SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark one)
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal year ended June 30, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-26983
DYNAMIC DIGITAL DEPTH INC.
(Exact Name of Registrant as Specified in its Charter)
ALBERTA, CANADA
(Jurisdiction of Incorporation or Organization)
8 BRODIE HALL DRIVE, BENTLEY 6102, WESTERN AUSTRALIA
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section
12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
COMMON SHARES, WITHOUT PAR VALUE
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the date of this registration
18,034,762 COMMON SHARES, WITHOUT PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) for the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
----- -----
Indicate by check mark which financial statement item the registrant has elected
to follow.
ITEM 17 X ITEM 18
----- -----
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) for the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
NOT APPLICABLE
TABLE OF CONTENTS
ITEM 1 DESCRIPTION OF BUSINESS.........................................................1
ITEM 2 DESCRIPTION OF PROPERTY........................................................55
ITEM 3 LEGAL PROCEEDINGS..............................................................56
ITEM 4 CONTROL OF REGISTRANT..........................................................56
ITEM 5 NATURE OF TRADING MARKET.......................................................57
ITEM 6 EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.............58
ITEM 7 TAXATION.......................................................................58
ITEM 8 SELECTED FINANCIAL DATA........................................................64
ITEM 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..........................................................65
ITEM 9A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................76
ITEM 10 DIRECTORS AND OFFICERS OF REGISTRANT...........................................76
ITEM 11 COMPENSATION OF DIRECTORS AND OFFICERS.........................................80
ITEM 12 OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.................81
ITEM 13 INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.................................82
ITEM 14 DESCRIPTION OF SECURITIES TO BE REGISTERED.....................................87
ITEM 15 DEFAULTS UPON SENIOR SECURITIES................................................87
ITEM 16 CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.....................................................................87
ITEM 17 FINANCIAL STATEMENTS...........................................................87
ITEM 19 FINANCIAL STATEMENTS AND EXHIBITS..............................................88
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EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS IS REGARDING
NUMBERS OF COMMON SHARES AND SHARE PRICES ARE BASED ON ADJUSTMENTS TO GIVE
EFFECT TO A ONE-FOR-FIVE REVERSE STOCK SPLIT WHICH OCCURRED IN AUGUST 1998.
CURRENCY AND EXCHANGE RATES
All dollar amounts set forth in this Registration Statement are in Canadian
dollars, except whether otherwise indicated. The following table sets forth
(i) the rates of exchange for the Canadian dollar, expressed in United States
dollars, in effect at the end of each of the June 30 Fiscal year periods
indicated; (ii) the average exchange rates based on the last day of each
month during such periods; and (iii) the high and low exchange rate during
such periods, in each case based on the noon buying rate in New York City for
cable transfers in Canadian dollars as certified for customs purposes by the
Federal Reserve Bank of New York.
FISCAL YEAR ENDING JUNE 30, 1999 1998 1997 1996 1995
--------------------------- ---- ---- ---- ---- ----
Rate at End of Period $0.6786 $0.7303 $0.7241 $0.7325 $0.7281
Average Rate During Period $0.6623 $0.7059 $0.7223 $0.7335 $0.7290
High Rate $0.6917 $0.7303 $0.7456 $0.7513 $0.7510
Low Rate $0.6307 $0.6819 $0.6967 $0.7238 $0.7028
On December 20, 1999, the noon buying rate in New York City for cable
transfers in Canadian dollars as certified for customer purposes by the
Federal Reserve Bank of New York (the "Exchange Rate") was $0.6757 = $1.00
Canadian.
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GLOSSARY OF TERMS
ANAGLYPH A stereo 3D format that uses viewing glasses
with different colored lenses (often red and
blue or red and green) to create a black and
white 3D image.
ASIC Application Specific Integrated Circuit. A
low cost, custom manufactured computer chip
that performs a pre determined set of
instructions specific to the application for
which it is used.
AUTO-STEREOSCOPIC A 3D display method that allows the viewer
to see a 3D image on a screen without the
need to wear any special viewing glasses.
DE-MULTIPLEXER A device that recognizes alternating left
and right eye stereo 3D images recorded on a
video tape or DVD and separates them into
two distinct left and right eye output
signals.
DYNAMIC DEPTH CUEING A patented process that allows a still or
moving 2D image to be analyzed to determine
the distance or depth of the objects in the
scene in relation to the viewer. The
resulting depth cue is used to enable the
distribution of 2D compatible 3D content.
EYE TRACKING SYSTEM A patented system that allows the location
of a viewers eyes to be calculated by
capturing a predetermined frequency of infra
red light reflected by the human eye.
FPGA Field Programmable Gate Array. A
reprogrammable micro chip that can be
programmed by software to perform a series
of instructions. The FPGA can be
reprogrammed to accommodate fixes to make
the instructions perform correctly and to
add new features or enhancements to the
capabilities of the chip.
FREEWARE Software licenses that are distributed at
nominal or zero cost, often bundled with
hardware products or other software packages
purchased by the end user. Freeware is also
distributed via the Internet as software
downloads from websites for which the user
is not required to pay a license fee.
GIANT SCREEN FILMS Films created in 65/70mm format that are
projected on screens that are
considerably larger than those found in
retail theaters and cinemas. The format
is often referred to by the brand name
IMAX-Registered Trademark-.
HEAD END ENCODERS Broadcasting hardware systems that
consolidate and encode multiple video and
audio signals into television channels for
distribution through terrestrial, satellite
and cable transmission.
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HEAD TRACKING SYSTEM A patented software system that uses the
information about the location of the
viewer's eyes from the Eye Tracking System
to determine and monitor the position of the
viewer's head.
LCD SHUTTER GLASSES A stereo 3D format that uses viewing glasses
with electronically controlled liquid
crystal display (LCD) lenses to create a
full color 3D image. The LCD lenses are
electronically switched to `shutter' on and
off to obscure the viewers left and right
eye as the alternate left and right eye
images are displayed on screen.
LINE DOUBLER A hardware device that increases the
display resolution of a video signal. The
device takes two successive lines of a video
signal and digitally recreates a third
intermediate line, based on information
contained in the two lines being compared.
The additional intermediate lines are then
displayed on screen and provides the
appearance of greater clarity and quality.
SET TOP BOXES A consumer hardware device, often
associated with cable or satellite
subscriber television. The set top box
decodes scrambled video signals to allow
cable and satellite operators to control
consumer access to pay per view or premium
channel programming.
STEREOSCOPIC An image comprising of two subtly different
(stereo) views of the same information. The
two images are interpreted by the viewer as
being stereo 3D, having the appearance of
depth on the screen, or giving the
impression that objects are moving off the
screen toward the viewer.
STREAMING VIDEO A format for delivering video images
over the Internet. Specially prepared video
content is delivered or `streamed' to the
end user via an Internet connection. The
video player software on the user's computer
creates the image directly from the
information delivered via the Internet
connection as opposed to storing it and
playing back from the user's hard drive.
2D COMPATIBLE 3D A proprietary 3D distribution format
based on the Dynamic Depth Cueing process.
The depth data is inserted into the original
unaltered 2D image and delivered to the end
user via Internet, television or DVD. The
end user may then view the image in 2D or
3D. The image can be viewed in 3D by
activating a software or hardware decoder to
interpret the depth data and create the 3D
image locally.
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ITEM 1 DESCRIPTION OF BUSINESS
GENERAL
Dynamic Digital Depth Inc. ("DDD" or the "Company") is a software and
hardware developer engaged in the development and commercialization of
effective, affordable 3D content, services and delivery technologies for
mass-market applications. DDD has developed a range of patented software and
hardware applications centered upon the emerging demand and technical
feasibility of displaying still and moving images in "stereoscopic 3D." The
Company's solutions are designed for ultimate use in a broad range of markets
including Internet, cable, satellite or terrestrial broadcasting, film and
prerecorded DVD markets. Through the date of this Registration Statement, the
Company's activities have been focused on developing the technological
feasibility of displaying and transmitting still and moving images in
stereoscopic 3D, and accordingly, the Company has generated limited revenues
from the commercial sale of its hardware and software products. The revenues
have comprised licences of the Company's technologies for prototype and
demonstration projects, the provision of services for conversion of film
material to 3D and governmental grants. See Item 9 Management Discussion and
Analysis. However, the development efforts have recently progressed to the
point where the Company anticipates commercial launch of its products in late
calendar year 1999 and early calendar year 2000.
Stereoscopic 3D differs from the heavily marketed term "3D" used extensively in
the present-day video game and PC software markets. Enhanced or "stereoscopic
3D," as created by DDD's Dynamic Depth Cueing process, allows the viewer to see
the images in lifelike 3D through polarized or LCD 'shutter' glasses by adding
the appearance of depth to the image. Stereoscopic 3D involves displaying two or
more slightly different left and right eye views of the image which the viewer
then perceives to be a `real' 3D image with enhanced depth. The benefit of
stereoscopic 3D is that it provides a visually richer image to the viewer
allowing objects and characters to appear behind the surface of the display
screen and also, importantly, to appear to move off the screen towards the
viewer under certain circumstances.
The Company has developed a software-based solution allowing images created
using conventional 2D techniques including video, film and computer generated
media formats, to be manipulated digitally and converted to 3D. Significantly,
the data used to create the 3D version of a 2D image may be subsequently
embedded in the original 2D image allowing the viewer to choose whether to view
in 2D or 3D using a single piece of media. The additional 3D data adds a minimal
increase in size to the original 2D image.
The Company has engineered digital video processing hardware. The video
processor provides a series of features including the control of 3D projection
and display systems, real time conversion of standard video and DVD material to
3D, and image enhancement allowing PC monitors to display video and television
images at higher definition resolution than conventional television sets.
