherwise
experience disruption in product development and delivery cycles. Such
disruption in particular markets could negatively impact these third-party
developers and end users, which could have a material adverse effect on
Autodesk's business and consolidated results of operations. Further, increased
merger and acquisition activity currently experienced in the technology
industry could affect relationships with other third-party developers, and
thus adversely affect operating results.
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Additionally, there can be no assurance that Autodesk's development efforts
will result in the timely introduction of new products or that such new
products will be commercially successful. Failure to successfully develop new
products, delays in the introduction of these new products, or lower-than-
anticipated demand for these products could have a material and adverse effect
on Autodesk's business and consolidated results of operations.
Marketing and Sales
Autodesk's customer-related operations are divided into three geographic
regions: the Americas, Europe, and Asia Pacific. Autodesk's products are
marketed worldwide through a network of domestic and foreign offices. Autodesk
sells its software products primarily through distributors and dealers (value-
added resellers or "VARs") who distribute Autodesk's products to end-users in
more than 150 countries. VARs, including both independent owners and computer
store franchisees, are supported by Autodesk and its subsidiaries through
technical training, periodic publications, and Autodesk's Home Page on the
Internet.
In addition, Autodesk works directly with dealer and distributor sales
organizations, computer manufacturers, other software developers, and
peripherals manufacturers through cooperative advertising, promotions, and
trade-show presentations. Autodesk also holds annual "Expos" throughout the
world. These dedicated trade shows, incorporated within major industry trade
shows, highlight Autodesk's products, as well as a number of third-party
products. Autodesk also employs mass-marketing techniques such as direct
mailings and advertising in business and trade journals. Further, Autodesk
supports user groups dedicated to the exchange of information related to the
use of Autodesk's products.
Domestically, Autodesk distributes its products primarily through its
authorized dealer network. Other domestic sales are made principally to large
corporations, governmental agencies, educational institutions, and, for
certain low-end CAD products, to end users. Substantially all of Autodesk's
international sales are made to dealers and distributors, which are supported
by Autodesk's foreign subsidiaries and international sales organizations.
Certain international sales result from direct exports from the United States.
Fluctuations in foreign exchange rates, specifically the stronger value of the
dollar, relative to certain international currencies, negatively impacted
foreign revenues during fiscal year 1998. These foreign currency fluctuations,
as well as any slowdowns in any of Autodesk's geographical markets, including
the recent economic instability experienced in certain Asia Pacific countries,
could have a material adverse effect on Autodesk's business and future
consolidated results of operations.
Autodesk's ability to effectively distribute its products depends in part
upon the financial and business condition of its VAR network. Although
Autodesk has not to date experienced any material problems with its VAR
network, computer software dealers and distributors are typically not highly
capitalized, have tended to experience difficulties during times of economic
contraction and during periods of technology-market price pressure, and may do
so in the future. While no single customer accounted for more than 10 percent
of Autodesk's consolidated revenues in fiscal years 1998, 1997, or 1996, the
loss of, or a significant reduction in, business with any one of Autodesk's
major international distributors or large U.S. resellers could have a material
adverse effect on Autodesk's business and consolidated results of operations.
Autodesk intends to continue to make its products available in foreign
languages and expects that foreign sales will continue to contribute a
significant portion of its consolidated revenues. Foreign revenues, including
export sales from the United States to foreign customers, accounted for
approximately 58 percent, 65 percent, and 64 percent of revenues in fiscal
years 1998, 1997, and 1996, respectively.
Customer and Dealer Support
During fiscal year 1998, Autodesk realigned its customer and dealer support
network around its market groups to better provide services related to
specific industry segments. Autodesk requires each authorized dealer and
distributor to provide a professional level of technical support to customers
by employing full-time, trained,
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technical-support personnel. Autodesk supports its dealers and distributors
through technical product training, sales training classes, and direct
telephone support. During fiscal year 1998, Autodesk began to offer more end-
user support in addition to services which had historically been offered such
as the online support available through the Autodesk Home Page on the
Internet. These new support services include the Web-Based Learning program, a
fee-based distance learning program that provides lessons and tutorials that
highlight critical components of Autodesk's products, and the Multimedia
Learning Assistance program, which provides lessons related to design projects
through an interactive multimedia tool.
Autodesk offers phone support through authorized Autodesk dealers under two
programs: the Autodesk Premier Support Program ("APSP") and the Autodesk
Systems Center Program ("ASCP"). Under the APSP, participating dealers act as
dedicated account managers to Autodesk customers that have technical questions
related to a specific vertical industry. The ASCP requires dealers to provide
superior industry-specific application training to end users of Autodesk's
products. In addition, Autodesk provides direct phone support to end users
under the new Safety Net Program ("SNP"). Under the SNP, Autodesk support
staff provide technical support for customers with questions about AutoCAD and
products offered by Autodesk's market groups.
As of January 31, 1998, Autodesk had authorized more than 900 independent
Autodesk Training Centers ("ATCs") throughout the world. These accredited
training centers offer in-depth education and training in computer-aided
design skills on AutoCAD and other Autodesk products, as well as on related,
independently developed software.
Customers have formed Autodesk user groups as forums for education and to
suggest product enhancements and development of new products. The Autodesk
User Group International ("AUGI"), officially recognized by Autodesk, sponsors
an annual meeting held concurrently with the Autodesk University user show;
publishes a quarterly newsletter; independently evaluates Autodesk products;
compiles user feature and functionality requirements; and offers telecourses
taught by its membership on CompuServe. In addition, there are local user
groups in Europe, Asia Pacific, and the Americas focused on expanding the use
of Autodesk products.
Developer Programs
One of Autodesk's key strategies is to maintain an open-architecture design
of its software products to facilitate third-party development of peripheral
and complementary products which enhance sales of Autodesk products. This
approach enables customers and third parties to customize Autodesk's products
for a wide variety of highly specific uses. The Autodesk Developer Network
program offers several programs that provide marketing, sales, and technical
support and programming tools to nearly 3,000 participating developers
worldwide, who have, to date, developed more than 5,000 commercially available
add-on applications for Autodesk products. Although Autodesk derives no direct
revenue from these application developers, Autodesk believes that the
availability and use of their add-on products enhance sales opportunities for
Autodesk's core products.
Under the Autodesk Developer Channel, Autodesk offers three programs to
third-party developers that are interested in licensing Autodesk software and
technology. The Unique Application Reseller program ("UAR") allows software
developer partners the ability to sell and support Autodesk software when
bundled with specifically defined vertical applications. The OEM program
provides the technology for qualified developers to create and deliver suites
of scalable products that focus on solving customer needs in specialized
markets. The Solution Integrator ("SI") allows solution provider partners the
ability to sell and support Autodesk software when bundled with specifically
defined vertical solutions.
To support the growth of third-party developers, whose applications extend
and enhance the functionality of Autodesk's products worldwide, Autodesk
established the Virtual Corporation Partner Program ("VCPP") during fiscal
year 1995. The VCPP is a business network comprised of dealers, independent
application developers, Autodesk Training Centers, and customers. This program
provides sales, marketing, technical, product, management, and financial
support to Autodesk Strategic Developers and dealers.
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During fiscal year 1998, Autodesk continued to expand the Mechanical
Applications Initiative ("MAI") by adding new partners. This program, which
was introduced in fiscal year 1996, is aimed at the development and marketing
of products which can be integrated with Autodesk's MCAD products. MAI
partners participate with Autodesk in product marketing and development
activities.
Backlog
Autodesk typically ships products within one to two weeks after receipt of
an order, which is common in the computer software industry. Accordingly,
Autodesk does not maintain significant backlog, and backlog as of any
particular date gives no indication of actual sales for any succeeding period.
Competition
The software industry has limited barriers to entry, and the availability of
desktop computers with continually expanding capabilities at progressively
lower prices contributes to the ease of market entry. Because of these and
other factors, competitive conditions in the industry are likely to intensify
in the future. Increased competition could result in price reductions, reduced
revenues and profit margins, and loss of market share, any of which could
adversely affect Autodesk's business, consolidated results of operations and
financial condition. The design software market in particular is characterized
by vigorous competition in each of the vertical markets in which Autodesk
competes, both by entry of competitors with innovative technologies and by
consolidation of companies with complementary products and technologies.
The AEC family of products competes directly with software offered by
companies such as Bentley Systems, Inc. ("Bentley"); Computervision
Corporation (a subsidiary of Parametric Technologies, Inc.); CADAM Systems
Company, Inc.; Diehl Graphsoft, Inc.; EaglePoint Software; International
Microcomputer Software, Inc. ("IMSI"); Intergraph Corporation; Ketiv
Technologies; Nemetschek Systems, Inc.; and Visio Corporation ("Visio").
Autodesk's MCAD products compete with products offered by a number of
competitors, including Bentley; Visionary Design Systems; Hewlett-Packard
Corporation; Parametric Technologies, Inc.; Structural Dynamics Research
Corporation; Unigraphics; Computervision Corporation (a subsidiary of
Parametric Technologies); Dassault Systemes; SolidWorks Corporation (a
subsidiary of Dassault); and Baystate Technologies, Inc. Autodesk's GIS Market
Group faces competition from companies such as Bentley; Intergraph
Corporation; MapInfo Corporation; Earth Sciences Research Institute; and MCI
Systemhouse. Kinetix product offerings compete with products offered by other
multimedia companies such as Adobe Systems Inc.; Macromedia, Inc.; and Silicon
Graphics, Inc. The Personal Solutions Group family of products competes with
IMSI; The Learning Company; Visio; Micrografx Inc. and others. Certain of the
competitors of Autodesk have greater financial, technical, sales and
marketing, and other resources than Autodesk.
Autodesk believes that the principal factors affecting competition in its
markets are product reliability, performance, ease of use, range of useful
features, continuing product enhancements, reputation, price and training. In
addition, the availability of third-party application software is a
competitive factor within the CAD market. Autodesk believes that it competes
favorably in these areas and that its competitive position will depend, in
part, upon its continued ability to enhance existing products, and to develop
and market new products.
In April 1998, Autodesk received notice that the FTC has undertaken a
nonpublic investigation of its business practices. The FTC had not made any
claims or allegations regarding Autodesk's current business practices or
policies, nor have any charges been filed. Autodesk intends to cooperate fully
with the FTC in its inquiry. Autodesk does not believe that the investigation
will have a material impact on its business or consolidated results of
operations.
Intellectual Property and Licenses
Autodesk protects its intellectual property through copyright, trade secret,
patent, and trademark laws. For substantially all AutoCAD sales outside of
North America, Autodesk uses software protection locks to inhibit unauthorized
copying. Nonetheless, there can be no assurance that Autodesk's intellectual
property rights can be
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successfully asserted in the future or will not be invalidated, circumvented,
or challenged. In addition, the laws of certain foreign countries where
Autodesk's products are distributed do not protect Autodesk's intellectual
property rights to the same extent as U.S. laws. The inability of Autodesk to
protect its proprietary information could have a material adverse effect on
Autodesk's business and consolidated results of operations.
From time to time, Autodesk receives claims alleging infringement of a third
party's intellectual property rights, including patents. Any disputes
involving Autodesk's intellectual property rights or those of another party
could lead to costly litigation which could have a material adverse effect on
Autodesk's business and consolidated results of operations.
Autodesk retains ownership of software it develops. All software is licensed
to users and provided in object code pursuant to either shrink-wrap, embedded
or on-line licenses, or executed license agreements. These agreements contain
restrictions on duplication, disclosure, and transfer.
Autodesk believes that because of the limitations of laws protecting its
intellectual property and the rapid, ongoing technological changes in both the
computer hardware and software industries, it must rely principally upon
software engineering and marketing skills to maintain and enhance its
competitive market position.
Autodesk has an in-house antipiracy program focused on pursuing companies
and individuals who illegally duplicate, sell, or install Autodesk's software
products. Software piracy is in some cases a felony under U.S. federal law,
which allows copyright and patent holders to protect and enforce their rights
as owners of intellectual property. Additionally, Autodesk is a member and co-
founder of the Business Software Alliance ("BSA"), an organization comprised
of member software companies whose purpose is to advance favorable public
policy for the technology industry and promote the importance of honoring
software copyrights.
Production
Production of Autodesk's software products involves duplication of the
software media and the printing of user manuals. The purchase of media and the
transfer of the software programs onto media for distribution to customers are
performed by Autodesk and by licensed subcontractors. Media for Autodesk's
products include CD-ROMs and disks which are available from multiple sources.
User manuals for Autodesk's products and packaging materials are produced to
Autodesk specifications by outside sources. Domestic production is performed
in leased facilities operated by Autodesk. Certain product assembly is also
performed by independent third-party contractors. International production is
performed by independent third-party contractors in Ireland and Singapore. To
date, Autodesk has not experienced any material difficulties or delays in the
production of its software and documentation.
Employees
As of December 31, 1998, Autodesk had 2,691 full-time employees, of which
2,063 were based in the Americas, 428 in Europe, and 200 in Asia Pacific. The
continued growth and success of Autodesk depends significantly on the
continued service of highly skilled employees. Competition for these employees
in today's marketplace, especially in the technology industries, is intense.
Autodesk's ability to attract and retain employees is dependent on a number of
factors, including its continued ability to grant stock incentive awards.
There can be no assurance that Autodesk will be successful in continuing to
recruit new personnel and to retain existing personnel. The loss of one or
more key employees or Autodesk's inability to maintain existing employees or
recruit new employees could have a material adverse impact on Autodesk. None
of Autodesk's employees in the United States is subject to a collective
bargaining agreement, and Autodesk has never experienced a work stoppage.
Management believes that its relations with its employees are good.
Properties
Autodesk's executive offices and those related to product development,
domestic marketing and sales, and production are located in leased office
space in northern California. Autodesk also leases office space in various
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locations throughout the United States for local sales, development, and
technical support personnel. Autodesk's foreign subsidiaries lease office
space for their operations. Autodesk owns substantially all equipment used in
its facilities.
Legal Proceedings
In May 1997, Autodesk settled a lawsuit filed by Tektronix, Inc. alleging a
patent infringement, pursuant to which all of Tektronix's claims have been
dismissed.
In December 1994, Autodesk recorded a $25.5 million litigation charge as a
result of a judgment against Autodesk on a claim of a trade secret
misappropriation brought by Vermont Microsystems, Inc. ("VMI"). Autodesk
appealed that judgment and, upon remand to the Federal District Court, a
reduced judgment was entered against Autodesk in the amount of $14.2 million
plus interest. On February 23, 1998, the U.S. Court of Appeals for the Second
Circuit reduced the judgment to $7.8 million.
In May 1998, final judgment was entered in the Vermont Microsystems, Inc.
("VMI") trade secret litigation in the amount of $7.8 million plus accrued
interest. Final payment of approximately $8.4 million was made to VMI and
charged against a previously recorded litigation accrual. During the quarter
ended July 31, 1998, Autodesk credited $18.2 million and $2.7 million to
operating income and interest income, respectively, to record the gain on the
litigation settlement and remaining unutilized interest accruals.
Autodesk is a party to various legal proceedings arising from the normal
course of business activities. While the outcome of these matters cannot be
predicted with certainty, in management's opinion, resolution of these matters
is not expected to have a material adverse impact on Autodesk's consolidated
results of operations or its financial position. However, depending on the
amount and timing, an unfavorable resolution of a matter could materially
affect Autodesk's future results of operations or cash flows in a particular
period.
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AUTODESK MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion in "Autodesk Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains trend analysis and
other forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Actual results could
differ materially from those set forth in the forward-looking statements as a
result of the factors set forth elsewhere herein, including "--Certain Risk
Factors Which May Impact Future Operating Results" and "Risk Factors."
Restatement of Financial Statements
On March 31, 1997, Autodesk acquired Softdesk, Inc. ("Softdesk"), a leading
supplier of AutoCAD-based applications software for the architecture,
engineering, and construction market, and on May 4, 1998, acquired from Genius
CAD Software GmbH ("Genius") various mechanical computer-aided-design software
and technologies. Both of these acquisitions were accounted for as business
combinations using the purchase method of accounting. In accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations," the costs of these acquisitions were allocated to the assets
acquired and the liabilities assumed (including in-process research and
development) based on their estimated fair values using valuation methods
believed to be appropriate at the time. The amounts allocated to in-process
research and development of $55.1 and $28.8 million for Softdesk and Genius,
respectively, were expensed in the periods in which the acquisitions were
consummated in accordance with FASB Interpretation No. 4, "Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method." Subsequent to the Securities and Exchange Commission's letter to the
AICPA dated September 9, 1998, regarding its views on in-process research and
development ("IPR&D"), Autodesk re-evaluated its IPR&D charges on the Softdesk
and Genius acquisitions, revised the purchase price allocations and restated
its financial statements. As a result, Autodesk made adjustments to decrease
the amounts previously expensed as IPR&D and increase the amounts capitalized
as goodwill and other intangibles relating to the Softdesk and Genius
acquisitions by $35.9 and $15.7 million, respectively.
The effect of these adjustments on the previously reported consolidated
financial statements as of and for the year ended January 31, 1998 and the
nine months ended October 31, 1998 and 1997 are as follows (in thousands):
Year ended Nine Months Ended Nine Months Ended
January 31, 1998 October 31, 1998 October 31, 1997
-------------------- -------------------- --------------------
As Reported Restated As Reported Restated As Reported Restated
----------- -------- ----------- -------- ----------- --------
Nonrecurring charges.... $58,087 $22,187 $37,692 $21,985 $ 58,087 $22,187
General and
administrative......... $83,287 $88,900 $84,306 $90,718 $ 60,455 $64,384
Cost of revenues........ $70,858 $71,338 $56,129 $56,648 $ 52,278 $52,614
Income from operations.. $45,355 $75,162 $88,718 $97,494 $ 1,799 $33,434
Provision for income
taxes.................. $39,635 $39,635 $42,251 $42,974 $ 23,144 $23,144
Net income (loss)....... $15,364 $45,171 $57,453 $65,506 $(13,954) $17,681
Basic net income (loss)
per share.............. $ 0.33 $ 0.97 $ 1.24 $ 1.41 $ (0.30) $ 0.38
Diluted net income
(loss) per share....... $ 0.31 $ 0.91 $ 1.18 $ 1.34 $ (0.30) $ 0.35
As of January 31, As of October 31, As of October 31,
1998 1998 1997
-------------------- -------------------- --------------------
As Reported Restated As Reported Restated As Reported Restated
----------- -------- ----------- -------- ----------- --------
Purchased technologies
and capitalized
software, net.......... $31,553 $33,373 $33,949 $34,640 $ 33,998 $35,962
Goodwill, net........... $16,995 $44,982 $35,054 $72,946 $ 18,545 $48,216
Deferred income taxes
(non-current asset).... $13,782 $13,782 $14,786 $14,063 $ -- $ --
Retained earnings....... $19,895 $49,702 $49,406 $87,266 $ 42,598 $74,233
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Results of Operations
The following table sets forth, as a percentage of net revenues,
consolidated statement of income data for the periods indicated. These
operating results are not necessarily indicative of results for any future
periods.
Fiscal Year Nine Months
Ended Ended
January 31, October 31,
----------------- -------------
1998 1997 1996 1998 1997
---- ---- ---- ----- -----
Net revenues................................ 100% 100 % 100% 100% 100 %
Costs and expenses:
Costs of revenues......................... 12 13 13 10 12
Marketing and sales....................... 38 40 34 35 39
Research and development.................. 20 19 15 20 21
General and administrative................ 14 15 14 16 15
Nonrecurring charges...................... 4 1 -- 4 5
Litigation accrual reversal............... -- -- -- (3) --
--- --- --- ----- -----
Total costs and expenses................ 88 88 76 82 92
--- --- --- ----- -----
Income (loss) from operations............... 12 12 24 18 8
Interest and other income, net.............. 1 1 2 2 1
--- --- --- ----- -----
Income (loss) before income taxes........... 13 13 26 20 9
Provision for income taxes.................. 6 5 9 8 5
--- --- --- ----- -----
Net income (loss)....................... 7% 8% 17% 12% 4%
=== === === ===== =====
Nine Months Ended October 31, 1998 and 1997
Net revenues. Autodesk's net revenues for the nine months ended October 31,
1998 were $551.0 million, which represented a 27% increase from the third
quarter of the prior fiscal year. Autodesk achieved significant net revenue
growth in the Americas and Europe when compared to the same period in the
prior fiscal year, while net revenues decreased in Asia Pacific. This net
revenue growth was the result of strong demand for products offered by
Autodesk's Design Solutions and Personal Solutions operating segments,
including software products such as AutoCAD Mechanical Desktop 3.0, AutoCAD
LT98, Architectural Desktop, and incremental software revenues associated with
the May 1998 acquisition of Genius (see Note 2 to the Autodesk condensed
consolidated interim financial statements). Sales of AutoCAD and AutoCAD
upgrades accounted for approximately 64 percent and 72 percent of Autodesk's
consolidated net revenues for the nine months ended October 31, 1998 and 1997,
respectively. The value of the US dollar, relative to certain international
currencies, negatively impacted revenues in the nine months of the fiscal year
compared to the same period in the prior fiscal year, principally due to
changes in the rate of exchange between the US dollar and the Japanese yen and
the Australian dollar. International sales, including exports from the U.S.,
accounted for approximately 58 percent of Autodesk's revenues in the nine
months of fiscal year 1999 as compared to 60 percent in the same period of the
prior fiscal year.
Autodesk experienced a decline in Asia Pacific net revenues during the nine
months of fiscal year 1999 compared to the corresponding period of the prior
year due to weak economic conditions in the region. Autodesk expects that
these adverse conditions in Asia Pacific will continue in the short term, and
that they may continue to adversely affect Autodesk's revenue and earnings.
Autodesk derives a substantial portion of its revenues from sales of AutoCAD
software, AutoCAD upgrades, and adjacent products which are interoperable with
AutoCAD, and expects this trend to continue. As such, any factor adversely
affecting sales of AutoCAD and AutoCAD upgrades, including such factors as
product life cycle, market acceptance, product performance and reliability,
reputation, price competition, and the availability of third-party
applications, could have a material adverse effect on Autodesk's business and
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consolidated results of operations. Additionally, slowdowns in any of
Autodesk's geographical markets could also have a material adverse impact on
Autodesk's business and consolidated results of operations.
Product returns, consisting principally of stock rotation, are recorded as a
reduction of revenues and represented approximately 4 percent and 6 percent of
consolidated revenues in the nine months of fiscal years 1999 and 1998,
respectively. The decrease in product returns as a percentage of revenues is
primarily due to Autodesk's continued focus on channel inventory management,
sell through sales activities and programs, and the absence of performance or
quality issues with Autodesk's software products. Although product returns
decreased as a percentage of consolidated revenues, comparing the nine months
of fiscal year 1999 to the same period in the prior year, management
anticipates that the level of product returns in future periods will continue
to be impacted by the timing of new product releases, as well as the quality
and market acceptance of new products.
Cost of revenues. Cost of revenues as a percentage of net revenues for the
nine months ended October 31, 1998 was 10 percent, compared to 12 percent in
the same period in the prior fiscal year. This reduction is largely due to
efficiencies in production and distribution activities and lower royalties
paid by Autodesk as a result of it having acquired the rights to certain
multimedia products during the third quarter of fiscal year 1998. Cost of
revenues as a percentage of net revenues has been and may continue to be
impacted by the mix of product sales, software amortization, royalty rates for
licensed technology embedded in Autodesk's products, and the geographic
distribution of sales.
Marketing and sales. As a percentage of net revenues, marketing and sales
expenses decreased to 35 percent of net revenues in the third quarter of
fiscal year 1999 from 39 percent in the nine months ended October 31, 1997.
Actual spending for this period increased 13 percent as a result of higher
employee costs and increased marketing costs associated with new and enhanced
product offerings.
Research and development. Research and development expenses as a percentage
of net revenues for the nine months ended October 31, 1998 decreased to 20
percent from 21 percent for the same period in the prior fiscal year. Actual
research and development spending (including capitalized software costs of
$2.2 million recorded during the first half of fiscal year 1998) increased 16
percent as compared to the same period in the prior fiscal year. The absolute
dollar increase is due primarily to the addition of software engineers,
expenses associated with the development and translation of new products, and
incremental research and development personnel expenses associated with the
acquisition of Genius during May, 1998.
General and administrative. General and administrative expenses were 16
percent of net revenues for the nine months ended October 31, 1998, and 15
percent of net revenues in the same period of the prior fiscal year. In
absolute dollar terms, general and administrative expenses increased 41
percent for the nine months ended October 31, 1998 from the same period of the
prior fiscal year, primarily because of increased employee-related expenses
($8 million increase), amortization of intangibles recorded in connection with
the acquisition of Genius and the Softdesk merger ($5.1 million increase),
other depreciation and amortization expenses ($2 million increase), costs
incurred to ensure that Autodesk's infrastructure is year 2000 compliant ($3
million), and costs incurred in the ongoing nonpublic FTC investigation ($1.1
million).
Nonrecurring charges--Genius acquisition. On May 4, 1998, Autodesk entered
into an agreement with Genius CAD Software GmbH ("Genius"), a German limited
liability company, to purchase various mechanical computer-aided-design
("CAD") software applications and technologies (the "acquisition"). In
consideration for this acquisition, Autodesk paid Genius approximately $69
million in cash. The acquisition has been accounted for using the purchase
method of accounting. In connection with the acquisition, Autodesk recorded a
charge for in-process research and development of $13.1 million, all of which
was recorded during the three months ended July 31, 1998.
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In-Process Technologies Overview
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relate to the
completion of all planning, designing and testing activities that are
necessary to establish that the product or service can be produced to meet its
design requirements, including functions, features and technical performance
requirements.
As of the acquisition date, Genius had initiated the research and
development effort related to the product features and functionality that will
reside in the next versions of the (i) Genius AutoCAD, (ii) Genius Desktop,
(iii) Genius Vario, and (iv) Genius Modules product families.
With respect to the acquired in-process technologies, the calculations of
value were adjusted to reflect the value creation efforts of Genius prior to
the close of the acquisition. Following are the estimated completion
percentages, estimated technology lives and projected introduction dates:
Percent Technology Introduction
Genius In-Process Technologies Completed Life Dates
- ------------------------------ --------- ---------- -------------
Genius AutoCAD Version R15................... 45% 6 years mid/late 1999
Genius Desktop Version 3.0................... 40% 4 years Sept. 1998
Genius AutoCAD LT 1998....................... 20% 5 years mid/late 1999
Genius Vario Version R15..................... 20% 3 years mid/late 1999
Genius Modules Version R15................... 20% 3 years mid/late 1999
A brief description of the acquired in-process projects is set forth below:
Genius AutoCAD and Genius Desktop
The substantial technological improvements under development at the time of
the acquisition included modernizing the code and significantly improving the
ease of use of the products.
Modernizing the code. Modernization of the code for Genius Desktop and
Genius AutoCAD included a complete replacement of the existing LISP based code
with modern ARX/object oriented code. Autodesk determined through technical
due diligence that a substantial portion of the source code in both Genius
Desktop and Genius AutoCAD was based on LISP, with remaining code based on
ADS. Replacing the LISP and ADS code was anticipated to significantly improve
the flexibility (e.g., to add additional features) and performance of the
products.
It was uncertain, however, whether all of the existing features could be
easily converted to ObjectARX oriented code and what impact this conversion
would have on any new features currently being developed. Autodesk estimates
that this conversion may take several releases in order to be fully complete.
Partially completed conversions for the interim product releases are expected
to rely on a combination of source code from LISP and ObjectARX code.
Ease of use. Working through an application programming interface ("API")
for the Autodesk products, a significant issue under continual development is
the level of functionality and ease of use of the features which require
access to the Autodesk product code. As a result of the acquisition, Autodesk
anticipates that a significant level of effort would be required to either
expand or remove these API's to increase the functionality and usability of
features, and to improve the interoperability of the products with Autodesk's
offerings.
A significant risk factor associated with this development effort is the
impact that removal of the API may have on the functionality of a given
feature, and the additional development effort required to restore a feature
to its current functionality (before any improvements in this functionality
can be made). Similar to development effort associated with modernizing the
code, Autodesk expects that it may take several releases of both of these
products to fully achieve this technological milestone. Autodesk estimated,
for purposes of its valuation, that at the date of the Genius acquisition,
development projects associated with the next release of Genius AutoCAD and
Genius Desktop were approximately 45 percent and 40 percent completed,
respectively.
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Estimated costs to be incurred to reach technological feasibility as of the
date of acquisition were less than $800,000 for Genius AutoCAD and less than
$500,000 for Genius Desktop.
Genius AutoCAD LT
The most significant technological challenge for the Genius AutoCAD LT
product offering was the fact API's to AutoCAD LT (the Autodesk product on
which Genius LT runs) did not exist. To develop features for Genius AutoCAD
LT, workarounds through the Windows interface are required. Genius had reverse
engineered the AutoCAD LT product to build the Genius AutoCAD LT software
product. This resulted in a product which was extremely fragile and vulnerable
to change in AutoCAD LT and Microsoft Windows. Therefore, the product is
dependent on both the AutoCAD LT releases and the Microsoft Windows releases.
Expanding and improving the features given Genius' limited access to the
platform product, AutoCAD LT, was expected to result in a substantial
development effort pre-acquisition. In addition, improving the
interoperability of the Genius LT product and AutoCAD LT also posed a
significant technological challenge to Autodesk post-acquisition. Autodesk
estimated that the next release of Genius AutoCAD LT project, for purposes of
its valuation, was approximately 20 percent complete at the date of the
acquisition. Estimated costs to be incurred to reach technological feasibility
as of the date of acquisition were less than $200,000.
Genius Vario and Modules
Genius Vario, which runs on top of AutoCAD, currently ships in a two-
dimensional version. At the date of acquisition, a three-dimensional version
was under development. The three-dimensional version is a significant shift in
technology, from handling two-dimensional drawings to three-dimensional
models, and the increasing complexity which results. Developing three-
dimensional Vario involved developing parametric modeling in three
dimensions--an area which has significant new development challenges and is
far more speculative than two-dimensional parametric modeling. In addition,
the three-dimensional Vario product is intended to provide much more internet
functionality than is currently available. Autodesk estimated that the next
release of Genius Vario and Modules projects were approximately 20 percent
complete at the date of the acquisition. Estimated costs to be incurred to
reach technological feasibility for the Genius Vario and Modules projects as
of the date of acquisition were less than $25,000.
Valuation analysis
Revenue
The revised value of the acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product sales. The discounted cash flow analysis was based on management's
forecast of future revenues, cost of revenues and operating expenses related
to the products and technologies purchased from Genius which represent the
process and expertise employed to develop mechanical design application
software designed to work in conjunction with Autodesk's mechanical CAD
products. Future revenue estimates were generated from the following product
families: (i) Genius AutoCAD, (ii) Genius Desktop, (iii) Genius AutoCAD LT,
(iv) Genius Vario, and (v) Genius Modules. Aggregate revenue for Genius
products was estimated to be less than $20 million for the period from May 4,
1998 to January 31, 1999. Thereafter, revenue was estimated to increase at
rates ranging from 25 to 33 percent for fiscal years 2000 through 2004,
stabilizing at 20 percent growth for the remainder of the estimation period.
Year-to-year revenue growth estimates were developed based on an expanding
market for CAD software products and the ability of Autodesk to maintain its
position in the market. The growth rates contained in the first five years of
the projections are greater than those historically experienced by Autodesk
and are largely a result of the expansion of the Genius products into
Autodesk's existing worldwide sales channels, particularly in North America
and Asia Pacific, which historically have not contributed significant revenues
to Genius.
As stated previously, revenues for developed technology were estimated by
management for the remainder of fiscal year 1999 through fiscal year 2004.
Management's estimates reflect a gradual decline in revenues from developed
technologies after considering historical product life cycles and anticipated
product release dates.
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While revenues derived from both developed and in-process technologies are
estimated to decline over the next several fiscal years, overall revenues
attributable to the Genius products and technologies are anticipated to grow
in absolute dollars and as a percentage of aggregate revenue to reflect the
growth of future (yet-to-be-developed) technologies.
Management's analysis also considered anticipated product release dates for
Autodesk's mechanical CAD products, as well as release dates for the various
acquired Genius products and technologies which are interoperable with
Autodesk's mechanical CAD products. The overall technology life was estimated
to be approximately three to four years for the Genius Desktop and Genius
Vario and Modules products, and approximately five to six years for all other
Genius products and technologies purchased by Autodesk.
Operating expenses
Operating expenses used in the valuation analysis of Genius included (i)
cost of revenues, (ii) general and administrative expense, (iii) marketing and
sales expense, and (iv) research and development expense. In developing future
expense estimates, it was estimated that the Genius operations would be merged
into Autodesk's operating structure. Selected operating expense assumptions
were based on an evaluation of Autodesk's overall business model, specific
product results, including both historical and expected direct expense levels
(as appropriate), and an assessment of general industry metrics.
Cost of revenues. Cost of revenues, expressed as a percentage of revenue,
for the developed and in-process technologies identified in the valuation was
estimated to be 11% throughout the estimation period. Autodesk's cost of
revenues was 13% for fiscal 1996 and fiscal 1997, and 12% for fiscal 1998.
General and administrative. General and administrative expense, expressed as
a percentage of revenue, for the developed and in-process technologies
identified in the valuation ranged from 8.5 percent in fiscal year 1999 to 6.0
percent in fiscal year 2002. Thereafter, general and administrative expenses,
expressed as a percentage of revenue for the developed and in-process
technologies identified in the valuation were estimated to stabilize at 5.0
percent of revenue. For the fiscal year ended January 31, 1998, Autodesk's
general and administrative expense, excluding depreciation and amortization,
was approximately 9 percent.
Marketing and sales. Marketing and sales expense, expressed as a percentage
of revenue, for the developed and in-process technologies identified in the
valuation, was estimated to be 25 percent throughout the estimation period,
based on Autodesk's historical experience with similar products.
Research and development. Research and development ("R&D") expenses consist
of the costs associated with activities undertaken to correct errors or keep
products updated with current information (also referred to as "maintenance"
R&D). Maintenance R&D includes all activities undertaken after a product is
available for general release to customers to correct errors or keep the
product updated with current information. These activities include routine
changes and additions. The maintenance R&D expense was estimated to be 2.5
percent of revenue for the developed and in-process technologies throughout
the estimation period.
Effective income tax rate
The effective income tax rate utilized in the analysis of in-process
technology was 34 percent in fiscal year 1999 and in the mid 30-percent range
thereafter, which reflects Autodesk's current combined federal and state
statutory income tax rate, exclusive of nonrecurring charges and its estimated
income tax rate in future years.
Discount rate
The discount rates selected for developed and in-process technology were
15.0 percent and 20.0 percent, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the Weighted
Average Cost of Capital ("WACC") (15.0 percent) and (ii) the Weighted Average
Return on Assets (15.7 percent). The discount rate utilized for the in-process
technology was determined to be higher than Autodesk's WACC due to the fact
that the technology had not yet reached technological feasibility as of the
date of
130
valuation. In utilizing a discount rate greater than Autodesk's WACC,
management has reflected the risk premium associated with achieving the
forecasted cash flows associated with these projects.
Allocation of value
The fair values of the assets acquired from Genius were allocated between
Europe and the rest of the world ("ROW"), which consisted of the U.S. and
Asia. The allocation of assets among Europe and ROW was based on revenue
expected to be generated on Genius products. Based on the management's revenue
forecast for fiscal years 1998 through 2003, it was determined that 60 percent
of Genius' products total sales are expected to be generated in Europe, while
the remaining 40 percent of sales are expected to be generated in ROW.
Accordingly, the identified intangible assets were allocated 60 percent to
Europe and 40 percent to ROW. The results of the allocation of values between
Europe and ROW based assets are as follows:
Geographic Allocation
---------------------
Identified Intangible Asset Europe ROW
--------------------------- ---------- ----------
Developed Technology..................................... $7,620,000 $5,080,000
In-Process Technology.................................... 7,860,000 5,240,000
Trademark, trade name and other intangible assets........ 660,000 440,000
Comparison to Actual Results
To date, revenues and operating expenses attributable to in-process
technologies associated with the Genius acquisition are consistent with
management's projections. Based upon factors currently known, management
believes the revenues and operating expenses associated with these in-process
technologies will favorably impact Autodesk's consolidated results of
operations and financial position. Failure to complete the development of
these projects in their entirety, or in a timely manner, could have an adverse
impact on Autodesk's operating results, financial condition and results of
operations. Additionally, the value of other intangible assets acquired from
Genius may become impaired.
Nonrecurring charges--Other. During the second fiscal quarter, Autodesk
recorded charges of approximately $8.9 million relating primarily to
restructuring charges associated with the consolidation of certain development
centers ($1.5 million); the write-off of purchased technologies associated
with these operations ($2.2 million); staff reduction in Asia Pacific in
response to current economic conditions in the region ($1.7 million); costs in
relation to potential legal settlements ($2.5 million); and the write-down to
fair market value of older computer equipment that Autodesk planned to dispose
of ($1.0 million). These charges reduced income after tax by approximately
$5.9 million ($0.12 per share on a diluted basis). The restructurings noted
above are expected to be completed by the end of Autodesk's fiscal year ending
January 31, 1999. See Note 8 to the Autodesk Unaudited Condensed Consolidated
Financial Statements for further explanation.
Nonrecurring charges--prior year transactions. On March 31, 1997, Autodesk
exchanged 2.9 million shares of its common stock for all of the outstanding
stock of Softdesk, Inc. Based on the value of Autodesk stock and options
exchanged, the transaction, including transaction costs, was valued at
approximately $94 million. This transaction was accounted for using the
purchase method of accounting with the purchase price being principally
allocated to capitalized software, purchased technologies, and intangible
assets. Approximately $19.2 million of the total purchase price represented
the value of in-process research and development that had not yet reached
technological feasibility and had no alternative future use. Approximately
$3.0 million of technology acquired from 3D/Eye during the first quarter of
fiscal year 1998 also represented the value of in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. The $19.2 million and the $3.0 million were charged to
operations in the first quarter of fiscal year 1998. These charges reduced net
income for the period by approximately $21.1 million ($0.46 per share on a
diluted basis) and reflect the fact the one-time charge for acquired in-
process research and development recorded in connection with the Softdesk
transaction was not deductible for income tax purposes.
Litigation accrual reversal. Autodesk recorded a $25.5 million nonrecurring
charge during fiscal year 1995 on a claim of trade-secret misappropriation
brought by Vermont Microsystems, Inc. ("VMI"). As of the end of
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the first quarter of fiscal year 1999, the total amount accrued related to the
initial judgment plus accrued interest was approximately $29.3 million.
Autodesk appealed this decision, and in May 1998, final judgment was entered
in the VMI litigation and a corresponding final payment of approximately $8.4
million was made to VMI. During the second quarter of fiscal year 1999,
Autodesk recognized $18.2 million and $2.7 million to operating income and
interest income, respectively, to reflect the remaining unutilized litigation
and related interest accruals.
Interest and other income. Interest and other income for the nine months
ended October 31, 1998 was $11.0 million as compared to $7.4 million for the
same period in the prior fiscal year. Interest income was $7.8 million for the
first nine months of the current fiscal year as compared with $5.0 million in
the prior fiscal year. The fiscal year 1999 amount included $2.7 million
representing the interest portion of the VMI settlement (see Note 3 to the
Autodesk condensed consolidated interim financial statements). Also
contributing to the year-over-year increase was a $1.3 million gain realized
upon the sale of technical programs and related documentation, certain
tangible fixed assets, copyrights, tradenames, and other intangible assets
associated with Autodesk's Picture This Home(R) software programs and series
of consumer titles. Autodesk did not transfer any liabilities as part of this
sale.