The Company has also developed a glasses-free `autostereoscopic' 3D projection
display targeted at the arcade video games industry. The 3D display creates a
giant 8' image and presents this to the player in 3D using a patented head
tracking system without the need for the player to wear glasses or a headset.
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DDD's focus is now the commercialization of these technologies within the
worldwide entertainment and multimedia industries. A number of key applications
have been identified which fall into the following broad categories:
- 2D compatible 3D images for Internet distribution;
- 2D compatible 3D broadcast programming;
- 2D compatible 3D movies for Digital Versatile Disc (DVD);
- 3D movies for theatrical release;
- Interactive Games Software applications; and
- Video Processor and Display technologies.
The Company's key product is a software application called DeepSee-TM-. Using
the DeepSee-TM- family of softwaRE products, existing 2D and 3D still and moving
images for Internet, television, film and video/DVD can be digitally manipulated
and enhanced to create a rich 3D stereoscopic image. The key to DDD's solution
lies in the generation of depth cue data based upon the original 2D image. DDD's
Dynamic Depth Cueing process uses a series of sophisticated software algorithms
to identify each object in a scene along with its distance or depth away from
the viewer. The compressed depth cue data is reinserted into the original 2D
image and distributed to the viewer in 2D compatible 3D formats. At the viewer's
discretion, the depth cue data may be decoded by a software or hardware-based
DeepSee-TM- decoder allowing the images to be viewed in 3D with available
glasses on conventional display hardware including PC monitors or television
sets.
DeepSee-TM- will consist of a range of easy to use semi-automated software tools
for the consumer or the content owner. The content owner, using a DeepSee-TM-
software toolkit licensed from the Company, then creates the appropriately
formatted 3D version of their 2D production for distribution over the Internet,
analog or digital broadcast channels or DVD disc.
DDD also provides a 2D to 3D conversion service, allowing the Company to
selectively offer this capability, particularly in professional markets such as
film and television.
HISTORY AND ORGANIZATION
NAME AND INCORPORATION
The Company was incorporated as Mirabeau Resources Limited pursuant to the
provisions of the Business Corporations Act (Alberta) on February 4, 1987 to
pursue oil and gas exploration opportunities, with a listing of its Common
Shares on The Alberta Stock Exchange (ASE) on April 27, 1987. In 1991 the
Company abandoned its oil and gas exploration activities, and began to explore
business opportunities which would take advantage of the Company's public
status. Eventually, in 1994, the Company became the subject of a reverse
takeover by two related Australian companies, Xenotech Australia Pty. Ltd. (now
known as Dynamic Digital Depth
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Australia Pty. Ltd.) and Xenotech Research Pty. Ltd. (now known as Dynamic
Digital Depth Research Pty. Ltd.).
Xenotech Research Pty. Ltd. was a privately held Australian company engaged
in the research and development of glasses-free `autostereoscopic' 3D display
systems and technologies for converting 2D images to stereoscopic 3D.
Xenotech Australia Pty. Ltd. was a privately held Australian company engaged
in the commercialization of 3D visualization and media conversion
technologies developed and provided under license by Xenotech Research Pty.
Ltd.
Since the reverse takeover, the Company has continued in the principal lines
of business of researching and developing 3D display systems and technologies
for converting 2D media to stereoscopic 3D. With the refinement of these
technologies, the Company has expanded its remit to include the development
of strategic relationships intended to yield commercial opportunities for the
exploitation of these technologies.
In late 1998 the Company changed its name to its current name, to better
identify the Company with its business. The Company remains a reporting
issuer in the Province of Alberta, Canada, and its Common Shares are listed
for trading on the ASE under the stock symbol "DDE".
The executive office of the Company is located at 8 Brodie Hall Drive, Bentley,
Western Australia 6102. The registered and records office of the Company is
located at 1600, 407 - 2nd Street S.W., Calgary, Alberta, Canada T2P 2Y3. The
Company maintains a North American office at 2450 Broadway, Suite 500, Santa
Monica, CA 90404, USA.
CORPORATE STRUCTURE
The Company has three wholly-owned subsidiaries, Dynamic Digital Depth Australia
Pty. Ltd., Dynamic Digital Depth Research Pty. Ltd. and Dynamic Digital Depth
USA, Inc. As of the date of this registration, the Company carries on business
and holds its principal assets through its subsidiaries.
Dynamic Digital Depth Research Pty. Ltd. is the registered owner of the patent
rights to 3D display technology and subsequent inventions and improvements in
the field of stereoscopic 3D. Dynamic Digital Depth Australia Pty. Ltd. was
formed with the purpose of acquiring an exclusive worldwide marketing license to
the patented autostereoscopic 3D display technology from Dynamic Digital Depth
Research Pty. Ltd. Dynamic Digital Depth USA, Inc. is engaged in the marketing
and support of the Company's products and services in North and South America.
INDUSTRY BACKGROUND
The earliest functional 3D devices were developed during the 19th century. Since
that time, there have been considerable efforts to develop various 3D
applications, however these have met with limited commercial success. The
Company believes that the key factor limiting commercial success has been the
lack of 3D content and effective delivery systems. The Company has focused its
research and development efforts on addressing these requirements by developing
a complete end to end solution. The Company believes that it is addressing
content issues through conversion technologies that will permit existing 2D film
and video libraries to be cost-effectively converted to 3D. The Company is also
addressing delivery through a range of technologies permitting distribution
through the Internet and cable, satellite and terrestrial broadcast.
The most common application of 3D technology has been in the entertainment
industry. During the 1950's, red and green `anaglyph' glasses were used for
viewing 3D `black and white' films. The use of glasses to view 3D entertainment
has continued in recent years, but viewers have still had to contend with
limited content.
The application of 3D technology has attained its greatest commercial success
in giant screen `IMAX-Registered Trademark-' 3D films and 3D theme park rides
and attractions. These films have been made using twin camera 3D technology
manufactured by IMAX-Registered Trademark- and iWERKS Entertainment, Inc.
("iWERKS"). Filming with twin camera 3D technology carries a comparatively
high cost of
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filming and limits the shots that can be created by the film maker due to the
physical equipment size and calibration requirements. Accordingly, even
IMAX-Registered Trademark- 3D theaters have a limited amount of content that
is both time consuming and expensive to produce.
In the television industry, broadcasters, including CBS, NBC and ABC, have
broadcast segments of their prime time television programming including
`Third Rock from the Sun' and `Home Improvement' in 3D.
To deliver 3D to a television viewer using present day technologies, the
broadcast signal is formatted in `anaglyph' for viewing in black and white using
low cost red and blue glasses. The second most popular method is field
sequential 3D where alternating left and right eye stereo color images are
broadcast to the viewer on one broadcast channel; however, this method requires
more expensive LCD viewing glasses. Finally two broadcast channels may be used
to deliver left and right eye stereo HDTV images to the viewer in color, again
in conjunction with Liquid Crystal Display viewing glasses. The former approach
provides a black and white image that can only be viewed in 3D while the latter
two are an expensive proposition for broadcasters since the content may either
only be viewed in 3D or requires two dedicated channels to deliver a single
program.
In today's interactive software applications, the heavily marketed term 3D is
used to describe the visual appearance of the computer models that the viewer
sees on screen as the game or application is viewed. This simply means that the
objects and characters are modeled with height, width and, importantly, depth
and therefore appear more visually convincing than their two dimensional
counterparts. 3D models may potentially be viewed from multiple angles.
Importantly, even in a `3D' software application, the viewer still sees a single
image on a conventional display such as a computer monitor or television screen
and therefore views in 2D.
STRATEGIC PARTNERSHIPS
In order to gain market acceptance in a broad variety of potential applications
as quickly as possible, the Company is seeking to secure a range of strategic
partnerships. The Company is targeting organizations with substantial market
presence in key markets including broadcasting and the Internet. The strategic
partnerships are initially intended to yield endorsements of the Company's
proprietary 2D compatible 3D conversion and transmission/delivery technologies.
Ultimately, the Company hopes to establish marketing partnerships with
organizations of substantial market presence and expertise with well-established
sales channels.
Pursuant to Stock Purchase and Joint Development Agreements dated June 17, 1999,
the Company entered into a strategic partnership with General Instrument
Corporation, Horsham, Pennsylvania, USA. General Instrument Corporation is a
provider of integrated and interactive
4
broadband access solutions. General Instrument has publicly announced its
desire, together with its business partners, to be at the forefront of the
widely-reported convergence of the Internet, telecommunications and video
entertainment industries. The Joint Development Agreement is intended to
implement the Company's 2D compatible 3D digital broadcasting technologies on
General Instrument's range of consumer television advanced set top boxes and
broadcast head-end encoder systems. General Instrument recently announced its
agreement to be acquired by Motorola Corporation. Based on press accounts and
discussions with General Instrument officials, the Company does not believe that
this later transaction will have a material adverse effect on the Company's
relationship with General Instrument.
The Company recently was admitted into the RealPartner development program
sponsored by Real Networks, Inc. of Seattle, Washington. Real Networks is a
publicly held company specializing in the development and marketing of
software and hardware products designed to deliver video material to PC users
and consumers via the Internet. In this connection, the Company is in the
process of developing a plug-in application for Real Network's RealPlayer G2
which would permit the transmission and viewing of 2D compatible 3D streaming
video over the RealPlayer G2. RealPlayer G2 is the Real Network's video
playback software application that has widespread use in the PC/Internet
community for watching video material streamed from web sites. The Real
Partners program provides proprietary tools and support to enable the Company
to develop the plug-in application for the RealPlayer G2. The Company and
Real Networks are in discussions regarding potential opportunities for a
strategic partnership, although as of the date of this Registration Statement
no such agreement has been reached.