Provision for income taxes. Autodesk's effective income tax rate, excluding
the impact of nonrecurring charges, was 36 percent for the first nine months
of fiscal year 1999 as compared to 38.5 percent for the same period in the
prior fiscal year. The decrease in the effective income tax rate was due to
incremental tax benefits associated with Autodesk's foreign sales corporation
and foreign earnings that are taxed at rates different than the U.S. statutory
rate. The $.70 million benefit from the $13.1 million charge in the second
quarter of fiscal year 1999 for in-process research and development associated
with the acquisition of Genius is less than the U.S. statutory rate as a
portion of it will not be deductible for U.S. tax purposes. Additionally, a
valuation allowance has been established for a portion of the deferred tax
asset which is deductible for U.S. tax purposes over an extended period of
time.
Autodesk's United States income tax returns for fiscal years ended January
31, 1992 through 1996, are under examination by the Internal Revenue Service
("IRS"). On August 27, 1997, the IRS issued a Notice of Deficiency proposing
increases to the amount of the Company's federal income taxes for fiscal years
1992 and 1993. On November 25, 1997, Autodesk filed a petition with the United
States Tax Court to contest these alleged tax deficiencies. Resolution of
these alleged tax deficiencies and any adjustments that may ultimately result
from these examinations are not expected to have a material adverse impact on
Autodesk's consolidated results of operations or its financial position.
Fiscal Years Ended January 31, 1998, 1997 and 1996
Net Revenues. Autodesk's consolidated net revenues in fiscal year 1998 were
$617.1 million, which represented a 24.2 percent increase from fiscal year
1997 net revenues of $496.7 million. Revenues in the Americas and Europe
increased $101.0 million or 54 percent and $19.3 million or 10 percent,
respectively, from the prior fiscal year, while remaining flat in Asia
Pacific. These increases were due largely to higher sales of AutoCAD software,
Autodesk's flagship product, and significant growth in Autodesk's market group
revenues. The most recent release of AutoCAD software, AutoCAD Release 14
("AutoCAD R14"), was released in the United States in May 1997 and in most
other regions shortly thereafter. Also contributing to the increased revenues
in fiscal year 1998 were revenues contributed by Softdesk, Inc., which was
acquired by Autodesk in March 1997. Net revenues in fiscal year 1997 decreased
7 percent from the $534.2 million posted in fiscal year 1996, reflecting
primarily slowdowns in the US dealer channel, Germany, Switzerland, and
France. The lower fiscal 1997 revenues reflected slowing sales of AutoCAD and
AutoCAD update software as the then most recent version of the product,
Release 13, entered the end of its product life cycle.
AutoCAD and AutoCAD updates represented approximately 70 percent, 70
percent, and 80 percent of total consolidated revenues in fiscal years 1998,
1997, and 1996, respectively. During fiscal year 1998, approximately 244,000
new AutoCAD licenses were added worldwide, compared to 207,000 and 233,000
licenses added during fiscal years 1997 and 1996, respectively. AutoCAD
upgrade revenues were $108 million, $45 million, and $49 million in fiscal
years 1998, 1997, and 1996, respectively.
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Foreign revenues, including exports from the United States, accounted for
approximately 58 percent, 65 percent, and 64 percent of consolidated revenues
in fiscal years 1998, 1997, and 1996, respectively. The stronger value of the
US dollar, relative to international currencies, primarily the Japanese yen
and German mark, negatively affected international revenues by approximately
$30 million in fiscal year 1998 compared to fiscal year 1997 and $17 million
in fiscal year 1997 compared to fiscal year 1996. Fluctuations in foreign
exchange rates positively impacted international operating expenses by $11
million in fiscal year 1998, and did not materially impact operating expenses
in fiscal years 1997 and 1996. A summary of revenues by geographic area is
presented in Note 9 to the Autodesk Consolidated Financial Statements.
Autodesk records product returns as a reduction of revenues. In fiscal years
1998, 1997, and 1996, product returns, consisting principally of stock
rotation, totaled $35.4 million, $44.3 million, and $51.2 million (or
6 percent, 9 percent, and 9 percent of total consolidated revenues,
respectively). Total product returns decreased $8.9 million from fiscal year
1997 to fiscal year 1998 due largely to continued management focus on the
level of inventories with Autodesk's resellers, sell-through sales activities
and programs in Autodesk's distribution channel, and fewer returns associated
with AutoCAD R14 compared to the prior version. Returns of AutoCAD products
accounted for 40 percent, 61 percent, and 79 percent of total product returns
in fiscal years 1998, 1997, and 1996, respectively. The lower level of product
returns in fiscal year 1998 compared to fiscal years 1997 and 1996 reflected a
lower level of product rotation that had previously been associated with
performance issues relating to AutoCAD Release 13 and customers' perception
issues associated with this product.
The nature and technical complexity of Autodesk's software is such that
defect corrections have occurred in the past and may occur in future releases
of AutoCAD and other products offered by Autodesk. As is the case with most
complex software, Autodesk has experienced performance issues with previous
releases of its AutoCAD software, and performance issues could occur in future
releases of AutoCAD and other products offered by Autodesk.
Delays in the introduction of planned future product releases, or failure to
achieve significant customer acceptance of these new products, may have a
material adverse effect on Autodesk's revenues and consolidated results of
operations in future periods. Additionally, slowdowns in any of Autodesk's
geographical markets, including the recent economic instability in certain
countries of the Asia Pacific region, could also have a material adverse
effect on Autodesk's business and consolidated results of operations. The
foregoing forward-looking information is based upon Autodesk's current
expectations. Actual results could differ materially for the reasons noted and
due to other risks, including, but not limited to, those mentioned above and
otherwise discussed under "--Certain Risk Factors Which May Impact Future
Operating Results."
Cost of Revenues. Cost of revenues includes the purchase of disks and
compact disks (CD-ROMs), costs associated with transferring Autodesk's
software to electronic media, printing of user manuals and packaging
materials, freight, royalties, amortization of purchased technology and
capitalized software, and, in certain foreign markets, software protection
locks. When expressed as a percentage of net revenues, cost of revenues
decreased approximately 1 percent in fiscal year 1998 as compared to the prior
fiscal year. Gross margins in fiscal year 1998 were positively impacted by
continued operational efficiencies, lower royalties for licensed technology
embedded in Autodesk's products, and the geographic distribution of sales. The
one-half of 1 percent decrease in gross margins between fiscal year 1996 and
1997 was largely due to the mix of product sales, particularly the fact that a
smaller portion of revenues was contributed by AutoCAD and a larger portion
was contributed by AutoCAD LT, and, to a lesser extent, the impact of
increased fixed costs on a lower net revenue base. In the future, cost of
revenues as a percentage of net revenues may be impacted by the mix of product
sales, royalty rates for licensed technology embedded in Autodesk's products,
and the geographic distribution of sales.
Marketing and Sales. Marketing and sales expenses include salaries, sales
commissions, travel, and facility costs for Autodesk'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
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of net revenues, marketing and sales expenses decreased from 40 percent in
fiscal year 1997 to 38 percent in fiscal year 1998. Actual fiscal year 1998
marketing and sales expenses of $237.1 million increased by 19 percent from
the $199.9 million of expense incurred in the prior fiscal year. The increase
in spending was largely due to higher employee costs and increases in
advertising and promotional costs associated with the launch of AutoCAD
Release 14 during the second quarter and other new and enhanced products
released throughout the year. Fiscal year 1997 marketing and sales expenses of
$199.9 million increased 9 percent over fiscal year 1996 expenses of $183.6
million due to higher employee costs as well as marketing and sales costs
associated with the launch of certain new products introduced by Autodesk's
market groups during fiscal year 1997. Autodesk expects to continue to invest
in marketing and sales of its products, to develop market opportunities, and
to promote Autodesk's competitive position. Accordingly, Autodesk expects
marketing and sales expenses to continue to be significant, both in absolute
dollars and as a percentage of net revenues.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software engineers, contract
development fees, expenses associated with product translations, costs of
computer equipment used in software development, and facilities expenses.
During fiscal years 1998, 1997, and 1996, Autodesk incurred $122.4 million,
$93.7 million, and $78.7 million, respectively, of research and development
expenses (excluding capitalized software development costs of $2.2 million
during fiscal year 1998; no software development costs were capitalized during
fiscal years 1997 and 1996). Research and development expenses increased both
in absolute dollars and as a percentage of net revenues in fiscal year 1998
due to the addition of software engineers, expenses associated with the
development of new and enhanced products, and incremental research and
development personnel expenses associated with the March 1997 business
combination with Softdesk. The increase in research and development expenses
between fiscal years 1996 and 1997 was due to the addition of software
engineers and fiscal year 1997 business combinations. Autodesk anticipates
that research and development expenses will increase in fiscal year 1999 as a
result of product development efforts by Autodesk's market groups and
incremental personnel costs. Additionally, Autodesk intends to continue
recruiting and hiring experienced software developers and to consider the
licensing and acquisition of complementary software technologies and
businesses.
General and Administrative. General and administrative expenses include
Autodesk's information systems, finance, human resources, legal, purchasing,
and other administrative operations. Fiscal year 1998 general and
administrative expenses of $88.9 million increased 20 percent from the $74.3
million recorded in the prior fiscal year, primarily due to higher employee-
related costs and amortization expense associated with intangible assets
recorded in connection with the acquisition of Softdesk, Inc. Fiscal year 1997
general and administrative expenses decreased 2 percent from fiscal year 1996
spending of $76.1 million reflecting lower professional fees, partially offset
by increased expenses to maintain and expand Autodesk's worldwide information
systems. Autodesk currently expects that general and administrative expenses
in the coming year will increase to support spending on infrastructure,
including continued investment in Autodesk's worldwide information systems and
making any additional corrections to Autodesk's hardware, software, and
products for compliance in the year 2000.
Nonrecurring Charges. On March 31, 1997, Autodesk issued approximately 2.9
million shares of its common stock for all outstanding shares of Softdesk.
Based upon the value of Autodesk stock and options exchanged, the transaction,
including transaction costs, was valued at approximately $94 million. In
connection with the acquisition, Autodesk recorded a charge for in-process
research and development of $19.2 million, all of which was recorded as a
nonrecurring charge in the fiscal quarter ended April 30, 1997.
In-Process Technologies Overview
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relate to the
completion of all planning, designing and testing activities that are
necessary to establish that the product or service can be produced to meet its
design requirements, including functions, features and technical performance
requirements.
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As of the acquisition date, Softdesk had spent a significant amount of
research and development effort related to the re-programming of all its
existing products to a new ARX technology (AutoCAD Runtime Extension) code
base. The new ARX technology is expected to provide significant improvement in
the orientation of objects in CAD products. As of the acquisition date,
Softdesk had completed improvements of ARX technology in various development
projects associated within the following technology categories: (i) AutoCAD-
Architectural/Structural, (ii) AutoCAD-Civil, (iii) AutoCAD-Imaging, (iv)
AutoCAD-Maintenance, (v) AutoCAD-Productivity, and (vi) AutoCAD-Retail.
In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of
software purchased to be integrated with another product or process will be
capitalized only if technological feasibility was established for the software
component and if all research and development activities for the other
components of the product or process were completed at the time of the
purchase." Although Autodesk purchased a set of professional products from
Softdesk, as described above, these products were built on top of AutoCAD
Release 13 and AutoCAD Release 12 software; they did not utilize AutoCAD's
ObjectARX programming system in any significant way. With this new technology,
AutoCAD developers and users could transform ordinary drawing geometry such as
lines, arcs, circles, and other entities into "intelligent" custom drawing
objects. Commercially shipped Softdesk products, as of the valuation date,
were limited to working with the native AutoCAD drafting entities and command
set--an environment in which real-world objects were represented by geometric
entities that could seldom respond directly to user commands. Higher level
entities that represented building elements could be built as groups or
collections of geometric entities but these collections were very rigid and
did not exhibit intelligent behavior.
With the relational database and the ObjectARX application programming
interface (API) in AutoCAD Release 13 software, objects could "know" their
form and function. For example, an ObjectARX-based custom door positioned in a
wall will not let itself be placed where it cannot open. In other
applications, clicking on a fastener or flange, or a land parcel or
topographical feature, can access additional design data in that custom object
and trigger operations ranging from a simple on-screen notice to the
preparation of a comprehensive spreadsheet. ObjectARX was a significant
departure from previous AutoCAD development environments. Programming
ObjectARX required a high level of skill in object-oriented programming.
Furthermore, development was being done on a new object oriented development
platform which did not have significant prior development built on top.
The first two AEC applications acquired from Softdesk was developed in this
new environment. Architectural Desktop and the Land Development desktop, both
released in the last half of fiscal year 1999, were developed on top of the
Object/ARX environment. The ObjectARX environment provided general mechanisms,
but the Softdesk development teams had to adapt these mechanisms specifically
for architectural and civil use. A significant amount of effort was undertaken
to develop these products in this new environment. They had to draw upon their
experience to arrive at object definitions which would function appropriately
in their specific markets. In addition, these object definitions had to be
general enough that they could be localized to meet the unique needs of the
design and construction practices in a variety of international markets. These
two products both attempted to move functionality from a "drafting-based" to
"model-based" approach. Although some model-based design systems have been
attempted in the past, none had been developed on top of a leading design and
drafting platform such as AutoCAD. Finally, none had been developed with a
tight linkage to the design and drafting functions inherent in a broad
platform such as AutoCAD.
Although the functionality of these products is somewhat similar to previous
Softdesk products, there was significant technological risk in developing
products in a new, unproven development environment. While such development
had been conducted within Autodesk--in the mechanical CAD division (Mechanical
Desktop), it had not been successfully done by other companies.
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With respect to the acquired in-process technologies, as previously
discussed, the calculations of value were adjusted to reflect the value
creation efforts of Softdesk prior to the close of the acquisition. Following
are the estimated completion percentages, estimated technology lives and
projected introduction dates:
Percent Technology Introduction
Softdesk In-Process Technologies Completed Life Dates
- -------------------------------- --------- ---------- --------------
AutoCAD Architectural/Structural Modules.... 65% 7 years Sept 98/Jun 97
AutoCAD Civil Modules....................... 90% 7 years May/Jun 97
AutoCAD Imaging Modules..................... 75% 5 years May/Jun 97
AutoCAD Maintenance Modules................. 65% 7 years May/Jun 97
AutoCAD Productivity Modules................ 65% 7 years May/Jun 97
AutoCAD Retail Modules...................... 70% 7 years July 97
Estimated costs to be incurred to reach technological feasibility as of the
date of acquisition for all of the Softdesk in-process technologies totaled
approximately $1.8 million with the AutoCAD Architectural/Structural Modules
comprising approximately $1.2 million of the total. The remaining in-process
projects each had estimated costs to complete of less than $200,000.
Valuation analysis
Revenue
Future revenue estimates were generated from the following product families:
(i) AutoCAD-Architectural/Structural, (ii) AutoCAD-Civil, (iii) AutoCAD-
Imaging, (iv) AutoCAD-Maintenance,
(v) AutoCAD-Productivity, and (vi) AutoCAD-Retail. Aggregate revenue for
Softdesk products was estimated to be less than $30 million for the 10 months
ended January 31, 1998. Revenues, including revenues associated with yet-to-
be-developed products utilizing the acquired technologies, as well as most of
the in-process projects identified in the valuation analysis, were estimated
to increase on an annualized basis by more than 250 percent in fiscal year
1999. Thereafter, revenue was estimated to increase at rates ranging from 11
to 17 percent for fiscal years 2000 through 2002, and stabilize at 10 percent
for the remainder of the estimation period. Revenue estimates were based on
(i) aggregate revenue growth rates for the business as a whole, (ii)
individual product revenues, (iii) growth rates for the CAD software market,
(iv) the aggregate size of the CAD software market, (v) anticipated product
development and introduction schedules, (vi) product sales cycles, and (vii)
the estimated life of a product's underlying technology. The estimated product
development cycle for the new modules ranged from 6 to 24 months (averaging 12
months).
Operating expenses
Operating expenses used in the valuation analysis of Softdesk included (i)
cost of goods sold, (ii) general and administrative expense, (iii) marketing
and sales expense, and (iv) research and development expense. In developing
future expense estimates, it was assumed that the Softdesk operations would be
merged into Autodesk's operating structure. Selected operating expense
assumptions were based on an evaluation of Autodesk's overall business model,
specific product results, including both historical and expected direct
expense levels (as appropriate), and an assessment of general industry
metrics.
Cost of revenues. Cost of revenues, expressed as a percentage of revenue,
for the developed technology identified in the valuation analysis ranged from
approximately 19 percent in fiscal 1998 to approximately 14 percent in fiscal
2002. Cost of revenues, expressed as a percentage of revenue, for the in-
process technology ranged from approximately 17 percent in fiscal 1998 to
approximately 15 percent in fiscal 2004. Autodesk's cost of revenues was 13
percent for fiscal 1996 and fiscal 1997, and 12 percent for fiscal 1998.
General and administrative. General and administrative expense, expressed as
a percentage of revenue, for the developed technology identified in the
valuation analysis, ranged from approximately 6 percent in fiscal 1998 to
approximately 7 percent in fiscal 2002. General and administrative expense,
expressed as a percentage of
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revenue, for the in-process technology ranged from approximately 8 percent in
fiscal 1998 to approximately 7 percent in fiscal 2002.
Marketing and sales. Marketing and sales expense, expressed as a percentage
of revenue, for the developed technology identified in the valuation ranged
from approximately 31 percent in fiscal 1998 to approximately 28 percent in
fiscal 2002. Marketing and sales expense, expressed as a percentage of
revenue, for the in-process technology ranged from approximately 32 percent in
fiscal 1998 to approximately 29 percent in fiscal 2002.
Research and development. Research and development expenses consists of the
costs associated with activities undertaken to correct errors or keep products
updated with current information. Maintenance R&D includes all activities
undertaken after a product is available for general release to customers to
correct errors or keep the product updated with current information. These
activities include routine changes and additions. The maintenance R&D expense
was estimated to be 2.5 percent of revenue for the developed and in-process
technologies throughout the estimation period.
Effective income tax rate
The effective income tax rate utilized in the analysis of in-process
technology was 36 percent in fiscal year 1998, 34 percent in fiscal year 1999
and in the mid 30 percentage-range--thereafter, which reflects Autodesk's
combined federal and state statutory income tax rate, exclusive of
nonrecurring charges at the time of the acquisition and estimated for future
years.
Discount rate
The discount rates selected for developed and in-process technology were
15.0 percent and 20.0 percent, respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the Weighted
Average Cost of Capital (14.0 percent) and (ii) the Weighted Average Return on
Assets (20.0 percent). The discount rate utilized for the in-process
technology was determined to be higher than Autodesk's WACC due to the fact
that the technology had not yet reached technological feasibility as of the
date of valuation. In utilizing a discount rate greater than Autodesk's WACC,
management has reflected the risk premium associated with achieving the
forecasted cash flows associated with these projects.
Comparison to Actual Results
To date, the assumptions used in the projections of revenues from in-process
technologies and the estimated costs and completion dates for those
technologies were reasonable based on factors known at the acquisition date.
Actual revenues from in-process technologies have been less than amounts
projected in connection with the analysis of the Softdesk acquisition. This
shortfall reflects competitive factors related to price, difficulties in
developing robust commercial applications in the new ObjectARX environment,
functionality and performance in the architecture, the engineering and
construction software industry, particularly in regard to localized building
services applications. Partially offsetting the variance from management's
original revenue projections is a favorable variance in spending such that
Autodesk's return on its investment in such technologies, as well as its
current and future results of operations and financial position have not been
and are not expected to be adversely impacted. However, if the in-process
projects contemplated in management's forecast are not successfully developed,
future revenue and profitability of Autodesk may be adversely affected.
Additionally, the value of other intangible assets acquired from Softdesk may
become impaired.
Nonrecurring charges in fiscal year 1998 also included charges for purchased
in-process research and development associated with Autodesk's licensing of
3D/Eye technology ($3.0 million) in fiscal year 1998 and Autodesk's
acquisitions of Teleos Research ($3.2 million) and Argus Technologies, Inc.
($1.5 million) in fiscal year 1997. For additional information, see "Business
Combinations" in Note 1 of the Autodesk Consolidated Financial Statements.
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As discussed in Note 4 to the Autodesk Consolidated Financial Statements, a
$25.5 million judgment was entered against Autodesk in fiscal year 1995 on a
claim of trade secret misappropriation brought by Vermont Microsystems, Inc.
("VMI"). Autodesk recorded this nonrecurring charge in the fourth quarter of
fiscal year 1995. Autodesk appealed and a reduced judgment was entered against
Autodesk in February 1998 in the amount of $7.8 million. In May 1998, final
judgment was entered in the VMI litigation. See Notes to the Autodesk Interim
Unaudited Financial Statements as of July 31, 1998.
Interest and Other Income. Interest income was $9.8 million, $8.8 million,
and $10.6 million for fiscal years 1998, 1997, and 1996, respectively. The
increase in fiscal year 1998 interest income over fiscal year 1997 interest
income was largely due to an increase in average cash, cash equivalents, and
marketable securities balances. The decrease in fiscal year 1997 interest
income from the prior fiscal year resulted from a lower average balance of
cash, cash equivalents, and marketable securities, partially offset by higher
interest rates on Autodesk's international investment portfolio when compared
to the same period in the prior fiscal year. Interest and other income for
fiscal years 1998, 1997, and 1996 was net of interest expense of $0.2 million,
$1.8 million, and $1.8 million, respectively.
Autodesk has a hedging program to minimize foreign exchange gains or losses,
where possible, from recorded foreign-denominated assets and liabilities. This
program involves the use of forward foreign exchange contracts in the primary
European and Asian currencies. Autodesk does not hedge anticipated foreign-
denominated revenues and expenses not yet incurred. Gains (losses) resulting
from foreign currency transactions primarily in Europe and Asia Pacific, which
are included in interest and other income, were ($68,000), ($197,000), and
$554,000 in fiscal years 1998, 1997, and 1996, respectively.
Provision for Income Taxes. Autodesk's effective income tax rate, excluding
one-time charges for acquired in-process research and development associated
with the March 1997 acquisition of Softdesk, Inc. and fiscal year 1997
acquisitions, was 38.0 percent in fiscal year 1998 compared to 35.5 percent
and 36.5 percent in fiscal years 1997 and 1996, respectively. The increase in
the effective income tax rate in fiscal year 1998 compared to fiscal year 1997
was principally due to the amortization of certain intangible assets not
deductible for tax purposes and foreign earnings which are taxed at rates
different from the US statutory rate. The decrease in the tax rate between
fiscal years 1997 and 1996 was due largely to a decrease in Autodesk's
effective state income tax rate. See Note 3 to the Autodesk Consolidated
Financial Statements for an analysis of the differences between the US
statutory and the effective income tax rates.
Autodesk's United States income tax returns for fiscal years ended January
31, 1992 through 1996 are under examination by the Internal Revenue Service.
On August 27, 1997, the Internal Revenue Service issued a Notice of Deficiency
proposing increases to the amount of Autodesk's United States income taxes for
fiscal years 1992 and 1993. On November 25, 1997, Autodesk filed a petition
with the United States Tax Court to contest these alleged tax deficiencies.
Management believes that adequate amounts have been provided for any
adjustments that may ultimately result from these examinations.
Comprehensive Income. As of February 1, 1998, the Company adopted Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income," 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.
Statement 130 requires unrealized gains or losses on the Company's available-
for-sale securities and the foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130. For further
discussion, see Note 1 to the Consolidated Financial Statements.
Recently Issued Accounting Standards. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which establishes standards for the way public business enterprises
report information in annual statements and interim financial reports
regarding operating segments, products and
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services, geographic areas, and major customers. SFAS 131 will first be
reflected in Autodesk's fiscal year 1999 Annual Report and will apply to both
annual and interim financial reporting subsequent to this date. Autodesk is
currently evaluating the impact of SFAS 131 on its financial disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. The
Statement requires Autodesk to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset against the
change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. SFAS 133 is effective
as of the beginning of Autodesk's fiscal year 2001. Autodesk is currently
evaluating the impact of SFAS 133 on its financial statements and related
disclosures.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), which supersedes SOP 91-1. SOP 97-2 will be effective beginning
in fiscal year 1999. In March 1998, the AICPA issued Statement of Position 98-
4 ("SOP 98-4"), which amends certain provisions of SOP 97-2. Autodesk believes
it is in compliance with the provisions of SOP 97-2 as amended by SOP 98-4.
However, detailed implementation guidelines for this standard have not been
issued. Once issued, such guidance could lead to unanticipated changes in
Autodesk's current revenue recognition practices and such changes could be
material to Autodesk's results of operations. 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 Autodesk's fiscal year 2000.
Autodesk is currently evaluating the impact of SOP 98-9 on its financial
statements and related disclosures.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This standard requires companies to
capitalize qualifying computer software costs which are incurred during the
application development stage and amortize them over the software's estimated
useful life. Autodesk is required to adopt this standard in fiscal year 2000
and is currently evaluating the impact that its adoption will have on the
consolidated financial position and results of operations of Autodesk.
Certain Risk Factors Which May Impact Future Operating Results
Autodesk operates in a rapidly changing environment that involves a number
of risks, some of which are beyond Autodesk's control. The following
discussion highlights some of these risks and the possible impact of these
factors on future results of operations.
Competition. The software industry has limited barriers to entry, and the
availability of desktop computers with continually expanding capabilities at
progressively lower prices contributes to the ease of market entry. Because of
these and other factors, competitive conditions in the industry are likely to
intensify in the future. Increased competition could result in price
reductions, reduced revenues and profit margins, and loss of market share, any
of which could adversely affect Autodesk's business, consolidated results of
operations, and financial condition. The design software market in particular
is characterized by vigorous competition in each of the vertical markets in
which Autodesk competes, both by entry of competitors with innovative
technologies and by consolidation of companies with complementary products and
technologies.
The AEC family of products competes directly with software offered by
companies such as Bentley Systems, Inc. ("Bentley"); Computervision
Corporation (a subsidiary of Parametric Technologies, Inc.)
("Computervision"); CADAM Systems Company, Inc.; Diehl Graphsoft, Inc.;
EaglePoint Software; International Microcomputer Software, Inc. ("IMSI");
Intergraph Corporation; Ketiv Technologies; Nemetschek Systems, Inc.; and
Visio Corporation ("Visio"). Autodesk's MCAD products compete with products
offered by Bentley;
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Visionary Design Systems; Hewlett-Packard Corporation; Parametric
Technologies, Inc.; Structural Dynamics Research Corporation; Unigraphics;
Computervision; Dassault Systemes ("Dassault"); Solidworks Corporation (a
subsidiary of Dassault); and Baystate Technologies, Inc. Autodesk's GIS Market
Group faces competition from Bentley; Intergraph; MapInfo Corporation; Earth
Sciences Research Institute ("ESRI"); and MCI Systemhouse. Kinetix product
offerings compete with products offered by other multimedia companies such as
Adobe Systems Inc.; Macromedia, Inc.; and Silicon Graphics, Inc. The Personal
Solutions Group family of products competes with; IMSI; The Learning Company;
Visio; Micrografx Inc. and others. Certain of the competitors of Autodesk have
greater financial, technical, sales and marketing, and other resources than
Autodesk.
Autodesk believes that the principal factors affecting competition in its
markets are product reliability, performance, ease of use, range of useful
features, continuing product enhancements, reputation, price and training. In
addition, the availability of third-party application software is a
competitive factor within the CAD market. Autodesk believes that it competes
favorably in these areas and that its competitive position will depend, in
part, upon its continued ability to enhance existing products, and to develop
and market new products.
In April 1998, Autodesk received notice that the FTC has undertaken a
nonpublic investigation to determine whether Autodesk or others have engaged
in or are engaging in unfair methods of competition. The FTC has not made any
claims or allegations regarding Autodesk's current business practices or
policies, nor have any charges been filed. Autodesk intends to cooperate fully
with the FTC in its inquiry. Autodesk does not believe that the investigation
will have a material impact on its business or consolidated results of
operations.
Fluctuations in Quarterly Operating Results. Autodesk has experienced
fluctuations in operating results in interim periods in certain geographic
regions due to seasonality. Autodesk's operating results in Europe during the
third fiscal quarter are usually impacted by a slow summer period while the
Asia Pacific operations typically experience seasonal slowing in the third and
fourth fiscal quarters.
The technology industry is particularly susceptible to fluctuations in
operating results within a quarter. While Autodesk experienced more linear
operating results within fiscal year 1998 compared to prior years,
historically the majority of Autodesk's orders within a fiscal quarter have
frequently been concentrated within the last weeks or days of that quarter.
These fluctuations are caused by a number of factors, including the relatively
long sales cycle of some of Autodesk's products, the timing of the
introduction of new products by Autodesk or its competitors, and other
economic factors experienced by Autodesk's customers and the geographic
regions in which Autodesk does business. Additionally, Autodesk's operating
expenses are based in part on its expectations for future revenues and are
relatively fixed in the short term. Accordingly, any revenue shortfall below
expectations could have an immediate and significant adverse effect on
Autodesk's consolidated results of operations and financial condition.
Similarly, shortfalls in Autodesk's revenues or earnings from levels
expected by securities analysts could have an immediate and significant
adverse effect on the trading price of Autodesk's common stock. Moreover,
Autodesk's stock price is subject to the volatility generally associated with
technology stocks and may also be affected by broader market trends unrelated
to performance.
Product Concentration. Autodesk derives a substantial portion of its
revenues from sales of AutoCAD software, AutoCAD updates, and adjacent
products which are interoperable with AutoCAD. As such, any factor adversely
affecting sales of AutoCAD and AutoCAD updates, including such factors as
product life cycle, market acceptance, product performance and reliability,
reputation, price competition, and the availability of third-party
applications, could have a material adverse effect on Autodesk's business and
consolidated results of operations.
In April 1998, Autodesk received notice that the FTC has undertaken a
nonpublic investigation to determine whether Autodesk or others have engaged
in or are engaging in unfair methods of competition. The FTC has not made any
claims or allegations regarding Autodesk's current business practices or
policies, nor have any charges been filed. Autodesk intends to cooperate fully
with the FTC in its inquiry. Autodesk does not believe that the investigation
will have a material impact on its business or consolidated results of
operations.
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Product Development and Introduction. The software industry is characterized
by rapid technological change as well as changes in customer requirements and
preferences. The software products offered by Autodesk are internally complex
and, despite extensive testing and quality control, may contain errors or
defects ("bugs"), especially when first introduced. In fiscal year 1996,
Autodesk experienced quality and performance issues associated with AutoCAD
Release 13, including issues related to compatibility with certain hardware
platforms and peripheral equipment, interoperability problems with products
designed to work in conjunction with AutoCAD Release 13, and other issues
associated with the software's object-oriented design. These factors resulted
in a high rate of product returns in fiscal year 1996. There can be no
assurance that defects or errors will not occur in future releases of AutoCAD
or other software products offered by Autodesk. Such defects or errors could
result in corrective releases to Autodesk's software products, damage to
Autodesk's reputation, loss of revenues, an increase in product returns, or
lack of market acceptance of its products, any of which could have a material
and adverse effect on Autodesk's business and consolidated results of
operations.
Autodesk believes that its future results will depend largely upon its
ability to offer products that compete favorably with respect to reliability,
performance, ease of use, range of useful features, continuing product
enhancements, reputation, price and training. Delays or difficulties may
result in the delay or cancellation of planned development projects, and could
have a material and adverse effect on Autodesk's business and consolidated
results of operations. Further, increased competition in the market for
design, mapping, or multimedia software products could also have a negative
impact on Autodesk's business and consolidated results of operations. More
specifically, gross margins may be adversely affected if sales of low-end CAD
products, which historically have had lower margins, grow at a faster rate
than Autodesk's higher-margin products.
Certain of Autodesk's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. Autodesk generally either owns or licenses the
software developed by third parties. Because talented development personnel
are in high demand, there can be no assurance that independent developers,
including those who have developed products for Autodesk in the past, will be
able to provide development support to Autodesk in the future. Similarly,
there can be no assurance that Autodesk will be able to obtain and renew
license agreements on favorable terms, if at all, and any failure to do so
could have a material adverse effect on Autodesk's business and consolidated
results of operations.
Autodesk's business strategy has historically depended in large part on its
relationships with third-party developers, who provide products that expand
the functionality of Autodesk's design software. There can be no assurance
that certain developers will not elect to support other products or otherwise
experience disruption in product development and delivery cycles. Such
disruption in particular markets could negatively impact these third-party
developers and end users, which could have a material adverse effect on
Autodesk's business and consolidated results of operations. Further, increased
merger and acquisition activity currently experienced in the technology
industry could affect relationships with other third-party developers, and
thus adversely affect operating results.
International Operations. Autodesk anticipates that international operations
will continue to account for a significant portion of its consolidated
revenues. Risks inherent in Autodesk's international operations include the
following: unexpected changes in regulatory practices and tariffs;
difficulties in staffing and managing foreign operations; longer collection
cycles; potential changes in tax laws; greater difficulty in protecting
intellectual property; and the impact of fluctuating exchange rates between
the US dollar and foreign currencies in markets where Autodesk does business.
During fiscal year 1998, changes in exchange rates from the same period of the
prior fiscal year adversely impacted revenues, principally due to changes in
the Japanese yen and the German mark. As more fully described in Note 2 to the
Autodesk consolidated financial statements, Autodesk's risk management
strategy uses derivative financial instruments in the form of forward foreign
exchange contracts for the purpose of hedging foreign currency market
exposures of underlying assets, liabilities, and other obligations which exist
as a part of its ongoing business operations. Autodesk does not enter into
derivative contracts for the purpose of trading or speculative transactions.
Autodesk's international results may also be impacted by general economic and
political conditions in these foreign markets. Autodesk's international
results have been impacted
141
by recent unfavorable economic and political conditions in the Asian markets.
There can be no assurance that the economic crisis and currency issues
currently being experienced will not have a material adverse effect on
Autodesk's future international operations and, consequently, on Autodesk's
business and consolidated results of operations.
Dependence on Distribution Channels. Autodesk sells its software products
primarily to distributors and resellers (value-added resellers, or "VARs").
Autodesk's ability to effectively distribute products depends in part upon the
financial and business condition of its VAR network. Although Autodesk has not
to date experienced any material problems with its VAR network, computer
software dealers and distributors are typically not highly capitalized and
have experienced difficulties during times of economic contraction and may do
so in the future. While no single customer accounted for more than 10 percent
of Autodesk's consolidated revenues in fiscal years 1998, 1997, or 1996, the
loss of or a significant reduction in business with any one of Autodesk's
major international distributors or large US resellers could have a material
adverse effect on Autodesk's business and consolidated results of operations
in future periods. Autodesk's largest international distributor is Computer
2000 AG in Germany. Autodesk's largest resellers in the United States are
Avatech, Advanced Enterprise Solutions and Integrated Systems Technologies.
Product Returns. With the exception of certain European distributors,
agreements with Autodesk's VARs do not contain specific product-return
privileges. However, Autodesk permits its VARs to return product in certain
instances, generally during periods of product transition and during update
cycles. While Autodesk experienced a decrease in the overall level of product
returns in fiscal year 1998 compared to fiscal years 1997 and 1996, management
anticipates that product returns in future periods will continue to be
impacted by product update cycles, new product releases, and software quality.
Autodesk establishes reserves, including reserves for stock balancing and
product rotation, based on estimated future returns of product and after
taking into account channel inventory levels, the timing of new product
introductions, and other factors. While Autodesk maintains strict measures to
monitor channel inventories and to provide appropriate reserves, actual
product returns may differ from Autodesk's reserve estimates, and such
differences could be material to Autodesk's consolidated financial statements.
Intellectual Property. Autodesk relies on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality procedures, and contractual
provisions to protect its proprietary rights. Despite such efforts to protect
Autodesk's proprietary rights, unauthorized parties may attempt to copy
aspects of Autodesk's software products or to obtain and use information that
Autodesk regards as proprietary. Policing unauthorized use of Autodesk's
software products is time-consuming and costly. Although Autodesk is unable to
measure the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. There can be no assurance
that Autodesk's means of protecting its proprietary rights will be adequate or
that its competitors will not independently develop similar technology.
Autodesk expects that software product developers will be increasingly subject
to infringement claims as the number of products and competitors in its
industry segments grows and the functionality of products in different
industry segments overlaps. There can be no assurance that infringement or
invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted against Autodesk or that any such assertions will
not have a material adverse effect on its business. Any such claims, whether
with or without merit, could be time-consuming, result in costly litigation
and diversion of resources, cause product shipment delays, or require Autodesk
to enter into royalty or licensing agreements. In addition, such royalty or
license agreements, if required, may not be available on acceptable terms, if
at all, which could have a material adverse effect on Autodesk's business and
consolidated results of operations.
Autodesk also relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in its products to perform key functions. There can be no
assurance that these third-party software licenses will continue to be
available on commercially reasonable terms, or that the software will be
appropriately supported, maintained, or enhanced by the licensors. The loss of
licenses to, or inability to support, maintain, and enhance any such software,
could result in increased costs, or in delays or
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reductions in product shipments until equivalent software could be developed,
identified, licensed, and integrated, which could have a material adverse
effect on Autodesk's business and consolidated results of operations.
Risks Associated with Acquisitions and Investments. Autodesk periodically
acquires or invests in businesses, software products, and technologies which
are complementary to Autodesk's business through strategic alliances, debt and
equity investments, joint ventures, and the like. The risks associated with
such acquisitions or investments include, among others, the difficulty of
assimilating the operations and personnel of the companies, the failure to
realize anticipated synergies, and the diversion of management's time and
attention. In addition, such investments and acquisitions may involve
significant transaction-related costs. There can be no assurance that Autodesk
will be successful in overcoming such risks or that such investments and
acquisitions will not have a material adverse impact on Autodesk's business,
financial condition, or results of operations. In addition, such investments
and acquisitions may contribute to potential fluctuations in quarterly results
of operations due to merger-related costs and charges associated with
eliminating redundant expenses or write-offs of impaired assets recorded in
connection with acquisitions, any of which could negatively impact results of
operations for a given period or cause lack of linearity quarter to quarter in
Autodesk's operating results or financial condition.
During the first quarter of fiscal year 1998, Autodesk completed its
acquisition of all of the outstanding stock of Softdesk, Inc. Autodesk
continues to integrate the operations acquired in the Softdesk merger with its
own. There can be no assurance that the anticipated benefits of the Softdesk
merger and any future mergers or acquisitions will be realized.
Attraction and Retention of Employees. The continued growth and success of
Autodesk depends significantly on the continued service of highly skilled
employees. Competition for these employees in today's marketplace, especially
in the technology industries, is intense. Autodesk's ability to attract and
retain employees is dependent on a number of factors including its continued
ability to grant stock incentive awards, which are described in more detail in
Note 6 to the Autodesk consolidated financial statements. There can be no
assurance that Autodesk will be successful in continuing to recruit new
personnel and to retain existing personnel. The loss of one or more key
employees or Autodesk's inability to maintain existing employees or recruit
new employees could have a material adverse impact on Autodesk. In addition,
Autodesk may experience increased compensation costs to attract and retain
skilled personnel.
Impact of Year 2000. Some of the computer programs used by Autodesk in its
internal operations rely on time-sensitive software that was written using two
digits rather than four to identify the applicable year. These programs may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Additionally, as Autodesk is in the business of software production, year 2000
issues may affect Autodesk's products which are being sold externally.
Autodesk launched a six-phase year 2000 compliance program in the third
quarter of fiscal year 1998. The first and second phases, respectively,
included conducting preliminary and detailed assessments of vendor hardware
and software to determine Autodesk's overall exposure to the year 2000 issue.
The third phase included implementing a year 2000-compliant procurement
process and testing the current desktop operating environment. These three
phases were complete as of the end of fiscal year 1998 and cost approximately
$500,000. These costs have been charged to expense as incurred.
The fourth phase of the compliance program involves determining a working
plan, including defining the future analyses needed, the scope, and total
budget for required compliance actions. The fifth phase involves the repair or
replacement of any noncompliant hardware or software currently purchased or
developed internally. The sixth and final phase will involve a final systems
check to ensure that all hardware and software in use by Autodesk is
compliant. Autodesk expects to spend between $5 million and $6 million during
fiscal year 1999 to complete phases four, five, and six. Of the total cost,
Autodesk plans to capitalize up to $1.7 million as it relates
143
primarily to the purchase of new software. The remaining $3.3 million to $4.3
million relates to modifying existing software and will be expensed as
incurred in accordance with EITF 96-14, "Accounting for the Costs Associated
with Modifying Computer Software for the Year 2000." There can be no
assurance, however, that there will not be a delay in the completion of these
procedures or that the cost of such procedures will not exceed original
estimates, either of which could have a material adverse effect on future
results of operations.