The Company is also in the developer program for Apple Computer, Inc.'s
QuickTime, pursuant to which the Company paid a nominal license fee in return
for the opportunity to develop a plug-in application for Apple's QuickTime
Movie. Apple QuickTime is a popular software technology used by PC/Internet
users to download and replay video material on the PC or Macintosh. The
Company is also engaged in discussions with Apple regarding a strategic
relationship although these discussions are in preliminary stages and there
can be no assurance that any such agreement will be reached.
The Company is currently engaged in a broad variety of discussions regarding
licensing opportunities, co-investment and acquisitions of licenses or
technologies. Except as described above, these discussions have not resulted in
agreements and there can be no assurance that the Company will be able to secure
the strategic relationships required to implement the Company's business plan.
To the extent that the Company is unable to obtain strategic partners to assist
in the exploitation of all of the identified applications of the Company's
technologies, the Company will be required to prioritize its efforts which may
delay or limit their commercialization.
INTELLECTUAL PROPERTY
The Company's Intellectual Property (IP) library spans proprietary hardware and
software technologies for which the patent applications are in various stages of
approval. The Company's issued patents and pending patent applications are
described below. The Company may apply for additional patents relating to other
aspects of its products. There can be no assurance as to the breadth or degree
of protection which existing or future patents, if any, may afford the Company,
that any patent applications will result in issued patents, that the Company's
patents will be upheld, if challenged, or that competitors will not develop
similar or superior methods or products outside the protection of any patent
issued to the Company.
The Company believes that product recognition is an important competitive factor
and, accordingly, the Company promotes the DeepSee-TM- names, among others, in
connection with its marketing activities, and has applied for trademark
registration for such names. The Company's
5
use of those marks may be subject to challenge by others, which, if successful,
could have a material adverse effect on the Company.
The Company also relies on confidentiality agreements with its directors,
employees, consultants, manufacturers and prospective licensees and employs
various methods to protect the source codes, concepts, ideas, proprietary
know-how and documentation of its proprietary technology. However, such
methods may not afford the Company complete protection, and there can be no
assurance that others will not independently develop similar know-how or
obtain access to the Company's know-how or software codes, concepts, ideas
and documentation. Furthermore, although the Company has and expects to
continue to have confidentiality agreements with its directors, employees,
consultants, manufacturers, and prospective licensees, there can be no
assurance that such arrangements will adequately protect the Company's trade
secrets.
The principal areas governed by Patent Applications are:
DYNAMIC DEPTH CUEING
This is the process that enables the assimilation of depth information from a 2D
image and the delivery of a 2D compatible 3D image to the viewer using either
analog or digital delivery mechanisms (Internet, DVD, cable, satellite and
terrestrial broadcast). The Company has filed a number of patents and
improvement applications encompassing techniques for assimilating depth
information from existing 2D images and also the Dynamic Depth Cueing
compression, transmission and decoding techniques necessary to generate a 3D
image at the viewpoint while maintaining 2D compatibility. These are referenced
under the following Application Numbers: PCT/AU96/00820/US 102,247, PQ1197 and
Improvement Application PCT/AU98/01005.
VIDEO PROCESSOR HARDWARE
The Company has developed a flexible hardware platform that enables a number of
different requirements to be satisfied through a re-programmable Field
Programmable Gate Array (FPGA) based circuit board. Variations of the video
processor provide a number of functions including:
- De-multiplexing of field sequential media, the process that allows
separate left and right eye projectors to be supplied by a single
media source.
- Real time conversion of standard video signal to 3D based upon
movement characteristics in the scene.
- Increasing the resolution of a standard video signal via line
doubling and quadrupling that allows it to be displayed in 3D or in
2D at higher resolution than it was originated in.
Of these, the Company has filed a patent application covering the Image
Processing Method & Apparatus (2D to 3D Realtime Conversion) under Application
Number PCT/AU98/00716. The Company has also filed a patent application covering
the Image Enhancement System under Application Number PQ1018.
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GLASSES-FREE 3D PROJECTION DISPLAY
The Company has developed a glasses-free 3D projection display that
incorporates a number of discrete patent applications. The patents relate to
the display system itself, the unique infrared head tracking system and the
use of the display system in single and multi-viewer applications. The
patents are referenced under Application Numbers PCT WO 94/25899,
PCT/AU95/00843, PCT/AU97/00353, PCT/AU98/00969 and PP7275.
3D VIEWING GLASSES
In analyzing the requirements necessary to support a successful introduction of
3D television broadcasting to users of existing television sets, the Company
identified the requirement for high quality viewing glasses. The Company has
developed glasses that allow television viewers to view images in 3D without the
flicker associated with the present generation of shuttered 3D viewing glasses.
In contrast to the switching of light method employed by the present generation
of Liquid Crystal Display `shutter' glasses, the Company's patented approach
uses the sequencing of color to which the human eye is far less susceptible. The
sequencing of color results in a very low flicker solution when used in
conjunction with existing television display screens. The patent is referenced
under Application Number PCT/AU/00028.
7
PATENT LIBRARY STATUS
The following is a summary of the status of the Company's patent library as at
the date of this registration statement. All of these Patents and Patent
Applications are believed to be material by the Company.
- ---------------------------------------------------------------------------------------------------------------------
APPLICATION NUMBERS INVENTION NAME STATUS PRIORITY DATE
- ---------------------------------------------------------------------------------------------------------------------
PCT WO 94/25899 3D Stereoscopic Display Unit Registered--USA May 4, 1993
Registered--Australia
Registered--Singapore
- ---------------------------------------------------------------------------------------------------------------------
PCT/AU95/00843 Head Tracking Unit Pending PCT Dec. 13, 1994
- ---------------------------------------------------------------------------------------------------------------------
PCT/AU96/00820 Dynamic Depth Cueing (DDC) Pending PCT Dec. 22, 1995
US 102,247 (2D to 3D Conversion--Offline--3D Camera--
2D Compatible 3D Transmission)
- ---------------------------------------------------------------------------------------------------------------------
PCT/AU97/00353 Video Display System (Multiviewer) Pending PCT June 4, 1996
- ---------------------------------------------------------------------------------------------------------------------
PCT/AU/00028 Method & Apparatus for Producing Stereoscopic Pending PCT Jan. 22, 1997
Images (3D Glasses)
- ---------------------------------------------------------------------------------------------------------------------
PCT/AU98/00716 Image Processing Method & Apparatus (2D to 3D Pending PCT Sept. 2, 1997
Conversion Realtime) (DDC Layers)
- ---------------------------------------------------------------------------------------------------------------------
PCT/AU98/00969 Eye Tracking Apparatus Pending PCT Nov 21, 1997
- ---------------------------------------------------------------------------------------------------------------------
PCT/AU98/01005 DDC/2 Pending PCT Dec. 2, 1997
Improvements to PCT/AU96/00820
Improvements to PCT/AU98/00716
- ---------------------------------------------------------------------------------------------------------------------
PP7275 Teleconferencing System Provisional Nov 23, 1998
- ---------------------------------------------------------------------------------------------------------------------
PQ1018 Image Enhancement System Provisional 17 June 1999
- ---------------------------------------------------------------------------------------------------------------------
PQ1197 Image Conversion and Encoding Techniques Provisional 25 June 1999
(DDC/3)
- ---------------------------------------------------------------------------------------------------------------------
During the preparation of Patent Applications, International Preliminary
Examiners' reports have identified international patents where a conflict with
the Company's application may potentially exist. The Company has provided a
response in each case indicating the areas in which the Company's applications
are unique and innovative and therefore avoid conflict with the third party
patents. The Company believes that the responses will be adequate to distinguish
the Company's applications from third party patents, however, there can be no
assurance that any patents will be issued pursuant to these applications or
that, if granted, such patents would survive a legal challenge to their validity
or provide significant protection for the Company.
PRODUCTS, SERVICES AND MARKETS
In developing its products and services the Company has focused on the worldwide
entertainment and multimedia markets. This has resulted in product development
and marketing efforts in the following market segments:
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PC/Internet Provision of 2D compatible 3D media via the Internet
Broadcast Television Provision of 2D compatible 3D broadcast media
DVD Movies 2D compatible 3D movies for DVD
Movie Films Conversion of 2D films to 3D for theatrical release
Computer Animation Simplifying the process of creating computer generated 3D movies
Video Games Creating enhanced visual quality for DVD based video games
Professional Audio Visual Professional video processor and 3D display technologies
Arcade Games 3D arcade display
The Product Development strategy adopted by the Company is designed to deliver a
range of hardware and software products that are based upon the Company's core
intellectual properties to these principal markets. The range of hardware and
software products is designed to accommodate the Company's strategy that
includes the formation of strategic partnerships to assist in commercializing
its products and services where appropriate. Since the Company is entering a new
market in many cases, it has attempted to create features that are anticipated
to be of benefit and value to end users.
The Company is developing a range of software and hardware products designed to
meet the requirements of the markets for which they are intended. The functions
and development stage of each of these products is described in the context of
the market in the following sections. The Company has prioritized its
development efforts on the software products necessary to support the Internet
and broadband broadcast markets. Consequently, this has placed DeepSee Photo,
DeepSee Viewer and the Internet components of DeepSee Studio Pro at the top of
the software development schedule.
The table below lists the software products together with the intended
markets and licensees. The functions and stages of introduction for each of
these products together with discussions with prospective licensees and users
is discussed within the context of the market in the following sections. It
is anticipated that the product release dates detailed in the following
sections may change over time as features and enhancements requested by
licensees and made available under license from third parties are
incorporated into the product specifications.
It should be noted that the Company has only just begun to market its
products and services. Accordingly, the target model, target licensees and
revenue are based upon the Company's intended business plan and do not
represent current operations.