In addition to correcting the business and operating systems used by
Autodesk in the ordinary course of business as described above, Autodesk has
also reviewed all products it produces internally for sale to third parties to
determine compliance of its products. Products either have been found to be
substantially compliant or are currently being tested for compliance. However,
many Autodesk products run on computer hardware and operating systems produced
and sold by third-party vendors. There can be no assurance that these computer
hardware and operating systems will be converted in a timely manner, and any
failure in this regard may cause Autodesk products not to function as
designed. Any future costs associated with ensuring that Autodesk's products
are compliant with the year 2000 are not expected to have a material impact on
Autodesk's results of operations or financial position. Autodesk anticipates
that all compliance procedures will be completed before the beginning of
Autodesk's fiscal year 2000, which begins February 1, 1999.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities, which consist primarily
of high-quality municipal bonds, tax-advantaged money market instruments, and
US treasury bills, totaled $301.3 million at January 31, 1998, compared to
$286.3 million at January 31, 1997. The $15.0 million increase in cash, cash
equivalents, and marketable securities was due primarily to cash generated
from operations ($158.6 million) and cash proceeds from the issuance of shares
through employee stock option and stock purchase programs ($80.1 million).
This increase was primarily offset by cash used to repurchase shares of
Autodesk's common stock ($174.9 million), to acquire complementary software
technologies and businesses ($19.8 million), to purchase computer equipment,
furniture, and leasehold improvements ($15.0 million), and to pay dividends on
Autodesk's common stock ($11.3 million).
During fiscal years 1998, 1997, and 1996, Autodesk repurchased and retired a
total of 2,332,500, 1,659,500, and 2,671,000 shares of its common stock at
average repurchase prices of $38.39, $32.44, and $40.43, respectively,
pursuant to an ongoing and systematic repurchase plan ("Systematic Plan")
approved by Autodesk's Board of Directors to reduce the dilutive effect of
common shares to be issued under Autodesk's employee stock plans. In December
1997, the Board of Directors authorized the purchase of an additional
4 million shares under the Systematic Plan.
In August 1996, Autodesk announced another stock repurchase program under
which Autodesk may purchase up to 5 million shares of common stock in open
market transactions as market and business conditions warrant--the
"Supplemental Plan." In December 1997, the Board authorized the purchase of an
additional 5 million shares under the Supplemental Plan. Autodesk may also
utilize equity options as part of the Supplemental Plan.
In connection with the Supplemental Plan, Autodesk sold put warrants to an
independent third party in September 1996 and purchased call options from the
same independent third party. The premiums received with respect to the equity
options equaled the premiums paid. Consequently, there was no exchange of
cash. Autodesk exercised the call options, repurchasing 2,000,000 shares of
its common stock during the third quarter of fiscal year 1998 for $51 million.
The put warrants expired unexercised in September 1997 and were reclassified
from put warrants to stockholders' equity during the third quarter of fiscal
year 1998. For additional information, see Note 7 to the consolidated
financial statements. In addition to the exercise of the call options in
fiscal year 1998, Autodesk repurchased an additional 1,000,000 shares in the
open market at an average per share repurchase price of $34.37. During fiscal
year 1997, Autodesk repurchased 557,500 shares at an average per share
repurchase price of $24.09 subject to the Supplemental Plan.
144
In December 1997, Autodesk sold put warrants to an independent third party
that entitle the holder of the warrants to sell 1.5 million shares of common
stock to Autodesk at $38.12 per share. Additionally, Autodesk purchased call
options from the same independent third party that entitle Autodesk to buy 1
million shares at $39.88 per share. The premiums received with respect to the
equity options totaled $4.5 million and equaled the premiums paid.
Consequently, there was no exchange of cash. The outstanding put warrants at
January 31, 1998, permitted a net share settlement at Autodesk's option. As a
result, the transaction did not result in a put warrant liability on the
consolidated balance sheet.
In August 1998, the Autodesk Board rescinded its authorization of the
Systematic Plan and the Supplemental Plan, both of which have been terminated.
Autodesk has an unsecured $40 million bank line of credit, of which $20
million is guaranteed, that may be used from time to time to facilitate short-
term cash flow. At January 31, 1998, there were no borrowings outstanding
under this credit agreement, which expires in January 1999.
Autodesk's principal commitments at January 31, 1998, consisted of
obligations under operating leases for facilities. For additional information,
see Note 5 to the Autodesk Consolidated Financial Statements. Autodesk
believes that its existing cash, cash equivalents, marketable securities,
available line of credit, and cash generated from operations will be
sufficient to satisfy its currently anticipated cash requirements for fiscal
year 1999.
Longer-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancement of
existing products; financing anticipated growth; dividend payments;
repurchases of Autodesk Common Stock; and the acquisition of businesses,
software products or technologies complementary to Autodesk's business.
Autodesk believes its existing cash, cash equivalents, marketable securities,
available line of credit and cash generated from operations will be sufficient
to satisfy its currently anticipated longer-term cash requirements.
145
AUTODESK MANAGEMENT, EXECUTIVE
COMPENSATION AND PRINCIPAL STOCKHOLDERS
Autodesk Management
The following sets forth certain information regarding the executive
officers and directors of Autodesk as of December 31, 1998:
Name Age Position
---- --- --------
Carol A. Bartz (1)...... 50 Chairman of the Board and Chief Executive Officer
Eric B. Herr............ 50 President and Chief Operating Officer
Joseph H. Astroth, 43 Vice President, GIS Market Group
Ph.D...................
Carl Bass............... 41 Vice President, Engineering and Chief Technical Officer
Steve Cakebread......... 47 Vice President and Chief Financial Officer
Dominic J. Gallello..... 43 Vice President, Mechanical CAD Market Group
Stephen McMahon......... 57 Vice President, Human Resources and Facilities
Marcia K. Sterling...... 54 Vice President, Business Development and General Counsel
Godfrey R. Sullivan..... 45 Vice President, Personal Solutions Group
Michael E. Sutton....... 53 Vice President, Worldwide Field Operations
Mark A. Bertelsen (2)... 54 Director
Crawford W. Beveridge 52 Director
(1)(3).................
J. Hallam Dawson (2).... 62 Director
Paul S. Otellini (3).... 48 Director
Mary Alice Taylor (2)... 48 Director
Morton Topfer (1)(3).... 62 Director
- --------
(1) Member of the Nominating Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Carol A. Bartz joined Autodesk in April 1992 and has served as Chief
Executive Officer and Chairman of the Board since May 1992. Ms. Bartz served
as President from May 1992 through September 1996. Ms. Bartz is a director of
AirTouch Communications, Inc., Network Appliance, Inc., and BEA Systems, Inc.
Eric B. Herr 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.
Dr. Joseph H. Astroth has served as Vice President, GIS Market Group, since
joining Autodesk in January 1996. From September 1989 through December 1995,
Dr. Astroth held various positions with Graphic Data Systems Corporation
including Director, Environmental Market Group, from January 1993 to June
1994, and Vice President of Product Management, Engineering, from June 1994 to
December 1995.
Carl Bass was named Vice President of Engineering in October 1997. He was
named Chief Technical Officer in December 1996. From November 1995 to December
1996, Mr. Bass served as a Senior Technical Fellow for the AutoCAD family of
products. Mr. Bass served as Chief Architect for AutoCAD from September 1993
to October 1995. Before joining Autodesk, Mr. Bass was cofounder and Chief
Technical Officer of Ithaca Software from May 1986 to August 1993.
Steve 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.
146
Mr. Cakebread held various finance and general management positions at
Hewlett-Packard from January 1972 through March 1993.
Dominic J. Gallello has served as Vice President, MCAD Market Group, since
January 1995. Mr. Gallello served as Vice President, Asia Pacific, from the
time he joined Autodesk in October 1992 until July 1996. From February 1995 to
August 1995, Mr. Gallello served as Acting Vice President, MCAD Market Group.
Stephen McMahon has served as Vice President, Human Resources, since joining
Autodesk in July 1992. From July 1987 to July 1992, Mr. McMahon served as
Senior Director, Human Resources, for Apple Computer, Inc.
Marcia K. Sterling 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.
Godfrey R. Sullivan was named Vice President, Personal Solutions Group, in
September 1997. Mr. Sullivan served as Vice President, the Americas, since
joining Autodesk in October 1992 and as Acting Vice President, AEC/FM Market
Group, from February 1995 to September 1995.
Michael E. Sutton has served as Vice President, Worldwide Field Operations,
since October 1998. Mr. Sutton joined Autodesk in October 1987 as a sales and
marketing director in the United Kingdom. Mr. Sutton was the Managing Director
of Autodesk's United Kingdom subsidiary from January 1990 to January 1992.
From January 1992 to February 1993, Mr. Sutton served as Northern Region
Manager, Europe; from February 1993 to May 1993, he served as Acting Vice
President, Europe; and from June 1993 to October 1998, he served as Vice
President, Europe/Middle East/Africa.
Mark A. Bertelsen has been a director of Autodesk since 1992. Mr. Bertelsen
joined the law firm of Wilson Sonsini Goodrich & Rosati, outside legal counsel
to Autodesk, in January 1972 and became a member of the firm in January 1977.
Crawford W. Beveridge has been a director of Autodesk since 1993. Mr.
Beveridge served as the Chief Executive Officer of Scottish Enterprise, an
economic development company, since January 1991. Mr. Beveridge is a director
of U.S. Smaller Companies Investment Trust and Clydeport plc.
J. Hallam Dawson has been a director of Autodesk since 1988. Mr. Dawson has
served since September 1986 as Chairman of IDI Associates, a private
investment bank specializing in Latin America.
Paul S. Otellini has been a director of Autodesk since 1997. Mr. Otellini
has served as Executive Vice President and General Manager of the Intel
Architecture Business Group at Intel Corporation since January 1998. Mr.
Otellini was promoted to Executive Vice President of Sales and Marketing of
Intel Corporation in April 1996 and served as Senior Vice President of Sales
and Marketing of Intel Corporation from May 1993 to May 1996. Mr. Otellini is
a director of Fritz Companies.
Mary Alice Taylor has been a director of Autodesk since 1995. Ms. Taylor has
served as Executive Vice President of Global Operations and Technology for
CitiCorp since January 1997. Ms. Taylor served as Senior Vice President of
Federal Express Corporation from September 1991 until December 1996. Ms.
Taylor is a director of Perrigo, Inc. and Allstate Insurance, Inc.
Morton Topfer has been a director of Autodesk since 1995. Mr. Topfer has
served as Vice Chairman of Dell Computer Corporation since June 1994. From
March 1971 to June 1994, Mr. Topfer was the Executive Vice President of
Motorola, Inc.
147
Compensation of Directors
Autodesk pays an annual fee of $25,000 to each director who is not an
employee of or consultant to Autodesk (currently six persons), of which not
more than fifty percent can be cash and the balance must be restricted stock
issued at the rate of $1.20 worth of stock for each $1.00 of cash compensation
foregone. Directors do not receive fees for Board or Board Committee meetings
attended.
Autodesk's 1990 Directors' Option Plan provides for the automatic grant of
nonstatutory options to outside directors of Autodesk. Upon being elected or
appointed to the Autodesk Board, each outside director is granted an option to
purchase 20,000 shares of Autodesk Common Stock, with subsequent annual grants
of 10,000 shares. Each option granted under the 1990 Directors' Option Plan
vests cumulatively as to one-third of the shares subject to the option on each
anniversary of the date of grant, for a total vesting period of three years.
The exercise price of options granted under the 1990 Directors' Option Plan is
equal to the fair market value of the Autodesk Common Stock on the date of
grant.
Autodesk Executive Compensation
The following table sets forth the compensation paid to or earned by
Autodesk's Chief Executive Officer and Autodesk's four other most highly
compensated officers whose salary plus bonus exceeded $100,000 during the last
fiscal year (collectively the "Autodesk Named Officers") for services rendered
to Autodesk during the fiscal years ended January 31, 1998, 1997 and 1996.
Summary Compensation Table
Long Term
Annual Compensation
Compensation Awards
----------------- ------------
Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary Bonus(1) Options(#) Compensation(2)
------------------ ------ -------- -------- ------------ ---------------
Carol A. Bartz........... 1998 $515,000 $490,125 -- $ 39,000
Chairman of the Board 1997 515,000 -- 560,000 39,000
and Chief Executive
Officer 1996 475,000 229,284 -- 38,500
Eric B. Herr............. 1998 $320,000 $260,000 -- $ 3,000
President and Chief
Operating Officer 1997 320,000 -- 280,000 3,000
1996 310,000 124,926 -- 2,500
Dominic J. Gallello...... 1998 $275,000 $173,125 -- $ 13,576
Vice President,
Mechanical CAD 1997 275,000 -- 210,000 3,000
Market Group 1996 250,000 125,500 20,000 2,500
Godfrey R. Sullivan...... 1998 $260,000 $173,750 -- $ 3,000
Vice President, Personal
Solutions 1997 260,000 -- 191,000 3,000
Group 1996 260,000 104,858 20,000 2,500
Michael E. Sutton........ 1998 $250,000 $160,000 -- $139,135
Vice President,
Worldwide Field
Operations 1997 250,000 -- 70,000 179,241
1996 222,500 89,806 20,000 99,000
- --------
(1) Represents incentive bonuses for achievement of corporate, individual and
organizational objectives in fiscal years 1996 and 1998.
(2) Amounts reported for fiscal year 1998 consist of: (i) matching
contributions by Autodesk to one of Autodesk's pre-tax savings plans (Ms.
Bartz $2,500, Mr. Herr $2,500, Mr. Gallello $2,500 and Mr. Sullivan
148
$2,500); (ii) Autodesk contributions to one of Autodesk's pre-tax plans
(Ms. Bartz $500, Mr. Herr $500, Mr. Gallello $500 and Mr. Sullivan $500);
(iii) $36,000 paid to Ms. Bartz for the purpose of reimbursing her for
certain transportation expenses; (iv) $10,576 paid to Mr. Gallello for
vacation cashout; (v) $100,000 paid to Mr. Sutton as a cost of living
adjustment related to his location in Switzerland; (vi) $3,621 paid by
Autodesk for health insurance premiums on behalf of Mr. Sutton; and (vii)
$35,514 paid by Autodesk into an employee retirement fund on behalf of Mr.
Sutton. Amounts reported for fiscal year 1997 consist of: (i) matching
contributions by Autodesk to one of Autodesk's pre-tax savings plans (Ms.
Bartz $2,500, Mr. Herr $2,500, Mr. Gallello $2,500 and Mr. Sullivan
$2,500); (ii) Autodesk contributions to one of Autodesk's pre-tax plans
(Ms. Bartz $500, Mr. Herr $500, Mr. Gallello $500 and Mr. Sullivan $500);
(iii) $36,000 paid to Ms. Bartz for the purpose of reimbursing her for
certain transportation expenses; (iv) $100,000 paid to Mr. Sutton as a cost
of living adjustment related to his location in Switzerland; (v) $3,104
paid by Autodesk for health insurance premiums on behalf of Mr. Sutton; and
(vi) $76,137 paid by Autodesk into an employee retirement fund on behalf of
Mr. Sutton. Amounts reported for fiscal year 1996 consist of: (i) matching
contributions by Autodesk to one of Autodesk's pre-tax savings plans
(Ms. Bartz $2,000, Mr. Herr $2,000, Mr. Gallello $2,000 and Mr. Sullivan
$2,000; (ii) Autodesk contributions to one of Autodesk's pre-tax plans (Ms.
Bartz $500, Mr. Herr $500, Mr. Gallello $500 and Mr. Sullivan $500); (iii)
$36,000 paid to Ms. Bartz for the purpose of reimbursing her for certain
transportation expenses; and (iv) $99,000 paid to Mr. Sutton as a cost of
living adjustment related to his location in Switzerland.
Option Grants
Autodesk did not grant any options to purchase shares of Autodesk Common
Stock to the Autodesk Named Officers during the fiscal year ended January 31,
1998. The total number of options granted to all employees during fiscal year
1998 was 3,227,808.
Option Exercises and Holdings
The following table sets forth, for each of the Autodesk Named Officers,
certain information concerning stock options exercised during Autodesk's 1998
fiscal year, and the number of shares of Autodesk Common Stock subject to both
exercisable and unexercisable stock options as of January 31, 1998. Also
reported are values for "in-the-money" options that represent the positive
spread between the respective exercise prices of outstanding stock options and
the fair market value of Autodesk Common Stock as of January 31, 1998.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Shares Year End(#) Fiscal Year End
Acquired on Value ------------------------- -------------------------
Name Exercise(#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ----------- ---------- ----------- ------------- ----------- -------------
Carol A. Bartz.......... 300,000 $7,217,376 1,080,000 440,000 $24,032,500 $6,285,000
Eric B. Herr............ 225,000 $5,937,344 199,000 206,000 $ 3,190,125 $1,320,500
Dominic J. Gallello..... -- -- 203,334 206,666 $ 2,431,251 $2,169,999
Godfrey R. Sullivan..... 120,000 $2,077,877 150,334 190,666 $ 1,924,876 $2,002,249
Michael E. Sutton....... 30,000 $ 382,500 86,694 97,786 $ 885,771 $1,087,339
149
Autodesk Principal Stockholders
The following table sets forth certain information regarding beneficial
ownership of Autodesk Common Stock as of December 31, 1998 (i) by each person
who is known by Autodesk to own beneficially more than five percent (5%) of
Autodesk Common Stock ("Autodesk Principal Stockholders"), (ii) by each of
Autodesk's directors, (iii) by each of the Autodesk Named Officers and (iv) by
all directors and executive officers who served as directors or executive
officers at December 31, 1998 as a group.
Shares Beneficially Owned
----------------------------
Directors, Officers and Five Percent (5%) Number(1) Percent(2)
Stockholders -------------- -------------
Principal Stockholders:(3)
J.P. Morgan & Co. Incorporated................... 5,316,268 11.33%
525 Fifth Avenue
New York, NY 10036
Jennison Associates LLC.......................... 3,810,400 8.12%
466 Lexington Avenue
New York, NY 10017
J. & W. Seligman & Co., Inc...................... 2,981,000 6.35%
125 University Ave.
Palo Alto, CA 94301
Fidelity Management & Research................... 2,937,000 6.26%
82 Devonshire St.
Boston, MA 02109
MFS Investment Management........................ 2,563,570 5.46%
500 Boylston Street
Boston, MA 02116
Directors:
Carol A. Bartz(4)................................ 1,205,873 2.51%
Mark A. Bertelsen(5)............................. 46,477 *
Crawford W. Beveridge(6)......................... 51,269 *
J. Hallam Dawson(7).............................. 63,243 *
Paul S. Otellini(8).............................. 30,766 *
Mary Alice Taylor(9)............................. 46,808 *
Morton Topfer(10)................................ 59,043 *
Other Autodesk Named Officers:
Eric B. Herr(11)................................. 162,873 *
Dominic J. Gallello(12).......................... 265,951 *
Godfrey R. Sullivan(13).......................... 221,289 *
Michael E. Sutton(14)............................ 149,795 *
All directors and executive officers as a group
(16 persons)(15):................................ 2,732,824 5.51%
- --------
* Represents less than 1% of the outstanding shares.
(1) The number and percentage of shares beneficially owned is determined
under the rules of the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares as to which the
individual has sole or shared voting power or investment power and also
any shares which the individual has the right to acquire within sixty
days of December 31, 1998, through the exercise of any stock option or
other right.
150
(2) Number of shares deemed outstanding includes 46,935,808 outstanding as of
December 31, 1998, plus any shares subject to stock options held by the
person or persons in question that are exercisable within 60 days of
December 31, 1998.
(3) This information was obtained from filings made with the SEC pursuant to
the Exchange Act.
(4) Includes options to purchase 1,200,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(5) Includes options to purchase 43,332 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(6) Includes options to purchase 50,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(7) Includes options to purchase 60,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(8) Includes options to purchase 30,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(9) Includes options to purchase 45,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(10) Includes options to purchase 45,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(11) Includes options to purchase 147,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(12) Includes options to purchase 260,200 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(13) Includes options to purchase 200,800 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(14) Includes options to purchase 148,080 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(15) Includes options to purchase 2,636,446 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
Employment Contracts and Certain Transactions
In April 1992, Autodesk entered into an agreement with Carol A. Bartz,
Autodesk's Chairman of the Board and Chief Executive Officer, which provides,
among other things, for a severance payment equal to two years' base salary
and incentive compensation in the event Ms. Bartz's employment is terminated
without cause within two years after commencement of employment or one year
after a change of control of Autodesk not approved by the Autodesk Board or
two years' base compensation in the event Ms. Bartz's employment is terminated
without cause under any other circumstances.
151
Pro Forma Stock Ownership of Autodesk Principal Stockholders and Directors
The following table sets forth certain information regarding the beneficial
ownership of Autodesk Common Stock on a pro forma basis for the Autodesk
Principal Stockholders, each of Autodesk's directors and all directors and
executive officers of Autodesk as a group. This table is based on the
capitalizations of Autodesk and Discreet as of December 31, 1998 and assumes
that (i) 9,878,110 shares of Autodesk Common Stock are issued in connection
with the Transactions and (ii) 3,000,000 shares of Autodesk Common Stock are
issued in the Reissuance Offering. Because the actual number of shares of
Autodesk Common Stock to be issued pursuant to the Transactions will not be
fixed until the Effective Time, the beneficial ownership at the Effective Time
of the persons and entities listed in the following table may differ from the
information presented in the table:
Shares Beneficially Percentage Beneficially
Owned After Owned After
Consummation of Consummation of
Name the Transactions(1) the Transactions(2)
---- -------------------- -----------------------
Autodesk Principal
Stockholders:(3)
J.P. Morgan & Co. Incorporated.. 5,316,268 8.89%
525 Fifth Avenue
New York, NY 10036
Jennison Associates LLC......... 3,810,400 6.37%
466 Lexington Avenue
New York, NY 10017
J. & W. Seligman & Co., Inc..... 2,981,000 4.98%
125 University Ave
Palo Alto, CA 94301
Fidelity Management & Research.. 2,937,000 4.91%
82 Devonshire St.
Boston, MA 02109
MFS Investment Management....... 2,563,570 4.29%
500 Boylston Street
Boston, MA 02116
Directors:
Carol A. Bartz(4)............... 1,205,873 2.02%
Mark A. Bertelsen(5)............ 46,477 *
Crawford W. Beveridge(6)........ 51,269 *
J. Hallam Dawson(7)............. 63,243 *
Paul S. Otellini(8)............. 30,766 *
Mary Alice Taylor(9)............ 46,808 *
Morton Topfer(10)............... 59,043 *
All directors and executive
officers as a group (16 persons)
(11)............................. 2,732,824 4.57%
- --------
* Represents less than 1% of the outstanding shares.
(1) The number and percentage of shares beneficially owned is determined
under rules of the SEC, and the information is not necessarily indicative
of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the individual has
sole or shared voting power or investment power and also any shares which
the individual has the right to acquire within sixty days of December 31,
1998, through the exercise of any stock option or other right.
(2) Number of shares deemed outstanding includes 59,813,918 shares that would
be outstanding after consummation of the Transactions (based on
Autodesk's capitalization as of December 31, 1998), assuming (i) the
issuance of 9,878,110 shares of Autodesk Common Stock in the
Transactions, plus any
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shares subject to stock options held by the person or persons in question
that are exercisable within 60 days of December 31, 1998 and (ii) the
issuance of 3,000,000 shares in the Reissuance Offering.
(3) This information was obtained from filings made with the SEC pursuant to
the Exchange Act.
(4) Includes options to purchase 1,200,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(5) Includes options to purchase 43,332 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(6) Includes options to purchase 50,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(7) Includes options to purchase 60,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(8) Includes options to purchase 30,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(9) Includes options to purchase 45,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(10) Includes options to purchase 45,000 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
(11) Includes options to purchase 2,636,446 shares of Autodesk Common Stock
exercisable within 60 days of December 31, 1998.
153
DISCREET
In this section, "Discreet" refers to, depending on the context, Discreet,
its subsidiaries and its ventures collectively, or Discreet and its
subsidiaries.
BUSINESS
Background
Discreet develops, assembles, markets and supports non-linear, on-line
digital systems and software for creating, editing and compositing imagery and
special effects for film, video, HDTV, broadcast and the Web. Discreet's
systems and software are utilized by creative professionals for a variety of
applications, including feature films, television programs, commercials, music
and corporate videos, interactive game production, live broadcasting, as well
as Web design. Discreet's 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 SGI,
scalable disk arrays and other peripherals. These can be networked together to
enable users to manage data more efficiently and collaborate in an integrated
production environment. Discreet's systems include its inferno* and flame*
systems (special effects), its fire* and smoke* systems (editing), and its
frost* system (broadcast production). Discreet's special effects and editing
Advanced Systems are used to manipulate digital media in an on-line, real-time
environment, providing instant feedback to the creative professional. These
systems are currently or are currently being designed to be resolution
independent and to allow users to work on uncompressed images from a variety
of media sources in the full range of resolutions necessary for film, video
and HDTV. In the broadcast production market, Discreet offers its frost*
system, a set of modeling, animation and rendering tools for the creation and
manipulation of 3D environments, including virtual sets, for broadcast
companies. Discreet sells its Advanced Systems worldwide through a direct
sales force as well as through high-end, sophisticated distributors.
During the last 18 months, Discreet has entered the new media marketplace
through a series of acquisitions and now offers editing and special effects
software which runs on the Microsoft Windows NT, the Apple Macintosh and/or
the Unix operating systems. The new media market is characterized by
institutional and educational customers, designers and prosumers. Discreet's
desktop or new media software (its "New Media Software") products include its
edit* software (formerly D-Vision OnLine) (video editing), its effect*
software (formerly Flint and Illuminaire Composition) (special effects), its
paint* software (formerly Illuminaire Paint) (special effects), and its light*
software (formerly Lightscape) (radiosity). Discreet's New Media Software is
primarily used to create, manipulate, and finish computer graphics images,
interactive and on-line content. effect* provides 3D video composition, clip
animation, and visual effects enabling artists to combine, enhance and modify
video frames or sequences of frames with a very high level of efficiency and
interactivity. paint* is a vector-based, object-oriented painting and
animation system for the manipulation and enhancement of both multi-frame
clips and single-frame graphic images. edit* is a real-time non-linear,
compressed editing software solution which performs compositing, keying and
visual effects on the desktop. light* is a 3D rendering solution that uses
advanced radiosity techniques to significantly enhance realism and lighting
accuracy in 3D environments created for virtual sets, film and video effects,
interactive games and architectural design projects.
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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.
Discreet is a company incorporated by Articles of Incorporation on September
10, 1991 under Part IA of the Quebec Act whose head office is located at 10
Duke Street, Montreal, Quebec, Canada H3C 2L7. Discreet has sales offices in
the United States in New York, Chicago, Los Angeles; Rio de Janeiro, Brazil;
London, England; Paris, France; Munich, Germany; Singapore; Bombay, India;
Hong Kong, China; Madrid, Spain; and Tokyo, Japan. As of December 31, 1998,
Discreet had 414 employees.
Products
The following table sets forth the Discreet products, their market, the date
of first shipment by Discreet, and their platform or operating system.
Date of First
Shipment by
Product Market Discreet Platform/Operating System
------- -------------------- ------------- --------------------------------
Advanced Systems
inferno*................ Special effects October 1995 SGI Onyx2/Unix
flame*.................. Special effects January 1993 SGI Octane/Unix
fire*................... Editing October 1996 SGI Onyx2/Unix
smoke*.................. Editing October 1997 SGI Octane/Unix
frost*(includes product
formerly sold as
Vapour)................ Broadcast Production October 1995 SGI Onyx2 and SGI Octane/Unix
New Media Software
effect* (formerly
Flint)................. Special effects December 1993 SGI O2/Unix
effect* (formerly
Illuminaire
Composition)........... Special effects June 1997 Microsoft NT and Apple Macintosh
paint* (formerly
Illuminaire Paint)..... Special effects June 1997 Microsoft NT and Apple Macintosh
edit* (formerly D-Vision
OnLine)................ Editing July 1997 Microsoft NT
light* (formerly
Lightscape)............ Radiosity December 1997 Microsoft NT
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.
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Special Effects Systems
flame*--flame* is an on-line, resolution-independent, non-linear,
uncompressed digital system. The system is used by creative professionals to
create, edit and composite special visual effects in an on-line, real-time
environment. Easily integrated into a suite environment and possessing the
power and features necessary to serve as the core of a fully digital suite,
flame* is designed to allow the operator to create desired effects with near
instantaneous feedback. A complete flame* system includes the flame* software,
an SGI Octane workstation, a stone* disk array and various I/O devices.
inferno*--inferno* is an on-line, non-linear, resolution-independent,
uncompressed digital system providing all the features of flame* with film
tools, and increased image resolution and color control for digital film work.
The system also features tools for grain management, wire and scratch removal
and colour calibration. A complete inferno* system includes the inferno*
software, an SGI Onyx2 workstation, a stone* disk array and various I/O
devices.
Editing Systems
fire*--fire* is an uncompressed, on-line, non-linear, digital video editing
system with special effects capabilities. fire* includes a sophisticated
toolset and a gestural, picture-based editing interface, which Discreet
believes specifically address the new and expanding requirements needed for
on-line finishing. In the fourth fiscal quarter of 1998, Discreet released a
resolution independent (including HDTV resolution) fire* system. A complete
fire* system includes the fire* software, an SGI Onyx2 workstation, stone*
disk arrays and various I/O devices.
smoke*--smoke*, like fire*, is an uncompressed, on-line, non-linear, digital
video editing system with more limited special effects capabilities. smoke*
uses the same gestural, picture-based editing interface as fire*. The primary
difference in the two systems is the greater speed of interactivity and
processing of fire* as well as greater special effects capabilities than those
of smoke*. However, smoke*'s special effects capabilities are modular; effects
modules may be purchased separately by the customer to augment the special
effects capabilities of the baseline smoke* system. A complete smoke* system
includes the smoke* software, an SGI Octane workstation, a stone* disk array
and various I/O devices.
Broadcast Production Systems
frost*--frost* is a computer-based set of modeling, animation and rendering
tools for the creation and manipulation of 3D graphics, including virtual
sets, for broadcast. Virtual sets are computer generated locales typically
used for news, sports and entertainment programming. frost* is designed to
operate on the SGI Onyx2 or SGI Octane workstation and allows the user to work
completely in real-time or through a combination of real-time and post-
produced components.
System Components
The Workstation
inferno*, fire*, and frost* run on SGI Onyx2 workstations, typically
configured with four or eight processors. flame*, smoke* and frost* run on the
SGI Octane workstation. The SGI hardware platforms are scaleable and
upgradeable (within the same machine) to fit the price and performance
criteria of the customer. Each system can be connected to other Discreet
systems and to numerous third party software, systems and devices.
Disk Arrays
Discreet offers stone*, a disk-based storage system for use with its video
and high-performance film applications, which is targeted at the production,
post-production and broadcast markets. stone* is designed to allow real-time
playback of uncompressed video frames in any order, efficiently store any mix
of resolutions and
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ensure image integrity by remaining operational in the event of disk or power
supply failure. A disk array is comprised of a number of disks working co-
operatively to handle high speed data flows. flame*, inferno*, fire*, smoke*,
and frost* must be used with Discreet's stone* disk arrays.
Networking
Discreet offers wire*, a high-performance transport system for digital film
and video for use with multiple stone* disk arrays. wire* builds on Discreet's
disk technology and is designed, if the network provides sufficient bandwidth,
to provide real-time CCIR-601 instant access to images located on a disk
anywhere within a post-production facility. wire* can be configured as a
centralized or distributed network, or both.
I/O
Third party video tape recorders can be controlled with flame*, inferno*,
fire* and smoke*'s stylus and tablet. I/O edits can be implemented
sequentially using the EDL capabilities of the flame*, inferno*, fire* and
smoke* systems. Other third party devices, such as film scanners and
recorders, can also be used with Discreet systems for HDTV and film transfers.
New Media Software
Through acquisitions made in fiscal years 1997 and 1998, Discreet now offers
software-only solutions which run on the Windows NT and the Apple Macintosh
platforms. These acquisitions are part of Discreet's strategy to expand the
range of creative professionals served by Discreet and to extend its product
line to include other aspects of the content creation process. See "--Recent
Acquisitions." Discreet's New Media Software is primarily used to create,
manipulate, and finish computer graphics images, interactive and on-line
content.
Special Effects Software
effect*--Discreet offers two versions of its effect* software: effect* on
the SGI O2 workstation (formerly Flint) and effect* on the Apple Macintosh and
Microsoft Windows NT operating systems (formerly Illuminaire Composition).
effect* is a resolution-independent, non-linear, uncompressed digital system
used by creative professionals to create, edit and composite special visual
effects. effect* provides 3D video composition, clip animation, and visual
effects enabling artists to combine, enhance and modify video frames or
sequences of frames with a very high of level of efficiency and interactivity.
Discreet acquired the Illuminaire product line as part of Discreet's
acquisition of substantially all of the assets of Denim Software L.L.C.
("Denim") in June 1997 (the "Denim Acquisition").
paint* (formerly Illuminaire Paint)--paint* is an Apple Macintosh and
Microsoft Windows NT-based paint software for effects, interactive content and
graphic design creation. paint* is resolution-independent, vector-based,
object-oriented painting and animation system for the manipulation and
enhancement of both multi-frame clips and single-frame graphic images.
Discreet acquired the Illuminaire product line as part of the Denim
Acquisition.
Editing Software
edit* (formerly D-Vision OnLine)--edit* is a real-time non-linear,
compressed editing software solution which performs compositing, keying and
visual effects on the desktop and runs on the Microsoft Windows NT operating
system. Discreet acquired edit* as part of the acquisition of all the
outstanding shares of capital stock of D-Vision Systems, Inc. ("D-Vision") in
July 1997 (the "D-Vision Acquisition").
Radiosity Software
light* (formerly Lightscape)--light* is a 3D rendering solution that uses
advanced radiosity techniques to significantly enhance realism and lighting
accuracy in 3D environments created for virtual sets, film and video
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effects, interactive games and architectural design projects. light* runs on
the Microsoft Windows NT operating system. Discreet acquired light* as part of
the acquisition of all the outstanding shares of capital stock of Lightscape
Technologies, Inc. in December 1997 (the "Lightscape Acquisition").
Customers
Discreet's Advanced Systems are sold primarily to film and video production,
post-production and broadcast companies. Discreet's New Media Software
products are sold in these markets as well as to institutional and educational
customers, designers and professional consumers.
No customer accounted for 10% or more of Discreet's total revenues in fiscal
1996, 1997 or 1998.
Marketing and Sales
Marketing Strategy. To date, Discreet has marketed its Advanced Systems
products primarily to production and post-production companies in the film,
video, and broadcast industries. Discreet's principal marketing strategy has
been to create awareness of its systems and software through appearances at
major international computer graphics and broadcasting tradeshows, such as
NAB, ACM SIGGRAPH (U.S.), International Broadcasters Convention ("IBC")
(Europe), INTERBEE (Japan) and Montreaux (Europe). Discreet has supported this
marketing strategy with direct-mail advertising and advertisements in trade
publications. In addition, Discreet believes that the high quality of computer
images generated using its products results in significant industry awareness.
With permission from its customers, Discreet creates promotional materials
utilizing content created using Discreet's products.
Discreet is marketing its New Media Software products primarily through
direct mail advertising, advertising in trade publications, seminars and
roadshows, as well as at both international and local tradeshows. In addition,
Discreet provides co-operative advertising funding to a number of its
distributors who locally advertise its products. As Discreet broadens the
markets for these products, Discreet intends to expand its marketing efforts
accordingly.
Sales and Distribution. In North America, sales activities are conducted
from Discreet's Montreal headquarters, sales offices in Los Angeles, Chicago
and New York and field representatives based in Boston, San Francisco, and
Atlanta. In markets outside of North America, sales activities are conducted
from sales offices located in the United Kingdom, Spain, France, Germany,
Japan, Singapore, India, Hong Kong and Brazil. Discreet's headquarters and
each of its sales offices have sales and demonstration capabilities. Since the
beginning of fiscal 1997, Discreet has pursued a strategy of increasing the
number of distributors and resellers qualified to sell its products.
Distributors and resellers may sell Advanced Systems products, New Media
Software products, or both. Generally, customers purchasing Discreet's
products and/or peripherals from the distributors will also purchase the
workstation hardware from the distributors. Discreet currently has
distribution relationships with over 371 distributors and resellers in over 84
countries. As of December 31, 1998, Discreet employed 48 Advanced Systems and
13 New Media Software sales and sales support personnel and 33 demonstration
artists worldwide.
Discreet's Advanced Systems products are sold through its direct sales
organization in its primary markets. In the United States, Discreet maintains
a direct sales presence in its primary markets including New York, Chicago and
Los Angeles. Outside of the United States, Discreet maintains a direct sales
presence in its primary markets, including London, Paris, Munich, Singapore
and Tokyo. In geographic areas generally not served by Discreet's direct sales
organization, Discreet's Advanced Systems products are sold through high-end
distributors and resellers, who are managed by Discreet's sales managers.
Discreet's strategy of marketing its products directly to customers and
indirectly through distributors may result in distribution channel conflicts
as Discreet's direct sales efforts may compete with those of its indirect
channels. Some of these distributors or resellers may receive a finder's fee
for customer system purchases from Discreet's direct sales organization.
Discreet's New Media Software products are sold through distributors and
resellers, who are managed by Discreet's sales managers.
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International Revenues. For fiscal 1996, 1997 and 1998, revenues from
customers outside North America accounted for approximately 57%, 57% and 53%,
respectively, of Discreet's total revenues. Discreet expects that revenues
from customers outside North America will continue to account for a
substantial portion of its revenues.
Reseller Arrangements. Discreet is a master value added reseller ("VAR") of
SGI workstations. There are significant risks associated with this reliance on
SGI and Discreet may be impacted by the timing of the development and release
of products by SGI, as was the case during fiscal 1996. In addition, Discreet
has faced and may in the future face unforeseen difficulties associated with
adapting Discreet's products to future SGI products. In May 1994, Discreet
entered into a Value-Added Reseller Agreement with SGI. The agreement grants
to Discreet a non-exclusive right to purchase and license certain hardware
products from SGI, including the SGI Onyx2, Octane, and O2 workstations for
remarketing by Discreet in the United States. Although the agreement contains
no minimum purchase requirements, the volume of systems purchased from SGI
affects the percentage discount received by Discreet. The agreement is subject
to annual renewal in May of each year and may be terminated by SGI for cause.
The agreement with SGI has been extended through December 31, 1998, and
Discreet has no reason to believe that SGI will not renew such agreement.
Discreet also acts as a reseller and systems integrator of certain peripheral
devices used in Discreet's systems, including audio and video I/O cards and
electronic tablets. Discreet receives discounts for the purchase price of
these products.
Backlog. Discreet has no significant backlog and does not believe that its
backlog at any particular point in time is indicative of future sales levels.
Systems Integration, Service and Support
Discreet provides its customers with a variety of systems integration,
support and training services including on-site and telephone support, and in-
house and on-site training in the use of Discreet's products. These services
are generally provided under separately priced arrangements with Discreet's
customers. In some markets, these services are provided by Discreet's
distributors who are compensated for such services directly by the customer.
Discreet maintains a staff of persons dedicated to training its distributors
in the performance of these services. Discreet believes that its focus on
customer service provides it with important information about the evolving
needs of its customers. Discreet derived revenues of approximately
$11,713,000, $13,606,000 and $14,050,000 from these services in fiscal 1996,
1997 and 1998, respectively.
Discreet supports its customers in North and South America from Discreet's
Montreal and other North American offices, and through its distributors.
Customers in Europe and the Pacific Rim are supported from the offices of
Discreet's European and Asian subsidiaries and by distributors. As of December
31, 1998, Discreet employed a total of 113 persons worldwide in its customer
support organization.
Research and Development
Discreet's research and product development efforts are focused on the
continued enhancement of its Advanced Systems and its New Media Software
products and the development of new products. Discreet employs a modular
development approach which it believes allows it to bring innovative
technology to market more rapidly than traditional analog or proprietary
hardware-based digital solutions and enables it to take advantage of advances
in general purpose workstation technology as they become available. Discreet
intends to continue to enhance and upgrade these products on a regular basis.
In fiscal 1996, 1997 and 1998, Discreet spent approximately $14,402,000,
$9,708,000 and $14,847,000 (net of tax credits), respectively, on research
and development, representing 17%, 10% and 10%, respectively, of total
revenues. Discreet's research and development staff consisted of 120 persons
as of December 31, 1998.
The markets for Discreet's systems and software are characterized by
evolving industry standards, changing technologies and frequent new product
introductions. Discreet believes that its future success will depend in part
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on its ability to enhance its existing systems and software and to develop and
introduce new products and features which meet changing customer requirements
and emerging industry standards on a timely basis. In addition, as a master
VAR of SGI workstations, Discreet obtains certain advance access to SGI
technology which facilitates its efforts to develop compatible systems and to
modify and improve existing products. If Discreet were unable to obtain such
advance access, it could have an adverse impact on Discreet's business and
results of operations.
On March 4, 1998, Discreet entered into a Strategic Development Agreement
with Intel to develop a new high-end special effects product. Discreet Logic
plans to develop new visual effects software for demanding real-time
compositing and image processing functions. The software will be designed to
run on multi-processor workstations based on the IA-64 processors and is
expected to deliver powerful performance capabilities for the visual effects
industry. Intel will provide access to IA-64 technology, aid in optimization
of the software, and design components of Merced processor-based workstations
to run the software optimally.
Proprietary Rights
Discreet's success is dependent upon its proprietary technology. Although
Discreet currently has 14 patents and has 71 patent applications on its
technology, it relies principally on unregistered copyrights and trade secrets
to protect its intellectual property. Discreet generally seeks to enter into
confidentiality agreements with its employees and license agreements with its
distributors and to limit access to and distribution of its systems, software,
documentation and other proprietary information. Until fiscal 1996,
substantially all of Discreet's systems were sold without written license
agreements. There can be no assurance that Discreet will not be involved in
litigation with respect thereto or that the outcome of any such litigation
might not be more unfavorable to Discreet as a result of such omissions. Any
such litigation could have a material adverse effect on Discreet's business
and results of operations. Discreet licenses its New Media Software products
under "shrink-wrap" licenses (i.e., licenses included as part of the product
packaging). Shrink-wrap licenses are not negotiated with or signed by
individual licensees, and purport to take effect upon the opening of the
product package. Certain provisions of such licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program, may be unenforceable under the laws of many jurisdictions.
Discreet uses both software and hardware keys with respect to its systems and
software but otherwise does not copy-protect its systems and software. It may
be possible for unauthorized third parties to copy Discreet's products or to
reverse engineer or obtain and use information that Discreet regards as
proprietary. There can be no assurance that Discreet's competitors will not
independently develop technologies that are substantially equivalent or
superior to Discreet's technologies. In addition, the laws of certain
countries in which Discreet's products are or may be distributed do not
protect Discreet's products and intellectual property rights to the same
extent as the laws of Canada or the United States. As the number of software
products in the industry increases and the functionality of these products
further overlaps, Discreet believes that software products generally may
increasingly become the subject of claims that such software products infringe
the rights of others.
Significant and protracted litigation may be necessary to protect Discreet's
intellectual property rights, to determine the scope of the proprietary rights
of others or to defend against claims of infringement. Discreet is not
currently involved in any litigation with respect to intellectual property
rights. Discreet receives letters from third parties, from time to time,
inquiring about Discreet's products and discussing intellectual property
matters, which Discreet reviews to determine the appropriate response, if any.
There can be no assurance that third-party claims alleging infringements will
not be asserted against Discreet in the future. For example, Discreet received
a letter from Avid Technology, Inc. ("Avid") stating its belief that certain
of Discreet's acquired products in connection with the acquisition of the
outstanding shares of the share capital of D-Vision practice inventions
claimed in a patent on a media editing system. Discreet has responded to
Avid's letter stating Discreet's belief that it is not infringing upon any
valid claim of Avid's patent. To Discreet's knowledge, Avid has not initiated
any suit, action, or other proceeding alleging any infringement by Discreet of
such patent. If infringement is alleged by Avid, or any other holder of
protected intellectual property rights, Discreet could be required to
discontinue the use of certain software code or processes, to cease the
manufacture, use and sale of infringing products, to incur significant
litigation costs and expenses, to develop non-infringing technology or to
obtain licenses to use the allegedly infringed technology. There can be no
assurance that Discreet would be able to
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develop alternative technologies or to obtain such licenses or, if a license
were obtainable, that the terms would be commercially reasonable or acceptable
to Discreet. Moreover, there may be pending or issued patents that extend to
Discreet's products, which, together with the growing use of patents to
protect technology, increase the risk that third parties may assert
infringement claims against Discreet in the future. There can be no assurance
that a court to which any infringement claims are submitted would not find
that Discreet's products infringe any third party's intellectual property
rights. Further, such litigation, regardless of its outcome, could result in
substantial costs to and diversion of efforts by Discreet. Litigation may also
be necessary to enforce Discreet's intellectual property rights. Any
infringement claim or other litigation against or by Discreet could have a
material adverse effect on Discreet's business and results of operations.
Manufacturing and Suppliers
Discreet has historically relied on third-party vendors to manufacture and
supply all of the hardware components used in Discreet's systems.
Manufacturing at Discreet consists of assembly (including disk array
assembly), testing, and value added systems integration. Discreet's
manufacturing staff consisted of 16 persons as of December 31, 1998.
Discreet's flame*, effect*, inferno*, fire*, smoke* and frost* software
currently run on workstations manufactured by SGI. There are significant risks
associated with this reliance on SGI and Discreet may be impacted by the
timing of the development and release of products by SGI, as was the case
during fiscal 1996. In addition, there may be unforeseen difficulties
associated with adapting Discreet's products to future SGI products. Discreet
is an authorized master VAR of workstations manufactured by SGI. Discreet's
agreement with SGI is subject to annual renewal in May of each year and
termination by SGI for cause. The agreement with SGI has been extended through
March 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, there can be
no assurance that Discreet will continue to be able to procure such
workstations in sufficient quantities on a timely basis or that SGI will
continue to recognize Discreet as a master VAR. The success of Discreet also
depends, in part, on the continued market acceptance of SGI workstations, in
general, and by the professional film and video industries, in particular.
Although Discreet intends to continue to evaluate new hardware platforms and
may adapt its products as technological advances and market demands dictate,
and although Discreet has now entered the market for content creation software
which runs on the Apple Macintosh and Windows NT operating systems, Discreet
believes that it will continue to derive substantially all of its revenue for
the foreseeable future from the sale and maintenance of systems designed to
include SGI workstations. As a result, financial, market and other
developments adversely affecting SGI or the sales of workstations, the
introduction or acquisition by SGI of products which are competitive with
those of Discreet, or the unanticipated timing or pricing of SGI products that
could cause customers to defer the decision to buy or determine not to buy
Discreet's then available products or systems, could have an adverse effect
upon Discreet's business and results of operations. As a master VAR, Discreet
also obtains certain advance access to SGI technology in order to develop
compatible systems and to modify and improve existing products. If Discreet
were unable to obtain such advance access, it could have an adverse impact on
Discreet's business and results of operations.
Discreet is dependent on SGI as Discreet's sole source for video I/O cards
used in Discreet's systems. Discreet also purchases electronic tablets
manufactured by Wacom Technology Corporation and believes that, while
alternative suppliers are available, there can be no assurance that
alternative electronic tablets would be functionally equivalent or be
available on a timely basis or on similar terms. Discreet generally purchases
sole source or other components pursuant to purchase orders placed from time
to time in the ordinary course of business and has no written agreements or
guaranteed supply arrangements with its sole source suppliers. Discreet has
experienced quality control problems and supply shortages for sole source
components in the past and there can be no assurance that Discreet will not
experience significant quality control problems or supply shortages for these
components in the future. Discreet does not maintain an extensive inventory of
these components, and an interruption in supply could have a material adverse
effect on Discreet's business and results
161
of operations. Because of Discreet's reliance on these vendors, Discreet may
also be subject to increases in component costs which could adversely affect
Discreet's business and results of operations.
Competition
The market in which Discreet competes is characterized by intense
competition. In the high-end of the special effects market, Discreet's flame*
system competes with Quantel Limited's ("Quantel") Henry product. In certain
applications in the non-real-time segment of the market, Discreet's effect* on
the SGI O2 workstation competes with Avid's Illusion product. Discreet's
inferno* system competes with Quantel's Domino product. Discreet's fire* and
smoke* systems competes with Quantel's Editbox product and Sony Corporation's
("Sony") range of proprietary editing equipment. In addition, the products
gained from the Denim Acquisition and the D-Vision Acquisition compete with
Adobe Systems Incorporated's ("Adobe") special effects products and Avid's and
Media 100 Inc.'s ("Media 100") range of editing products. Many of Discreet's
current and prospective competitors, including Quantel, Avid, Sony, and Adobe,
have significantly greater financial, technical, manufacturing and marketing
resources than Discreet. Moreover, these companies may introduce additional
products that are competitive with those of Discreet, and there can be no
assurance that Discreet's products would compete effectively with such
products. In addition, as personal computers become more powerful, software
suppliers may be able to introduce products for personal computers that would
be competitive with Discreet's products in terms of price and performance for
professional users.
Discreet believes that its ability to compete depends on elements both
within and outside its control, including the success and timing of new
product development and introduction by Discreet and its competitors, product
performance and price, distribution and customer support. There can be no
assurance that Discreet will be able to compete successfully with respect to
these factors. Although Discreet believes that it has certain technological
and other advantages over its competitors, maintaining such advantages will
require continued investment by Discreet in research and development, sales
and marketing and customer service and support. There can be no assurance that
Discreet will have sufficient resources to make such investments or that
Discreet will be able to make the technological advances necessary to maintain
such competitive advantages. In addition, as Discreet enters new markets,
distribution channels, technical requirements and levels and bases of
competition may be different than those in Discreet's current markets and
there can be no assurance that Discreet will be able to compete favorably.
Furthermore, competitive pressures or other factors, including Discreet's
entry into new markets, may result in significant price erosion that could
have a material adverse effect on Discreet's business and results of
operations.
Employees
As of December 31, 1998, Discreet had 414 full-time employees. Of such
employees, 120 were employed in research and development, 94 in sales, 16 in
marketing, 113 in customer support, 16 in manufacturing and 55 in
administration and finance. Discreet believes that its future success will
depend in large part upon its ability to attract and retain highly skilled
technical, management and sales and marketing personnel. Moreover, because the
development and marketing of Discreet's Advanced Systems and New Media
Software requires knowledge of film and video production and post-production,
key technical personnel must be proficient in a number of disciplines.
Competition for such technical personnel is intense, and the failure of
Discreet to hire and retain talented technical personnel or the loss of one or
more key employees could have an adverse effect on Discreet's business and
results of operations. Discreet's employees are not represented by a labor
union, and Discreet considers its employee relations to be good.
Properties
In July 1997, Discreet signed an agreement to rent space for its new
headquarters in Montreal from TGR Zone Corporation ("TGR Zone"), a company
indirectly owned by Discreet's Chairman, President and Chief Executive
Officer. As part of this agreement, TGR Zone assumed Discreet's lease
commitment at its previous Montreal location. The agreement provides that
Discreet leases approximately 55,000 square feet of space at
162
approximately Cdn$13.00 (or approximately $8.86 at June 30, 1998) per square
foot per annum subject to normal escalation clauses. The lease is set to
expire in July 2007. The lease was signed in October 1997. As of August 31,
1998, Discreet leased sales offices, research and development facilities
and/or warehouse space in the United States, Brazil, France, the United
Kingdom, Spain, Germany, Singapore, India, Hong Kong and Japan, pursuant to
leases which expire from September 1998 through February 2003. Discreet's
current aggregate annual rental expense for these additional facilities is
approximately $1,175,000.
In August 1995, Discreet purchased an approximately 10,000 square foot
office building in London, England for use as a sales facility for
approximately (Pounds)1,148,000 (or approximately $1,916,000 at June 30,
1998). Subsequently, in December 1995, Discreet purchased an approximately
50,000 square foot office building in Montreal, Quebec for Cdn$1,730,000
(approximately $1,250,000 at June 30, 1997). The carrying values of the
Montreal building and the London building were written down to their estimated
fair market values and the buildings were classified as assets held for resale
in fiscal 1996. In September 1997, Discreet sold the Montreal office building
for a price not materially different from its carrying value.
Legal Proceedings
On May 29, 1996, June 13, 1996 and April 29, 1997, certain of Discreet's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against Discreet and certain of its officers
and directors, among others. The three lawsuits were filed in the Superior
Court of the State of California, the United States District Court, District
of Massachusetts and the United States District Court, Northern District of
California, respectively. On or about November 25, 1997, a settlement of all
three shareholder class actions received final court approval. Under the
$10,800,000 settlement, Discreet contributed approximately $7,400,000 from its
own funds, with the remainder provided by insurance.
On June 2, 1998, Discreet was named as a defendant in a breach of warranty
action filed in the Supreme Court of the State of New York for the County of
New York entitled Griffith & Tekushan, Inc. v. Discreet Logic, Inc. (Index No.
602684/98) (the "Action"). The complaint alleges, among other things, that
Discreet breached certain warranties arising out of a software licensing
agreement and seeks damages of $1 million. On July 10, 1998, the Action was
removed from state court to the United States District Court for the Southern
District of New York (Case No. 98 Civ. 4909 (BSJ)). On July 17, 1998, Discreet
filed a motion to dismiss the Action in its entirety. The motion to dismiss is
currently pending. Discreet intends to contest this case vigorously; however,
the ultimate outcome of the case cannot be predicted at this point.
On August 28, 1998 a complaint was filed in the Marin County, California,
Superior Court, entitled Jerry Krim, on Behalf of Himself and All Others
Similarly Situated, vs. Discreet Logic Inc., et al., case No. 174792 (the
"Krim Complaint"). The lawsuit names as defendants Discreet, Discreet'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 Transactions. The Krim Complaint asks the court
to enjoin the consummation of the Transactions or, alternatively, seeks to
rescind the Transactions or an award of unspecified damages from the
defendants in the event the Transactions are consummated. Discreet 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. vs. 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 Discreet,
certain of Discreet'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 Transactions with Autodesk. The
Clark Complaint asks the court to enjoin the closing of the Transactions or,
alternatively, seeks to rescind the Transactions or an award of unspecified
damages from the defendants in the event the Transactions are consummated.
Discreet believes the claims asserted in the complaint are without merit and
intends to vigorously contest them.
163
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 Discreet's October 26, 1998
motions to dismiss. The Order dismissed both the Krim and the Clark Complaints
as against Discreet for failing to state a claim against Discreet. 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 Discreet, certain of Discreet's directors and certain
unidentified "John Does," and seeks the same relief. Discreet believes the
claims asserted in the Amended Complaint are without merit and intends to
vigorously contest them.
Recent Acquisitions
On July 15, 1997, Discreet acquired all of the outstanding shares of capital
stock of D-Vision pursuant to a Stock Purchase Agreement dated as of July 10,
1997, among Discreet, D-Vision, the former stockholders of D-Vision and
certain other individuals. As a result of the D-Vision acquisition, Discreet
acquired the D-Vision OnLINE and PRO software products for non-linear video
and digital media editing solutions including related know-how and goodwill.
The purchase price was paid in a combination of 555,000 newly issued Discreet
Common Shares and approximately $10,750,000 in cash. In addition,
approximately $4,000,000 of the cash consideration is being held in escrow
until September 30, 1999, subject to (i) earlier release from escrow of up to
$1,900,000 on September 30, 1998, pending satisfactory resolution of a dispute
regarding an indemnification claim against such escrow, and (ii) the
resolution of any indemnification claims made by Discreet pursuant to the
Stock Purchase Agreement. The D-Vision acquisition was accounted for as a
purchase. The cash used by Discreet to fund the acquisition was derived
primarily from cash flow from operations. A substantial portion of the
purchase price, net liabilities of D-Vision and transaction costs was
allocated to purchased in-process research and development, that had not yet
reached technical feasibility and had no alternative use, for which Discreet
incurred a one-time charge against earnings in the amount of $5,269,000 ($0.18
per share as restated) in the quarter ending September 30, 1997, based on an
appraisal. The terms of the transaction and the consideration received by the
D-Vision stockholders were the result of arms-length negotiations between the
representatives of Discreet and D-Vision. D-Vision develops Microsoft Windows
NT-based non-linear, digital editing solutions.
On December 2, 1997, Discreet entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") with Lantern Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Discreet ("Merger Sub"),
and Lightscape Technologies, Inc., a Delaware corporation ("Lightscape"). On
December 30, 1997, pursuant to the Merger Agreement, and upon the satisfaction
of certain closing conditions, Merger Sub merged (the "Lightscape Merger")
with and into Lightscape with Lightscape as the surviving corporation and a
wholly-owned subsidiary of Discreet. As a result of the Lightscape Merger,
Discreet acquired, among other products, the Lightscape product, a software
application which integrates radiosity and raytracing with physically based
lighting, including related know-how and goodwill. The aggregate purchase
price for Lightscape includes the assumption of approximately $5,700,000 of
net liabilities (of which approximately $3,400,000 was paid at the closing),
not including costs associated with the transaction, and up to $6,800,000 in
contingent consideration to be paid only if certain revenue objectives are
achieved by Lightscape in calendar 1998 and 1999. The Lightscape Merger has
been accounted for as a purchase. A substantial portion of the purchase price
and transaction costs was allocated to purchased in-process research and
development, that had not yet reached technical feasibility and had no
alternative use, for which Discreet incurred a one-time charge against
earnings in the amount of $1,646,000 ($0.06 per share as restated), based on
an independent appraisal, in the quarter ended December 31, 1997 and
approximately $5,241,000, as restated, was allocated to intangible assets,
which include goodwill and acquired technology, and is being amortized on a
straight-line basis over their estimated useful lives of three to five years.
The terms of the transaction were the result of arm's-length negotiations
between the representatives of Discreet and Lightscape.
164
DISCREET MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and Notes thereto included elsewhere herein.
Restatement of Financial Statements
In connection with the proposed business combination of Discreet and
Autodesk, a Form S-4 Registration Statement (file no. 333-65075) was filed
with the SEC. Subsequent to the SEC's letter to the AICPA dated September 9,
1998 regarding the SEC's views on in-process research and development,
Discreet increased the allocation of the purchase price to "Goodwill" and has
decreased the allocation to the "Write-off of purchased research and
development" for its acquisitions of Denim Software in fiscal 1997, and D-
Vision Systems and Lightscape Technologies, Inc. in fiscal 1998. The impact on
Discreet's previously reported financial information is as follows:
The revised allocation of the aggregate purchase price is as follows:
As Reported As Restated
----------- -----------
In-process research and development.................... $36,600,000 $ 9,178,000
Acquired technology.................................... 5,553,991 5,553,991
Goodwill............................................... 1,328,753 28,750,753
Fair value of tangible assets acquired................. 3,526,651 3,526,651
----------- -----------
$47,009,395 $47,009,395
=========== ===========
The effect of these adjustments on previously reported consolidated
financial statements as of and for the eleven-month period ended June 30, 1997
and the year ended June 30, 1998 is as follows:
Eleven-Months
Ended Year Ended
June 30, 1997 June 30, 1998
------------------------ ------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
Other assets................. $ 2,659,964 $10,092,283 $ 6,548,313 $25,635,785
Accumulated deficit.......... $42,639,374 $35,207,055 $43,250,587 $24,163,115
General and administrative
expenses.................... $ 6,396,024 $ 6,500,705 $ 8,077,175 $16,307,022
Write-off of purchased
research and development.... $ 9,800,000 $ 2,263,000 $26,800,000 $ 6,915,000
Operating income (loss)...... $(1,257,395) $ 6,174,924 $ 8,176,614 $19,831,767
Net income (loss)............ $(6,755,975) $ 676,344 $ (611,213) $11,043,940
Basic earnings (loss) per
share....................... $ (0.24) $ 0.02 $ (0.02) $ 0.38
Diluted earnings (loss) per
share....................... $ (0.24) $ 0.02 $ (0.02) $ 0.36
The effect of these adjustments on the previously reported unaudited
consolidated financial statements for the six-month period ended December 31,
1997 are as follows:
As
As Reported Restated
------------ ----------
General and administrative............................ $ 3,896,000 $7,556,000
Charge for purchased research and development......... $ 26,800,000 $6,915,000
Operating income (loss)............................... $ (9,103,000) $7,122,000
Net income (loss)..................................... $(14,312,000) $1,913,000
Basic earnings (loss) per share....................... $ (0.50) $ 0.07
Diluted earnings (loss) per share..................... $ (0.50) $ 0.06
165
Certain Factors That May Affect Future Results
The success of Discreet is subject to a number of risks and uncertainties,
including, without limitation, Discreet's ability to successfully develop,
introduce and gain customer acceptance of existing and new or enhanced
products; the need for the continued development of the market for Discreet's
systems; the ability of Discreet to expand its current market to include
additional applications and develop new products for related markets; the risk
that as Discreet enters new markets, the distribution channels, technical
requirements and levels and basis of competition may be different from those
in Discreet's current markets; the presence of competitors with greater
financial, technical, manufacturing, marketing and distribution resources; the
risk that the products and technologies acquired by Discreet through
acquisitions will not be successful, achieve market acceptance or be
successfully integrated with Discreet's existing products and business; the
risk of quarterly fluctuations in Discreet's operating results; the risk of
Discreet's reliance on SGI for the workstations included in Discreet's systems
including the impact of the timing of the development and release of SGI
products as well as unforeseen difficulties associated with adapting
Discreet's products to future SGI products; the risk that Discreet derives a
significant portion of its revenues from foreign sales; Discreet's reliance
principally on unregistered copyrights and trade secrets to protect its
intellectual property; the risk that Discreet's direct sales efforts may
compete with those of its indirect channels; the risk of Discreet's reliance
on SGI as the sole source for video input/output cards used in Discreet's
systems; Discreet's dependence on key management and technical employees;
market price fluctuations due to quarter-to-quarter variations in Discreet's
operating results, announcements of technological innovations or new products
by Discreet or its competitors and the historical fluctuations in market
prices of technology companies generally; and other risks detailed from time
to time in Discreet's filings with the SEC, including this Proxy Circular.
Information provided by Discreet from time to time including statements in
this Proxy Circular which are not historical facts, are so-called forward-
looking statements, and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 and releases of the SEC. In
particular, statements contained in this section entitled "Discreet
Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are not historical facts (including, but not limited to,
statements regarding Discreet's anticipated cost of revenues, statements
concerning anticipated expense levels and such expenses as a percentage of
revenues, statements about the portion of revenues from customers outside
North America and statements regarding the adequacy of cash to meet cash
operations and capital expenditures), as well as statements contained in
"Discreet--Business--Background," "--Marketing and Sales," "--Research and
Development," "--Proprietary Rights," "--Manufacturing and Suppliers," "--
Competition," "--Employees" and "--Legal Proceedings" which are not historical
facts, may constitute forward-looking statements. Discreet's actual future
results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not
limited to, the factors discussed immediately above and below under the
heading "--Certain Factors That May Affect Future Results," and elsewhere in
this Proxy Circular, as well as from time to time in Discreet's other filings
with the SEC.
Discreet's future results are subject to substantial risks and
uncertainties. Discreet's future financial performance will depend in part on
the successful development, introduction and customer acceptance of its
existing and new or enhanced products. In addition, in order for Discreet to
achieve sustained growth, the market for Discreet's systems and software must
continue to develop and Discreet must expand this market to include additional
applications within the film and video industries and develop or acquire new
products for use in related markets. There can be no assurance that Discreet
will be successful in marketing its existing or any new or enhanced products.
In addition, as Discreet enters new markets, distribution channels, technical
requirements and levels and bases of competition may be different from those
in Discreet's current markets and there can be no assurance that Discreet will
be able to compete favorably. The markets in which Discreet competes are
characterized by intense competition and many of Discreet's current and
prospective competitors have significantly greater financial, technical,
manufacturing and marketing resources than Discreet. These companies may
introduce additional products that are competitive with those of Discreet, and
there can be no assurance that Discreet's products would compete effectively
with such products. Furthermore, competitive pressures or other factors,
including Discreet's entry into new markets, may result in significant price
erosion that could have a
166
material adverse effect on Discreet's business and results of operations.
Discreet has recently completed the purchase of certain products and
technology through acquisitions. There can be no assurance that the products
and technologies acquired from these companies will be successful or will
achieve market acceptance, or that Discreet will not incur disruptions and
unexpected expenses in integrating the operations of the acquired businesses
with those of Discreet.
Discreet's flame*, effect*, inferno*, fire*, smoke* and frost* systems
currently include workstations manufactured by SGI. There are significant
risks associated with this reliance on SGI and Discreet may be impacted by the
timing of the development and release of products by SGI, as was the case
during fiscal 1996. In addition, there may be unforeseen difficulties
associated with adapting Discreet's products to future SGI products. Discreet
derives a significant portion of its total revenues from foreign sales.
Foreign sales are subject to significant risks, including unexpected legal,
tax and exchange rate changes (including the recent currency volatility in
Asia) and other barriers. In addition, foreign customers may have longer
payment cycles and the protection of intellectual property in foreign
countries may be more difficult to enforce. Discreet currently relies
principally on unregistered copyrights and trade secrets to protect its
intellectual property. Any invalidation of Discreet's intellectual property
rights or lengthy and expensive defense of those rights could have a material
adverse effect on Discreet. Discreet receives letters from third parties, from
time to time, inquiring about Discreet's products and discussing intellectual
property matters, which Discreet reviews to determine the appropriate
response, if any. For example, Discreet received a letter from Avid stating
its belief that certain of Discreet's recently acquired D-Vision products
practice inventions claimed in a patent on a media editing system. Discreet
has responded to Avid's letter stating Discreet's belief that Discreet is not
infringing any valid claim of Avid's patent. To Discreet's knowledge, Avid has
not initiated any suit, action or other proceeding alleging any infringement
by Discreet of such patent. Discreet currently markets its systems through its
direct sales organization and through distributors. This marketing strategy
may result in distribution channel conflicts as Discreet's direct sales
efforts may compete with those of its indirect channels. Discreet currently
relies on SGI as the sole source for video input/output cards used in
Discreet's systems. An interruption of the supply or increase in the price of
these components could have a material adverse effect on Discreet's business
and results of operations. To date, Discreet has depended to a significant
extent upon a number of key management and technical employees and Discreet's
ability to manage its operations will require it to continue to recruit and
retain senior management personnel and to motivate and effectively manage its
employee base. The loss of the services of one or more of these key employees
could have a material adverse effect on Discreet's business and results of
operations. There can be no assurance that these factors will not have a
material adverse effect on Discreet's future international sales and
consequently, on Discreet's business and results of operations.
The market price of Discreet Common Shares could be subject to significant
fluctuations in response to quarter-to-quarter variations in Discreet's
operating results, announcements of technological innovations or new products
by Discreet, its competitors or suppliers and other events or factors. In
addition, the stock market in recent years has experienced extreme price and
volume fluctuations that have particularly affected the market prices of many
technology companies and that have often been unrelated or disproportionate to
the operational performance of these companies. These fluctuations, as well as
general economic and market conditions, may materially and adversely affect
the market price of Discreet Common Shares.
Discreet believes that its operating results could vary significantly from
quarter to quarter. A limited number of systems sales may account for a
substantial percentage of Discreet's quarterly revenue because of the high
average sales price of such systems and the timing of purchase orders.
Historically, Discreet has generally experienced greater revenues during the
period following the completion of the annual conference of the NAB, which is
typically held in April. Discreet's expense levels are based, in part, on its
expectations of future revenues. Therefore, if revenue levels are below
expectations, particularly following NAB, Discreet's operating results are
likely to be adversely affected as was the case for the three-month periods
ended April 30, 1996 and July 31, 1996. In addition, the timing of revenue is
influenced by a number of other factors, including: the timing of individual
orders and shipments, other industry trade shows, competition, seasonal
customer buying patterns, changes to customer buying patterns in response to
platform changes and changes in product development and sales and marketing
expenditures. Because Discreet's operating expenses are based on anticipated
revenue levels
167
and a high percentage of Discreet's expenses are relatively fixed in the short
term, variations in the timing of recognition of revenue could cause
significant fluctuations in operating results from quarter to quarter and may
result in unanticipated quarterly earnings shortfalls or losses. There can be
no assurance that Discreet will be successful in maintaining or improving its
profitability or avoiding losses in any future period. Discreet believes that
quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance.
Overview
General
Discreet develops, assembles, markets and supports non-linear, on-line
digital systems and software for creating, editing and compositing imagery and
special effects for film, video, HDTV, broadcast and the Web. Discreet's
systems and software are utilized by creative professionals for a variety of
applications, including feature films, television programs, commercials, music
and corporate videos, interactive game production, live broadcasting as well
as Web design. Discreet's revenues consist of product revenues (including
licensing of its software, sales of Discreet's proprietary hardware, and
resale of third party hardware) and revenues from maintenance and other
services (including consulting and training). Effective January 1, 1998,
Discreet has recognized revenue in accordance with Statement of Position (SOP)
97-2, entitled "Software Revenue Recognition," issued by the American
Institute of Certified Public Accountants. The adoption of SOP 97-2 has not
had a material impact on revenue recognition.
Proposed Transaction with Autodesk
On August 20, 1998, Discreet announced that it has entered into a definitive
agreement providing for the acquisition of Discreet by Autodesk. Under the
terms of the agreement, as amended on November 18, 1998, December 18, 1998 and
January 18, 1999, Autodesk will exchange 0.33 shares of its common stock for
each outstanding share of Discreet. The transaction is intended to be
accounted for as a pooling of interests. Subject to several conditions,
including regulatory approvals and approval of the shareholders of both
companies, the transaction is expected to close in early March, 1999. Until
this transaction is finalized, both companies will operate as separate
entities.
Private Placement of Shares to Intel Corporation
On March 4, 1998, Discreet completed a private placement sale to Intel
Corporation of 645,000 Discreet Common Shares for proceeds to Discreet of
approximately $13,527,000, net of issuance costs.
Legal Proceedings
On May 29, 1996, June 13, 1996 and April 29, 1997 certain of Discreet's
shareholders filed class action lawsuits alleging violations of federal
securities laws and other claims against Discreet and certain of its officers
and directors, among others. The three lawsuits were filed in the Superior
Court of the State of California, the United States District Court, District
of Massachusetts and the United States District Court, Northern District of
California, respectively. On or about November 25, 1997, a settlement of all
three shareholder class actions received final court approval. Under the
$10,800,000 settlement, Discreet contributed approximately $7,400,000 from its
own funds, with the remainder provided by insurance.
On June 2, 1998, Discreet was named as a defendant in a breach of warranty
action filed in the Supreme Court of the State of New York for the County of
New York entitled Griffith & Tekushan, Inc. v. Discreet Logic Inc. (Index No.
602684/98) (the "Action"). The complaint alleges, among other things, that
Discreet breached certain warranties arising out of a software licensing
agreement and seeks damages of $1 million. On July 10, 1998, the Action was
removed from state court to the United States District Court for the Southern
District of New York (Case No. 98 Civ. 4909 (BSJ)). On July 17, 1998, Discreet
filed a motion to dismiss the Action in its entirety. The motion to dismiss is
currently pending. Discreet intends to contest this case vigorously; however,
the ultimate outcome of the case cannot be predicted at this point.
168
On August 28, 1998, a complaint was filed in the Marin County, California,
Superior Court, entitled Jerry Krim, on Behalf of Himself and All Others
Similarly Situated, vs. Discreet Logic Inc., et al., case No. 174792 (the
"Krim Complaint"). The lawsuit names as defendants Discreet, Discreet'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 Transactions. The Krim Complaint asks the court
to enjoin the consummation of the Transactions or, alternatively, seeks to
rescind the Transactions or an award of unspecified damages from the
defendants in the event the Transactions are consummated. Discreet 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. vs. 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 Discreet,
certain of Discreet'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 Transactions with Autodesk. The
Clark Complaint asks the court to enjoin the closing of the Transactions or,
alternatively, seeks to rescind the Transactions or an award of unspecified
damages from the defendants in the event the Transactions are consummated.
Discreet believes the claims asserted in the complaint are without merit and
intends to vigorously contest them.
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 Discreet's October 26, 1998
motions to dismiss. The Order dismissed both the Krim and the Clark Complaints
as against Discreet for failing to state a claim against Discreet. 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 Discreet, certain of Discreet's directors and certain
unidentified "John Does," and seeks the same relief. Discreet believes the
claims asserted in the Amended Complaint are without merit and intends to
vigorously contest them.
Recent Acquisitions
On July 15, 1997, Discreet acquired all of the outstanding shares of capital
stock of D-Vision pursuant to a Stock Purchase Agreement dated as of July 10,
1997, among Discreet, D-Vision, the former stockholders of D-Vision and
certain other individuals. As a result of the D-Vision acquisition, Discreet
acquired the D-Vision OnLINE and PRO software products for non-linear video
and digital media editing solutions including related know-how and goodwill.
The purchase price was paid in a combination of 555,000 newly issued Discreet
Common Shares and approximately $10,750,000 in cash. In addition,
approximately $4,000,000 of the cash consideration is being held in escrow
until September 30, 1999, subject to (i) earlier release from escrow of up to
$1,900,000 on September 30, 1998, pending satisfactory resolution of a dispute
regarding an indemnification claim against such escrow, and (ii) the
resolution of any indemnification claims made by Discreet pursuant to the
Stock Purchase Agreement. The D-Vision acquisition was accounted for as a
purchase. The cash used by Discreet to fund the acquisition was derived
primarily from cash flow from operations. A substantial portion of the
purchase price, net liabilities of D-Vision and transaction costs was
allocated to purchased in-process research and development that had not yet
reached technical feasibility and had no alternative use for which Discreet
incurred a one-time charge against earnings in the amount of $5,269,000 ($0.18
per share as restated) in the quarter ending September 30, 1997, based on an
appraisal. The terms of the transaction and the consideration received by the
D-Vision stockholders were the result of arms-length negotiations between the
representatives of Discreet Logic and D-Vision. D-Vision develops Microsoft
Windows NT-based non-linear, digital editing solutions.
On December 2, 1997, Discreet entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") with Lantern Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Discreet Logic ("Merger
Sub"), and Lightscape Technologies, Inc., a Delaware corporation
("Lightscape"). On December 30, 1997, pursuant to the Merger Agreement, and
upon the satisfaction of certain closing conditions,
169
Merger Sub merged (the "Lightscape Merger") with and into Lightscape with
Lightscape as the surviving corporation and a wholly-owned subsidiary of
Discreet. As a result of the Lightscape Merger, Discreet acquired, among other
products, the Lightscape TM product, a software application which integrates
radiosity and raytracing with physically based lighting, including related
know-how and goodwill. The aggregate purchase price for Lightscape includes
the assumption of approximately $5,700,000 of net liabilities (of which
approximately $3,400,000 was paid at the closing), not including costs
associated with the transaction, and up to $6,800,000 in contingent
consideration to be paid only if certain revenue objectives are achieved by
Lightscape in calendar 1998 and 1999. The Lightscape Merger has been accounted
for as a purchase. A portion of the purchase price and transaction costs was
allocated to purchased in-process research and development that had not yet
reached technical feasibility and had no alternative use for which Discreet
incurred a one-time charge against earnings in the amount of $1,646,000 ($0.06
per share as restated), based on an appraisal, in the quarter ended
December 31, 1997 and approximately $5,241,000, as restated, was allocated to
intangible assets, which include goodwill and acquired technology, and is
being amortized on a straight-line basis over their estimated useful lives of
three to five years. The terms of the transaction were the result of arms'-
length negotiations between the representatives of Discreet and Lightscape.
In-process Research and Development
Overview--The Acquisition of Lightscape Technologies, Inc. by Discreet Logic
Inc.
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relates to the
completion of all planning, designing and testing activities that are
necessary to establish that the products can be produced to meet their design
requirements, including functions, features and technical performance
requirements. Generally, if the R&D project and technologies are not completed
as planned, they will neither satisfy the technical requirements of a changing
market nor be cost effective.
As of the acquisition date, Lightscape Technologies, Inc. ("Lightscape"),
had initiated the research and development effort related to the product
features and functionality that will reside in a technology and application
platform for a next-generation lighting algorithm and software system.
With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of Lightscape prior
to the close of the acquisition. Following are, as of the acquisition date,
the estimated completion percentage, estimated technology life and projected
introduction date:
Percent Technology Introduction
Lightscape In-Process Technology Completed Life Date
-------------------------------- --------- ---------- ------------
Next generation Lightscape technology...... 25% 5 years April 1999
A brief description of the acquired in-process project is set forth below:
Next generation Lightscape technology
The in-process technology under development at the time of the acquisition
included improved performance and progressive refinement control, improved
accuracy and iterative design control, and improved ease of use of the
Lightscape product.
Improved Performance and Progressive Refinement Control--Using this process,
light is transferred from every surface to every other surface (not just from
the brightest surfaces), yielding correct local brightness much earlier during
the simulation as well as more accurate numerical results. The simulation can
be multi-threaded to take advantage of multi-processor computers and
distributed processing environments.
Improved Accuracy and Iterative Design Control--The accuracy of the
simulation can be refined iteratively without having to restart the simulation
from scratch. Furthermore, the user can interactively direct the refinement
process to regions of interest within the scene or change materials and
luminaires and the radiosity engine can immediately compensate for these
changes.
170
Improved Ease of Use--The simulation is controlled by fewer parameters than
ever possible before making the technology immediately useful to inexperienced
users. In addition, advanced model conditioning techniques are used to reduce
artifacts due to inconsistent data and non-physical models generated by CAD
systems.
Currently, Discreet is also developing progressive refinement radiosity
technology, integration of radiosity effects into non-physical renderers, and
new technology to offer a much higher degree of flexibility and control than
the progressive refinement radiosity-based approach. As previously mentioned,
these efforts are an attempt to make substantial technological improvements
over the lighting software product offerings available today.
Valuation analysis
Revenue
The value of the acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product sales. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net
cash flows from the projects and discounting the net cash flows to their
present value. The revenue projection used to value the in-process research
and development was based on estimates of relevant market sizes and growth
factors, expected trends in technology and the nature and expected timing of
new product introductions by Discreet and its competitors. Future revenue
estimates were generated from the next generation Lightscape product family.
Aggregate revenue for Lightscape products was estimated to be approximately $5
million for the period from January 1, 1998 to December 31, 1998, increasing
to approximately $25 million by 2002 (representing a compound annual growth
rate of 35%) and stabilizing at a 5 percent growth rate for the remainder of
the estimation period.
The estimated revenues for the in-process technologies assumed compound
annual growth rates of 54% in the four years following introduction, assuming
the successful completion and market acceptance of the major R&D programs.
Revenues for developed technology were estimated for 1998 through 2002, and
were expected to decline gradually as new products are expected to enter the
marketplace. The estimated revenues for the in-process projects were expected
to peak within five years of acquisition and then decline sharply as other new
products and technologies are expected to enter the market.
Management's analysis also considered anticipated product release dates for
a next-generation version of Discreet's Lightscape product scheduled for
release in April 1999, as well as release dates for the various acquired
products and technologies which are scheduled for release in 2001. The overall
technology life was estimated to be approximately five years for both
Discreet's Lightscape product and the various products and technologies
acquired from Lightscape.