9
Table: Intended Markets and Licensees for the Company's Software Products
- -------------------------------------------------------------------------------------------------------------------------
PRODUCT TARGET MARKET TARGET LICENSEES REVENUE MODEL
- -------------------------------------------------------------------------------------------------------------------------
DEEPSEE-TM- VIEWER PC Users Consumers License Purchases
Set Top Box Users Internet Browser Publishers Software Upgrades
Set Top Box Manufacturers
PC Media Player Publishers
- -------------------------------------------------------------------------------------------------------------------------
DEEPSEE-TM- PHOTO PC Users Consumers License Purchases
PC Peripheral Manufacturers Software Upgrades
Digital Camera Manufacturers
Graphic Software Publishers
Photographic Image Processors
- -------------------------------------------------------------------------------------------------------------------------
DEEPSEE-TM- MOVIE PC Users Consumers License Purchases
Web Masters PC Peripheral Manufacturers Software Upgrades
Digital Camcorder Manufacturers
Graphic Software Publishers
Web Developers
- -------------------------------------------------------------------------------------------------------------------------
DEEPSEE-TM- STUDIO PRO Internet Video Providers, Internet Publishers Annual License Fee
Television Broadcasters Television Content Providers Support Fees Royalty
Income
Film Post Production Film Content Providers
Film Library Owners
- -------------------------------------------------------------------------------------------------------------------------
PC/INTERNET
The Internet is a uniquely international visual medium where content is
delivered to users around the globe without the restrictions of country borders
or regional languages. Commercial and consumer web sites offer both photographic
and movie images for visitors to browse and download. The Company believes that
with significant competition to attract and maintain visitors to high profile
web sites, the opportunity to allow visitors to view pictures and movies in 3D
or 2D from a single download or video stream file is highly attractive to
content driven web sites.
Recent Internet statistics indicate that the provision of video content via
the Internet is a fast growing segment. There are over 300,000 sites offering
streaming video content with major sites such as Broadcast.com receiving
800,000 visitors daily. Over 300,000 hours of live audio and video content is
produced weekly and is available to more than 60 million users of Real
Networks RealPlayer software.
The Company is in the process of delivering a series of tools designed to be
used on standard Intel and Apple PCs to provide clear 3D images on conventional
PC display screens. These include DeepSee-TM- Photo and DeepSee-TM- Movie
software applications used to convert 2D images and
10
movies to 3D and the DeepSee-TM- Viewer browser or media player `plug-in' that
allows the user to view an encoded 2D image in 3D.
Applying the DDD process to a typical picture or movie file increases the file
size by approximately 1% above the original 2D picture or movie file size.
Consequently, the encoded image file is highly suited to distribution via
present day Internet connection speeds and communications bandwidths.
The market for media software applications that allow still pictures and
video movies to be digitally captured, prepared and distributed via the
Internet is occupied by a small number of companies. Real Networks, Microsoft
Corporation, Apple Corporation and Adobe all provide packaged software tools
and media players that allow the user to create and view images on PCs. The
Company is in communication with these companies as potential strategic
partners and/or licensees.
The Company is developing the following products intended for use in the
Internet/PC market
DeepSee-TM- Viewer Decoding 2D compatible 3D images using
web browser or media player `plug-in'
software modules
DeepSee-TM- Photo Converting 2D still photographs from
digital cameras or scanners to 3D and
formatting them as 2D compatible 3D.
DeepSee-TM- Movie Converting 2D movie and streaming video
images to 3D and formatting them as 2D
compatible 3D.
DeepSee-TM- Studio Pro Converting large volumes of movie and
streaming video images from 2D to 3D for
professional Web Master use.
DEEPSEE-TM- VIEWER FOR THE INTERNET/PC MARKET
The DeepSee-TM- Viewer is a software application capable of decoding DDC data
embedded in a 2D image and generating a 3D version of the image dynamically at
the viewpoint. The DeepSee-TM- Viewer is primarily a software-based application
in Internet/Desktop PC applications, however it may also be implemented as a
hardware application.
The Company has developed DeepSee-TM- Viewer software for use with Internet
Explorer and Netscape Navigator web browsers for viewing still photographic
images. This capability became available in the Demos & Downloads area of the
Company's web site in September 1999. The Company has developed a plug-in
software module for use with Apple Computer, Inc.'s
11
Quicktime Movie Player. The Company is a member of the RealNetworks RealPartner
program and is currently working with RealNetworks to deliver a plug-in software
module for the RealPlayer G2. In this manner, a streaming video prepared in the
Company's proprietary 2D compatible 3D format may be downloaded from a web site.
Visitors to the web site who wish to view the video movie in 3D may download a
free copy of the DeepSee-TM- Viewer compatible with their media player and
install it on their PC. By providing limited functions of the Viewer at zero
cost to the end user, the Company envisages lowering the barriers to entry for
those users wishing to experience 3D on their PC screens. This is intended to
increase the Company's profile within the 3D market and help gain market share
and acceptance of the Company's revenue generating 3D image authoring tools.
Producing `plug-in' software modules compatible with the most popular media
players also allows the Company to reach a sizeable audience of pre-existing
users.
A version of the DeepSee-TM- Viewer compatible with Microsoft Corporation's
Internet Explorer and Netscape Navigator web browsers was made available on
the Company's web site in September 1999. Based upon current resource and
development planning, the development schedule for DeepSee-TM- Viewer
includes further zero cost license `freeware' versions together with
chargeable versions scheduled for release before July 2000. The chargeable
upgrades are scheduled for release in the second quarter of 2000. The release
schedule is intended to provide successive upgradeable modules that offer
enhanced functionality to the customer as is customary in the software
industry.
Users who download the zero cost `freeware' Viewers will receive limited
functions, primarily aimed at generating 3D images using the lowest cost
`anaglyph' red/blue glasses. For those users who wish to exercise more control
over aspects of the 3D image and also use more advanced 3D image systems such as
LCD shutter glasses, an upgrade to a chargeable DeepSee-TM- Viewer will be
required.
DEEPSEE(TM) PHOTO FOR THE INTERNET/PC MARKET
DeepSee-TM- Photo will be a PC based software application capable of being used
to convert PC photographic image files from 2D to 3D and to generate physical 3D
photographs that may be viewed in 3D without glasses through a lenticular lens
laminated to the photograph or viewed through anaglyph or LCD `shutter' glasses.
The objective of DeepSee-TM- Photo is to enable consumer users to enhance
digitized 2D photographs created using scanning or digital camera technology.
Upon introduction, DeepSee-TM- Photo will provide a number of sophisticated
tools encapsulated in an easy to use interface that make the process of
converting and editing a 3D image very straightforward. The Company expects
DeepSee-TM- Photo will be supplied with red/blue `anaglyph' 3D glasses as well
as full color LCD `shutter' glasses, intended for use in conjunction with PC
monitors.
Multiview 3D generation will allow DeepSee-TM- Photo to create up to 30
discrete views of a single image by using the depth cue to create up to 7
degrees of visual perspective to the 2D image. Multiview 3D is intended to
open up the consumer photographic market allowing glasses free 3D photographs
to be created. The Company has signed a non-disclosure agreement with a
major international supplier of photographic film and photo refinishing
equipment and services and is in discussions with this company regarding the
integration of DeepSee Photo the organization's dynamic imaging technologies
in the consumer photo processing market.
12
DeepSee-TM- Photo has been developed in Java, allowing it to be deployed on a
number of target operating systems including Microsoft Windows, Apple
Macintosh and UNIX. It has been extensively tested by independent software
testers and is expected to be released in the first quarter of 2000.
DeepSee-TM- Photo is intended to be a low cost, shrink-wrap software package
that is comparable to Adobe's PhotoDeluxe product in terms of pricing and
distribution. The Company has a preference for third parties to distribute and
support DeepSee-TM- Photo and envisages licensing the global distribution to
specialist graphics software publishers. The Company has initiated discussions
with Adobe Corporation and MGI Software, Inc. concerning the retail and OEM
distribution of DeepSee-TM- Photo. Through the relationship with a major
international supplier of photographic film and photo refinishing equipment and
services, the Company is also seeking to participate in the revenues generated
from end users who submit images created by DeepSee Photo for printing as 3D
photographs.
In addition to the distribution of physical products, the Company also expects
DeepSee-TM- Photo to be distributed through Internet based e-commerce. Here, the
user would download an encrypted version of the product prior to undertaking a
credit card purchase transaction to install and authorize the license for the
software on their PC. The Company would likely contract with a third party to
handle the back office mechanics of an e-commerce offering.
The Company has also made provision for a limited feature version of
DeepSee-TM- Photo intended for distribution with digital imaging products
including flat bed scanners and digital cameras. This provides the
opportunity for the Company to gain a sizable distribution base through
bundling with popular scanner and camera systems as a `freeware' component of
another manufacturer's product. This distribution channel is intended to
create awareness leading the end user to upgrade their `freeware' version to
a fully functional, chargeable version of the product.
Based upon current resource and development planning, the development
schedule for DeepSee-TM- Photo includes zero cost license `freeware' versions
together with chargeable versions scheduled for availability between March
2000 and July 2001. Introduction of DeepSee-TM- Photo is presently pending
the conclusion of discussions with a major international supplier of
photographic film and photo refinishing equipment and services and the
conclusion of one or more distribution agreements with a suitable software
publisher.
DEEPSEE-TM- MOVIE FOR THE INTERNET/PC MARKET
DeepSee-TM- Movie will be a PC based software application capable of being used
by web masters and advanced consumers to convert PC movie and streaming video
files from 2D to 3D. The objective of DeepSee-TM- Movie is to enable users to
enhance PC movies and videos created using popular movie creation tools and
digital camcorder technology. DeepSee-TM- Movie will provide a number of
sophisticated tools encapsulated in an easy to use interface that make the
process of converting and editing a 3D movie very straightforward.
13
DeepSee-TM- Movie will be developed in Java as a subset of the functions
available in DeepSee-TM- Studio Pro, allowing it to be deployed on a number of
target operating systems including Microsoft Windows, Apple Macintosh and UNIX.
DeepSee-TM- Movie will be supplied with red/blue `anaglyph' 3D glasses as well
as full color Liquid Crystal Display `shutter' glasses, intended for use in
conjunction with PC monitors.
DeepSee-TM- Movie is intended to be a shrink-wrap software package that is
comparable to RealVideo Producer G2 in terms of pricing and distribution. The
Company has a preference for third parties to distribute and support
DeepSee-TM- Movie and envisages licensing the global distribution to a
specialist software publisher.
In addition to the distribution of physical shrinkwrap products, the Company
also expects DeepSee-TM- Movie to be distributed through Internet based
e-commerce. The user downloads an encrypted version of the product prior to
undertaking a credit card purchase transaction to install and authorize the
license for the software on their PC. Again, the Company will seek the provision
of an e-commerce solution from third parties that offer such services, although
the experience may appear to be that of buying directly from DDD to the end
user.
DeepSee-TM- Movie will be developed as a derivative product based upon the
software code drawn from DeepSee-TM- Studio Pro. The Company has not yet
commenced the development of DeepSee-TM- Movie since it is contingent upon
the successful completion of DeepSee-TM- Studio Pro. Consequently, the
Company has not yet set a general release date for the launch of
DeepSee-TM-Movie.
DEEPSEE-TM- STUDIO PRO FOR THE INTERNET/PC MARKET
DeepSee-TM- Studio Pro is the Company's professional media conversion and
transmission application intended for use in Internet, film, DVD, video and
broadcast media applications.
DeepSee-TM- Studio prepares the 2D compatible 3D media for transmission through
encoding the depth cue data in a variety of Internet video formats supported by
the Company's DeepSee-TM- Viewer plug-ins (see DeepSee-TM- Viewer).
To meet the high volume, fast turnaround economics of the Internet video market,
DeepSee-TM- Studio Pro includes advanced scene identification and tracking
techniques. This allows the components of a scene and their depth to be
determined with minimal human intervention. Component and depth data forms the
basis for the Company's depth cue data used for creating the 3D image from the
2D source. In order to support these features, DeepSee-TM- Studio Pro is founded
on powerful workstation hardware technology coupled with high capacity digital
video storage devices.
DeepSee-TM- Studio Pro is packaged as a turn-key combination of;
- DeepSee-TM- Studio Pro software;
- A Video Processor for real-time, on-screen editing of 3D images;
14
- A powerful Intel Xeon or Itanium workstation capable of processing
large volumes of digitized film and video material;
- A high capacity Pluto Technologies video storage device compatible
with storing the unaltered 2D images and the corresponding depth cue
data.
DeepSee-TM- Studio Pro licenses are expected to be relatively high cost, largely
due to the sophisticated underlying processor hardware and video storage
devices. In all cases, the Company expects to license DeepSee-TM- Studio Pro to
principal organizations including Internet video content providers,
post-production companies, film studios, cable broadcasters, television
programmers and film library owners. The Company expects to charge an annual
license fee associated with the DeepSee-TM- Studio Pro license, and a royalty
fee based upon the media created using DeepSee-TM- Studio Pro.
The Company has been approached by Intel Corporation's Workstation Products
Group, Medford, OR to determine the practical implications of standardizing
DeepSee-TM- Studio Pro on Intel's professional Xeon 32 bit Pentium 3
architecture and Itanium 64 bit workstation architectures. The Company has
also entered into a relationship with Pluto Technologies, Boulder, CO to
standardize on the Pluto range of Video Storage Devices for DDD's film and
broadcast data storage needs. The Company has licensed certain user interface
software technologies that the Company developed to make the Pluto products
easier to use. In exchange for the ability to provide these functions to
other users, Pluto Technologies has agreed to provide the Company with
discounted rates of purchase and access to certain proprietary Pluto
programming interfaces.
The Company may consider third parties for the distribution and support of
DeepSee-TM- Studio Pro The Company is also investigating distributing and
supporting the product from within the Company. No discussions with third
parties have been held as at the time of this Registration Statement.
DeepSee-TM- Studio Pro is currently a Java application and was demonstrated in
alpha release format on the Intel Booth at the SIGGRAPH '99 computer graphics
convention in Los Angeles in August 1999. Based upon current resource and
development planning, the development schedule for DeepSee-TM- Studio Pro
includes versions scheduled for release between December 1999 and July 2001.
BROADCAST TELEVISION
The Company has identified an opportunity to deliver 2D compatible 3D
programming to consumer households via terrestrial, cable or satellite
television transmission. This market is central to the convergence of consumer
entertainment television technology with digital technologies derived from the
personal computing and Internet sectors.
The delivery infrastructure used to bring television programming to the
household is being upgraded from the existing `analog' technology to digital,
allowing a number of additional services to be provided to the consumer through
their terrestrial, cable or satellite television channels. These services
include movies on demand, interactive software such as games and shopping, as
well as electronic mail and simplified access to the wealth of information now
available on the Internet.
15
A new generation of digital `Set Top Boxes' is the focal point of this new
consumer market. A large number of leading PC hardware and software
technology providers have a stake in set top boxes, delivering powerful
processor chips, graphics technology, memory, high speed modems and easy to
use operating environments. Their principal customers are the consumer set
top box manufacturers including General Instrument, Scientific Atlanta, Pace
Micro Technologies plc and Motorola. The Company is in discussions with these
companies as potential strategic partners and/or licensees and, as previously
stated, has entered into an agreement with General Instrument.
DDD's DeepSee-TM- 3D Viewer is designed for set top box applications either as a
downloadable software module or as an Application Specific Integrated Circuit
(ASIC) chip embedded in the set top box circuitry. Adding DeepSee-TM- 3D Viewer
technology to the set top box enables the decoding and display of 2D compatible
3D images on standard television sets.
The unique nature of the Company's 2D compatible 3D transmission process avoids
the need for two separate channels to deliver 3D content or the delivery of
content only capable of being viewed in 3D.
The set top box decodes the proprietary depth cue data and applies it to the 2D
image to create the 3D version as it is received in the home. This allows
standard television sets to display 3D images through the use of glasses worn by
the viewer.
The Company has also focused on unlocking the wealth of existing 2D television
content allowing it to be transmitted and viewed in 3D. This is vital to the
success of 3D broadcasting. It allows programming produced using conventional
techniques to be converted to 3D, and prepared for broadcast in a proprietary
format that can be viewed in 2D or 3D.
The DeepSee-TM- Studio Pro software allows the TV program to be digitally
processed, using advanced proprietary algorithms, to create depth cue
information for each frame of the broadcast. The content producer may then edit
the depth cue to ensure the optimal 3D view is created. The depth data is then
highly compressed and inserted back into the analog or digital broadcast signal
along with the original, unaltered 2D picture.
The Company is developing the following products intended for use in the
Broadcast Television market
DeepSee-TM- Viewer Decoding 2D compatible 3D images using
a Set Top Box either as a software
module, hardware chip or Set Top Box
accessory.
DeepSee-TM- Studio Pro Converting large volumes of broadcast
content from 2D to 3D for cable,
satellite or terrestrial broadcasting.
16
DEEPSEE-TM- VIEWER FOR THE BROADCAST TELEVISION MARKET
The Company is presently developing a version of the DeepSee-TM- Viewer to
support the generation of 3D images by the General Instrument DCT5000 Advanced
Digital Set Top Box. This is part of the development agreement entered into
between the Company and General Instrument in June 1999.
In this manner, a digital broadcast signal prepared in the Company's proprietary
2D compatible 3D format may be delivered to the home. Television viewers who
wish to view the program in 3D may download the DeepSee-TM- Viewer where it is
automatically activated in their set top box.
Based upon current resource and development planning, the development schedule
the delivery of the first phase of the DeepSee-TM- Viewer for the GI set top box
is intended to be complete by the end of May 2000.
Images can be viewed in 3D on television screens using low cost `anaglyph' red
and blue glasses or consumer priced Liquid Crystal Display `shutter' glasses.
DEEPSEE-TM- STUDIO PRO FOR THE BROADCAST TELEVISION MARKET
DeepSee-TM- Studio prepares the 2D compatible 3D media for transmission through
encoding the depth cue data in a variety analogue or digital broadcast signal
formats supported by the Company's DeepSee-TM- Viewer set top box decoders.
DeepSee Studio Pro for broadcast use is founded on the same software techniques
and hardware platform as previously described for Internet/PC use.
The Company expects to commence work on developing the Broadcast compatible
output format for DeepSee-TM- Studio Pro following the successful completion
of the first phase of the General Instrument development agreement in the
second half of 2000.
The Company expects to license DeepSee-TM- Studio Pro to principal
organizations including post-production companies, film studios, cable
broadcasters, television programmers and film library owners. The Company
will charge an annual license fee associated with the DeepSee-TM- Studio Pro
license, and a royalty fee based upon the media created using DeepSee-TM-
Studio Pro. To date, the Company has not held any discussions concerning the
licensing of DeepSee-TM- Studio Pro to such companies.
DVD VIDEO
A significant market determining the profitability of a feature film is the
consumer video/DVD market. Sales in this market represent a considerable
opportunity to the Company for converting and distributing both new and existing
films in the 2D compatible 3D format. A new generation of Digital Versatile Disc
(DVD) has recently been introduced that is expected to supersede videocassette
over the coming years. In July 1998, Warner Advanced Media Operations announced
they had recently replicated their 10 millionth DVD disc for a content library
which includes blockbuster titles such as `Twister' and `Batman Returns'.
DVD players can be used to display both 2D and 3D images played from a single
DVD disc through the integration of the Company's DeepSee-TM- Viewer
technologies. The DeepSee-TM- 3D
17
Viewer is designed with DVD applications in mind both as an Application Specific
Integrated Circuit chip embedded in the DVD player and as a decoder accessory
compatible with the present installed base of DVD players.