Cost to Complete
Discreet anticipated incurring costs of approximately $2.0 million over the
24 months following the acquisition to complete the R & D projects.
Operating Expenses
Operating expenses used in the valuation analysis of Lightscape included (i)
selling, general and administrative expenses and (ii) research and development
expenses. Operating expenses were estimated based on historical results and
anticipated cost savings. Due to general economies of scale, improved
infrastructure, and greater management breadth, estimated operating expense as
a percentage of revenues were expected to decrease after the acquisitions.
Cost of sales. Cost of sales, expressed as a percentage of revenue, for the
developed and in-process technologies identified in the valuation was
estimated to be 15 percent for 1998 through 2002.
171
Selling, General and Administrative. Selling, general and administrative
expenses, expressed as a percentage of revenue for the developed and in-
process technologies identified in the valuation, were 70.8 percent in 1998,
55.8 percent in 1999, 53.8 percent in 2000, 44.7 percent in 2001, and 37.0
percent in 2002. Thereafter, selling, general and administrative expenses,
expressed as a percentage of revenue for the developed and in-process
technologies identified in the valuation were estimated to stabilize at 37.0
percent of revenue.
Research and Development. Research and development ("R&D") expenses consist
of the costs associated with activities undertaken to develop new software and
to correct errors or to keep products updated with current information. The
R&D expense was estimated to be 20.1 percent of revenues in 1998, declining to
10.0% of revenues in 2003.
Effective income tax rate. The effective income tax rate utilized in the
analysis of the in-process technology was 35 percent throughout the valuation
period. The 35 percent reflects Discreet's estimated combined federal and
state statutory income tax rate, exclusive of nonrecurring charges, and its
estimated income tax rate, as provided by management, in future years.
Discount rate. The discount rate selected for developed and in-process
technology was 25 and 40 percent, respectively. In the selection of the
appropriate discount rate, consideration was given to the Weighted Average
Cost of Capital ("WACC"), which was determined, in part, by using the Capital
Asset Pricing Model (CAPM) and by reviewing venture capital rates of return.
The discount rate utilized for the in-process technology was higher than
Discreet's WACC due to the risk of realizing cash flows from products that had
yet to reach technological feasibility as of the valuation date.
Allocation of value
The fair values of the assets acquired from Lightscape were allocated
between: Intellectual property--in-process research and development and
developed technology; and Other intangible assets--assembled work force and
goodwill/other intangibles. The results of the allocation of values between
the assets are as follows:
Asset Fair Market Value
----- -----------------
(Restated)
Intellectual Property:
In-Process Research and Development...................... $1,646,000
Acquired Technology...................................... $ 990,000
Other Intangible Assets:
Assembled Work Force..................................... $ 100,000
Goodwill/Other Intangibles............................... $4,151,000
Comparison to Actual Results
Discreet believed that the foregoing assumptions used in the Lightscape's
in-process R&D analysis were reasonable at the time of the acquisition. No
assurance can be given, however, that the underlying assumptions used to
estimate expected project sales, development costs or profitability, or the
events associated with such projects, will transpire as estimated. Actual
results have been lower than forecasts with respect to acquired in-process
revenues. This has been primarily due to the following factors: (1)
unanticipated delays in the integration of the Lightscape product into
Discreet's corporate branding initiatives, resulting in a longer than
anticipated period of reduced marketing effort; (2) slow progress in the
development of a distribution channel; (3) delays in integrating retained
Lightscape personnel into Discreet's research and development and sales and
marketing groups; and (4) unforeseen difficulties in the development of an
application program interface which would enable the Company to derive
substantial OEM revenues from this product. Due to missed market
opportunities, Discreet anticipates greater uncertainty, regarding future
revenue levels, than originally forecasted. Discreet does not account for
operating expenses by product line. Therefore, Discreet has not determined the
actual expenses associated with this product. However, Discreet believes that
expenses incurred to date associated with the development and integration of
the in-process R&D projects are approximately consistent with Discreet's
previous estimates.
172
Discreet has completed many of the original R&D projects in accordance with
the plans outlined above. Discreet continues to work toward the completion of
other projects. The majority of the projects are on schedule, but delays have
occurred due to changes in technological and market requirements for digital
video systems. Further, factors such as the inherent complexity and breadth of
the projects have delayed the development process as well. The risks
associated with these efforts are still considered high and no assurance can
be made that Lightscape's upcoming products will meet with market acceptance.
Delays in the introduction of certain products may have adversely affected
Discreet's revenues and earnings in prior quarters. Further delays may have a
similar impact on financial results going forward.
Overview--The Acquisition of D-Vision Systems, Inc. by Discreet
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relates to the
completion of all planning, designing and testing activities that are
necessary to establish that the products can be produced to meet their design
requirements, including functions, features and technical performance
requirements. Generally, if the R&D projects and technologies are not
completed as planned, they will neither satisfy the technical requirements of
a changing market nor be cost effective.
As of the acquisition date, D-Vision Systems, Inc. ("D-Vision"), had
initiated research and development efforts related to the product features and
functionality that will reside in the advancement of its WindowsNT with other
operating systems to develop an advanced, cross-platform editing/effects
product capable of performing complete video editing functions for a broad
array of customers.
With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of D-Vision prior to
the close of the acquisition. Following are, as of the acquisition date, the
estimated completion percentage, estimated technology life and projected
introduction date:
Percent Technology Introduction
D-Vision In-Process Technology Completed Life Date
------------------------------ --------- ------------ ------------
Next generation D-Vision technology...... 26% 4 to 5 years April 1999
A brief description of the acquired in-process project is set forth below:
Next generation D-Vision technology
The substantial technological improvements under development at the time of
the acquisition included the introduction of advanced user interface concepts
and structures to the combined product that support both the editing and
effects paradigms and building advanced product features. Examples of the
advanced product features being built included: remote editing capabilities
with live interaction between remote users; a text or script-based interface
designed to allow the user to customize the application by typing common
statements or words; and text command interpretation that will read film or
program scripts and provide computer-generated "virtual" clips allowing users
to visualize a scene even before the first field shot begins.
Cost to Complete
Discreet anticipated incurring costs of approximately $2.6 million over the
24 months following the acquisition to complete the R & D projects.
Valuation analysis
Revenue
The value of the acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product sales. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable
173
products, estimating the resulting net cash flows from the projects and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on estimates
of relevant market sizes and growth factors, expected trends in technology and
the nature and expected timing of new product introductions by Discreet and
its competitors. Future revenue estimates were generated from the next
generation D-Vision product family. Aggregate revenue for D-Vision products
was estimated to be approximately $11 million for the period from January 1,
1997 to December 31, 1997, increasing to approximately $48 million by 2002
(representing a compound annual growth rate of 21%) and stabilizing at a 5
percent growth rate in 2002 and for the remainder of the estimation period.
The estimated revenues for the in-process technologies assumed compound
annual growth rates of 45% in the four years following introduction, assuming
the successful completion and market acceptance of the major R&D programs. The
estimated revenues for the in-process projects were expected to peak within
five years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market. Revenues for developed
technology were estimated for 1997 through 2002, and were expected to decline
gradually as new products are expected to enter the marketplace.
Management's analysis also considered anticipated product release dates for
a next-generation version of Discreet's D-Vision product scheduled for release
in April 1999, as well as the release date for a significantly enhanced
version of D-Vision's existing product currently scheduled for release in
April 1999. The overall technology life was estimated to be approximately five
years for both Discreet's next generation D-Vision product and the
significantly enhanced version of its D-Vision's existing product.
Operating Expenses
Operating expenses used in the valuation analysis of D-Vision included (i)
cost of sales, (ii) selling, general and administrative expenses, and (iii)
research and development expenses. Operating expenses were estimated based on
historical results and anticipated cost savings. Due to general economies of
scale, improved infrastructure, and greater management breadth, estimated
operating expense as a percentage of revenues were expected to decrease after
the acquisitions.
Cost of sales. Cost of sales, expressed as a percentage of revenue, for the
developed and in-process technologies identified in the valuation was
estimated to range from 10 to 45.2 percent for 1997 through 2002. The cost of
sales was forecast by management for 1997 and 1998. Cost of sales as a
percentage of revenue were stabilized for 2003 based on fiscal 2002 data.
Selling, General and Administrative. Selling, general and administrative
expenses, expressed as a percentage of revenue for the developed and in-
process technologies identified in the valuation, ranged from 52.2 percent in
1997 to 30.0 percent in 2002. Selling, general and administrative expenses
were forecast by management for 1997 through 2002. Thereafter, selling,
general and administrative expenses, expressed as a percentage of revenue,
were estimated to stabilize at 25.0 percent of revenue. Long-term margins were
expected to decline due to increased competitive pressures within the maturing
industry.
Research and Development. Research and development ("R&D") expenses consist
of the costs associated with activities undertaken to develop new software and
to correct errors or to keep products updated with current information. The
R&D expense was estimated to be 6.5 percent of revenues throughout the
forecast period.
Effective income tax rate. The effective income tax rate utilized in the
analysis of the in-process technology was 32 percent throughout the valuation
period. The 32 percent reflects Discreet's estimated combined federal and
state statutory income tax rate, exclusive of nonrecurring charges, and its
estimated income tax rate, as provided by management, in future years.
174
Discount rate. The discount rate selected for developed and in-process
technology was 20 and 25 percent, respectively. In the selection of the
appropriate discount rate, consideration was given to the Weighted Average
Cost of Capital ("WACC"), which was determined, in part, by using the Capital
Asset Pricing Model (CAPM). The discount rate utilized for the in-process
technology was higher than Discreet's WACC due to the risk of realizing cash
flows from products that had yet to reach technological feasibility.
Allocation of value
The fair values of the assets acquired from D-Vision were allocated between:
Intellectual property--in-process research and development and developed
technology; and other intangible assets--assembled work force and
goodwill/other intangibles. The results of the allocation of values between
the assets are as follows:
Asset Fair Market Value
----- -----------------
(Restated)
Intellectual Property:
In-Process Research and Development...................... $ 5,269,000
Acquired Technology...................................... $ 3,100,000
Other Intangible Assets:
Assembled Work Force..................................... $ 200,000
Goodwill/Other Intangibles............................... $16,448,000
Comparison to Actual Results
Discreet believed that the foregoing assumptions used in the D-Vision's in-
process R&D analysis were reasonable at the time of the acquisition. No
assurance can be given, however, that the underlying assumptions used to
estimate expected project sales, development costs or profitability, or the
events associated with such projects, will transpire as estimated. Actual
results to date have been lower than forecasts with respect to acquired in-
process revenues. This has been primarily due to the following factors: (1)
unanticipated delays in the integration of the D-Vision product into
Discreet's corporate branding initiatives, resulting in a longer than
anticipated period of reduced marketing effort; (2) slow progress in resolving
disputes with D-Vision's existing resellers and the development of a
distribution channel; (3) following the acquisition, Discreet generated
revenues solely from the sale of D-Vision software and not from the sale of
software/hardware bundles (including D-Vision software and Truevision graphics
boards) as originally forecasted, (4) following the acquisition, Truevision
discontinued selling D-Vision software, however, the forecasts were prepared
using the assumption that these sales would continue (5) delays in the
realization of synergies from fully integrated products based on the Denim and
D-Vision technologies due to delays in the completion and integration of these
technologies. Due to missed market opportunities, Discreet anticipates greater
uncertainty, regarding future revenue levels, than originally forecasted.
Discreet does not account for operating expenses by product line. Therefore,
Discreet has not determined the actual expenses associated with this product.
However, Discreet believes that expenses incurred to date associated with the
development and integration of the in-process R&D projects are approximately
consistent with Discreet's previous estimates.
Discreet has completed many of the original R&D projects in accordance with
the plans outlined above. Discreet continues to work toward the completion of
other projects. The majority of the projects are on schedule, but delays have
occurred due to changes in technological and market requirements for digital
video systems. Further, factors such as the inherent complexity and breadth of
the projects have delayed the development process as well. The risks
associated with these efforts are still considered high and no assurance can
be made that D-Vision's upcoming products will meet with market acceptance.
Delays in the introduction of certain products may have adversely affected
Discreet's revenues and earnings in prior quarters. Further delays may have a
similar impact on financial results going forward.
175
Overview--The Acquisition of Denim Software LLC by Discreet
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relates to the
completion of all planning, designing and testing activities that are
necessary to establish that the products can be produced to meet their design
requirements, including functions, features and technical performance
requirements. Generally, if the R&D project and technologies are not completed
as planned, they will neither satisfy the technical requirements of a changing
market nor be cost effective.
As of the acquisition date, Denim Software LLC ("Denim"), had initiated
research and development efforts related to the product features and
functionality that would reside in the advancement of its WindowsNT technology
with other operating systems to develop a revolutionary, cross-platform
editing/effects product capable of performing complete video special effects
functions for a broad array of customers. This next-generation product is
designed to deliver technology across all major platforms for digital video
systems and will enable Discreet to provide a range of solutions designed to
meet the needs of all digital artists.
With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of Denim prior to
the close of the acquisition. Following are, as of the acquisition date, the
estimated completion percentage, estimated technology life and projected
introduction date:
Percent Technology Introduction
Denim In-Process Technology Completed Life Date
--------------------------- --------- ------------ ------------
Next-generation Denim technology......... 24% 4 to 5 years April 1999
A brief description of the acquired in-process project is set forth below:
Next generation Denim technology
The substantial technological improvements under development at the time of
the acquisition included providing new advanced editing capabilities and
developing productivity tools, such as machine control, media management and
video card support. This will involve reconstructing the internal architecture
of the existing products to achieve complete compatibility, as well as
developing new technology for adding the desired editing and productivity
functions.
At the time of the acquisition, Denim had initiated development of new
technologies aimed at offering new products that could gain market share in
the nascent digital video systems market by extending Discreet's product line
and targeting new markets. Development plans center on developing a stand-
alone effect /editing product, migrating products to more advanced platforms,
and creating new features.
Cost to Complete
Discreet anticipated incurring costs of approximately $1.0 million over the
24 months following the acquisition to complete the R & D projects.
Valuation analysis
Revenue
The value of the acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product sales. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net
cash flows from the projects and discounting the net cash flows to their
present value. The revenue projection used to value the in-process research
and development was based on estimates of relevant market sizes and growth
factors, expected trends in technology and the nature and expected timing of
new product introductions by Discreet and its competitors. Future revenue
estimates were generated from the next-generation Denim product family.
Aggregate revenue for Denim products was estimated
176
to be approximately $400,000 for the period from July 1, 1996 to June 30, 1997
increasing to approximately $17 million by 2002 (representing a compound
annual growth rate of 46 percent) and stabilizing at a 5 percent growth rate
in 2003 and for the remainder of the estimation period. Year-to-year revenue
growth estimates were developed based on management's forecasts for 1997
through 2002.
Beyond 2002, the estimated revenues for the in-process technologies were
assumed to normalize at a stable growth rate. Revenues for developed
technology were estimated for 1997 through 2002, and were expected to decline
gradually as new products are expected to enter the marketplace.
Management's analysis also considered anticipated product release dates for
a next-generation version of Discreet's Denim product scheduled for release in
April of 1999, as well as the release date for a significantly enhanced
version of Denim's existing product scheduled for release in April of 1998.
The overall technology life was estimated to be approximately five years for
both the Company's next generation Denim product and the significantly
enhanced version of its Denim's existing product.
Operating Expenses
Operating expenses used in the valuation analysis of Denim included (i) cost
of sales, (ii) selling, general and administrative expenses, and (iii)
research and development expenses. Operating expenses were estimated based on
historical results and anticipated cost savings. Due to general economies of
scale, improved infrastructure, and greater management breadth, estimated
operating expense as a percentage of revenues were expected to decrease after
the acquisitions.
Cost of sales. Cost of sales, expressed as a percentage of revenue, for the
developed and in-process technologies identified in the valuation was
estimated to range from 8.6 to 13.2 percent for fiscal 1997 through 2002. The
cost of sales was forecast by management for fiscal 1998 to 2002. Cost of
sales as a percentage of revenue were stabilized for 2003 based on fiscal 2002
data.
Selling, General and Administrative. Selling, general and administrative
expenses, expressed as a percentage of revenue for the developed and in-
process technologies identified in the valuation, ranged from 137.5 percent in
fiscal 1997 to 19.4 percent in fiscal 2002. Selling, general and
administrative expenses were forecast by management for fiscal 1998 to 2002.
Thereafter, selling, general and administrative expenses, expressed as a
percentage of revenue were estimated to stabilize at 25.0 percent of revenue.
Long-term margins were expected to decline due to increased competitive
pressures within the maturing industry.
Research and Development. Research and development ("R&D") expenses consist
of the costs associated with activities undertaken to develop new software and
to correct errors or to keep products updated with current information. The
R&D expense was estimated to be 14.4 percent of revenues in fiscal 1998,
declining to 6.5 percent of revenues by 2002.
Effective income tax rate. The effective income tax rate utilized in the
analysis of the in-process technology was 32 percent throughout the valuation
period. The 32 percent reflects Discreet's estimated combined federal and
state statutory income tax rate, exclusive of nonrecurring charges, and its
estimated income tax rate, as provided by management, in future years.
Discount rate. The discount rate selected for developed and in-process
technology was 20 and 25 percent, respectively. In the selection of the
appropriate discount rate, consideration was given to the Weighted Average
Cost of Capital ("WACC"), which was determined, in part, by using the Capital
Asset Pricing Model (CAPM). The discount rate utilized for the in-process
technology was higher than Discreet's WACC due to the risk of realizing cash
flows from products that had yet to reach technological feasibility.
177
Allocation of value
The fair values of the assets acquired from D-Vision were allocated between:
Intellectual property--in-process research and development and developed
technology; and Other intangible assets--assembled work force and
goodwill/other intangibles. The results of the allocation of values between
the assets are as follows:
Asset Fair Market Value
----- -----------------
(Restated)
Intellectual Property:
In-Process Research and Development...................... $2,263,000
Acquired Technology...................................... $1,464,000
Other Intangible Assets:
Assembled Work Force..................................... $ 100,000
Goodwill/Other Intangibles............................... $7,752,000
Comparison to Actual Results
Discreet believed that the foregoing assumptions used in the Denim's in-
process R&D analysis were reasonable at the time of the acquisition. No
assurance can be given, however, that the underlying assumptions used to
estimate expected project sales, development costs or profitability, or the
events associated with such
projects, will transpire as estimated. Discreet currently believes that actual
results have been lower than forecasts with respect to acquired in-process
revenues. This has been primarily due to the following factors:
(1) unanticipated delays in the integration of the Denim product into
Discreet's corporate branding initiatives, resulting in a longer than
anticipated period of reduced marketing effort; (2) slow progress in the
development of a distribution channel; and (3) delays in the realization of
synergies from fully integrated products based on the Denim and D-Vision
technologies due to delays in the integration of these technologies. Due to
missed market opportunities, Discreet anticipates greater uncertainty,
regarding future revenue levels, than originally forecasted. Discreet does not
account for operating expenses by product line. Therefore, Discreet has not
determined the actual expenses associated with this product. However, Discreet
believes that expenses incurred to date associated with the development and
integration of the in-process R&D projects are approximately consistent with
Discreet's previous estimates.
Discreet has completed many of the original R&D projects in accordance with
the plans outlined above. Discreet continues to work toward the completion of
other projects. The majority of the projects are on schedule, but delays have
occurred due to changes in technological and market requirements for digital
video systems. Further, factors such as the inherent complexity and breadth of
the projects have delayed the development process as well. The risks
associated with these efforts are still considered high and no assurance can
be made that Denim's upcoming products will meet with market acceptance.
Delays in the introduction of certain products may have adversely affected
Discreet's revenues and earnings in prior quarters. Further delays may have a
similar impact on financial results going forward.
Restructurings
During the fiscal year ended July 31, 1996, excluding a restructuring charge
of $15,000,000 and its related tax effects, Discreet incurred a net loss of
approximately $31,000,000 on revenues of approximately $83,997,000. In
response to the financial results and other developments facing the business,
Discreet developed a restructuring plan during the fourth fiscal quarter of
1996. Discreet began implementation of its restructuring plan in the fourth
fiscal quarter of 1996 and had substantially completed the implementation of
the plan at the end of fiscal 1997. During the fourth fiscal quarter of 1998,
Discreet revised its estimates of remaining costs to be incurred and reversed
approximately $2,333,000 of reserves no longer considered to be necessary. As
of December 31, 1998 Discreet still has approximately $711,000 in
restructuring reserves primarily for the estimated cost of terminating leases,
and the legal and taxation winding down of several subsidiaries.
Discreet also recorded an unrelated restructuring charge in the fourth
fiscal quarter of 1998 in the amount of $829,000 for the estimated costs of
closing its U.K. research and development facility. As of June 30, 1998,
178
the closure was substantially complete and Discreet still has approximately
$50,000 in restructuring reserves primarily for the estimated cost of
professional fees associated with the winding down of this subsidiary. See
Note 19 of Notes to Discreet's Consolidated Financial Statements.
Change in Fiscal Year
On January 9, 1997, the Discreet Board approved the change of Discreet's
fiscal year end from July 31 to June 30. This change was effective beginning
with Discreet's second fiscal quarter of 1997. The consolidated financial
statements are presented for the year ended June 30, 1998, the eleven-month
period ended June 30, 1997 and the year ended July 31, 1996. Discreet prepares
consolidated financial statements, remeasures accounts in foreign currencies
to reflect changes in exchange rates and examines and adjusts certain reserve
accounts at the end of each quarter. Therefore, it is not practicable to
recast the 1996 fiscal year's results to reflect a June 30 fiscal year end.
Consequently, the results for the twelve-month period ended June 30, 1998 are
not directly comparable with those for the eleven-month period ended June 30,
1997, or the twelve-month period ended July 31, 1996.
Year 2000
Discreet has made preliminary assessments of its products and information
systems and has determined that they are Year 2000 compliant, or that only a
limited effort will be required to achieve compliance. Discreet is currently
proceeding with detailed reviews of every application used. It is expected
that some will have to be upgraded to Year 2000 compliant applications. Some
Discreet products run on platforms, or work with peripherals that are
currently not Year 2000 compliant. Accordingly, it is expected that some
customers may experience some difficulties related to non-Discreet products,
which may affect the performance of Discreet products and, therefore, lead to
an unusually high number of calls to Discreet's technical support department.
Discreet anticipates that the costs related to the detailed assessments,
application upgrades, and responding to the increased volume of support calls
will not be material to its results of operations, liquidity and capital
resources. Although management does not expect Year 2000 issues to have a
material impact on its business or future results of operations, there can be
no assurance that the potential problems described above, related to the
platforms and peripherals on and with which Discreet's products operate, will
be resolved in a timely manner, and that Discreet will not experience
significant costs or delays in developing versions of its products that are
compatible with Year 2000 compliant versions of these platforms and
peripherals.
179
Results of Operations
The following table sets forth the percentages of total revenues represented
by certain line items in the statement of operations:
Six Months
Ended
Year Eleven Months Year December 31,
Ended July 31, Ended Ended June 30, -------------
1996 June 30, 1997 1998 1997 1998
-------------- ------------- -------------- -------- ----
Restated Restated Restated
Total revenues.......... 100 % 100 % 100 % 100% 100%
Cost of revenues........ 59 47 41 41 48
--- --- --- --- ---
Gross profit...... 41 53 59 59 52
--- --- --- --- ---
Operating expenses:
Research and
development........ 17 10 10 10 13
Sales and
marketing.......... 31 23 23 21 30
General and
administrative..... 13 6 11 10 16
Write-down of
investment......... 3 -- -- -- --
Gain on sale of
investment......... -- -- (2) -- --
Costs related to
terminated
transaction........ -- -- 1 -- --
Write-off of
purchased research
and development.... 10 2 5 9 --
Restructuring
expense............ 18 -- (1) -- --
Litigation and
related settlement
expense............ 3 6 -- -- --
--- --- --- --- ---
Total operating
expenses......... 95 47 47 50 59
--- --- --- --- ---
Operating income
(loss)........... (54) 6 12 9 (7)
Other income (expense).. 3 1 2 1 4
--- --- --- --- ---
Income (loss) before
income taxes........... (51) 7 14 10 (3)
Provision for income
taxes.................. 2 6 7 8 2
--- --- --- --- ---
Net income
(loss)........... (53)% 1% 7% 2% (5)%
=== === === === ===
Three Months and Six Months Ended December 31, 1998 and December 31, 1997
Total Revenues. Discreet's revenues consist of product revenues (including
licensing of its software, sales of Discreet's proprietary hardware, and
resale of third party hardware) and, to a lesser extent, revenues from
maintenance and other services (including consulting and training). Effective
January 1, 1998, Discreet has recognized revenue in accordance with Statement
of Position (SOP) 97-2, entitled Software Revenue Recognition, issued by the
American Institute of Certified Public Accountants. The implementation of this
new standard did not have a material impact on the consolidated results of
operations.
Total revenues were $28,396,000 and $37,268,000 for the three-month periods
ended December 31, 1998, and December 31, 1997, respectively, and $55,827,000
and $75,673,000 for the six-month periods ended December 31, 1998 and 1997,
respectively. Discreet believes that the decline in revenues, in both the
three and six-month periods, is primarily due to the following factors: (1)
continued effects of a lack of a senior sales and marketing executive combined
with several field vacancies; (2) slower than expected sales in Europe and
Asia due in part to the personnel issues noted above as well as market
conditions in these areas causing delays in capital spending; (3) customers
deferring purchase decisions due to confusion over HDTV timing and standards;
(4) what Discreet believed to be temporary concerns in the Advanced Systems
customer base regarding the acquisition of Discreet by Autodesk which may have
lead to purchasing delays particularly in the quarter ended September 30,
1998; and (5) some product discounting and certain price reductions in the
three-month period ended December 31, 1998 that were not offset by increases
in volume.
Revenues from customers outside of North America were $12,481,000 (44% of
total revenues) and $21,702,000 (58% of total revenues) for the three-month
periods ended December 31, 1998, and December 31,
180
1997, respectively, and $28,277,000 (51% of total revenues) and $39,965,000
(53% of total revenues) for the six-month periods ended December 31, 1998 and
1997, respectively. Revenues from customers outside North America decreased as
a result of the factors noted above, particularly, field vacancies in Asia,
Europe and Latin America. Discreet expects that revenues from customers
outside of North America will continue to account for a substantial portion of
its revenues and should, as a percentage of total revenues, increase from the
level experienced in the three-month period ended December 31, 1998.
Cost of Revenues. Cost of revenues consists primarily of the cost of
hardware sold (mainly workstations manufactured by Silicon Graphics, Inc.
(SGI)), cost of hardware service contracts, cost of integration and hardware
assembly, cost of service personnel and the facilities, computing, benefits
and other administrative costs allocated to such personnel and the provision
for inventory reserves. Cost of revenues was $13,918,000 (49% of total
revenues) and $13,458,000 (36% of total revenues) for the three-month periods
ended December 31, 1998, and December 31, 1997, respectively, and $26,677,000
(48% of total revenues) and $30,827,000 (41% of total revenues) for the six-
month periods ended December 31, 1998 and 1997, respectively. The increase in
cost of revenues, as a percentage of total revenues, in the three and six-
month periods ended December 31, 1998 as compared to the three month period
ended December 31, 1997 was primarily due to the following factors: (1) the
decrease in revenues in Europe, Asia, and Latin America where customers
typically purchase only software, or software and storage media bundles from
Discreet; (2) product discounting and certain price reductions; (3) the
presence of certain fixed expenses in cost of revenues; (4) greater hardware-
only sales generating lower margins in the three-month period ended December
31, 1998; and (5) a greater number of systems (including the workstations and
other hardware peripherals) sold through the indirect channel. Should revenues
increase, Discreet expects that cost of revenues as a percentage of total
revenues should decrease from its current levels. However, cost of revenues
remains difficult to predict and is subject to fluctuations due to a number of
factors including product and product configuration mix and the proportion of
direct and indirect sales.
Research and Development. Research and development expenses consist
primarily of the cost of research and development personnel and the
facilities, depreciation on research and development equipment, computing,
benefits and other administrative costs allocated to such personnel, and
consulting fees. Expenditures for research and development, after deducting
Canadian federal and provincial tax credits, were $3,600,000 (13% of total
revenues) and $3,901,000 (10% of total revenues) for the three-month periods
ended December 31, 1998, and December 31, 1997, respectively, and $7,350,000
(13% of total revenues) and $7,413,000 (10% of total revenues) for the six-
month periods ended December 31, 1998 and 1997, respectively. The decrease in
research and development expenses in the three and six-month periods ended
December 31, 1998 as compared to the three and six-month periods ended
December 31, 1997, respectively, was primarily due to the closure of the UK
research and development facility offset by increases in the number of
software engineers to develop and enhance Discreet's existing and newly
acquired products and to develop new products. The increase in research and
development expenses as a percentage of total revenues is primarily due to the
decline in revenues during the three and six-month periods ended December 31,
1998 as compared to the three and six-month periods ended December 31, 1997.
Research and development costs are expensed as incurred. Software development
costs are considered for capitalization once technical feasibility has been
established. Discreet has not capitalized any software development costs to
date. Certain research and development expenditures are incurred substantially
in advance of related revenue and in some cases do not generate revenues.
Discreet expects that research and development expenses will increase from
current levels, however, should revenues increase, Discreet expects that
research and development expenses as a percentage of total revenues should
decrease from current levels.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related benefits, facilities and administrative
costs allocated to Discreet's sales and marketing personnel, tradeshow
expenses, advertising, marketing programs and dealer commissions. Sales and
marketing expenses were $8,943,000 (31% of total revenues) and $8,407,000 (23%
of total revenues) for the three-month periods ended December 31, 1998, and
December 31, 1997, respectively, and $16,857,000 (30% of total revenues) and
$15,840,000 (21% of total revenues) for the six-month periods ended December
31, 1998 and 1997, respectively. The increase in sales and marketing expenses,
in the three and six-month periods ended December 31, 1998 as compared to the
three and six-month periods ended December 31, 1997, respectively, was
primarily due to the
181
continued expansion of Discreet's direct and indirect sales organization,
including the operating costs of domestic sales offices and foreign
subsidiaries, and the introduction of marketing initiatives designed to
support the expanded dealer network. The increase in sales and marketing
expenses as a percentage of total revenues is primarily due to the decline in
revenues during the three and six-month periods ended December 31, 1998 as
compared to the three and six-month periods ended December 31, 1997,
respectively. Discreet expects that sales and marketing expenses will increase
from current levels, however, should revenues increase, Discreet expects that
sales and marketing expenses as a percentage of total revenues should decrease
from current levels.
General and Administrative. General and administrative expenses include the
costs of finance and accounting, human resources, facilities, corporate
information systems, legal and other administrative functions of Discreet,
amortization of goodwill, and reserves for doubtful accounts receivable.
General and administrative expenses were $4,161,000 (15% of total revenues)
and $3,951,000 (11% of total revenues), as restated, for the three-month
periods ended December 31, 1998, and December 31, 1997, respectively, and
$8,603,000 (16% of total revenues) and $7,556,000 (10% of total revenues), as
restated, for the six-month periods ended December 31, 1998 and 1997,
respectively. The increase in general and administrative expenses in the three
and six-month periods ended December 31, 1998 as compared to the three and
six-month periods ended December 31, 1997, respectively, is explained by
additional personnel and salary increases as well as the amortization of
goodwill associated with the Lightscape acquisition. The increase in general
and administrative expenses as a percentage of total revenues is primarily due
to the above factors and the decline in revenues during the three and six-
month periods ended December 31, 1998 as compared to the three and six-month
periods ended December 31, 1997, respectively. Discreet expects that general
and administrative expenses will increase from their current levels, however,
should revenues increase, Discreet expects that general and administrative
expenses as a percentage of total revenues should decrease from current
levels.
Charge for Purchased Research and Development. In the three-month period
ended December 31, 1997, in connection with the Lightscape acquisition,
Discreet expensed $1,646,000, as restated, of in-process research and
development, based on an appraisal, that had not yet reached technological
feasibility and had no alternative use. In the three-month period ended
September 30, 1997, in connection with the D-Vision acquisition, Discreet
expensed $5,269,000, as restated, of in-process research and development,
based on an appraisal, that had not yet reached technological feasibility and
had no alternative use.
Other Income. Other income primarily consists of foreign currency gains and
losses and interest income and expense. Foreign currency translation resulted
in gains of $128,000 and $179,000 for the three-month periods ended December
31, 1998, and December 31, 1997, respectively, and $1,118,000 and $308,000 for
the six-month periods ended December 31, 1998 and 1997, respectively. These
gains are primarily the result of Discreet and each subsidiary translating
intercompany balances denominated in a currency other than its own functional
currency. These balances are remeasured into the functional currency of each
company every reporting period. This remeasurement results in either
unrealized gains or losses depending on the exchange rate fluctuation between
the functional currency of each company and the currency in which the monetary
asset or liability is denominated. In particular during the three-month period
ended September 30, 1998; Discreet recorded unrealized gains when translating
into Canadian dollars its U.S. dollar cash balance and its trade receivables
with its U.S. and German subsidiaries.
Provision for Income Taxes. Discreet's provision for income taxes was
$323,000 and $3,097,000 for the three-month periods ended December 31, 1998,
and December 31, 1997, respectively, and $1,185,000 and $5,872,000 for the
six-month periods ended December 31, 1998 and 1997, respectively. The
provision for all periods is based upon the Canadian federal statutory rate of
38% and reflects the impact of various tax credits and foreign taxes. The
effective tax rate for the three and six-month periods ended December 31, 1998
differed from the statutory rate primarily as a result of the following
factors: (1) Discreet incurring losses in jurisdictions where tax loss
carryforwards were not available; and (2) the amortization of goodwill for
which no tax benefit was recorded. The effective tax rate for the three and
six-month periods ended December 31, 1997 differed from the statutory rate
primarily as a result of the following factors: (1) Discreet recording charges
for purchased in-process research and development for which no benefit was
recorded due to the uncertainty of
182
realizing any future tax benefit associated with these charges; (2) the
amortization of goodwill for which no tax benefit was recorded; offset by (3)
the realization of the benefit for some prior year tax losses for which no
benefit was previously recorded. Discreet has foreign net operating loss carry
forwards which may be available to reduce future income tax liabilities.
Twelve months ended June 30, 1998 and eleven months ended June 30, 1997
As discussed above, it is not practicable to recast prior quarterly results
to reflect new fiscal periodic reporting resulting from Discreet's previously
announced change in fiscal year end. Therefore, the results for the twelve-
month period ended June 30, 1998 are not directly comparable to the results of
the eleven-month period ended June 30, 1997.
Total Revenues.
Total revenues were $151,558,000 and $101,924,000 for the twelve-month
period ended June 30, 1998, and the eleven-month period ended June 30, 1997,
respectively. The increase in total revenues is primarily due to:
(1) increased penetration of inferno*; (2) increased penetration of flame* due
in part to the introduction of flame* on the SGI Octane platform resulting in
a significantly reduced system cost to customers; (3) the introduction of
smoke*; (4) the introduction of the New Media Software products acquired
through the Denim, D-Vision, and Lightscape acquisitions; and (5) the
additional month in the fiscal 1998 period. These increases were partially
offset by a decrease in revenues from Discreet's Broadcast Production
products.
Revenues from customers outside of North America were $80,691,000 (53% of
total revenues) and $58,171,000 (57% of total revenues) for the twelve-month
period ended June 30, 1998, and the eleven-month period ended June 30, 1997,
respectively. Revenues from customers outside North America increased due to
the increased penetration of Discreet's products in Discreet's European and
Asian markets as well as the additional month in the fiscal 1998 period.
Discreet expects that revenues from customers outside of North America will
continue to account for a substantial portion of its revenues and should, as a
percentage of total revenues, increase slightly from current levels.
Cost of Revenues. Cost of revenues consists primarily of the cost of
hardware sold (mainly workstations manufactured by SGI), cost of hardware
service contracts, cost of integration and hardware assembly, cost of service
personnel and the facilities, computing, benefits and other administrative
costs allocated to such personnel and the provision for inventory reserves.
Cost of revenues was $62,033,000 (41% of total revenues) and $47,571,000 (47%
of total revenues) for the twelve-month period ended June 30, 1998, and the
eleven-month period ended June 30, 1997, respectively. The decrease in cost of
revenues, as a percentage of total revenues, was primarily due to: (1) an
increase in sales to Discreet's indirect channel partners, whose purchases
from Discreet are predominantly software only and software and storage media
bundles since these indirect channel partners are themselves hardware
resellers; (2) porting certain of Discreet's software products to recently
available, lower priced workstations, resulting in a lower cost to Discreet
for the hardware component of system sales; and (3) the increased penetration
of Discreet's products in the Asian market where customers typically purchase
from Discreet only software or software and storage media bundles.
Additionally, in order to reflect inventory at its estimated net realizable
value, the Company recorded inventory reserves of $3,232,000 during the
eleven-month period ended June 30, 1997. No additional provision for inventory
was recorded in fiscal 1998. The decrease in cost of revenues, as a percentage
of total revenues, is also attributable to lower margins realized on systems
sold in the three-month period ended October 31, 1996 under an aggressive
sales program, including product discounts, designed to reduce the inventory
on hand at the end of the fourth fiscal quarter of 1996. Discreet expects that
cost of revenues, as a percentage of total revenues, should decrease slightly
from its current levels. However, cost of revenues remains difficult to
predict and is subject to fluctuations due to a number of factors including
product and product configuration mix and the proportion of direct and
indirect sales.
Research and Development. Research and development expenses consist
primarily of the cost of research and development personnel and the
facilities, depreciation on research and development equipment, computing,
183
benefits and other administrative costs allocated to such personnel, and
consulting fees. Expenditures for research and development, after deducting
Canadian federal and provincial tax credits, were $14,847,000 (10% of total
revenues) and $9,708,000 (10% of total revenues) for the twelve-month period
ended June 30, 1998, and the eleven-month period ended June 30, 1997,
respectively. The increase in research and development expenses was primarily
due to: (1) an increase in the number of software engineers (including the
engineers joining Discreet as a result of the Denim, D-Vision and Lightscape
Acquisitions) to develop and enhance Discreet's existing and newly acquired
products and to develop new products, (2) an increase in depreciation charges
on the additional research and development equipment required for the
additional personnel, and (3) the additional month in the fiscal 1998 period.
Research and development costs are expensed as incurred. Software development
costs are considered for capitalization once technical feasibility has been
established. Discreet has not capitalized any software development costs to
date. Certain research and development expenditures are incurred substantially
in advance of related revenue and in some cases do not generate revenues.
Discreet expects that research and development expenses will increase from
current levels. Should revenues increase, Discreet expects that research and
development expenses, as a percentage of total revenues, should remain
approximately the same as current levels.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related benefits, facilities and administrative
costs allocated to Discreet's sales and marketing personnel, tradeshow
expenses, and dealer commissions. Sales and marketing expenses were
$34,321,000 (23% of total revenues) and $23,206,000 (23% of total revenues)
for the twelve-month period ended June 30, 1998, and the eleven-month period
ended June 30, 1997, respectively. The increase in sales and marketing
expenses, was primarily due to: (1) the continued expansion of Discreet's
direct and indirect sales organization, including the operating costs of
domestic sales offices and foreign subsidiaries, (2) an increase in tradeshow
activities, (3) the launch of a corporate branding initiative in the fourth
fiscal quarter of 1998, and (4) the additional month in the fiscal 1998
period. Discreet expects that sales and marketing expenses will increase from
their current levels. Should revenues increase, Discreet expects that sales
and marketing expenses, as a percentage of total revenues, should remain
approximately the same as current levels.
General and Administrative. General and administrative expenses include the
costs of finance and accounting, human resources, facilities, corporate
information systems, legal and other administrative functions of Discreet,
amortization of goodwill, and reserves for doubtful accounts receivable.
General and administrative expenses were $16,307,000 (11% of total revenues),
as restated, and $6,501,000 (6% of total revenues), as restated for the
twelve-month period ended June 30, 1998, and the eleven-month period ended
June 30, 1997, respectively. The increase in general and administrative
expenses is explained by an increase in personnel, the amortization in the
twelve month period ended June 30, 1998, of the goodwill associated with the
Denim, D-Vision, and Lightscape acquisitions as well as the additional month
in the fiscal 1998 period. Discreet expects that general and administrative
expenses will increase from their current levels. Should revenues increase,
Discreet expects that general and administrative expenses, as a percentage of
total revenues, should remain approximately the same as current levels.
Gain on Sale of Investment. In the fourth fiscal quarter of 1998, Essential
Communications Corporation, a company in which Discreet held a minority
interest investment of preferred shares, was sold. As a result of this sale,
Discreet received proceeds of $2,500,000 in exchange for the preferred shares
held by it. Previously, in fiscal 1996, Discreet had taken a charge to
operations due to the uncertainty regarding the realizability of this
investment. Upon receipt of the proceeds, Discreet realized a gain of
$2,500,000.
Costs related to Terminated Transaction. In the fourth fiscal quarter of
1998, Discreet incurred $1,713,000 of costs related to the terminated
agreement to acquire MGI Software Corp.
Restructuring expense. In the fourth fiscal quarter of 1998, Discreet
reversed $2,333,000 of restructuring reserves. These reserves were for the
estimated cost of buying out the lease for the previous Montreal headquarters
and were no longer considered necessary as an assignment of this lease was
negotiated during the fiscal year ended June 30, 1998. This reversal was
offset by an additional accrual of $829,000 to accrue the cost
184
of closing Discreet's U.K. research and development facility. The closure of
this facility substantially was completed by June 30, 1998. See Note 19 of
Notes to Discreet's Consolidated Financial Statements.
Charge for Purchased Research and Development. In connection with the
Lightscape acquisition, Discreet expensed $1,646,000, as restated, based on an
appraisal, of in-process research and development that had not yet reached
technological feasibility and had no alternative use, in the three-month
period ended December 31, 1997. In connection with the D-Vision acquisition,
Discreet expensed $5,269,000, as restated, based on an appraisal, of in-
process research and development, that had not yet reached technological
feasibility and had no alternative use, in the three-month period ended
September 30, 1997. During the eleven-month period ended June 30, 1997,
Discreet expensed $2,263,000, as restated, based on an appraisal, of in-
process and development related to the Denim Acquisition, that had not yet
reached technical feasibility and had no alternative use. See Notes 2 and 15
of Notes to Discreet's Consolidated Financial Statements.
Litigation and Related Settlement Expenses. In the third fiscal quarter of
1998, Discreet reversed $405,000 of litigation and related settlement expenses
in order to adjust previously estimated legal costs to the actual amount of
costs incurred to settle the class action litigations. During the eleven-month
period ended June 30, 1997, Discreet recorded a provision of $6,500,000 to
accrue the additional estimated settlement costs to be borne by Discreet. See
Note 5 of Notes to Discreet's Consolidated Financial Statements.
Other Income (Expense). Other Income (Expense) primarily consists of foreign
currency gains and losses and interest income and expense. Foreign currency
translation resulted in gains of $1,083,000 and losses of $188,000 for the
twelve-month period ended June 30, 1998, and the eleven-month period ended
June 30, 1997, respectively. Included in the gains of $1,083,000 are the
following significant items: a gain of approximately $320,000 realized on the
dissolution of Discreet's Barbados subsidiary and the legal transfer of its
assets and liabilities to Discreet (this subsidiary's functional currency was
the US dollar whereas Discreet's functional currency is the CDN dollar),
realized gains, in the amounts of $354,000 and $251,000 from the receipt of
payment against notes receivable, denominated in currencies other than the CDN
dollar, from Discreet's subsidiaries in the United States and United Kingdom,
respectively, and other unrealized gains and losses which were primarily the
result of Discreet and each subsidiary remeasuring monetary asset or liability
balances (primarily intercompany balances) denominated in a currency other
than its own functional currency. These balances are remeasured into the
functional currency of each company every reporting period.
Provision for Income Taxes. Discreet's provision for income taxes was
$10,854,000 and $6,489,000 for the twelve-month period ended June 30, 1998,
and the eleven-month period ended June 30, 1997, respectively. The provision
for all periods is based upon the Canadian federal statutory rate of 38% and
reflects the impact of various tax credits and foreign taxes. The effective
tax rate for the twelve-month period ended June 30, 1998 differed from the
statutory rate primarily as a result of Discreet recording charges for
purchased in-process research and development for which no benefit was
recorded due to the uncertainty of realizing any future tax benefit associated
with these charges, and the amortization of goodwill for which no tax benefit
was recorded, offset by the realization of the benefit for some prior year tax
losses for which no benefit was previously recorded. The effective tax rate
for the eleven-month period ended June 30, 1997 differed from the statutory
rate primarily as a result of Discreet not recording benefits related to
losses, and charges for purchased in-process research and development and the
settlement of the class action litigation, where the realization of the
benefits were uncertain. Discreet has foreign net operating loss carry
forwards of approximately $13,841,000 which may be available to reduce future
income tax liabilities.
Eleven months ended June 30, 1997 and twelve months ended July 31, 1996
As discussed above, it is not practicable to recast prior quarterly results
to reflect new fiscal periodic reporting resulting from Discreet's previously
announced change in fiscal year end. Therefore, the results for the eleven-
month period ended June 30, 1997, are not directly comparable to the results
of the twelve-month period ended July 31, 1996.
185
Total Revenues. Total revenues were $101,924,000 and $83,997,000 for the
eleven-month period ended June 30, 1997 and the twelve-month period ended July
31, 1996, respectively. Despite the fact that fiscal 1997 was an eleven-month
period, total revenues increased in fiscal 1997 over total revenues for fiscal
1996 due to new product offerings during the year, namely FIRE and FLINT RT,
as well as wider acceptance of Discreet's premier resolution-independent
effects system, INFERNO, and a growing installed base. Revenues from FLAME
systems, including software and hardware, were $26,159,000 (26% of total
revenues) and $44,745,000 (53% of total revenues) for the eleven-month period
ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decline in FLAME revenues, both in amount and as a
percentage of total revenues, was primarily a result of an aggressive program
in the three months ended October 31, 1996 which included significant
discounting designed to reduce inventory on hand at the end of fiscal 1996,
and the wider acceptance of Discreet's premier resolution-independent effects
system, INFERNO, which began to ship commercially in October 1995. Revenues
from INFERNO systems, including software and hardware, were $16,161,000 (16%
of total revenues) and $8,887,000 (11% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decline in FLAME revenues was also offset by an increase in
FLINT revenues due to the initial commercial shipment of FLINT RT. Revenues
from FLINT (including FLINT RT) systems, including software and hardware, were
$17,263,000 (17% of total revenues) and $14,068,000 (17% of total revenues)
for the eleven-month period ended June 30, 1997 and the twelve-month period
ended July 31, 1996, respectively. Revenues from FIRE systems, including
software and hardware, were $26,482,000 (26% of total revenues) during the
eleven-month period ended June 30, 1997, the first period it was commercially
available. Revenues from VAPOUR and FROST systems, including software and
hardware, were $2,253,000 (2% of total revenues) and $4,784,000 (6% of total
revenues) for the eleven-month period ended June 30, 1997 and the twelve-month
period ended July 31, 1996, respectively. Due to the high average sales price,
the timing of purchase orders and the lengthy sales cycle of VAPOUR and FROST
systems, a limited number of sales of these systems could account for a
significant amount of revenues. The decline in VAPOUR and FROST revenues is
attributable to the fact that the 1996 revenues include the sale of several
large systems.
Software-only revenues were $7,495,000 (7% of total revenues) and $4,564,000
(5% of total revenues) for the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 31, 1996, respectively. Hardware-only revenues,
consisting primarily of the sale of disk arrays and other peripherals, were
$6,639,000 (7% of total revenues) and $4,938,000 (6% of total revenues) for
the eleven-month period ended June 30, 1997 and the twelve-month period ended
July 31, 1996, respectively. System revenues, which include software and
hardware, were $74,183,000 (73% of total revenues) and $63,183,000 (75% of
total revenues) for the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 31, 1996, respectively. The fluctuations in
software-only, hardware-only and system revenues are primarily due to the high
average sales price of Discreet's products, such that a limited number of
sales can account for a substantial portion of total revenues. The increase in
software-only revenues as a percentage of total revenues resulted from more
revenues in fiscal 1997 being derived from Discreet's indirect sales channel
which primarily purchases only software from Discreet.
Maintenance revenues were $9,728,000 (10% of total revenues) and $6,483,000
(8% of total revenues) for the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 31, 1996, respectively. Maintenance revenues
increased due to the increased installed base of Discreet's FLAME, INFERNO and
FLINT systems as well as the development of an installed base for Discreet's
FIRE systems. Other revenues were $3,878,000 (4% of total revenues) and
$4,829,000 (6% of total revenues) for the eleven-month period ended June 30,
1997 and the twelve-month period ended July 31, 1996, respectively. Other
revenues for all periods consisted primarily of rentals, systems integration,
and training services provided to customers. Other revenues decreased in the
eleven-month period ended June 30, 1997 as compared to the twelve-month period
ended July 31, 1996, due to the decrease in rentals of Discreet's FLAME
systems.
Revenues from customers outside of North America were $58,171,000 (57% of
total revenues) and $47,711,000 (57% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. Discreet is continuing to develop its direct and indirect
distribution
186
channels in North America, Asia and Europe. Discreet expects that revenues
from customers outside of North America will continue to account for a
substantial portion of its revenues and, as a percentage of total revenues,
remain approximately the same.
Cost of Revenues. Cost of revenues was $47,571,000 (47% of total revenues)
and $49,333,000 (59% of total revenues) for the eleven-month period ended June
30, 1997 and the twelve-month period ended July 31, 1996, respectively. The
decrease in cost of revenues as a percentage of total revenues was a result of
the following factors: (1) Discreet's growing penetration into the Asian
market where customers typically purchase only software or software and
storage media bundles, (2) the SGI workstation component of cost of revenues
declined as Discreet's installed base purchased additional software and
storage media to add on to existing workstations, and (3) provision to write
inventories down to their net realizable values, in the amount of $3,232,000,
was lower for the eleven-month period ended June 30, 1997 as compared to the
provision of $5,663,000 for the twelve-month period ended July 31, 1996. These
provisions were recorded, on a specific item basis, as a result of excess
inventories. In 1996, Discreet experienced greater levels of excess
inventories due to inventories being purchased to fulfill revenue forecasts
which did not materialize. The excess inventories in 1996 and 1997 were caused
primarily by rapidly changing technology for workstations, peripherals, and
disk drives. These changes significantly diminished the market demand for the
older technology and, consequently, its net realizable value.
Research and Development. Expenditures for research and development, after
deducting Canadian federal and provincial tax credits, were $9,708,000 (10% of
total revenues) and $14,402,000 (17% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decrease in research and development expenses, after
deducting tax credits, was a result of the implementation of Discreet's
restructuring plan which included the reduction of personnel, closure of
certain research and development offices, and consolidation of software
research and development in its Montreal headquarters during the fourth fiscal
quarter of 1996 and the eleven-month period ended June 30, 1997. See Note 19
to Notes to Discreet's Consolidated Financial Statements. These decreases were
partially offset by general salary increases. Research and development costs
are expensed as incurred. Software development costs are considered for
capitalization once technical feasibility has been established. Discreet has
not capitalized any software development costs to date. See Note 2(e) of Notes
to Discreet's consolidated financial statements. Certain research and
development expenditures are incurred substantially in advance of related
revenue and in some cases do not generate revenues.
Sales and Marketing. Sales and marketing expenses were $23,206,000 (23% of
total revenues) and $26,088,000 (31% of total revenues) for the eleven-month
period ended June 30, 1997 and the twelve-month period ended July 31, 1996,
respectively. The decrease in sales and marketing expenses resulted primarily
from the implementation of Discreet's restructuring plan, which included a
reduction of personnel and the closure of the Florida sales office and the
relocation of the New York demonstration center during the fourth fiscal
quarter of 1996. These decreases were partially offset by the continued
expansion of Discreet's direct and indirect sales organization, including the
operating costs of domestic sales offices and foreign subsidiaries.
General and Administrative. General and administrative expenses were
$6,501,000 (6% of total revenues) and $10,582,000 (13% of total revenues) for
the eleven-month period ended June 30, 1997 and the twelve-month period ended
July 31, 1996, respectively. The decrease in general and administrative
expenses resulted primarily from the implementation of Discreet's
restructuring plan which included a reduction of administrative personnel as
well as the closure of administrative offices in Cambridge, Massachusetts.
Additionally, in fiscal 1996, Discreet provided approximately $3,300,000 in
reserves for potentially uncollectible accounts receivable and provided
$830,000 to reflect certain recourse provisions associated with third party
financing arrangements, and reduced the carrying value of a building purchased
in Montreal by CDN$500,000 (approximately $365,000) to reflect the value
expected to be realized upon sale. The allowance for potentially uncollectible
accounts was increased because Discreet was experiencing difficulty collecting
receivables due to customers' concerns regarding Discreet's business problems,
change in management, restructuring plans and Discreet's ability to support
its products and customers over the long term.
187
Charge for Purchased Research and Development. In connection with the
acquisition of substantially all of the assets of Denim Software L.L.C.,
Discreet expensed $2,263,000, as restated (2% of total revenues), of in-
process research and development, that had not yet reached technical
feasibility and had no alternative use, during the eleven-month period ended
June 30, 1997. During fiscal 1996, in connection with the COSS/IMP
acquisition, Discreet expensed $8,500,000 (10% of total revenues) of
in-process research and development. See Note 15 of Notes to Discreet's
Consolidated Financial Statements.
Write-down 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.
Restructuring Expense. In the fourth quarter of fiscal 1996, Discreet
recorded a restructuring expense of $15,000,000 (18% of total fiscal 1996
revenues). The restructuring charge included amounts for asset write-downs
relating to the goodwill, and acquired technology related to discontinued
product initiatives, and the write-down of other assets including the UK
building, and leasehold improvements and office equipment of closed offices.
These assets were written down to their estimated net realizable values. The
focus of Discreet's restructuring plan was to solidify its senior management
team, reduce operating expenses through workforce reductions and office
closings, consolidate software research and development activities in
Montreal, discontinue certain product lines, and restructure its sales force
to emphasize indirect sales channels. While Discreet began implementation of
its restructuring plan in the fourth fiscal quarter of 1996 and had
substantially completed the implementation of the plan at the end of fiscal
1997, as of June 30, 1997, Discreet had $4,272,000 in restructuring reserves
primarily for the estimated cost of terminating leases, resolving outstanding
severance issues, and the legal and taxation winding down of several
subsidiaries. See Note 19 of Notes to Discreet's Consolidated Financial
Statements.
Litigation and Settlement. In August 1997, Discreet announced an agreement-
in-principle to settle all three of the class action shareholder lawsuits
outstanding against it for $10,800,000. In the fiscal year ended July 31,
1996, Discreet had provided a $2,506,000 (3% of total revenues) litigation
reserve for legal costs associated with defending the class action lawsuits.
During the eleven-month period ended June 30, 1997, Discreet recorded a
provision of $6,500,000 (6% of total revenues) to accrue the additional
estimated settlement costs to be borne by Discreet. See Note 5 of Notes to
Discreet's Consolidated Financial Statements.
Other Income (Expense). Foreign currency translation losses were $188,000
during the eleven-month period ended June 30, 1997 compared to gains of
$179,000 during the year ended July 31, 1996.
Provision for Income Taxes. Discreet's provision for income taxes was
approximately $6,489,000 and $1,435,000 for the eleven-month period ended June
30, 1997 and the twelve-month period ended July 31, 1996, respectively. The
provision for all periods was based on the Canadian federal statutory rate of
38% and reflects the impact of various tax credits and foreign taxes. The tax
provision for these periods resulted from taxable earnings in jurisdictions
where Discreet did not have available tax loss carryforwards partially offset
by the realization of the benefit for some prior year tax losses for which no
benefit was previously recorded. In both fiscal years, Discreet recorded
charges for acquired in-process research and development for which no benefit
was recorded due to the uncertainty of realizing any future tax benefit
associated with these charges. In addition, in fiscal 1997, Discreet recorded
a provision for estimated litigation settlement costs for which no tax benefit
was recorded because of the uncertainty of realizing any tax benefit
associated with this charge.
188
Quarterly Results of Operations
The following tables set forth certain quarterly financial data for each of
the eight most recent quarters in the period ended December 31, 1998, together
with such data as a percentage of total revenues. The quarterly information
presented is unaudited. In the opinion of management, the unaudited quarterly
information has been prepared on the same basis as the annual audited
consolidated financial statements and includes all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
information for the periods presented. Operating results for any quarter are
not necessarily indicative of results for any future period.
Quarters Ended
-----------------------------------------------------------------------------------------
Mar. 31, June 30, Sept.30, Dec.31, March31, June30, Sept.30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- ---------- ---------- ---------- ---------- ---------- ---------- --------
(Restated) (Restated) (Restated) (Restated) (Restated) (Restated)
(in thousands)
Total revenues.......... $27,044 $34,784 $38,405 $37,268 $35,712 $40,173 $27,431 $28,396
Cost of revenues........ 11,255 16,026 17,280 13,548 14,191 17,015 12,759 13,918
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........ 15,789 18,758 21,125 23,720 21,521 23,158 14,672 14,478
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development.......... 2,746 2,709 3,512 3,901 4,032 3,402 3,750 3,600
Sales and marketing... 6,534 6,045 7,433 8,407 8,610 9,870 7,914 8,943
General and
administrative....... 1,842 1,954 3,605 3,951 4,422 4,329 4,442 4,161
Gain on sale of
investment........... -- -- -- -- -- (2,500) -- --
Costs related to
terminated
transaction.......... -- -- -- -- -- 1,713 -- --
Write-off of purchased
research and
development.......... -- 2,263 5,269 1,646 -- -- -- --
Restructuring expense. -- -- -- -- -- (1,504) -- --
Litigation and related
settlement expenses.. -- 6,500 -- -- (405) -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses........... 11,122 19,471 19,819 17,905 16,659 15,310 16,106 16,704
------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)............. 4,667 (713) 1,306 5,815 4,862 7,848 (1,434) (2,226)
Total other income
(expense).............. 46 51 377 287 (205) 1,608 1,547 661
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 4,713 (662) 1,683 6,102 4,657 9,456 113 (1,565)
Provision for income
taxes.................. 1,674 2,853 2,775 3,097 1,739 3,243 863 323
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)... $ 3,039 $(3,515) $(1,092) $ 3,005 $ 2,918 $ 6,213 $ (750) $(1,888)
======= ======= ======= ======= ======= ======= ======= =======
Total revenues.......... 100% 100 % 100 % 100% 100 % 100 % 100% 100%
Cost of revenues........ 42 46 45 36 40 42 47 49
------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 58 54 55 64 60 58 53 51
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development.......... 10 8 9 10 11 9 14 13
Sales and marketing... 24 17 20 23 24 25 29 31
General and
administrative....... 7 6 9 11 12 11 16 15
Gain on sale of
investment........... -- -- -- -- -- (6) -- --
Costs related to
terminated
transaction.......... -- -- -- -- -- 4 -- --
Write-off of purchased
research and
development.......... -- 6 14 4 -- -- -- --
Restructuring expense. -- -- -- -- -- (4) -- --
Litigation and related
settlement expenses.. -- 19 -- -- (1) -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 41 56 52 48 46 39 59 59
------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss).............. 17 (2) 3 16 14 19 (6) (8)
Total other income
(expense).............. -- -- 1 -- (1) 4 6 2
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 17 (2) 4 16 13 23 0 (6)
Provision for income
taxes.................. 6 8 7 8 5 8 3 1
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).... 11% (10)% (3)% 8% 8% 15 % (3)% (7)%
======= ======= ======= ======= ======= ======= ======= =======
189
Liquidity and Capital Resources
Discreet has funded its operations to date primarily through cash flow from
operations (including deferred revenue and customer deposits), borrowings
under its demand line of credit, capital leases, the private and public sales
of equity securities, and the receipt of research and development tax credits
from the Canadian federal government and the Quebec government. As of December
31, 1998, Discreet had cash of approximately $49,767,000. During fiscal 1998,
Discreet amended its revolving demand line of credit with its bank. The new
agreement provides for a revolving demand line of credit under which it may
borrow up to Cdn$7,000,000 (approximately $4,569,000 at December 31, 1998).
Advances under the line accrue interest monthly at the Canadian prime rate
(6.75% at December 31, 1998) plus 0.25%. Additionally, the agreement provides
for a Cdn$600,000 (approximately $392,000 at December 31, 1998) demand leasing
facility, and a Cdn$600,000 (approximately $392,000 at December 31, 1998)
demand research and development tax credit facility. Advances under these
facilities accrue interest monthly at the Canadian prime rate (6.75% at
December 31, 1998) plus 1%. The line and facilities are secured by essentially
all of Discreet's North American assets. As additional security, Discreet
assigned to the bank its insurance on these assets. Discreet is required to
maintain certain financial ratios, including minimum levels of working
capital, debt service coverage and equity to assets ratios. As of December 31,
1998, there were no amounts outstanding under the demand leasing and demand
research and development tax credit facilities, however, the amount available
to Discreet under the line of credit was reduced by the letter of guarantee
discussed below.
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
(approximately 2.1% at December 31, 1998) and are secured by a letter of
guarantee, in the amount of $3,000,000, issued by Discreet in favour of the
subsidiary's bank. As of December 31, 1998, the subsidiary had borrowed
(Yen)300,372,000 (approximately $2,643,000 at December 31, 1998).
Discreet's operating activities, including research and development tax
credits, provided cash of $17,107,000, $26,012,000 and used cash of
$24,425,000, in the fiscal year ended June 30, 1998, and in the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31, 1996,
respectively. The principal sources of cash in the twelve-month period ended
June 30, 1998 were cash generated from operations, the decreases in inventory
and in income taxes receivable, and the increase in income taxes payable,
offset by an increase in accounts receivable, decreases in accounts payable
and accrued expenses, deferred revenue, and customer deposits, and the
disbursement of funds used to settle the class action litigation. Accounts
receivable increased during fiscal 1998 as a result of Discreet experiencing a
level of revenues greater than in the fourth fiscal quarter of 1997 and the
timing of those revenues being close to the end of the year. Inventory
decreased during fiscal 1998, as a result of close monitoring of inventory
throughout the year and the migration of some of Discreet's products to
hardware platforms that cost less than previous generations. Accrued expenses
decreased due to the settlement of the class action litigation and the
reduction of the accrued restructuring reserve. (See Note 19 of Notes to
Discreet's Consolidated Financial Statements). The primary sources of cash in
fiscal 1997 were cash generated from operations, reductions in inventory and
income taxes receivable, and increases in accounts payable, accrued expenses,
deferred revenue, income taxes payable, offset by uses of cash including the
increase in accounts receivable and the reduction of customer deposits. The
primary sources of cash in fiscal 1996 were the increases in accrued expenses,
deferred revenue and customer deposits, offset by decreases in cash including
the increases in accounts receivable, inventory, income taxes receivable and
other current assets and the reductions of accounts payable and income taxes
payable. Discreet's operating activities include $492,000, $309,000, and
$397,000 of research and development tax credits received from the Quebec
government, and $990,000, $583,000, and $827,000 of research and development
tax credits received from the federal government during the fiscal year ended
June 30, 1998, the eleven-month period ended June 30, 1997, and the fiscal
year ended July 31, 1996, respectively.
Discreet's investing activities used cash of $16,526,000, $17,867,000 and
$24,223,000 in the twelve-month period ended June 30, 1998, the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31,
190
1996, respectively. The principal uses of cash in fiscal 1998 were the
acquisition of D-Vision and the purchase of computer equipment and software,
general office equipment, leasehold improvements and furniture and fixtures
used in the operation of Discreet's business, offset by the receipt of the
proceeds of sale of the Montreal building and the investment in Essential
Communications Corporation. The principal uses of cash in fiscal 1997 were the
acquisition of Denim, and the purchase of computer equipment and software,
general office equipment, leasehold improvements and furniture and fixtures
used in the operation of Discreet's business. In fiscal 1996, the principal
uses of cash were the acquisition of COSS/IMP, the purchase of the preferred
shares of Essential Communications Corporation, the purchase of land and an
office building in London, England, the purchase of land and an office
building in Montreal, Quebec, and the purchase of computer equipment and
software, general office equipment, leasehold improvements, and furniture and
fixtures used in the operation of Discreet's business.
Financing activities provided cash of $17,901,000, $1,479,000 and
$30,310,000 during the fiscal year ended June 30, 1998, the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31, 1996,
respectively. In all three periods, cash was provided from common stock option
exercises and the issuance of shares under the Employee Stock Purchase Plan.
In fiscal 1998, Discreet issued 645,000 Discreet Common Shares under a private
placement sale to Intel Corporation for proceeds of approximately $13,527,000,
net of issuance costs, and borrowed approximately $2,713,000 under its
Japanese subsidiary's line of credit. In fiscal 1996, cash was provided
primarily from proceeds from the issuance of approximately 971,000 common
shares in a secondary public offering which was completed in December 1995,
proceeds from the repayment of subscriptions receivable, and proceeds from
common stock option exercises less payment of capital lease obligations.
Discreet incurred $9,502,000, $6,265,000 and $15,871,000 of capital
expenditures during the fiscal year ended June 30, 1998, the eleven-month
period ended June 30, 1997, and the fiscal year ended July 31, 1996,
respectively, consisting primarily of computer equipment, software and general
office equipment and leasehold improvements. In the fiscal year ended July 31,
1996, Discreet purchased an office building and related land in London,
England. Discreet incurred (Pounds)1,034,000 (or approximately $1,663,000),
and (Pounds)715,000 (or approximately $1,114,000) in capital expenditures
during the fiscal years ended June 30, 1997 and July 31, 1996, respectively,
for the refitting of the London property. In fiscal 1996, Discreet also
purchased an office building in Montreal, Quebec. The carrying values of the
Montreal building and the London building were written down to their estimated
fair market values and the buildings were classified as assets held for sale
in fiscal 1996. In September 1997, Discreet sold the Montreal office building
for proceeds of $818,000.
As of December 31, 1998, Discreet did not have any material commitments for
capital expenditures.
During the fiscal year ended June 30, 1998, Discreet concluded a financing
arrangement in relation to the Lightscape Acquisition with the Societe de
Developpement Industriel du Quebec, an agency of the Quebec provincial
government. This agreement provides for an interest free (until July 2004)
loan in the amount of Cdn$2,800,000 (approximately $1,828,000 at December 31,
1998). The funds were received in July 1998 and are repayable in four annual
installments of Cdn$600,000 (approximately $392,000 at December 31, 1998)
commencing in July 2004, and a final installment of Cdn$400,000 (approximately
$261,000 at December 31, 1998) in July 2008. The loan is subject to standard
covenants for these arrangements, including covenants that may require early
repayment of the loan.
Discreet's operating activities provided cash of $4,515,000 in the six-month
period ended December 31, 1998. The principal sources of cash for this period
were operations, the decrease in accounts receivable, and the increase in
deferred revenue, offset by increases in inventory, and other current assets
and decreases in accounts payable and accrued expenses and income taxes
payable. The decrease in accounts receivable and the increase in inventory
were primarily a result of the shortfall in revenues during the six-month
period ended December 31, 1998. Discreet's operating activities include
$300,000 of research and development tax credits received from the Quebec
government, and $375,000 of research and development tax credits received from
the federal government.
191
Discreet's investing activities used cash of $3,837,000 in the six-month
period ended December 31, 1998. The principal uses of cash during the six-
month period ended December 31, 1998 included the purchase of capital assets,
primarily computer hardware and software, the acquisition of other intangible
assets related to the licensing of third-party technology, and certain costs
related to the proposed transaction with Autodesk.
Financing activities provided cash of $3,294,000 during the six-month period
ended December 31, 1998. The principal sources of cash for the six-month
period ended December 31, 1998 included the receipt of a government loan from
the Societe de Developpement Industriel du Quebec, and proceeds from the
exercises of common stock options and the issuance of shares under the 1995
Employee Stock Purchase Plan.
Discreet has never declared or paid cash dividends on its Common Shares and
does not anticipate paying any cash dividends on Discreet Common Shares in the
forseeable future. In the event cash dividends are declared or paid, Discreet
anticipates that they would be declared and paid in US dollars. Part 1A of the
Quebec Act prohibits Discreet from paying dividends that would prevent it from
discharging its liabilities when due or that would bring the book value of its
assets to an amount less than the sum of its liabilities and its issued and
paid-up share capital account. At June 30, 1998, Discreet could not distribute
any dividends.
Subject to the factors discussed in "--Certain Factors That May Affect
Future Results," Discreet believes that, with its current levels of working
capital together with funds generated from operations, it has adequate sources
of cash to meet its operations and capital expenditure requirements through
fiscal 1999.
192
DISCREET MANAGEMENT, EXECUTIVE
COMPENSATION AND PRINCIPAL SHAREHOLDERS
Discreet Management
The following table sets forth the directors and the executive officers of
Discreet, their ages, and the positions currently held by each such person
with Discreet. Discreet Common Shares beneficially owned by each director,
directly or indirectly, as of December 31, 1998, appears under the heading "--
Security Ownership of Certain Beneficial Owners and Management of Discreet."
Name Age Position
---- --- --------
Richard J. Szalwinski(1)......... 47 President, Chief Executive Officer,
Chairman of the Board of Directors
and Director
Francois Plamondon............... 40 Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
Winston Rodrigues................ 56 Senior Vice President, Advanced
Systems and Operations
Gary G. Tregaskis................ 39 Director
Thomas Cantwell(1)(2)............ 71 Director
Brian P. Drummond(1)(2).......... 67 Director
Perry M. Simon(1)................ 43 Director
Pierre Desjardins(2)............. 56 Director
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Richard J. Szalwinski, a founder of Discreet, has served as a Director since
May 1992 and as Chairman of the Board of Directors since March 1994. Mr.
Szalwinski served as acting President and Chief Executive Officer from
February 1996 and assumed that position officially in July 1996. From May 1992
to November 1994 Mr. Szalwinski served as Chief Executive Officer of Discreet
and served as President of Discreet from May 1992 to March 1994. Prior to
founding Discreet, he held several positions at Softimage Inc. from June 1988
to December 1991, most recently as a Director and Vice President of Sales. Mr.
Szalwinski also serves as the Chairman of the Board of Directors of Behaviour
Communications Inc., a public company.
Francois Plamondon joined Discreet in July 1996 and, since August 1996,
served as Executive Vice President, Senior Vice President, Chief Financial
Officer, Treasurer and Secretary of Discreet. Prior to joining Discreet, Mr.
Plamondon was a partner at Ernst & Young, Chartered Accountants, from December
1990 to July 1996.
Winston Rodrigues joined Discreet in October 1997 and currently serves as
Senior Vice President, Advanced Systems and Operations. Prior to joining
Discreet, Mr. Rodrigues was Vice President, Operations at Memotec
Communications Inc., a communications and networking company, from 1995 to
1997. From 1994 to 1995, Mr. Rodrigues was a Vice-President at Circo Craft Co.
Inc., a manufacturer of printed circuit boards; prior to that, he occupied
various positions at IBM Canada Ltd., most recently as a product manager.
Gary G. Tregaskis has served as a Director of Discreet since July 1992. Mr.
Tregaskis has been an independent consultant to Discreet since December 1995.
Prior to that, Mr. Tregaskis served as Director of Advanced Products of
Discreet from February 1994 to December 1995. He has also served as Director
of Advanced Systems Division of Discreet from July 1992 to February 1994. Mr.
Tregaskis was the principal designer and architect of flame*. Prior to joining
Discreet, Mr. Tregaskis served as the Director of Research
193
and Development at D.A. Technology, an Australian software development
corporation, from 1985 to June 1992. Mr. Tregaskis also serves as a Director
of Behaviour Communications Inc., a public company.
Thomas Cantwell has served as a Director of Discreet since September 1992.
Dr. Cantwell has been an investor and venture capitalist since 1987. He has
served as President of Technical Computer Graphics, a computer distributor and
software development corporation, since November 1987. Dr. Cantwell also
serves as a Director of Supreme Industries, Inc., a public company and as
Chairman of the Board of Directors of Paradigm Entertainment Inc., a privately
held developer of computer and video games.
Brian P. Drummond has served as a Director of Discreet since January 1996.
Mr. Drummond has served as President of Brican Investments Ltd., a private
holding company, since March 1979. Mr. Drummond was Vice Chairman and Director
of Richardson Greenshields of Canada Limited, an investment dealer, from 1982
to June 1997. Mr. Drummond also serves as a Director of Atco Ltd. and Canadian
Utilities Limited, both public companies.
Perry M. Simon has served as a Director of Discreet since January 1996. Mr.
Simon has been President, of Viacom Television for Viacom Entertainment,
Viacom, Inc., a television and film developer and producer, since September
1993. Prior to that, Mr. Simon held several positions with NBC Entertainment,
from 1985 to 1993, most recently as Executive Vice President-Prime-time
Programs.
Pierre Desjardins has served as a Director of Discreet since January 1997.
Mr. Desjardins has been Chairman, President and Chief Executive Officer of
Total Containment, a manufacturer and distributor of underground systems and
products for the conveyance and containment of fuels, since September 1996.
Prior to that, Mr. Desjardins was President and Chief Executive Officer of
Domtar Inc., a producer of paper, pulp and forest products, from September
1990 to October 1994. Mr. Desjardins also served as President of Labatt
Breweries of Canada from 1988 to September 1990. Mr. Desjardins also serves as
a Director of Canam Manac Group Inc., a public company and Uniselect, Inc., a
public company.
Discreet's executive officers are elected by the Discreet Board on an annual
basis and serve until their successors have been duly elected and qualified or
until their earlier resignation or removal.
194
Compensation and Other Information Concerning Discreet Officers
Executive Compensation Summary
The following table sets forth summary information concerning the
compensation paid or earned for services rendered to Discreet in all
capacities during the fiscal years ended July 31, 1996, June 30, 1997 and June
30, 1998 to (i) Discreet's current Chief Executive Officer; and (ii) each of
the four most highly compensated executive officers of Discreet (other than
the Chief Executive Officer) who earned more than $100,000 in salary and bonus
in fiscal year 1998 (collectively, the "Discreet Named Executive Officers"):
Summary Compensation Table
Long-Term
Compensation
------------
Annual Compensation(1)
------------------------- Option
Name and Principal Position(1) Year Salary Bonus Awards (#)
- ------------------------------ ---- -------- -------- ------------
Richard J. Szalwinski................... 1998 $264,562 $ 81,355 75,000
President, Chief Executive Officer, 1997 $192,724 $172,500 450,000
Chairman of the Board of Directors and
Director 1996 $154,557 -- --
Francois Plamondon...................... 1998 $176,875 $ 60,138 50,000
Executive Vice President, 1997 $133,833 $ 50,920 --
Chief Financial Officer, Secretary and
Treasurer 1996 -- -- 300,000
Winston Rodrigues(2).................... 1998 $ 84,923 $ 30,643 65,000
Senior Vice President, Advanced Systems
and Operations 1997 -- -- --
1996 -- -- --
Terrence Higgins(3)..................... 1998 $123,813 -- 40,000
Former Senior Vice President, Products 1997 $ 93,683 $ 25,550 --
1996 $121,549 -- 40,000
Graham Sharp............................ 1998 $176,881(4) -- --
Former Senior Vice President, 1997 $183,337(5) $ 25,000 300,000
Sales and Marketing 1996 $ 98,572(6) -- 10,000
- --------
(1) 1997 amounts represent salary and bonus actually paid or earned during the
eleven month period ended June 30, 1997.
(2) Mr. Rodrigues joined Discreet in October 1997. This amount includes his
salary for the nine months of fiscal 1998 during which he was employed by
Discreet.
(3) Mr. Higgins' employment with Discreet was terminated on July 2, 1998.
(4) This amount includes $60,000 of sales commissions earned by Mr. Sharp
during fiscal 1998. Mr. Sharp's employment with Discreet was terminated on
July 2, 1998.
(5) This amount includes $68,750 of sales commissions earned by Mr. Sharp
during fiscal 1997.
(6) Mr. Sharp joined Discreet in January 1996. This amount includes his salary
as well as $57,948 of sales commissions paid to Mr. Sharp for the seven
months of fiscal 1996 during which he was employed by Discreet.
195
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 1998 to each of the Discreet Named Executive
Officers:
Individual Grants
-------------------------------------------
Potential
Realizable Value at
% of Total Assumed Annual
Number of Options Rates of Stock
Securities Granted to Price Appreciation
Underlying Employees for Option Term
Options in Fiscal Price Expiration -------------------
Name Granted (#) Year (1) ($/Share) Date 5% ($) 10% ($)
- ---- ----------- ---------- -------- ---------- -------- ----------
Richard J. Szalwinski... 75,000 8.32% $15.75 11/20/07 $742,881 $1,882,608
Terrence Higgins(2)..... 40,000 4.44% $24.25 08/11/07 $610,027 $1,545,930
Francois Plamondon(3)... 50,000 5.54% $24.25 08/11/07 $762,534 $1,932,413
Graham Sharp............ -- -- -- -- -- --
Winston Rodrigues(4).... 45,000 4.99% $21.00 10/30/07 $594,305 $1,506,086
20,000 2.22% $22.63 03/02/08 $284,575 $ 721,168
- --------
(1) Percentages are based upon a total of 901,771 options granted to employees
in the fiscal year ended June 30, 1998.
(2) On July 2, 1998, Mr. Higgins' employment with Discreet was terminated and,
as a result, on that same day, the option to purchase 40,000 Discreet
Common Shares which was granted on August 11, 1997 was cancelled.
(3) On August 5, 1998, Mr. Plamondon was granted an option to purchase 60,000
Discreet Common Shares, at an exercise price per share of $11.00.
(4) On August 5, 1998, Mr. Rodrigues was granted an option to purchase 60,000
Discreet Common Shares, at an exercise price per share of $11.00.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth, for each of the Discreet Named Executive
Officers, information with respect to the exercise of stock options during the
year ended June 30, 1998 and the year-end value of unexercised options:
Shares Value of Unexercised In-
Acquired on Number of Unexercised the-Money Options
Exercise Value Options at Year-End at Year-End(2)
Name (#) Realized ($)(1) (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- ---- ----------- --------------- --------------------------- ---------------------------
Richard J. Szalwinski... -- -- 0/525,000 --/$2,517,165
Terrence Higgins(3)..... -- -- 40,508/ 40,000 $389,285/--
Francois Plamondon...... -- -- 0/350,000 --/$1,837,500
Graham Sharp(4)......... -- -- 5,625/304,375 --/$2,137,500
Winston Rodrigues....... -- -- 0/ 65,000 --/--
- --------
(1) Amounts disclosed in this column are calculated based on the difference
between the fair market value of Discreet Common Shares on the date of
exercise and the exercise price of the options in accordance with
regulations promulgated under the Securities Exchange Act, and do not
reflect amounts actually received by the Discreet Named Executive
Officers.
(2) Value is based on the difference between the option exercise price and the
fair market value at June 30, 1998, the fiscal year-end ($11.625 per
share), multiplied by the number of shares underlying the option.
(3) Represents shares and amounts as of June 30, 1998. Mr. Higgins' employment
with Discreet was terminated on July 2, 1998 and, as a result, on that
same day, Mr. Higgins' option to purchase 40,000 Discreet Common Shares
was cancelled. On August 14, 1998, Mr. Higgins exercised options to
purchase 8,008 Discreet Common Shares at an exercise price of $0.0463
pursuant to an option granted on June 14, 1994 and
196
32,500 Discreet Common Shares at an exercise price of $2.50 pursuant to an
option granted on January 10, 1995. As of the Discreet Record Date, the
number of unexercised options held by Mr. Higgins and the value of such
options were 0 and $0.00 respectively.