The unique nature of the Company's 2D compatible 3D DVD distribution format
allows DVDs to be produced that can be viewed in both 2D and 3D. This removes
the need for specialized 3D media only capable of being viewed in 3D.
Unlocking existing 2D film and video content allowing it to be distributed on
DVD and viewed in 3D is vital to the success of 3D DVD. It allows content
produced using conventional 2D techniques to be converted to 3D, and prepared
for distribution in a proprietary 2D compatible 3D format. The constant stream
of blockbuster content created by Hollywood can be converted to 3D, as well as
enabling the 3D repurposing of existing film libraries for re release on DVD.
The Company is developing the following products for the DVD video market
DeepSee-TM- Viewer Decoding 2D compatible 3D images using a
DVD player either as a hardware chip or
DVD Player accessory.
DeepSee-TM- Studio Pro Converting large volumes of film and
video content from 2D to 3D for creating
2D compatible 3D DVD Discs.
DEEPSEE-TM- VIEWER FOR THE DVD VIDEO MARKET
The Company has developed a plug-in software module for use with Apple Computer,
Inc.'s Quicktime Movie Player. The Company is a member of the RealNetworks
RealPartner program and is currently working with RealNetworks to deliver a
plug-in software module for the RealPlayer G2. In this manner, a DVD disc may be
recorded in Apple Quicktime format and supplied to the end user in the Company's
proprietary 2D compatible 3D format. PC users who wish to play the DVD in 3D may
activate the DeepSee-TM- Viewer for Quicktime on their PC. (See Internet/PC
DeepSee-TM- Viewer).
The second approach that the Company has not yet initiated is to make
DeepSee-TM- Viewer compatible with the MPEG2 video format that consumer DVDs for
movies are produced in. The digital MPEG2 signal stored on the DVD is similar to
the digital broadcast signal used in television set top boxes.
Based upon current resource and development planning, the development schedule
for DeepSee-TM- Viewer includes zero cost license `freeware' versions together
with chargeable versions scheduled for introduction between October 1999 and
July 2000 that are compatible with the PC media players including Apple
Quicktime. No schedule has yet been set to deliver a DVD MPEG2 DeepSee-TM-
Viewer.
18
Images can be viewed in 3D on television screens using low cost `anaglyph' red
and blue glasses or consumer priced Liquid Crystal Display `shutter' glasses.
DEEPSEE-TM- STUDIO PRO FOR THE DVD VIDEO MARKET
DeepSee-TM- Studio prepares the 2D compatible 3D media for transmission through
encoding the depth cue data the Internet movie formats supported by the
Company's DeepSee-TM- Viewer PC media player decoders.
DeepSee Studio Pro for DVD use is founded on the same software techniques and
hardware platform as previously described for Internet/PC and broadcast use.
The Company expects to license DeepSee-TM- Studio Pro to principal organizations
including post-production companies, film studios, and film library owners. The
Company will charge an annual license fee associated with the DeepSee-TM- Studio
Pro license, and a royalty fee based upon the media created using DeepSee-TM-
Studio Pro. To date, the Company has not held any discussions concerning the
licensing of DeepSee Studio Pro to such companies.
MOVIE FILMS
The Company is active in the conversion of film and video media from 2D to
3D. The initial markets are Giant Screen `IMAX-Registered Trademark-'
theaters, Digital & Electronic Cinema and Special Events, Advertising &
Promotion. The Company presently provides 2D to 3D conversion services in
some movie film markets as described below.
GIANT SCREEN `IMAX-Registered Trademark-' FILMS
The giant screen market is mainly occupied by IMAX-Registered Trademark-
Corporation, Showscan Entertainment and iWERKS. Presently 3D theaters
represent 20% of IMAX's installed base. This total of 28 theaters is forecast
to grow by a further 65 over the next three years. In 1998, over 70 million
people attended a theater using the IMAX-Registered Trademark- system and
this is forecast to triple over the next five years. Since its launch three
decades ago, over 500 million people have watched large format movies.
The production techniques and equipment required to produce a 3D giant screen
film are substantially different from those of a comparable 2D film. Special
cameras with dual lenses are required. Due to the weight of the extra film
drums and the additional camera hardware, 3D cameras are large and bulky,
making certain conventional shots impossible to film, and reducing the number
of takes possible during a day on location. This makes the process of
producing a 3D giant screen film expensive, with production budgets almost
double that of a conventional 2D film. These constraints lead to a surfeit of
conventional films and few 3D films.
By processing digitized giant screen 2D film with DeepSee-TM- Studio Pro, it
is possible to create a 3D IMAX-Registered Trademark- movie in post
production. This reduces production costs on-set and provides for a
19
wider range of shot types for 3D film makers. Post production 3D conversion
allows film makers to expand the nature of 3D films to include mainstream
consumer story lines and plots.
The advanced 3D editing capabilities of DeepSee-TM- Studio Pro permit
extensive artistic control over the 3D effects in each scene. Applying
DeepSee-TM- Studio Pro to incorrectly filmed 3D shots allows them to be
manipulated digitally and thus rescued. This combination of features makes
DeepSee-TM- Studio Pro a significant tool for 3D film makers.
As part of the Company's alliance with IMAGICA USA, a specialist giant screen
post production company, the Company has already undertaken conversion
projects for the film `Sigfried & Roy' and test conversions for the film
`Ocean of Light'. The Company has converted test sequences from the Showscan
Entertainment ridefilms `Cosmic Pinball' and `Street Luge' and the trailer of
the IMAX-Registered Trademark- blockbuster film `Everest'. Each of these
projects was undertaken with a prior written agreement between IMAGICA USA,
the Company and the film maker. The Company does not currently have any
written agreements with IMAGICA USA.
The Company is in discussions with companies including IMAGICA USA and
IMAX-Registered Trademark- Corporation as potential strategic partners and/or
licensees of DeepSee-TM- Studio Pro in the giant screen film market.
35MM THEATRICAL FILMS AND PROFESSIONAL VIDEO
The DeepSee-TM- Studio Pro toolkit has also been used to convert 35mm film
and professional video media with equal success. The Company has provided
conversion services for 35mm film and professional video media for IMAGICA
Corporation of Japan (the parent company of IMAGICA USA). The Company does
not have any outstanding agreements with IMAGICA Corporation of Japan for
additional conversion services.
The Company has undertaken test conversion work for IMAGICA Corporation of
Japan as a prelude to anticipated commercial conversion contracts.
The Company has also converted `Natures Symphony' a VHS video production
designed for sale with Ilixco Inc.'s LCD shutter glasses in North America.
DIGITAL & ELECTRONIC CINEMA
This is an emerging market intended to provide a successor to 35mm celluloid
projection and distribution systems in the theatrical film market. Companies
including Texas Instruments, Hughes-JVC and Cinecomm are focused on introducing
advanced alternatives to present 35mm film projection and theatrical film
distribution. In June 1999, `Star Wars Episode 1 -- The Phantom Menace' was
screened in Los Angeles and New York using Hughes-JVC electronic projectors.
Digitally stored film ensures that each screening is of equal quality since
there is no film degradation or accumulation of dust and dirt particles
detracting from the viewer experience. The advanced digital distribution system
allows movies to be distributed instantaneously to theaters via satellite,
substantially reducing the processing and delivery costs of conventional 35mm
film stock.
20
Digital projection equipment and distribution is ideally suited to the Company's
2D compatible 3D transmission technologies, providing the opportunity to convert
35mm films to 3D using DeepSee-TM- Studio Pro and to distribute these in 2D
format with embedded 3D depth cue data.
The theater owner may then decide whether to offer screenings of 3D versions of
encoded films by projecting the decoded 3D version. The same film can be viewed
in conventional 2D since the depth cue process leaves the 2D image unaltered.
SPECIAL EVENTS, ADVERTISING & PROMOTION
The Company is introducing its products and services to the niche market of
Special Events, Advertising and Promotion. In this market, a temporary 3D
theater is constructed for use in trade shows, product launches, sports events
or music concerts.
3D video theaters utilize low cost video projectors such as those manufactured
by Hughes-JVC, Barco and Sony. The ease of video resolution production and
distribution on laser disc, videocassette tape or DVD is more cost effective
than conventional 35mm film. The more sophisticated large screen installations
are powered by the latest generation of digital and electronic projection
systems including those made by Hughes-JVC.
Temporary installations have widespread use in advertising and promotions and
at special events such as trade shows, and conferences and concerts. The
Company believes this offers a potentially lucrative revenue stream through
the conversion of short 3D video movies designed to support product launches
or promotional campaigns.
DeepSee-TM- Studio Pro is used to convert 2D video material to 3D. The
resulting 3D film is then either mastered onto DVD disc using the 2D
compatible 3D format or is recorded onto video cassette tape or a video
storage device for subsequent playback.
The Company has entered into an agreement with Video Applications Inc., of
Tustin, CA a company specializing in the corporate and promotional market.
Initially, DDD will undertake conversions for Video Applications, Inc. on
behalf of their clients, however it is intended that Video Applications Inc.
will ultimately acquire a DeepSee-TM- Studio Pro license. This license is
intended to yield a royalty to DDD based upon the volume of 3D conversion
work undertaken for Video Application Inc.'s clients.
The Company is developing the following products intended for use in the film
and video market
DeepSee-TM- Studio Pr Converting film and video content from 2D to
3D for creating 2D compatible 3D and custom `3D
only' film and video material.
DEEPSEE-TM- STUDIO PRO FOR THE MOVIE FILM MARKET
21
DeepSee-TM- Studio Pro is capable of providing output suitable for physical
film processing as required in the large format or IMAX-Registered Trademark-
film market as well creating 2D compatible 3D films suitable for digital
distribution to electronic cinemas.