(4) Represents shares and amounts as of June 30, 1998. Mr. Sharp's employment
with Discreet was terminated on July 2, 1998 and as a result, on that day
options to purchase an additional 150,000 Discreet Common Shares became
vested. On September 15, 1998, Mr. Sharp exercised options to purchase
30,000 Discreet Common Shares at an exercise price of $4.50 per share
pursuant to an option granted on August 12, 1996. On September 16, 1998,
Mr. Sharp exercised options to purchase 20,000 Discreet Common Shares at
an exercise price of $4.50 per share pursuant to an option granted on
August 12, 1996. On September 23, 1998, Mr. Sharp exercised options to
purchase 70,000 Discreet Common Shares at an exercise price of $4.50 per
share pursuant to an option granted on August 12, 1996. As of September
24, 1998, the number of unexercised options held by Mr. Sharp and the
value of such options were 36,250 and $255,000 respectively. Mr. Sharp's
remaining vested options to purchase 36,250 Discreet Common Shares will
expire if not exercised by September 30, 1998.
Employment Agreements and Severance Arrangements
Richard J. Szalwinski and Francois Plamondon have each entered into
agreements with Autodesk pursuant to which such individuals reconfirmed their
current employment arrangements with Discreet and agreed, subject to
consummation of the Transactions, to a minimum one year term of employment
with the Combined Company following the Effective Time and, in the event their
employment relationship with the Combined Company is terminated, to refrain
from competing with the Combined Company and from soliciting customers and
employees of the Combined Company for a specified period after such
termination.
In August 1997, Discreet entered into an agreement with Richard J.
Szalwinski, whereby Mr. Szalwinski agreed to serve as President and Chief
Executive Officer of Discreet. Mr. Szalwinski previously had no employment
agreement with Discreet. Pursuant to such agreement, Mr. Szalwinski's annual
base salary was increased from $200,000 to $230,000, effective March 1, 1997.
In addition, pursuant to such agreement, Mr. Szalwinski is eligible to receive
an annual bonus of up to 75% of his base annual salary, based on Discreet
meeting the consolidated budgets and forecasts approved by the Discreet Board.
In the event that Discreet does not meet such consolidated budgets and
forecasts, the Discreet Board may, at its sole discretion, approve the payment
of a bonus of up to 75% of his base annual salary to Mr. Szalwinski if the
Discreet Board determines that Mr. Szalwinski's performance of his duties was
outstanding and that Discreet's failure to meet such consolidated budgets and
forecasts was not attributable to factors within Mr. Szalwinski's control. In
August 1997, the Discreet Board increased Mr. Szalwinski's annual base salary
to $255,500, effective July 1, 1997. The agreement provides that Mr.
Szalwinski's employment with Discreet may be terminated by Mr. Szalwinski upon
three months written notice to Discreet, in which case Discreet must pay to
Mr. Szalwinski his salary and benefits for the remaining time period specified
in his notice of termination. The agreement further provides that Discreet may
terminate the agreement at any time with or without cause, upon written
notice. In the event Mr. Szalwinski's employment is terminated by Discreet,
without cause, Discreet must pay Mr. Szalwinski a lump sum amount equal to
twenty-four months base annual salary at the time of such termination. In
addition, Mr. Szalwinski was granted an incentive stock option to purchase
450,000 Discreet Common Shares under the Discreet's Amended and Restated 1994
Restricted Share and Option Plan (the "1994 Plan") at an exercise price of
$6.03 per share. In the event that Mr. Szalwinski's employment is terminated
without cause, then all options to purchase shares of Discreet which would
have next vested, shall immediately vest upon such termination. The agreement
further provides that in the event of a Reorganization, as defined in the 1994
Plan, then (i) the option to purchase the 450,000 Discreet Common Shares
granted to Mr. Szalwinski will become immediately vested or (ii) if the
Discreet Board elects, in accordance with the 1994 Plan, not to accelerate the
vesting of the options granted pursuant to the 1994 Plan, Mr. Szalwinski will
receive in substitution for all of his outstanding options to purchase
Discreet Common Shares, whether vested or not, such securities (excluding
options) of Discreet or of any merged, consolidated or otherwise reorganized
corporation or, only in the event of a merger of Discreet with one of its
subsidiaries, options of the merged company, all of which securities or
options shall be of equivalent value and liquidity.
197
In June 1996, Discreet entered into an agreement with Francois Plamondon,
whereby Mr. Plamondon became Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of Discreet, effective August 1, 1996. Pursuant to
such agreement, Mr. Plamondon received an annual base salary of Cdn$200,000,
and is eligible to receive an annual bonus of up to Cdn$70,000, based on
Discreet meeting the consolidated budgets and forecasts approved by the
Discreet Board. In the event that Discreet does not meet such consolidated
budgets and forecasts, the Discreet Board may, at its sole discretion, approve
the payment of a bonus of up to Cdn$70,000 to Mr. Plamondon if the Discreet
Board determines that Mr. Plamondon's performance of his duties was
outstanding and that Discreet's failure to meet such consolidated budgets and
forecasts was not attributable to factors within Mr. Plamondon's control. In
August 1997, the Discreet Board increased Mr. Plamondon's annual base salary
from Cdn$200,000 to Cdn$250,000, effective July 1, 1997 and increased his
eligible annual bonus from Cdn$70,000 to 50% of his annual base salary. The
agreement provides that Mr. Plamondon's employment with Discreet may be
terminated by Mr. Plamondon upon three months written notice to Discreet, in
which case Discreet must pay to Mr. Plamondon his salary and benefits for the
remaining time period specified in his notice of termination. The agreement
further provides that Discreet may terminate the agreement at any time with or
without cause, upon written notice. In the event Mr. Plamondon's employment is
terminated by Discreet, without cause, Discreet must pay Mr. Plamondon a lump
sum amount equal to twelve months base annual salary at the time of such
termination. In addition, Mr. Plamondon was granted an incentive stock option
to purchase 300,000 Discreet Common Shares under the 1994 Plan at an exercise
price of $5.50 per share (the "Initial Grant"). In the event that
Mr. Plamondon's employment is terminated without cause after August 1, 1997,
then all options to purchase Discreet Common Shares granted which would have
next vested following the effective date of such termination, will become
immediately vested upon such termination. The agreement further provides that
in the event of a Reorganization, as defined in the 1994 Plan, then (i) all
options to purchase Discreet Common Shares granted under the Initial Grant
will become immediately vested or (ii) if the Discreet Board elects, in
accordance with the 1994 Plan, not to accelerate the vesting of the options
granted pursuant to the 1994 Plan, Mr. Plamondon will receive in substitution
for all of his outstanding options to purchase Discreet Common Shares, whether
vested or not, such securities (excluding options) of Discreet or of any
merged, consolidated or otherwise reorganized corporation or, only in the
event of a merger of Discreet with one of its subsidiaries, options of the
merged company, all of which securities or options shall be of equivalent
value and liquidity.
In November 1996, Discreet entered into an agreement with Graham Sharp
related to Mr. Sharp's employment as Discreet's Senior Vice President-Sales &
Marketing, effective July 23, 1996. Pursuant to such agreement, Mr. Sharp
received an annual base salary of $125,000, and was eligible to receive sales
commissions of up to $75,000, based on Discreet meeting the sales and margin
contribution targets approved by the Discreet Board, and, in the event
Discreet exceeds such targets, an annual bonus of $25,000. The Discreet Board
could also, at its sole discretion, approve the payment of an additional bonus
to Mr. Sharp if Discreet exceeded the sales and margin contribution targets.
In addition, in the event Discreet did not meet such sales targets, the
Discreet Board could, at its sole discretion, approve the payment of a bonus
to Mr. Sharp if the Discreet Board determined that Mr. Sharp's performance of
his duties was outstanding and Discreet's failure to meet such targets was not
attributable to factors within Mr. Sharp's control. In August 1997, the
Discreet Board increased Mr. Sharp's annual base salary from $125,000 to
$150,000, effective July 1, 1997 and increased his eligible annual bonus from
$25,000 to up to 50% of his annual base salary. Under this agreement, Mr.
Sharp's eligibility to receive sales commissions remained unchanged. The
agreement provided that Mr. Sharp's employment with Discreet could be
terminated by Mr. Sharp upon three months written notice to Discreet, in which
case Discreet must pay to Mr. Sharp his salary and benefits for the remaining
time period specified in his notice of termination. The agreement further
provided that Discreet could terminate the agreement at any time, with or
without cause, upon written notice. In the event Mr. Sharp's employment was
terminated by Discreet, without cause, Discreet must pay Mr. Sharp a lump sum
amount equal to twelve months of his base annual salary at the time of such
termination. In addition, Mr. Sharp was granted an incentive stock option to
purchase 300,000 Discreet Common Shares under the Plan at an exercise price of
$4.50 per share. In the event that Mr. Sharp's employment was terminated
without cause after July 23, 1997, then all options to purchase shares of
Discreet which would have next vested, immediately vested upon such
termination. The agreement provided that in the event of a Reorganization, as
defined in the 1994 Plan, then (i) the option to purchase the 300,000 Discreet
Common Shares
198
granted to Mr. Sharp would become immediately vested or (ii) if the Discreet
Board elected, in accordance with the 1994 Plan, not to accelerate the vesting
of the options granted pursuant to the 1994 Plan, Mr. Sharp would receive in
substitution for all of his outstanding options to purchase Discreet Common
Shares, whether vested or not, such securities (excluding options) of Discreet
or, only in the event of a merger of Discreet with one of its subsidiaries,
options of the merged company, all of which securities or options would be of
equivalent value and liquidity. Also, Discreet agreed to reimburse Mr. Sharp's
documented out-of-pocket expenses incurred in connection with his relocation
from Montreal. On July 2, 1998, Mr. Sharp's employment with Discreet was
terminated. Pursuant to the terms of Mr. Sharp's employment agreement,
Discreet paid a lump sum amount equal to twelve months of his base annual
salary ($150,000) and agreed to reimburse Mr. Sharp for his documented out-of-
pocket expenses up to $20,000, incurred in connection with his relocation from
Montreal. Such payment was made on July 24, 1998. Additionally, all options to
purchase Discreet Common Shares, which would have next vested, became
immediately vested. Of those vested options to purchase Discreet Common Shares
which totalled 156,250, Mr. Sharp exercised options to purchase 50,000
Discreet Common Shares in September of 1998. The remaining options to purchase
106,250 Discreet Common Shares must be exercised by September 30, 1998 or they
will expire.
Discreet entered into an agreement with Winston Rodrigues dated as of
September 26, 1997 related to Mr. Rodrigues' employment as Discreet's Senior
Vice President, Operations. Pursuant to such agreement. Mr. Rodrigues received
an annual base salary of US$119,315 (Cdn. $175,000 converted as of June 30,
1998) and was eligible to receive an annual bonus in an amount determined by
the Compensation Committee of the Discreet Board, such amount not to exceed
40% of the annual base salary, if Discreet achieved certain budgets and
forecasts approved by the Discreet Board from time to time. In addition, in
the event Discreet did not meet such budgets and forecasts, the Discreet Board
could approve for Mr. Rodrigues an annual bonus not to exceed 40% of his
annual base salary if the Discreet Board was of the view that Mr. Rodrigues'
performance was outstanding and Discreet's failure to achieve its budgets and
forecasts was not attributable to factors within Mr. Rodrigues' control. In
addition, Discreet agreed to advance Mr. Rodrigues $23,000, interest free, if
Mr. Rodrigues left his former employer prior to December 31, 1997 and thereby
incurred a $23,000 resignation penalty. Discreet further agreed to forgive
such advance if Mr. Rodrigues remained at the employment of Discreet for at
least twelve consecutive months, provided Mr. Rodrigues complied with all
other terms and obligations under the agreement, failing which the advance
would become immediately due and payable upon Mr. Rodrigues' cessation of
employment. In August 1998, the Discreet Board increased Mr. Rodrigues' annual
base salary from Cdn. $175,000 to Cdn. $210,000, and increased his eligible
annual bonus from 40% to 50% of his annual base salary. The agreement provides
that Mr. Rodrigues' employment with Discreet may be terminated by Mr.
Rodrigues upon three months written notice to Discreet, in which case Discreet
must pay to Mr. Rodrigues his salary and benefits for the remaining time
period specified in his notice of termination. The agreement further provides
that Discreet may terminate the agreement at any time, with or without cause,
upon written notice. In the event Mr. Rodrigues' employment is terminated by
Discreet without cause, Discreet must pay Mr. Rodrigues a lump sum amount
equal to six months of his base annual salary at the time of such termination.
In addition, Mr. Rodrigues was granted an incentive stock option to purchase
45,000 Discreet Common Shares under the 1994 Plan at an exercise price of
$21.00 per share. In the event that Mr. Rodrigues' employment is terminated
without cause after October 27, 1998, then all options to purchase Discreet
Common Shares which would have next vested, shall immediately vest upon such
termination.
On July 17, 1998, Discreet entered into a severance agreement with Terrence
Higgins in connection with his termination as an executive officer of
Discreet. Pursuant to such agreement, Discreet agreed to pay Mr. Higgins
severance in the amount of $68,100 (Cdn $100,000 converted as of June 30,
1998) plus an additional $341 (Cdn $500 converted as of June 30, 1998) as a
reimbursement of related legal expenses. Discreet also agreed to provide Mr.
Higgins with outplacement counselling for six months. In addition, pursuant to
the terms of the 1994 Plan, Mr. Higgins had 90 days from July 2, 1998 to
exercise his vested options to purchase Discreet Common Shares. On August 14,
1998, Mr. Higgins exercised such options to purchase 40,508 Discreet Common
Shares.
199
Compensation Committee Interlocks and Insider Participation
The Discreet Board has established a Compensation Committee consisting of
Messrs. Szalwinski, Cantwell, Drummond and Simon. During this period, Mr.
Szalwinski, Discreet's Chairman and Chief Executive Officer, participated in
deliberations of Discreet's Compensation Committee concerning the compensation
of executive officers other than his own. No executive officer of Discreet
served as a member of the compensation committee of another entity (or other
committee of the Discreet Board performing equivalent functions or, in the
absence of any such committee, the entire Discreet Board), one of whose
executive officers served as a director of Discreet.
Compensation of Discreet Directors
Employee directors of Discreet do not receive cash compensation for their
service as members of the Board of Directors. Non-Employee Directors (as
defined below) receive an annual fee of $10,000 for services on the Discreet
Board and an additional $2,500 for services on each committee of the Board of
Directors. Non-Employee Directors also receive reimbursement of their expenses
for each Discreet Board or committee meeting attended. Discreet may from time
to time, and at the discretion of the Discreet Board (or the Compensation
Committee), grant stock options to directors in addition to the options
specified in the 1995 Non-Employee Director Stock Option Plan.
Certain Relationships and Related Transactions
During fiscal 1996, Richard Szalwinski, Discreet's Chairman, President and
Chief Executive Officer extended three loans to Smoke and Mirrors Productions
Limited ("Smoke and Mirrors") in an aggregate amount of (Pounds)1,077,975 (or
approximately $1,678,650 at July 31, 1996). As of June 1997, the loans had
been repaid by Smoke and Mirrors. Each loan was negotiated at arm's length and
bore interest at the Canadian prime borrowing rate as quoted by a Canadian
chartered bank. Discreet recorded revenue of $2,304,000 during fiscal 1996
from Smoke and Mirrors. Discreet had a trade account receivable of $836,000
from Smoke and Mirrors at July 31, 1996, which amount was subsequently
collected in full by Discreet in fiscal 1997.
During fiscal 1996, fiscal 1997 and fiscal 1998, Discreet paid Gary
Tregaskis, a director of Discreet, (Pounds)27,916 (approximately $45,000),
(Pounds)0, and (Pounds)75,000 (approximately $122,000), respectively for
services rendered to Discreet.
Thomas Cantwell, a director of Discreet, is a majority shareholder of
Radium, Inc. ("Radium"). The Corporation recorded revenue of $1,138,000 during
fiscal year 1996 from Radium. At July 31, 1996, the full amount of the sale
had been collected.
BHVR Communications Inc. ("BHVR"), an entity of which Richard Szalwinski
owns 84% of the voting securities, owns 100% of Behaviour Entertainment Inc.
("Behaviour"). During fiscal 1996, Discreet recorded revenue of $121,000 from
Behaviour and had trade receivables of $113,000 from Behaviour at July 31,
1996, which amount was subsequently collected in full during fiscal 1997.
During fiscal 1997, Discreet did not record revenue from sales, purchase
services or have trade receivables from Behaviour at June 30, 1997. During
fiscal 1998, Discreet purchased marketing services from Behaviour in the
amount of $223,090, recorded revenue from sales of an effect* (option 3)
system, and other hardware to Behaviour in the amount of $320,573 and had net
trade receivables of $97,483 from Behaviour at June 30, 1998.
BHVR owns 100% of TGR Zone Corporation ("TGR Zone"). In July 1997, Discreet
agreed to rent space for its headquarters in Montreal from TGR Zone and a
lease was subsequently executed whereby Discreet agreed to rent approximately
55,000 square feet of space at approximately Cdn $13.00 (or approximately
$8.86 converted as of June 30, 1998) per square foot per annum subject to
normal escalation clauses. The lease is set to expire in July 2007. As part of
this agreement, TGR Zone assumed Discreet's lease commitment at its previous
Montreal location. During fiscal 1998, Discreet made rental payment to TGR
Zone in the amount of $941,151.
Discreet purchased professional consulting services from BHVR in the amount
of $106,244 during fiscal 1998 and had a payable of $106,244 at June 30, 1998.
200
BHVR indirectly owns approximately 37.5% of Behaviour Design, Inc.
("Behaviour Design"), Discreet purchased marketing services from Behaviour
Design in the amount of $1,383,639 during fiscal 1998 and had a payable of
$1,383,639 to Behaviour Design at June 30, 1998.
BHVR indirectly owns approximately 37.5% of Behaviour Studios, Inc.
("Behaviour Studios"). Discreet recorded revenue from sales of fire* and
inferno* systems of Behaviour Studios in the amount of $1,837,077 during
fiscal 1998 and had trade receivables of $1,837,077 from Behaviour Studios at
June 30, 1998.
Security Ownership of Certain Beneficial Owners and Management of Discreet
The following table sets forth as of December 31, 1998, with respect to
beneficial ownership of Discreet Common Shares by: (i) the name of each person
who, to the knowledge of Discreet beneficially owned more than 5% of the
Discreet Common Shares outstanding as of such date; (ii) the name of each
director of Discreet; (iii) each Discreet Named Executive Officer and (iv) all
directors and executive officers of Discreet as a group.
Amount and Nature Percent
Name of Beneficial Owner of Ownership(1) of Class
------------------------ ----------------- --------
Richard J. Szalwinski............................ 5,650,646(2) 18.88%
Terrence Higgins................................. 140,427(3) *
Thomas Cantwell.................................. 3,057,467(4) 10.21%
Gary G. Tregaskis................................ 3,123,700(5) 10.44%
Brian P. Drummond................................ 30,000(6) *
Perry M. Simon................................... 30,000(7) *
Francois Plamondon............................... 312,500(8) 1.04%
Graham Sharp..................................... -- *
Pierre Desjardins................................ 31,000(10) *
Winston Rodrigues................................ -- *
Putnam Investments Management, Inc............... 1,548,877(11) 5.17%
Pilgrim Baxter & Associates...................... 2,159,500(12) 7.21%
All current executive officers and directors as a
group (8 persons)............................... 12,375,740(13) 41.34%
- --------
* Less than 1%
(1) Applicable percentage of ownership as of December 31, 1998, is based upon
29,935,666 Discreet Common Shares outstanding as of such date. Beneficial
ownership is determined in accordance with the rules of the SEC, and
includes voting and investment power with respect to shares. Discreet
Common Shares subject to options currently exercisable or exercisable
within 60 days of December 31, 1998, are deemed outstanding for computing
the percentage ownership of the person holding such options, but are not
deemed outstanding for computing the percentage of any other person.
(2) Includes 450,000 Discreet Common Shares issuable upon the exercise of
options, which options are exercisable upon the change of control of
Discreet effected by the Transactions, 18,750 Discreet Common Shares
issuable upon the exercise of options, which options are exercisable
within 60 days of December 31, 1998, and 5,181,896 Discreet Common Shares
held of record by BHVR Communications Inc., a holding corporation
controlled by Mr. Szalwinski.
(3) Mr. Higgins' employment with Discreet was terminated on July 2, 1998. See
"--Compensation and Other Information Concerning Discreet Directors and
Officers--Employment Agreements and Severance Arrangements."
(4) Consists of Discreet Common Shares owned by Cantwell Holdings, Ltd., a
Texas Limited Partnership of which Mr. Cantwell is the General Partner.
(5) Includes 723,700 Discreet Common Shares held of record by Nearco Trustee
Company (Jersey) Limited re: Gary Tregaskis Settlement, a trust
established for the benefit of Mr. Tregaskis.
(6) Consists of Discreet Common Shares issuable upon the exercise of options,
which options are exercisable within 60 days of December 31, 1998.
201
(7) Consists of Discreet Common Shares issuable upon the exercise of options,
which options are exercisable within 60 days of December 31, 1998.
(8) Consists of a total of (i) 162,500 Discreet Common Shares issuable upon
the exercise of options, which options are exercisable within 60 days of
December 31, 1998, and (ii) 150,000 Discreet Common Shares issuable upon
the exercise of options, which options are exercisable upon the change of
control of Discreet effected by the Transactions.
(9) Mr. Sharp's employment with Discreet was terminated on July 2, 1998. See
"--Compensation and Other Information Concerning Discreet Directors and
Officers--Employment Agreements and Severance Arrangements."
(10) Includes 20,000 Discreet Common Shares issuable upon the exercise of
options, which options are exercisable within 60 days of December 31,
1998 and 11,000 Discreet Common Shares beneficially owned by Mr.
Desjardins.
(11) Such information is based on a Form 13G dated January 16, 1998 and filed
with the SEC. Putnam Investment Management, Inc.'s address is: One Post
Office Square, Boston, Massachusetts 02110.
(12) Such information is based on a Form 13G/A dated February 12, 1998 and
filed with the SEC. Pilgrim Baxter & Associates' address is: 825
Duportail Road, Wayne, Pennsylvania, 19087.
(13) Includes 861,250 Discreet Common Shares issuable upon the exercise of
options, which options are exercisable within 60 days of December 31,
1998 or upon the change in control of Discreet effected by the
Transactions.
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AMALGAMATION SUB
Business
Amalgamation Sub, a wholly owned subsidiary of Dutchco and indirect
subsidiary of Autodesk, was incorporated in Quebec in August 1998. Its
principal executive offices are located at 1000 Sherbrooke Street West, 27th
Floor, Montreal, Quebec, Canada H3A 3G4 and its telephone number is (514) 987-
5000. Amalgamation Sub was organized solely for the purpose of effecting the
Amalgamation. It has no material assets and has not engaged in any activities
except in connection with the Amalgamation. As of December 31, 1998,
Amalgamation Sub had no employees.
Amalgamation Sub's executive offices are located in the offices of
Autodesk's and Amalgamation Sub's Quebec legal counsel, Mendelsohn Rosentzveig
Shacter, and are available to Amalgamation Sub at no cost to the company.
Amalgamation Sub is not involved in any material pending legal proceedings
to which Amalgamation Sub is a party or of which any of its property is the
subject.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Amalgamation Sub is a wholly owned subsidiary of Dutchco and indirect
subsidiary of Autodesk, and has been organized under the laws of Quebec for
the sole purpose of effecting the Amalgamation. It has no material assets or
any meaningful operating results, and has not engaged in any activities except
in connection with the Amalgamation.
Amalgamation Sub Management
The following sets forth certain information regarding the directors and
executive officers of Amalgamation Sub as of December 31, 1998:
Name Age Position
---- --- --------
Eric B. Herr........................... 50 Director and President
Steve Cakebread........................ 47 Director and Chief Financial
Officer
Marcia K. Sterling..................... 54 Director and Secretary
Eric B. Herr has been a director and the President of Amalgamation Sub since
the company's inception in August 1998. 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 Executive Officer of
Amalgamation Sub since the company's inception in August 1998. He 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. Mr. Cakebread 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 Amalgamation Sub
since the company's inception in August 1998. 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.
203
Messrs. Herr and Cakebread and Ms. Sterling will serve as New Discreet's
directors and as New Discreet's President, Chief Executive Officer and
Secretary, respectively. Each of such persons agree to assume all of the
liabilities and responsibilities under the US Securities Laws of Autodesk
Quebec, Amalgamation Sub and Discreet.
Amalgamation Sub's directors and officers and officers are not compensated
for their services to the company.
Amalgamation Sub's Sole Shareholder
Dutchco owns all 100 outstanding Common Shares, no par value, of
Amalgamation Sub, which shares are not publicly traded.
204
AUTODESK QUEBEC
Business
Autodesk Quebec, a wholly owned subsidiary of ACI and indirect subsidiary of
Autodesk, was incorporated in Quebec in August 1998. Its principal executive
offices are located at 1000 Sherbrooke Street West, 27th Floor, Montreal,
Quebec, Canada H3A 3G4 and its telephone number is (514) 987-5000. Autodesk
Quebec was organized solely for the purpose of effecting the Amalgamation. It
has no material assets and has not engaged in any activities except in
connection with the Amalgamation. As of December 31, 1998, Autodesk Quebec had
no employees.
Autodesk Quebec's executive offices are located in the offices of Autodesk's
and Autodesk Quebec's legal counsel, Mendelsohn Rosentzveig Shacter, and are
available to Autodesk Quebec at no cost to the company.
Autodesk Quebec is not involved in any material pending legal proceedings to
which Autodesk Quebec is a party or of which any of its property is the
subject.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Autodesk Quebec is a wholly owned subsidiary of ACI and indirect subsidiary
of Autodesk, and has been organized under the laws of Quebec for the sole
purpose of effecting the Amalgamation. It has no material assets or any
meaningful operating results, and has not engaged in any activities except in
connection with the Amalgamation. Prior to the Effective Time, ACI will
transfer substantially all of its assets and liabilities of Autodesk Quebec.
Autodesk Quebec Management
The following sets forth certain information regarding the directors and
executive officers of Autodesk Quebec as of December 31, 1998:
Name Age Position
---- --- --------
Eric B. Herr........................... 50 Director and President
Steve Cakebread........................ 47 Director and Chief Financial
Officer
Marcia K. Sterling..................... 54 Director and Secretary
Eric B. Herr has been a director and the President of Autodesk Quebec since
the company's inception in August 1998. 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 Executive Officer of
Autodesk Quebec since the company's inception in August 1998. He 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. Mr. Cakebread 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 Autodesk Quebec
since the company's inception in August 1998. 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.
205
Messrs. Herr and Cakebread and Ms. Sterling will serve as New Discreet's
directors and as New Discreet's President, Chief Executive Officer and
Secretary, respectively. Each of such persons agree to assume all of the
liabilities and responsibilities under the US Securities Laws of Autodesk
Quebec, Amalgamation Sub and Discreet.
Autodesk Quebec's directors and officers are not compensated for their
services to the company.
Autodesk Quebec's Sole Shareholder
ACI owns all 100 outstanding Common Shares, no par value, of Autodesk
Quebec, which shares are not publicly traded.
206
DESCRIPTION OF CAPITAL STOCK
Autodesk Capital Stock
The authorized capital stock of Autodesk consists of 250,000,000 shares of
Common Stock, $0.01 par value per share and 2,000,000 shares of Preferred
Stock, $0.01 par value per share
Autodesk Common Stock
As of the Autodesk Record Date, there were approximately 1,098 shares of
Autodesk Common Stock outstanding, held of record by approximately 47,327,000
stockholders. Autodesk Common Stock is listed on the Nasdaq National Market
under the symbol "ADSK." Autodesk Common Stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to Autodesk Common Stock. Autodesk Stockholders are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Autodesk Board out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of Autodesk, each share
of Autodesk Common Stock is entitled to participate pro rata in the
distribution of all assets remaining after payment of liabilities. All
outstanding shares of Autodesk Common Stock are fully paid and non-assessable,
and the shares of Autodesk Common Stock to be outstanding upon completion of
the Transactions will be fully paid and non-assessable.
Autodesk Stockholders are entitled to one vote per share on all matters to
be voted upon by Autodesk Stockholders. Autodesk Stockholders do not have
cumulative voting rights in connection with the election of Directors. The By-
laws of Autodesk (the "Autodesk By-Laws") provide that any action required or
permitted to be taken at any annual or special meeting of Autodesk
Stockholders may be taken without a meeting, without prior notice, and without
a vote, if written consents are obtained from the holders of outstanding
Autodesk Common Stock having not less than the minimum number of votes that
would be necessary to take such action at a meeting at which all shares
entitled to vote were present and voted.
Preferred Stock
Autodesk has 2,000,000 shares of Preferred Stock authorized, of which, as of
the Autodesk Record Date, no shares were outstanding. Under Autodesk's
Restated Certificate of Incorporation (the "Autodesk Certificate"), the
Autodesk Board has the authority to issue these shares of Preferred Stock in
one or more series and, subject to limitations prescribed by law, to fix the
designations, rights, powers, and preferences and the qualifications,
limitations or restrictions thereof, of each such series of Preferred Stock,
including without limitation authority to fix the dividend rights, dividend
rate, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), and liquidation preferences of any wholly
unissued series of Preferred Stock and the number of shares constituting any
such series and the designation thereof, or any of the foregoing, without any
further vote or action by the stockholders. Although it presently has no
intention to do so, the Autodesk Board, without Autodesk Stockholder approval,
can issue Preferred Stock with voting and conversion rights which could
adversely affect the voting power or other rights of the holders of Autodesk
Common Stock and the issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of Autodesk.
In connection with the adoption of a stockholder rights plan in December
1995, the Autodesk Board of Directors designated a series of Preferred Stock
as "Series A Participating Stock," with a par value of $0.01 per share and
consisting of 100,000 shares. See "--Comparison of Shareholders' Rights--
Autodesk Rights Plan."
In connection with the Transactions, the Autodesk Board will also designate
one share of Preferred Stock as "Series B Preferred Stock," which share will
be issued to the Trustee pursuant to the Voting and Exchange Trust Agreement.
See "Terms of the Transactions--Description of New Discreet Exchangeable
Shares--Voting Rights."
Autodesk Transfer Agent and Registrar
The Transfer Agent and Registrar for the Autodesk Common Stock is Harris
Trust & Savings Bank, Chicago, IL.
207
Discreet Share Capital
The authorized share capital of Discreet consists of an unlimited number of
Discreet Common Shares and an unlimited number of preferred shares. Discreet
Common Shares entitle their holder to one vote per share on all matters voted
on by the Discreet Shareholders (except for matters which require class or
series votes) and are entitled to receive such dividends as are declared by
the directors out of funds legally available therefor and to receive the
remaining properties of Discreet on dissolution. Discreet Common Shares do not
confer any pre-emptive, redemption or conversion rights.
As of the Discreet Record Date, 29,949,629 Discreet Common Shares were
outstanding. No preferred shares were outstanding.
Discreet Transfer Agent and Registrar
The Transfer Agent and Registrar for the Discreet Common Shares is Boston
EquiServe, Canton, MA.
Comparison of Shareholders' Rights
In the event the Transactions are consummated, shareholders of Discreet, a
Quebec company, will, immediately after the Effective Time, have the right to
receive either Autodesk Common Stock or New Discreet Exchangeable Shares,
exchangeable for Autodesk Common Stock. Holders of New Discreet Exchangeable
Shares have the right to exchange such shares for an equivalent number of
shares of Autodesk Common Stock. Moreover, pursuant to the Voting and Exchange
Trust Agreement, the Trustee may, at the direction of the holders of the New
Discreet Exchangeable Shares, exercise votes equivalent to those possessed by
holders of Autodesk Common Stock. Autodesk is a corporation organized under
the Delaware General Corporation Law. While the rights and privileges of
stockholders of a Delaware Corporation are, in many instances, comparable to
those of shareholders of a Quebec company, there are certain differences. The
following is a summary of the material differences between the rights of
holders of Discreet Common Shares at the date hereof and of New Discreet
Exchangeable Shares and Autodesk Common Stock after giving effect to the
Transactions. These differences arise from differences between United States
and Canadian securities laws, between the DGCL and the Quebec Act, and between
the Discreet Articles and Discreet By-laws, the New Discreet articles and the
New Discreet by-laws as proposed to be amended in connection with the
Transactions (the "New Discreet Articles" and the "New Discreet By-Laws,"
respectively), and the Autodesk Restated Certificate and Autodesk's by-laws
(the "Autodesk By-Laws"). For a description of the respective rights of the
holders of Autodesk Common Stock and Discreet Common Shares, see,
respectively, "--Autodesk Capital Stock" and "--Discreet Share Capital."
Vote Required for Extraordinary Transactions
Under the Quebec Act, certain extraordinary corporate actions, such as
certain amalgamations and continuances, are required to be approved by special
resolution. A special resolution is a resolution passed by not less than two-
thirds (2/3) of the votes cast by the shareholders at the special meeting
called for that purpose. An arrangement (if ordered by a court) must be
approved by a resolution passed by not less than three-fourths (3/4) of the
votes cast by the shareholders of each class represented at the special
meeting of shareholders called for that purpose. The dissolution or winding-up
of a Quebec company must be approved by a resolution passed by the vote of at
least two-thirds (2/3) in value of the shares represented at the meeting of
shareholders called for that purpose pursuant to the Winding-Up Act (Quebec).
Under the Quebec Act, a class or series of shares of a company is entitled to
vote as a class or series if any provision of a proposed amalgamation or
amendment would affect the rights, privileges, conditions or restrictions of
shares of a class or series as the case may be, or changes them in relation to
another class or series, as the case may be.
The DGCL requires the affirmative vote of a majority of the outstanding
stock entitled to vote thereon to authorize any merger, consolidation,
dissolution or sale of substantially all of the assets of a corporation,
except that, unless required by its certificate of incorporation, no
authorizing stockholder vote is required of a
208
corporation surviving a merger if (a) such corporation's certificate of
incorporation is not amended in any respect by the merger, (b) each share of
stock of such corporation outstanding immediately prior to the effective time
of the merger will be an identical outstanding or treasury share of the
surviving corporation after the effective time of the merger, and (c) the
number of shares to be issued in the merger does not exceed 20% of such
corporation's outstanding common stock immediately prior to the effective time
of the merger. The Autodesk Restated Certificate does not require a greater
percentage vote for such actions. Stockholder approval is also not required
under the DGCL for mergers or consolidations in which a parent corporation
merges or consolidates with a subsidiary of which it owns at least 90% of the
outstanding shares of each class of stock.
Such matters as take-over bids, issuer bids or self tenders, going-private
transactions and transactions with directors, officers, significant
shareholders and other related parties to which New Discreet is a party will
be subject to regulation by Canadian provincial securities legislation and
administrative policies of Canadian securities administrators. Similar matters
to which Autodesk is a party will be subject to regulation under US securities
laws, regulations and policies.
Dissenters' Rights
Section 262 of the DGCL provides appraisal rights (sometimes referred to as
"dissenters' rights") to stockholders of Delaware corporations in certain
situations involving the acquisition of such corporations. The Quebec Act does
not provide appraisal or similar rights to shareholders of a Quebec company in
connection with an amalgamation or similar takeover transaction.
Cumulative Voting and Classification of Board of Directors
The Autodesk Restated Certificate and the Autodesk By-Laws do not provide
for cumulative voting in director elections or for a classified board of
directors. The Discreet Articles and the Discreet By-Laws do not provide for
cumulative voting in director elections and for a classified board of
directors.
Amendment to Governing Documents
Under the Quebec Act, any amendment to a company's articles generally
requires the approval by special resolution, which is a resolution passed by a
majority of not less than two-thirds of the votes cast by shareholders present
in person or by proxy at the meeting at which the resolution is considered.
Under the Quebec Act, unless the articles or by-laws of the company otherwise
provide, the directors may, by resolution, make, amend, repeal or re-enact any
by-laws that regulates the business or affairs of the company. Where the
directors make, amend, repeal or re-enact a by-law, they are required under
the Quebec Act to submit the by-law, amendment, repeal or re-enactment to the
shareholders at a special meeting of the shareholders of the company called
for that purpose or, at the next annual meeting of shareholders, and such
by-law, in default of confirmation thereat, shall at and from that time only
cease to be in force. The shareholders may confirm, reject or amend the by-
law, amendment, repeal or re-enactment by an ordinary resolution, which is a
resolution passed by a majority of the votes cast by shareholders present in
person or by proxy at the meeting at which the by-law is considered.
The DGCL requires a vote of the corporation's board of directors followed by
the affirmative vote of a majority of the outstanding stock of each class
entitled to vote for any amendment to the certificate of incorporation, unless
a greater level of approval is required by the certificate of incorporation.
The Autodesk Restated Certificate does not require a greater level of approval
for an amendment thereto. If an amendment alters the powers, preferences or
special rights of a particular class or series of stock so as to affect them
adversely, that class or series shall be given the power to vote as a class
notwithstanding the absence of any specifically enumerated power in the
certificate of incorporation. The Autodesk Series B Preferred Stock which will
be issued in connection with the Transactions has special voting powers. See
"Terms of the Transactions--Description of New Discreet Exchangeable Shares--
Voting Rights." The DGCL also states that the power to adopt, amend or repeal
the by-laws of a corporation shall be in the stockholders entitled to vote,
provided that the corporation in its certificate of incorporation may confer
such power on the board of directors in addition to the stockholders.
209
The Autodesk Restated Certificate expressly authorizes each of the board of
directors and the stockholders to adopt, amend or repeal the Autodesk By-Laws.
Derivative Action
Derivative actions may be brought in Delaware by a stockholder on behalf of,
and for the benefit of, the corporation. The DGCL provides that a stockholder
must aver in the complaint that he or she was a stockholder of the corporation
at the time of the transaction of which he or she complaints. A stockholder
may not sue derivatively unless he or she first makes demand on the
corporation that it bring suit and such demand has been refused, unless it is
shown that such demand would have been futile.
Under the Civil Code of Quebec, in the case of fraud against a company, a
court may, on the application of a shareholder, hold the founders, directors,
other senior officers or shareholders of the company who have participated in
the alleged act or derived personal profit therefrom liable for any damage
suffered by the company.
Shareholder Consent in Lieu of Meeting
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required to be taken or which may be taken at an
annual or special meeting of stockholders may be taken without a meeting if a
consent in writing is signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize
such action at a meeting at which all shares entitled to vote were present and
voted. The Autodesk Restated Certificate does not contain any special
provision relating to action by written consent. Under the Quebec Act,
shareholder action without a meeting may only be taken by written resolution
signed by all shareholders who would be entitled to vote thereon at a meeting.
Director Qualifications
In the absence of qualifications in the articles of incorporation or by-
laws, directors of a Quebec company need not be residents of Quebec or Canada,
nor be shareholders of the company, in order to act as directors of the
company. Discreet's articles of incorporation and by-laws contain no such
limiting provisions. However, the Quebec Act requires that the board of
directors of a company that has made a distribution to the public of its
securities shall be composed of not fewer than three directors.
Fiduciary Duties of Directors
Directors of corporations incorporated or organized under the Quebec Act and
the DGCL have fiduciary obligations to the corporation and its shareholders.
Pursuant to these fiduciary obligations, the directors must act in accordance
with the so-called duties of "due care" and "loyalty." Under the DGCL, the
duty of care requires that the directors act in an informed and deliberative
manner and to inform themselves, prior to making a business decision, of all
material information reasonably available to them. The duty of loyalty may be
summarized as the duty to act in good faith, not out of self-interest, and in
a manner which the directors reasonably believe to be in the best interests of
the stockholders.
Pursuant to the Civil Code of Quebec, directors have a duty of care,
requiring that the directors of a company incorporated under the laws of
Quebec act with prudence and diligence, and a duty of loyalty, requiring the
directors to act with honesty and loyalty and in the best interests of the
company.
Indemnification of Officers and Directors
Under the Quebec Act and the Civil Code of Quebec, Discreet must assume the
defense of a director or officer if he or she is prosecuted by a third person
for an act done in the exercise of his or her duties and must pay for the
damages, if any, resulting from such act, as well as reasonable expenses
incurred in respect of any
210
such prosecution, unless the director or officer has committed a grievous
offense or a personal offense separable from the exercise of his or her
duties. In a penal or criminal proceeding, however, Discreet must assume the
payment of the expenses of an officer or director only if he or she had
reasonable grounds to believe that his or her conduct was in conformity with
the law, or was freed or acquitted. In addition, Discreet must assume the
expenses of an officer or director if, having prosecuted him for an act done
in the exercise of his duties, Discreet loses its case and the court so
decides. If Discreet wins its case only in part, the court may determine the
amount of the expenses it shall assume.
The DGCL provides that a corporation may indemnify its present and former
directors, officers, employees and agents (each an "indemnitee") against all
reasonable expenses (including attorneys' fees) and, except in actions
initiated by or in the right of the corporation, against all judgments, fines
and amounts paid in settlement in actions brought against them, if such
indemnitee acted in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and
with respect to a criminal action or proceeding, had no reasonable cause to be
believe that his or her conduct was unlawful. The corporation shall indemnify
an indemnitee to the extent that he or she is successful on the merits or
otherwise in the defense of any claim, issue or matter associated with an
action. In the case of actions brought against a present or former director,
officer, employee or agent by or in the right of the corporation, no
indemnification shall be made in respect of any claim, issue or matter as to
which such a person shall have been adjudged to be liable to the corporation
unless and only to the extent that an appropriate court of law shall determine
upon application that, despite the adjudication of liability, but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
The Autodesk Restated Certificate provides for indemnification of directors
and officers to the fullest extent permitted by the DGCL.
The DGCL allows for the advance payment of an indemnitee's expenses prior to
the final disposition of an action, provided that the indemnitee undertakes to
repay any such amount advanced if it is later determined that the indemnitee
is not entitled to indemnification with regard to the action for which such
expenses were advanced. The Quebec Act does not expressly provide for such
advance payment.
Director Liability
The DGCL provides that the charter of the corporation may include a
provision which limits or eliminates the liability of directors to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided such liability does not arise from certain
proscribed conduct, including acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, breach of the
duty of loyalty, the payment of unlawful dividends or expenditure of funds for
unlawful stock purchases or redemptions or transactions from which such
director derived an improper personal benefit. The Autodesk Restated
Certificate contains a provision limiting the liability of its directors to
the fullest extent permitted by the DGCL. The Quebec Act does not permit any
such limitation of a director's liability.
Anti-takeover Provisions and Interested Stockholder Transactions
The DGCL prohibits, in certain circumstances, a "business combination"
between corporation and an "interest stockholder" within three years of the
stockholder becoming an "interest stockholder". An "interested stockholder" is
a holder who, directly or indirectly, controls 15% or more of the outstanding
voting stock or is an affiliate of the corporation and was the owner of 15% or
more of the outstanding voting stock at any time within the prior three-year
period. A "business combination" includes a merger or consolidation, a sale or
other disposition of assets having an aggregate market value of 10% or more of
the consolidated assets of the corporation or the aggregate market value of
the outstanding stock of the corporation and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation. This provision does not apply where: (i) either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder is approved by the corporation's board of directors
prior to the date to the interested stockholder acquired such 15% interest;
(ii) upon the consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the
211
outstanding voting stock of the corporation excluding, for the purpose of
determining the number of shares outstanding, shares held by persons who are
directors and also officers and by employee stock plans in which participants
do not have the right to determine confidentially whether shares held subject
to the plan will be tendered; (iii) the business combination is approved by a
majority of the board of directors and the affirmative vote of the two-thirds
of the outstanding votes entitled to be cast by disinterested stockholders at
an annual or special meeting; (iv) the corporation does not have a class of
voting stock that is listed on a national securities exchange, authorized for
quotation on an inter-dealer quotation system of a registered national
securities association, or held of record by more than 2,000 stockholders
unless any of the foregoing results from action taken, directly or indirectly,
by an interested stockholder or from a transaction in which a person becomes
an interested stockholder; or (v) the corporation has opted out of this
provision. Autodesk has not opted out of this provision.
The Quebec Act does not contain a comparable provision with respect to
"business combinations". However, policies of certain Canadian securities
regulatory authorities, including Policy Q-27 of the QSC ("Policy Q-27"),
contain requirements in connection with related party transactions. A related
party transaction means, generally, any transaction by which an issuer,
directly or indirectly, acquires or transfers an asset or acquires or issues
treasury securities or assumes or transfers a liability from or to, as the
case may be, a related party by any means in any one transaction or any
combination of transactions. "Related party" is defined in Policy Q-27 and
includes directors, senior officers and holders of at least 10% of the voting
securities of the issuer.
Policy Q-27 requires more detailed disclosures in the proxy material sent to
security holders in connection with a related party transaction and, subject
to certain exemptions, the preparation of a formal valuation of the subject
matter of the related party transaction and any non-cash consideration offered
therefor and the inclusion of a summary of the valuation in the proxy
material. Policy Q-27 also requires, subject to certain exemptions, that the
minority shareholders of the issuer approve the transaction, by either a
simple majority or two-thirds of the votes cast, depending upon the
circumstances.
Currently, Policy Q-27 does not apply to a going private transaction or to a
related party transaction involving Discreet since certain exemptions from the
requirements of Policy Q-27 are available.
Autodesk Rights Plan
In December 1995, pursuant to a Preferred Shares Rights Agreement (the
"Rights Agreement") between Autodesk and Harris Trust & Savings Bank, as
Rights Agent (the "Rights Agent"), the Autodesk Board declared a dividend of
one right (a "Right") to purchase one one-thousandth share of the Autodesk's
Series A Participating Preferred Stock ("Series A Preferred") for each
outstanding share of Autodesk Common Stock. The dividend is payable on
December 29, 1995 (the "Record Date") to Autodesk Stockholders of record as of
the close of business on that date. Each Right entitles the registered holder
to purchase from Autodesk one one-thousandth of a share of Series A Preferred
at an exercise price of $200.00 (the "Purchase Price"), subject to adjustment.
The Rights will not be exercisable until the Distribution Date (defined
below). Prior to the Distribution Date, certificates for the Rights ("Rights
Certificates") will not be sent to Autodesk Stockholders and the Rights will
attach to and trade only together with the Autodesk Common Stock. Accordingly,
Autodesk Common Stock certificates outstanding on the Record Date will
evidence the Rights related thereto, and Autodesk Common Stock certificates
issued after the Record Date but prior to the Distribution Date will contain a
notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender or transfer of any certificates for Autodesk Common Stock, even
without notation or a copy of the Summary of Rights being attached thereto
(but as to certificates representing Autodesk Common Stock issued after the
Record Date, only if they bear the legend required by the Rights Agreement),
will also constitute the transfer of the Rights associated with the Autodesk
Common Stock represented by such certificate.
212
The Rights will separate from the Autodesk Common Stock, Rights Certificates
will be issued and the Rights will become exercisable upon the earlier of: (i)
10 days (or such later date as may be determined by a majority of the Autodesk
Board, excluding directors affiliated with the Acquiring Person, as defined
below (the "Continuing Directors") following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person")
has acquired, or obtained the right to acquire, beneficial ownership of 15% or
more of the outstanding Autodesk Common Stock, or (ii) 10 days (or such later
date as may be determined by a majority of the Continuing Directors) following
the commencement of, or announcement of an intention to make, a tender offer
or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Autodesk
Common Stock. The earlier of such dates is referred to as the "Distribution
Date."
As soon as practicable following the Distribution Date, separate Rights
Certificates will be mailed to holders of record of the Autodesk Common Stock
as of the close of business on the Distribution Date and such separate Rights
Certificates alone will evidence the Rights from and after the Distribution
Date. All shares of Autodesk Common Stock issued prior to the Distribution
Date will be issued with Rights. Autodesk Common Stock issued after the
Distribution Date may be issued with Rights if such shares are issued (i) upon
the conversion of outstanding convertible debentures or any other convertible
securities issued after adoption of the Rights Agreement (including without
limitation the New Discreet Exchangeable Shares) or (ii) pursuant to the
exercise of stock options or under employee benefit plans or arrangements
unless such issuance would result in (or create a risk that) such options,
plans or arrangements would not qualify for otherwise available special tax
treatment. Except as otherwise determined by the Autodesk Board, no other
shares of Autodesk Common Stock issued after the Distribution Date will be
issued with Rights. The Rights will expire on the earliest of (i) December 14,
2005 (the "Final Expiration Date"), (ii) redemption or exchange of the Rights
as described below, or (iii) consummation of an acquisition of Autodesk
satisfying certain conditions by a person who acquired shares pursuant to a
Permitted Offer as described below.
Following the Distribution Date, and until one of the further events
described below, holders of the Rights will be entitled to receive, upon
exercise and the payment of $200.00 per Right, one one-thousandth share of the
Series A Preferred.
Unless the Rights are earlier redeemed, in the event that an Acquiring
Person becomes the beneficial owner of 15% or more of Autodesk Common Stock
then outstanding (other than pursuant to a Permitted Offer), then proper
provision will be made so that each holder of a Right which has not
theretofore been exercised (other than Rights beneficially owned by the
Acquiring Person, which will thereafter be void) will thereafter have the
right to receive, upon exercise, Autodesk Common Stock having a value equal to
two times the Purchase Price. Rights are not exercisable following the
occurrence of an event as described above until such time as the Rights are no
longer redeemable by Autodesk as set forth below.
In the event that Autodesk does not have sufficient Autodesk Common Stock
available for all Rights to be exercised, or the Autodesk Board decides that
it is necessary and not contrary to the interests of Rights holders to do so,
Autodesk may instead substitute cash, assets or other securities for the
Autodesk Common Stock for which the Rights would have been exercisable under
this provision.
Similarly, unless the Rights are earlier redeemed, in the event that, after
the Shares Acquisition Date (as defined below), (i) Autodesk is acquired in a
merger or other business combination transaction, or (ii) 50% or more of
Autodesk's consolidated assets or earning power are sold (other than in
transactions in the ordinary course of business), proper provision must be
made so that each holder of a Right which has not theretofore been exercised
(other than Rights beneficially owned by the Acquiring Person, which will
thereafter be void) will thereafter have the right to receive, upon exercise,
shares of common stock of the acquiring company having a value equal to two
times the Purchase Price (unless the transaction satisfies certain conditions
and is consummated with a person who acquired shares pursuant to a Permitted
Offer, in which case the Rights will expire).
213
A Permitted Offer means a tender offer for all outstanding shares of
Autodesk Common Stock that has been determined by a majority of the Continuing
Directors to be adequate and otherwise in the best interests of Autodesk and
its stockholders. Where the Autodesk Board has determined that a tender offer
constitutes a Permitted Offer, the Rights will not become exercisable to
purchase Autodesk Common Stock or shares of the acquiring company (as the case
may be) at the discounted price described above.
At any time after the acquisition by an Acquiring Person of 15% or more of
the then outstanding shares of Autodesk Common Stock and prior to the
acquisition by such Acquiring Person of 50% or more of the then outstanding
shares of Autodesk Common Stock, the Autodesk Board may exchange the Rights
(other than Rights owned by the Acquiring Person), in whole or in part, at an
exchange ratio of one share of Autodesk Common Stock per Right.
At any time on or prior to the close of business on the earlier of (i) the
10th day following the acquisition by an Acquiring Person (the "Share
Acquisition Date") or such later date as may be determined by a majority of
the Continuing Directors and publicly announced by Autodesk, or (ii) the Final
Expiration Date of the Rights, Autodesk may redeem the Rights in whole, but
not in part, at a price of $.01 per Right.
The Purchase Price payable, the number of Rights, and the number of Series A
Preferred or shares of Autodesk Common Stock or other securities or property
issuable upon exercise of the Rights are subject to adjustment from time to
time in connection with the dilutive issuances by Autodesk as set forth in the
Rights Agreement. With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at
least 1% in such Purchase Price.
No fractional portion less than integral multiples of one share of Autodesk
Common Stock will be issued upon exercise of a Right and in lieu thereof, an
adjustment in cash will be made based on the market price of the Autodesk
Common Stock on the last trading date prior to the date of exercise.
Until a Right is exercised, the holder thereof, as such, will have no rights
as an Autodesk Stockholder (other than any rights resulting from such holder's
ownership of Autodesk Common Stock), including, without limitation, the right
to vote or to receive dividends.
The provisions of the Rights Agreement may be supplemented or amended by the
Autodesk Board in any manner prior to the close of business on the
Distribution Date without the approval of Rights holders. After the
Distribution Date, the provisions of the Rights Agreement may be amended by
the Autodesk Board in order to cure any ambiguity, defect or inconsistency, to
make changes which do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or to shorten or lengthen
any time period under the Rights Agreement; provided, however, that no
amendment to adjust the time period governing redemption shall be made at such
time as the Rights are not redeemable.
Series A Preferred purchasable upon exercise of the Rights will not be
redeemable. Each share of Series A Preferred will be entitled to an aggregate
dividend of 1,000 times the dividend declared per share of Autodesk Common
Stock. In the event of liquidation, the holders of the Series A Preferred will
be entitled to a minimum preferential liquidation payment equal to the greater
of (i) $1,000 per share or (ii) 1,000 times the per share amount to be
distributed to the holders of Autodesk Common Stock. Each share of Series A
Preferred will have 1,000 votes, voting together with the Autodesk Common
Stock. In the event of any merger, consolidation or other transaction in which
the Autodesk Common Stock are changed or exchanged, each share of Series A
Preferred will be entitled to receive 1,000 times the amount received per
share of Autodesk Common Stock. These rights are protected by customary anti-
dilution provisions.
Because of the nature of the dividend, liquidation and voting rights of the
shares of Series A Preferred, the value of the one one-thousandth interest in
a share of Series A Preferred purchasable upon exercise of each Right should
approximate the value of one share of Autodesk Common Stock.
214
The Rights approved by the Autodesk Board are designed to protect and
maximize the value of the outstanding equity interests in Autodesk in the
event of an unsolicited attempt by an acquiror to take over Autodesk, in a
manner or on terms not approved by the Autodesk Board. Takeover attempts
frequently include coercive tactics to deprive the Autodesk Board and Autodesk
Stockholders of any real opportunity to determine the destiny of Autodesk.
The Rights have been declared by the Autodesk Board in order to deter such
tactics, including a gradual accumulation in the open market of a 15% or
greater position to be followed by a merger or a partial or two-tier tender
offer that does not treat all stockholders equally. These tactics unfairly
pressure stockholders, squeeze them out of their investment without giving
them any real choice and deprive them of the full value of their shares.
The Rights are not intended to prevent a takeover of Autodesk and will not
do so. The Rights may be redeemed by Autodesk at $.01 per Right within ten
days (or on such later date as may be determined by a majority of the Autodesk
Board, excluding directors affiliated with an Acquiring Person) after the
accumulation of 15% or more of Autodesk's Common Stock by a single acquiror or
group.
Accordingly, the Rights should not interfere with any merger or business
combination approved by the Autodesk Board.
Issuance of the Rights does not in any way weaken the financial strength of
Autodesk or interfere with its business plans. The issuance of the Rights
themselves has no dilutive effect, will not affect reported earnings per
share, should not be taxable to Autodesk or to Autodesk Stockholders, and will
not change the way in which Autodesk's shares are presently traded. The
Autodesk Board believes that the Rights represent a sound and reasonable means
of addressing the complex issues of corporate policy created by the current
takeover environment.
However, the Rights may have the effect of rendering more difficult or
discouraging an acquisition of Autodesk deemed undesirable by the Autodesk
Board. The Rights may cause substantial dilution to a person or group that
attempts to acquire Autodesk on terms or in a manner not approved by the
Autodesk Board, except pursuant to an offer conditioned upon the negation,
purchase or redemption of the Rights.
EXPERTS
The consolidated financial statements of Autodesk at January 31, 1998 and
1997, and for each of the three years in the period ended January 31, 1998,
included in the Proxy Circular of Autodesk, Inc. which is referred to and made
a part of this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Discreet as of June 30, 1997 and
1998, and for the year ended July 31, 1996, the eleven-month period ended
June 30, 1997, and the year ended June 30, 1998, appearing in this Proxy
Circular and in the Form S-4 have been audited by Arthur Andersen & Cie,
independent chartered accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.
ATTENDANCE BY INDEPENDENT ACCOUNTANTS AT THE AUTODESK MEETING AND THE DISCREET
MEETING
It is expected that representatives of Ernst & Young LLP, Autodesk's
independent accountants, will be present at the Autodesk Meeting and that
representatives of Arthur Andersen & Cie, Discreet's independent chartered
accountants, will be present at the Discreet Meeting where such
representatives, in each case, will have an opportunity to respond to
appropriate questions of stockholders and to make a statement if they so
desire.
215
LEGAL MATTERS
Certain legal matters in connection with the Transactions will be passed on
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California, Aird & Berlis, Toronto, Ontario, and Mendelsohn Rosentzveig
Shacter, Montreal, Quebec, on behalf of Autodesk, Dutchco, Amalgamation Sub
and Autodesk Quebec. Mark A. Bertelsen, a director of Autodesk, is also a
member of Wilson Sonsini Goodrich & Rosati, Professional Corporation. Certain
legal matters in connection with the Transactions will be passed on by Testa,
Hurwitz & Thibeault, LLP, Boston, Massachusetts, and Stikeman, Elliott,
Montreal, Quebec, on behalf of Discreet.
216
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
DISCREET LOGIC INC. AND SUBSIDIARIES
Annual Audited Financial Statements
Report of Arthur Andersen & Cie......................................... F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Shareholders' Equity......................... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
Interim Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet.................................... F-35
Condensed Consolidated Statements of Operations......................... F-36
Condensed Consolidated Statements of Cash Flows......................... F-37
Notes to Condensed Consolidated Financial Statements.................... F-38
AUTODESK, INC.
Annual Audited Financial Statements
Report of Ernst & Young LLP, Independent Auditors....................... F-45
Consolidated Balance Sheet as of January 31, 1998 and 1997.............. F-46
Consolidated Statement of Income for the Years ended January 31, 1998,
1997, and 1996......................................................... F-47
Consolidated Statement of Cash Flows for the Years ended January 31,
1998, 1997 and 1996.................................................... F-48
Consolidated Statement of Stockholders' Equity for the Years ended
January 31, 1998, 1997, and 1996....................................... F-49
Notes to Consolidated Financial Statements.............................. F-50
Interim Financial Statements (Unaudited):
Condensed Consolidated Balance sheet as of October 31, 1998 (Unaudited). F-67
Condensed Consolidated Statement of Income for the Nine Months ended
October 31, 1998 and 1997 (Unaudited).................................. F-68
Condensed Consolidated Statement of Cash Flows for the Nine Months ended
October 31, 1998 and 1997.............................................. F-69
Notes to Unaudited Condensed Consolidated Financial Statements.......... F-70
F-1
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 restated--See Note
2(a), at June 30, 1997 and 1998 and the related consolidated statements of
operations, shareholders' equity and cash flows, as restated--See Note 2(a)
for the year ended July 31, 1996, the eleven-month period ended June 30, 1997,
and the year ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada, which are in substantial agreement with those in the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Discreet Logic Inc. and subsidiaries as at June 30, 1997 and 1998, and the
results of their operations and their cash flows for the year ended July 31,
1996, the eleven-month period ended June 30, 1997, and the year ended June 30,
1998, in accordance with generally accepted accounting principles in the
United States of America.
Arthur Andersen & Cie
Chartered Accountants
General Partnership
Montreal, Canada
July 31, 1998
(except with respect to the matter discussed in Note 22, as to which the date
is January 18, 1999 and Note 2(a) as to which the date is February 3, 1999.)
F-2
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in U.S. Dollars)
June 30, June 30,
1997 1998
------------ ------------
ASSETS
------ (Restated) (Restated)
Current Assets:
Cash and cash equivalents........................ $ 31,668,128 $ 46,459,113
Accounts receivable (less reserves for
uncollectible accounts of $3,487,000 and
$3,654,000 respectively)........................ 26,893,405 32,102,444
Inventory--
Resale......................................... 10,867,176 7,880,378
Demonstration.................................. 3,053,752 4,776,387
Income taxes receivable.......................... 448,059 --
Other current assets............................. 3,888,689 4,718,671
------------ ------------
76,819,209 95,936,993
Property and equipment--less accumulated
depreciation and amortization..................... 7,728,248 9,576,129
Deferred income taxes.............................. 3,489,537 877,514
Other assets....................................... 10,092,283 25,635,785
Assets held for resale............................. 5,247,741 4,384,160
------------ ------------
$103,377,018 $136,410,581
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Borrowings under line of credit.................. $ -- $ 2,713,131
Accounts payable................................. 23,687,070 23,265,953
Accrued expenses................................. 20,398,720 12,833,320
Deferred revenue................................. 8,103,294 6,544,620
Customer deposits................................ 1,359,619 288,113
Income taxes payable............................. 4,734,484 9,882,485
------------ ------------
58,283,187 55,527,622
------------ ------------
Deferred income taxes.............................. 713,236 2,228,634
------------ ------------
Commitments and Contingencies (Notes 5, 12, and 15)
Shareholders' Equity:
Preferred shares--no par value
Authorized--unlimited number of shares
Issued and outstanding--none
Common shares--no par value
Authorized--unlimited number of shares
Issued and outstanding--28,117,415 shares at
June 30, 1997 and 29,617,504 shares at June 30,
1998........................................... 81,075,419 107,748,709
Accumulated deficit.............................. (35,207,055) (24,163,115)
Deferred compensation............................ (673,750) (907,491)
Cumulative translation adjustment................ (814,019) (4,023,778)
------------ ------------
Total shareholders' equity..................... 44,380,595 78,654,325
------------ ------------
$103,377,018 $136,410,581
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in U.S. Dollars)
Eleven
Year Ended Months Ended Year Ended
July 31, June 30, June 30,
1996 1997 1998
------------ ------------ ------------
(Restated) (Restated)
Total revenues....................... $ 83,997,447 $101,923,931 $151,558,128
Cost of revenues..................... 49,333,071 47,571,342 62,033,320
------------ ------------ ------------
Gross profit..................... 34,664,376 54,352,589 89,524,808
------------ ------------ ------------
Operating expenses:
Research and development, net of
tax credits of $711,000, $696,000
and $1,108,000, respectively...... 14,402,432 9,707,890 14,847,019
Sales and marketing................ 26,088,163 23,206,070 34,320,612
General and administrative......... 10,581,670 6,500,705 16,307,022
Write-off of purchased research and
development (Note 15)............. 8,500,000 2,263,000 6,915,000
Write-down of investment (Note 16). 2,500,000 -- --
Gain on sale of investment (Note
16)............................... -- -- (2,500,000)
Costs of terminated agreement (Note
17)............................... -- -- 1,712,860
Restructuring expense (Note 19).... 15,000,000 -- (1,504,472)
Litigation and related settlement
expenses (Note 5)................. 2,506,203 6,500,000 (405,000)
------------ ------------ ------------
Total operating expenses......... 79,578,468 48,177,665 69,693,041
------------ ------------ ------------
Operating income (loss).......... (44,914,092) 6,174,924 19,831,767
------------ ------------ ------------
Other income (expense):
Interest income.................... 2,258,705 1,233,924 1,118,343
Interest expense................... (229,579) (55,318) (135,625)
Foreign currency exchange gain
(loss)............................ 178,620 (187,843) 1,083,450
------------ ------------ ------------
Total other income (expense)..... 2,207,746 990,763 2,066,168
------------ ------------ ------------
Income (loss) before income taxes.. (42,706,346) 7,165,687 21,897,935
Provision for income taxes........... 1,434,835 6,489,343 10,853,995
------------ ------------ ------------
Net income (loss).................. $(44,141,181) $ 676,344 $ 11,043,940
============ ============ ============
Earnings (loss) per share:
Basic.............................. $ (1.64) $ 0.02 $ 0.38
============ ============ ============
Diluted............................ $ (1.64) $ 0.02 $ 0.36
============ ============ ============
Weighted Average Common Shares
Outstanding:
Basic.............................. 26,836,834 27,947,807 29,029,147
============ ============ ============
Diluted............................ 26,836,834 28,893,652 30,792,932
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in U.S. Dollars)
Retained Share Cumulative Total
Common Earnings Deferred Subscriptions Translation Shareholders'
Shares Amount (Deficit) Compensation Receivable Adjustment Equity
---------- ------------ ------------ ------------ ------------- ----------- -------------
Balance, July 31, 1995.. 25,166,860 $ 43,232,545 $ 8,257,782 $ -- $(1,645,000) $ 279,126 $ 50,124,453
Issuance of common
shares net of issuance
costs of $1,988,202
and related tax effect
of $775,399........... 970,920 28,157,527 -- -- -- -- 28,157,527
Exercise of common
stock options......... 1,244,918 1,230,734 -- -- -- -- 1,230,734
Issuance of shares
through Employee Stock
Purchase Plan......... 16,728 302,108 -- -- -- -- 302,108
Issuance of shares to
COSS ................. 300,000 6,000,000 -- -- -- -- 6,000,000
Collection of share
subscriptions
receivable............ -- -- -- -- 1,645,000 -- 1,645,000
Net loss............... -- -- (44,141,181) -- -- -- (44,141,181)
Change in cumulative
translation
adjustment............ -- -- -- -- -- (975,625) (975,625)
---------- ------------ ------------ --------- ----------- ----------- ------------
Balance, July 31, 1996.. 27,699,426 78,922,914 (35,883,399) -- -- (696,499) 42,343,016
Exercise of common
stock options......... 321,577 1,128,256 -- -- -- -- 1,128,256
Issuance of shares
through Employee Stock
Purchase Plan......... 96,412 350,499 -- -- -- -- 350,499
Grant of compensatory
stock options......... -- 673,750 -- (673,750) -- --
Net income, as
restated.............. -- -- 676,344 -- -- -- 676,344
Change in cumulative
translation
adjustment............ -- -- -- -- -- (117,520) (117,520)
---------- ------------ ------------ --------- ----------- ----------- ------------
Balance, June 30, 1997,
as restated............ 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
Net income, as
restated.............. -- -- 11,043,940 -- -- -- 11,043,940
Change in cumulative
translation
adjustment............ -- -- -- -- -- (3,209,759) (3,209,759)
---------- ------------ ------------ --------- ----------- ----------- ------------
Balance, June 30, 1998,
as restated............ 29,617,504 $107,748,709 $(24,163,115) $(907,491) $ -- $(4,023,778) $ 78,654,325
========== ============ ============ ========= =========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in U.S. Dollars)
Eleven Months
Year Ended Ended Year Ended
July 31, 1996 June 30, 1997 June 30, 1998
------------- ------------- -------------
(Restated) (Restated)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).................. $(44,141,181) $ 676,344 $ 11,043,940
Adjustments to reconcile net income
(loss) to cash provided by
operating
activities--
Depreciation and amortization.... 6,276,139 5,987,256 16,384,309
Deferred income taxes............ (2,072,789) 503,699 3,769,945
Loss on sale of fixed assets..... 31,819 -- --
Write-off of purchased research &
development..................... 8,500,000 2,263,000 6,915,000
Write-off of assets for
restructuring................... 5,510,237 -- 610,472
Reversal of restructuring
reserve, net.................... -- -- (1,504,472)
Write-off of investment in
Essential Communications
Corporation..................... 2,500,000 -- --
Gain on sale of investment in
Essential Communications
Corporation..................... -- -- (2,500,000)
Compensation expense related to
stock options................... -- -- 602,199
Changes in assets and liabilities
(net of effect of
acquisitions)--
Settlement of class action
litigation.................... -- -- (10,800,000)
Insurance proceeds related to
class action litigation....... -- -- 3,459,000
Accounts receivable............ (1,100,199) (10,819,617) (4,326,039)
Inventory...................... (6,088,107) 2,986,146 3,378,732
Income taxes receivable........ (2,718,204) 2,743,232 448,059
Other current assets........... (1,917,776) (248,546) (682,982)
Accounts payable............... (6,183,710) 14,336,101 (3,880,117)
Accrued expenses............... 16,865,069 799,643 (8,328,774)
Deferred revenue............... 961,399 3,333,788 (1,558,674)
Income taxes payable........... (2,578,994) 4,734,484 5,148,001
Customer deposits.............. 1,807,254 (1,258,442) (1,071,506)
Due to related parties......... (75,778) (25,535) --
------------ ------------ ------------
Net cash provided by (used in)
operating activities......... (24,424,821) 26,011,553 17,107,093
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment. (15,870,636) (6,265,405) (9,501,868)
Proceeds from disposal of property
and equipment..................... 212,719 4,885 818,000
Increase in other assets........... (519,841) (2,480,908) --
Cash paid for Denim acquisition and
related costs..................... -- (9,125,611) --
Cash paid for D-Vision acquisition
and related costs................. -- -- (10,342,000)
Cash paid for COSS/IMP acquisition
and related costs................. (5,544,848) -- --
Cash paid for investment in
Essential Communications
Corporation....................... (2,500,000) -- --
Proceeds from sale of investment in
Essential Communications
Corporation....................... -- -- 2,500,000
------------ ------------ ------------
Net cash used in investing
activities................... (24,222,606) (17,867,039) (16,525,868)
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from line of credit....... -- -- 2,713,131
Proceeds from issuance of common
shares, net of issuance costs..... 27,382,128 -- 13,527,375
Proceeds from the exercise of stock
options........................... 1,230,734 1,128,256 1,136,747
Proceeds from the employee stock
purchase plan..................... 302,108 350,499 524,165
Payment of capital lease
obligations....................... (249,699) -- --
Proceeds from share subscriptions
receivable........................ 1,645,000 -- --
------------ ------------ ------------
Net cash provided by financing
activities................... 30,310,271 1,478,755 17,901,418
------------ ------------ ------------
Foreign exchange effect on cash..... (991,874) 386,808 (3,691,658)
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents........................ (19,329,030) 10,010,077 14,790,985
Cash and cash equivalents, beginning
of year............................ 40,987,081 21,658,051 31,668,128
------------ ------------ ------------
Cash and cash equivalents, end of
year............................... $ 21,658,051 $ 31,668,128 $ 46,459,113
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
DISCREET LOGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Eleven Months Year Ended
Year Ended Ended June 30,
July 31, 1996 June 30, 1997 1998
------------- ------------- ------------
(Restated) (Restated)
Supplemental disclosure of cash flow
information:
Interest paid during the year...... $ 229,610 $ 16,579 $ 150,243
Income taxes paid during the year.. 8,823,579 1,141,487 2,527,720
Supplemental disclosure of non-cash
financing and investing activities:
Issuance of common shares to COSS.. 6,000,000 -- --
Deferred tax asset recorded in
connection with share issuance
costs............................. 775,399 -- --
In connection with the acquisition
of Lightscape in December 1997, the
following non-cash transaction
occurred:
Fair value of assets acquired...... $ -- $ -- $ 7,614,322
Liabilities assumed................ -- -- (7,614,322)
---------- ---------- ------------
Cash paid for acquisition, net of
cash acquired...................... $ -- $ -- $ --
========== ========== ============
In connection with the acquisition
of D-Vision in July 1997, the
following non-cash transaction
occurred:
Fair value of assets acquired...... $ -- $ -- $ 27,210,063
Liabilities assumed................ -- -- (5,811,000)
Cash acquired...................... -- -- (408,000)
Issuance of 555,000 shares of
common stock...................... -- -- (10,649,063)
---------- ---------- ------------
Cash paid for acquisition, net of
cash acquired...................... $ -- $ -- $ 10,342,000
========== ========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. Dollars)
(1) Operations
Discreet Logic Inc. ("the Company") was incorporated under Part 1A of the
Quebec Companies Act on September 10, 1991. The Company and its subsidiaries
develop, assemble, market and support non-linear, digital systems and software
for creating, editing and compositing imagery and special effects for film,
video, HDTV, broadcast and the Web. The Company's systems and software are
utilized by creative professionals, for a variety of applications, including
feature films, television programs, commercials, music and corporate videos,
interactive game production, live broadcasting as well as Web design.
The Company sells its advanced systems and other products through its direct
sales force, as well as through distributors and resellers. The Company
markets and sells its systems directly in North America and in certain
European and Pacific Rim countries. Sales activities in North America are
conducted from the Company's Montreal headquarters, sales offices in Los
Angeles, New York and Chicago and field representatives based in Boston, San
Francisco and Atlanta. In fiscal 1996, the Company opened sales offices in
India, Hong Kong and Japan. The Company also markets its systems through sales
offices located in the United Kingdom, France, Germany, Singapore, Spain and
Brazil and through a network of distributors and resellers in over 80
countries.
The success of the Company is subject to a number of risks and
uncertainties, including, without limitation, the Company's ability to
successfully develop, introduce and gain customer acceptance of existing and
new or enhanced products; the need for the continued development of the market
for the Company's systems; the ability of the Company to expand its current
market to include additional applications and develop new products for related
markets; the risk that as the Company enters new markets, the distribution
channels, technical requirements and levels and basis of competition may be
different from those in the Company's current markets; the presence of
competitors with greater financial, technical, manufacturing, marketing and
distribution resources; the risk that the products and technologies acquired
by the Company through acquisitions will not be successful, achieve market
acceptance or be successfully integrated with the Company's existing products
and business; the risk of quarterly fluctuations in the Company's operating
results; the risk of the Company's reliance on Silicon Graphics, Inc. ("SGI")
for the workstations included in the Company's systems including the impact of
the timing of the development and release of SGI products as well as
unforeseen difficulties associated with adapting the Company's products to
future SGI products; the risk that the Company derives a significant portion
of its revenues from foreign sales; the Company's reliance principally on
unregistered copyrights and trade secrets to protect its intellectual
property; the risk that the Company's direct sales efforts may compete with
those of its indirect channels; the risk of the Company's reliance on SGI as
the sole source for video input/output cards used in the Company's systems;
the Company's dependence on key management and technical employees; market
price fluctuations due to quarter-to-quarter variations in the Company's
operating results, announcements of technological innovations or new products
by the Company or its competitors and the historical fluctuations in market
prices of technology companies generally; and other risks detailed from time
to time in the Company's filings with the Securities and Exchange Commission.
The Company believes that with its current level of working capital together
with funds generated from operations, it has adequate sources of cash to meet
its operational and capital expenditure requirements through fiscal 1999.
(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").
F-8
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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) Restatement of Financial Statements
In connection with the proposed merger of the Company and Autodesk, Inc., a
Form S-4 (registration no. 333-65075) was filed with The Securities and
Exchange Commission ("SEC"). Subsequent to the SEC's letter to the AICPA dated
September 9, 1998, regarding the SEC's views on in-process research and
development, the Company has increased the allocation of purchase price to
"Goodwill" and has decreased the allocation to the "Write-off of purchased
research and development" for its acquisitions of Denim Software in fiscal
1997, D-Vision Systems and Lightscape Technologies, Inc. in fiscal 1998. The
impact on the Company's previously reported financial information is as
follows:
The revised allocation of the aggregate purchase price is as follows:
As reported As restated
----------- -----------
In-process research and development................. $36,600,000 $ 9,178,000
Acquired technology................................. 5,553,991 5,553,991
Goodwill............................................ 1,328,753 28,750,753
Fair value of tangible assets acquired.............. 3,526,651 3,526,651
----------- -----------
$47,009,395 $47,009,395
=========== ===========
The effect of these adjustments on previously reported consolidated
financial statements as of and for the eleven-month period ended June 30, 1997
and the year ended June 30, 1998 is as follows:
1997 1998
------------------------ ------------------------
As reported As restated As reported As restated
----------- ----------- ----------- -----------
Other assets................. $ 2,659,964 $10,092,283 $ 6,548,313 $25,635,785
Accumulated deficit.......... $42,639,374 $35,207,055 $43,250,587 $24,163,115
General and administrative
expenses.................... $ 6,396,024 $ 6,500,705 $ 8,077,175 $16,307,022
Write-off of purchased
research and development.... $ 9,800,000 $ 2,263,000 $26,800,000 $ 6,915,000
Operating income (loss)...... $(1,257,395) $ 6,174,924 $ 8,176,614 $19,831,767
Net income (loss)............ ($6,755,975) $ 676,344 ($ 611,213) $11,042,940
Basic earnings (loss) per
share....................... ($0.24) $0.02 ($0.02) $0.38
Diluted earnings (loss) per
share....................... ($0.24) $0.02 ($0.02) $0.36
The reconciliation of net income, as previously reported, to net income, as
restated for the eleven months ended June 30, 1997 and June 30, 1998 is as
follows:
1997 1998
----------- -----------
Net income (loss), as reported....................... $(6,755,975) $ (611,213)
Restatement adjustments:
Write-off of purchased research and development, as
reported.......................................... $ 9,800,000 $26,800,000
Write-off of purchased research and development, as
restated.......................................... $(2,263,000) $(6,915,000)
Increase in goodwill amortization.................. (104,681) $(8,230,847)
----------- -----------
Net income, as restated.............................. $ 676,344 $11,042,940
=========== ===========
F-9
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Change of Fiscal Year
On January 9, 1997, the Board of Directors of the Company approved the
change of the Company's fiscal year end from July 31 to June 30. This change
was effective beginning with the Company's second fiscal quarter of 1997. The
consolidated financial statements are presented for the twelve-month period
ended June 30, 1998, the eleven-month period ended June 30, 1997 and the
twelve-month period ended July 31, 1996.
The Company prepares consolidated financial statements, remeasures accounts
in foreign currencies to reflect changes in exchange rates, and examines and
adjusts certain reserve accounts at the end of each quarter. Therefore, it is
not practicable to recast the previous fiscal years' results to reflect the
current fiscal period. Consequently, the results for the twelve-month period
ended June 30, 1998 are not directly comparable with those for the eleven-
month period ended June 30, 1997, or with the twelve-month period ended July
31, 1996.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All subsidiaries are wholly owned as of June 30, 1998.
All significant intercompany accounts and transactions have been eliminated
upon consolidation.
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.
(d) Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, Software Revenue Recognition.
The statement provides specific industry guidance and stipulates that revenue
recognized from software arrangements is to be allocated to each element of
the arrangement based on the relative fair values of the elements, such as
software products, upgrades, enhancements, postcontract customer support,
installation or training. Under SOP 97-2, the determination of fair value is
based on objective evidence that is specific to the vendor. If such evidence
of fair value for each element of the arrangement does not exist, all revenue
from the arrangement is deferred until such time that the evidence of fair
value does exist or until all elements of the arrangement are delivered.
Revenue allocated to software products, specified upgrades and enhancements is
generally recognized upon delivery of the related products, upgrades and
enhancements. Revenue allocated to postcontract customer support is generally
recognized ratably over the term of the support, and revenue allocated to
service elements is generally recognized as the services are performed. SOP
97-2 was adopted by the Company effective January 1, 1998 and has not had a
material effect on revenue recognition.
The Company recognizes revenue from software licenses, and the related
hardware and peripherals, upon shipment of the products. 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
F-10
DISCREET LOGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
arrangements under which the Company has recorded revenues of $11,713,000,
$13,606,000 and $14,050,000 for the year ended July 31, 1996, the eleven-month
period ended June 30, 1997, and for the year ended June 30, 1998,
respectively.
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.
(e) Net Income (Loss) per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share. The new standard simplifies the computation of earnings per share (EPS)
and increases comparability to international standards. Under SFAS No. 128,
primary EPS is replaced by "Basic" EPS, which excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. "Diluted" EPS,
which is computed similarly to fully diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. The Company is required
to disclose both basic and diluted EPS. All prior period EPS data have been
restated to conform to SFAS No. 128.
The following table presents, in thousands (except for EPS amounts) a
reconciliation of Basic EPS to Diluted EPS as required by SFAS No. 128:
Year Ended Eleven Months Ended Year Ended
July 31, 1996 June 30, 1997 June 30, 1998
----------------------- ------------------- --------------------
Income Shares EPS Income Shares EPS Income Shares EPS
-------- ------ ------ ------ ------ ----- ------- ------ -----
(Restated) (Restated)