In the 35m and 70mm film applications, the amount of detail in each frame of
film requires highly accurate scene identification and tracking techniques.
This allows the components of a scene and their depth to be determined with
minimal human intervention. Component and depth data forms the basis for the
Company's depth cue data used for creating the 3D image from the 2D source.
The accuracy of the algorithms that form the basis of DeepSee-TM- Studio Pro
allow it to be applied to the largest of all films, those screened in
IMAX-Registered Trademark- theaters, on 3D screens as large as 100' wide and
80' high.
DeepSee Studio Pro for film use is founded on the same software techniques
and hardware platform as previously described for Internet/PC, broadcast and
DVD use.
The Company expects to license DeepSee-TM- Studio Pro to principal
organizations including post-production companies and film studios and film
library owners. The Company will charge an annual license fee associated with
the DeepSee-TM- Studio Pro license, and a royalty fee based upon the media
created using DeepSee-TM- Studio Pro. The Company is presently in
negotiations with IMAGICA USA relating to the licensing of DeepSee-TM- Studio
Pro to IMAGICA USA for use in the large format film industry. The
negotiations are based on a licensing and royalty model. The Company
anticipates delivering an alpha release of DeepSee-TM- Studio Pro suitable
for use by IMAGICA USA in the large format film market in December 1999.
COMPUTER ANIMATION
A growing number of productions, from IMAX-Registered Trademark- movies to
theatrical films and television programs are now being originated entirely
from computer graphics with no live action or filmed components. Examples
include Pixar's `Toy Story', Dreamworks' `Antz' and Disney's `A Bug's Life'.
IMAX-Registered Trademark- recently concluded an agreement with Mainframe
Entertainment Inc. to bring computer animated 2D productions to the
IMAX-Registered Trademark- screen.
Computer animated productions are built from detailed models of the
characters and scenery that appears on-screen. Sophisticated animation tools
create wire frame representations of the characters and objects onto which
highly detailed graphic texture maps are rendered. This method creates
increasingly realistic scenes to the point where the difference between
footage shot with a film camera and footage created in the memory of a
computer is difficult for the viewer to discern.
To create 3D animation, present day techniques require the graphic artist to
recreate a second `stereo' 3D frame by re-rendering each scene from the
computer a second time. This more than doubles the time taken to create the
3D production compared with the original 2D version.
In a back to back comparison of the process, a conventional render of a 3D
computer animated scene took almost 20 hours whereas the DeepSee-TM- Studio
Pro toolkit required 2.5 hours to produce the same results.
22
Due to the largely automated performance efficiencies of creating 3D computer
animation with DeepSee-TM- Studio Pro, the Company has identified this as a
rapid route to market for the delivery of 2D compatible 3D media. The converted
3D productions will be supplied for film, broadcast and Internet use delivered
via the Company's proprietary 3D transmission technologies.
The Company has recently undertaken animated 3D conversion projects on behalf of
Showscan Entertainment, Hasbro Interactive and Intel Corporation. The Company
was paid US$10,000 to complete a 20 second test clip of a Showscan theme park
ride film. The Company converted computer animated material supplied by Blur and
Threshold Entertainment on behalf of Intel Corporation for inclusion in a 3D
theater presentation at the SIGGRAPH '99 tradeshow held in Los Angeles in August
1999. Intel provided computer hardware technology to the Company in
consideration for the work undertaken to deliver the SIGGRAPH '99 presentation.
The Company is developing the following product intended for use in the computer
animation market
DeepSee-TM- Studio Pro Converting computer animated content from 2D to
3D for creating 2D compatible 3D DVD, Internet or
Broadcast media or custom `3D only' film and
video material.
DEEPSEE-TM- STUDIO PRO FOR THE COMPUTER ANIMATION MARKET
DeepSee-TM- Studio Pro is capable of converting computer animated content to 3D
and providing the resultant material in formats suitable for physical output to
35mm and 70mm film as well as the proprietary 2D compatible 3D formats for
broadcast, Internet and DVD distribution.
DeepSee-TM- Studio Pro is capable of creating highly accurate 3D depth cue data
directly from animation source files, with minimal operator involvement. Once
the data is created, the second stereo 3D frame of animation can be generated
much more efficiently. By combining the depth cue with the existing 2D image,
the graphic artist may refine the 3D effect of each scene without the need to
render two frames. This significantly reduces the time taken to create the
stereo 3D version.
The Company has already created a DeepSee Studio Pro automated depth extraction
software module compatible with the Lightwave computer animation software
package.
DeepSee Studio Pro for computer animation use is founded on the same software
techniques and hardware platform as previously described for Internet/PC,
broadcast and DVD use.
The Company expects to license DeepSee-TM- Studio Pro to principal organizations
including post-production companies, animation companies, film studios and film
library owners. The Company will charge an annual license fee associated with
the DeepSee-TM- Studio Pro license, and a royalty fee based upon the media
created using DeepSee-TM- Studio Pro. To date, the Company has not held any
discussions concerning the licensing of DeepSee-TM- Studio Pro to such
companies.
23
VIDEO GAMES
Since the mid 1990's, the visual quality of computer graphics available on the
consumer PC and games console platforms has increased dramatically with graphics
processor capabilities doubling annually. There has been substantial growth in
the market for high quality interactive computer games. Recently, the DVD-ROM
has emerged as the alternative to distributing games on CD-ROM. The DVD stores
enough video and audio material to play back a feature length movie. This is
significant since blockbuster Hollywood films are often licensed as video games
where the game play takes place in scenes from the film.
The latest generation of consumer PCs from Compaq, Gateway, Hewlett Packard and
others are equipped with DVD-ROM drives that can read data from both CD-ROM and
DVD-ROM discs. Peripheral suppliers such as Creative Labs are already delivering
low priced DVD-ROM drives as add-ons to existing PCs.
DeepSee-TM- Studio Pro allows video from blockbuster films to be digitally
processed using advanced proprietary algorithms, and to create depth cue
information for each frame of the background scenery. The games developer may
then edit the depth cue to ensure that the optimal depth cue is created. The
depth data is then highly compressed and inserted back into the DVD video signal
along with the original, unaltered 2D version of the background scenery.
The solution offers a scaleable benefit to the games software publishers. The
games application reads the depth cue data from the DVD providing the game with
knowledge about the `passive' background scenery. The games application may
generate correctly scaled and positioned characters and objects with which the
player is interacting and insert them into a 2D live action background
dynamically. The same depth data can optionally be used to generate a 3D version
of the game.
This allows the game player to experience a visually richer game than can
currently be played in 2D or 3D. Game characters appear in 2D live action
backgrounds played directly from the DVD, freeing up the graphics processor to
generate more compelling game characters and objects. The Company is presently
in discussion with Hasbro Interactive regarding use of the Company's
technologies in the interactive computer games market.
The Company is developing the following products intended for use in the video
games market
DeepSee-TM- Viewer Decoding depth cue data from DVD using a PC software
application.
DeepSee-TM- Studio Pro Processing video content for creating depth cue
encoded DVD discs.
DEEPSEE-TM- VIEWER FOR THE VIDEO GAME MARKET
24
The features of DeepSee-TM- Viewer required for use with the Internet and the
DVD markets may be applied to the Computer Games market. See Internet/PC DeepSee
Viewer and DVD DeepSee Viewer.
The software module that undertakes decoding of the depth data and the
generation of the 3D image may be activated from within the computer game
software application. Any games publisher who creates a game based on this
format would ship a version of the Company's DeepSee-TM- Viewer as part of the
game itself.
Images can be viewed in 3D on television screens using low cost `anaglyph' red
and blue glasses or consumer priced Liquid Crystal Display `shutter' glasses.
DEEPSEE-TM- STUDIO PRO FOR THE VIDEO GAME MARKET
DeepSee-TM- Studio prepares the 2D compatible 3D media for transmission through
encoding the depth cue data the video formats supported by the Company's
DeepSee-TM- Viewer PC media player decoders.
DeepSee Studio Pro for video game use is founded on the same software techniques
and hardware platform as previously described for DVD and Internet/PC use.
The Company expects to license DeepSee-TM- Studio Pro to principal organizations
including post-production companies, film studios, and film library owners. The
Company will charge an annual license fee associated with the DeepSee-TM- Studio
Pro license, and a royalty fee based upon the media created using DeepSee-TM-
Studio Pro. To date, the Company has not held any discussions concerning the
licensing of DeepSee-TM- Studio Pro to such companies.
PROFESSIONAL AUDIO VISUAL
25
In conjunction with the software products previously described, the Company
is developing a range of hardware products designed to meet the requirements
of the markets for which they are intended. These hardware products are
primarily aimed at the professional audio visual market as described in this
section. The functions and stages of introduction for each of these products
together with discussions with prospective licensees and users is discussed
within the context of the market in the following sections. It is anticipated
that the product release dates detailed in the following sections may change
over time as features and enhancements requested by licensees and made
available under license from third parties are incorporated into the product
specifications.
The table below lists the hardware products together with the intended
markets and licensees. It should be noted that the Company has only just
begun to market its products and services. Accordingly, the target model,
target licensees and revenue models are based upon Company's intended
business plan and do not represent current operations.
- -------------------------------------------------------------------------------------------
PRODUCT TARGET MARKET TARGET LICENSEES REVENUE MODEL
- -------------------------------------------------------------------------------------------
DEPTH CUE DECODER DeepSee Studio Pro DeepSee Studio Pro Licensees Unit Sales
Set Top Boxes DVD Player Manufacturers Manufacture
Royalties
DVD Players Set Top Box Manufacturers
- -------------------------------------------------------------------------------------------
3D DEMULTIPLEXER Professional A/V Professional A/V Users Unit Sales
3D Projection/Display 3D theater installations Manufacture
Royalties
- -------------------------------------------------------------------------------------------
REAL TIME CONVERTER PC Users Consumers Manufacture
Royalties
Consumer A/V PC Peripheral Manufacturers
Consumer Electronic
Manufacturers
- -------------------------------------------------------------------------------------------
LINE DOUBLER PC Video Players PC Peripheral Manufacturers Manufacture
Royalties
PC Television PC Manufacturers
Home Theater Consumer Electronic
Manufacturers
Set Top Boxes Set Top Box Manufacturers
- -------------------------------------------------------------------------------------------
The Company intends to introduce the Video Processor hardware technologies in 2D
and 3D applications for professional audio visual ("A/V") use. The professional
A/V markets include 3D projection systems, home theater, video played on
Personal Computer screens and depth cue decoder accessories for use with DVD
players and broadcast set top boxes.
The Company has engineered a digitally reprogrammable platform based upon a
Field Programmable Gate Array (FPGA). This provides a flexible platform with the
added advantage that any functionality created by programming the FPGA can be
easily transferred to create a highly customized Application Specific Integrated
Circuit (ASIC) chipset.
DEPTH CUE DECODER FOR SET TOP BOXES, DVD PLAYERS AND ACCESSORIES
Certain implementations of DeepSee-TM- Viewer restrict the ability to use a
software application to decode depth cue data. These include adding decoder
capabilities to existing set top boxes, DVD players and MPEG cards used to play
video from DVD discs on PCs. To address this
26
requirement, the Company has developed a hardware-based depth cue decoder. This
allows the decoding of DDD's proprietary depth cue data from depth cue encoded
media via hardware alone.
This hardware based depth cue decoder may be embedded in chip sets of digital
and analog set top boxes, set top box accessories, DVD players, DVD player
accessories and PC MPEG cards.
Accessories for the current users of Set Top Boxes and DVD players may be
manufactured, ensuring consumers do not have to replace existing technologies to
obtain the benefits of 2D compatible 3D DVD movies and television broadcasts.
The system processes an incoming analog or digital video signal for DVD, PC and
set top box applications. The 3D depth data is extracted from the video signal
and applied to the 2D image within the video processor. A second stereo 3D image
is then constructed dynamically in real time prior to display.
A second important use for this feature is within DeepSee-TM- Studio Pro.
DeepSee-TM- Studio Pro stores the unaltered 2D image and the corresponding depth
cue data on a video storage device. Through combining the Video Processor
hardware with DeepSee-TM- Studio Pro software, the 2D image and 3D depth data
may be combined in real time and displayed on a monitor. This allows the user to
dynamically refine and edit the 3D effect to obtain the optimal 3D version of a
scene. This configuration provides real time, on-screen editing of a 3D image.
A prototype is due for completion in the fourth quarter of 1999. The Company
intends to license the hardware chip to Broadcast Set Top Box, DVD player and PC
MPEG card manufacturers and will demonstrate the hardware-based depth cue
decoding to prospective licensees in these markets once the prototype is
available.
3D DEMULTIPLEXER FOR 3D PROJECTION SYSTEMS
For 3D projection systems there is the requirement to provide a separate video
feed of a left image and right image to each projector in order to create stereo
3D. Under normal circumstances this requires two accurately synchronized video
cassette players or DVD players.
In order for a single media player to be used, alternate left and right eye
images of each successive frame are recorded onto the videocassette or DVD in
`field sequential' format. The Video Processor simply uses the synchronization
signal found between each field on the videotape or DVD to `demultiplex' or
redirect the successive fields to two output channels. The output channels can
be in Composite Video PAL or NTSC formats, S-Video or Red Green Blue (RGB). One
projector is then connected to each output channel to create a 3D projection
system.
This enables the Company to provide a cost-effective solution in the Special
Events, Promotions and Advertising market as well as to specialist 3D theaters.
27
A prototype was completed in the third quarter of 1998, able to accept input
signals from media players in Composite Video PAL or NTSC formats, S-Video or
RGB. The company has already sold a limited number of video processors to
organizations in the 3D video projection system market who are seeking
competitively priced 3D signal demultiplexers. The more popular S-VHS version
has a retail price of US $2,500. The prototype has recently been approved for
use in North America by gaining an FCC and UL authorization.
REAL TIME CONVERTER FOR 3D
Real time 3D conversion can be achieved through analyzing the motion
characteristics in a scene. An incoming video signal played from a VCR, DVD,
television broadcast or games console can therefore be viewed in 3D without the
need to pre-process the signal with depth cue information. Real time 3D can only
be created in a rudimentary manner based upon certain types of movement in a
scene and is therefore of a substantially lower quality than the post production
depth cue based 3D created with DeepSee-TM- Studio Pro.
The Company has embedded some of the basic 2D to 3D conversion algorithms into a
hardware based real time 3D converter. This allows any conventional video signal
from videocassette, DVD, broadcast or video game console to be converted to a
simple form of 3D in real time.
The Company may license the manufacturing of this solution as an accessory or
add-on PC card in markets where the DeepSee-TM- Studio Pro professional off-line
conversion and transmission technologies for broadcast and DVD use do not gain
widespread acceptance.
A prototype was completed in the first quarter of 1999 capable of undertaking
basic real time 2D to 3D conversion through a combination of field delay and
pixel shifting processes. The result is a 3D image which is acceptable on a
PC screen or TV display, but which is not continuously provided in 3D,
reverting to regular 2D in circumstances where the content does not permit
the processor to assimilate 3D images. The Company has yet to provide a
solution that would allow continuous display of a 3D image since the
engineering challenge of generating 3D automatically from a single, non
moving image is substantial. The Company is not presently developing this
technology at the time of filing and is, instead, focusing resources on the
non real time conversion process offered by DeepSee-TM- Studio Pro. The
Company has not entered into discussions concerning licensing relationships
for the system at this time due to the rudimentary 3D effect offered by the
real time conversion process and the lack of a continuous 3D image. Should
the Company decide to pursue this approach to the creation of 3D content, the
Company expects that further development and modifications to the prototype
would be required in order to provide a continuous 3D image necessary to
permit the license and sale of the product in volume.
LINE DOUBLING FOR VIDEO SIGNALS
With the ever present advances in PC graphics processors and the recent
convergence of broadcast and Internet technologies, a number of PC manufacturers
now offer the ability to play back digital video, video cassette, DVD and
broadcast signals via the PC.
Many PC monitors are capable of displaying images of 800 x 600 lines of
resolution, considerably higher than that of a television set. Traditionally,
PAL and NTSC video signals are designed for television display screens. This
results in a videocassette tape producing images that are between 200 and 250
lines in resolution. As the tape is played, the first field builds up the odd
lines of an image, and the second field builds up the even lines of the image on
the TV screen. The viewer
28
then sees an image comprising between 400 and 500 lines of resolution.
Consequently, when videocassette tapes or DVDs are played on a PC monitor, the
image quality is consequently that of a television set and therefore well below
the display capability of the PC monitor.
The Company has created a video processor capable of `line doubling' an incoming
video signal and displaying it on a PC monitor at a higher resolution and with
greater clarity. The video processor uses digital line interpolation algorithms
to create additional lines in the output signal based upon the comparison of
input line pairs to double the output resolution. This digitally synthesizes the
image to a higher resolution, approaching that of high definition television
(HDTV).
The Company intends to license the line doubler hardware to Broadcast Set Top
Box, PC monitor manufacturers and suppliers of electronic and digital projection
systems.
A prototype was completed in the first quarter of 1999, able to accept input
signals from media players in Composite Video PAL or NTSC formats or S-Video.
The company has already sold a limited number of video processors to
organizations who are seeking line doubler technologies, particularly for
medical endoscopy. Modifications to the prototype may be required in order to
permit sale of the product in volume.
ARCADE GAMES
The origins of Dynamic Digital Depth 3D Projection Display lie in the design and
manufacture of a prototype glasses free stereo `autostereoscopic' 3D display
system targeted for use in the arcade video games industry. The system uses a
patented combination of an infra-red head tracking system coupled to a twin LCD
projection system that provides a life like 8 foot 3D image on a large display
screen without the need for the viewer to wear glasses or a headset.
The international arcade market is dominated by a small number of companies
including SEGA Enterprises, NAMCO, WMS Industries, Atari Games Corporation and
Konami. In this market, popular consumer games debut in out of home
entertainment complexes and theme parks prior to their release in the consumer
channel.
Today, consumers can acquire the latest generation of powerful PC graphics
processors where the visual differential between what a player can experience in
the family entertainment center and at home is considerably reduced. In order
for the operators of family entertainment centers to offer a differentiating
experience from the home, the Company offers the 3D Projection Display under
license to arcade game manufacturers.
The 3D Projection Display provides a video game in true life like 3D, without
requiring the player to put on or take off any viewing accessory, which would
reduce the number of plays per hour and the earning capacity of the game. This
is seen as a considerable advantage by owners of family entertainment centers
and theme parks when compared to similar 3D game experiences such as virtual
reality, which require the player to wear a headset. The 8 foot 3D display
yields an experience that is not presently available at home.
29
The 3D Projection Display was launched at the 1998 International Association of
Amusement Parks and Attractions Show (IAAPA) in Dallas, TX.
Following the IAAPA Show, Atari Games Corporation of Milpitas, CA undertook a
field trial of the system at a family entertainment center in Northern
California.
Based upon the results of the field trial, Atari has identified several
areas in which the display could be modified. However, because Atari has not
committed to license the 3D projection display management has focused the
Company's limited engineering resources on the high volume opportunities in
priority consumer broadcasting Internet/PC markets rather than on the arcade
game display. The Company plans to decide whether to apply further resources
to the 3D projection display enhancements in the latter half of the calendar
year 2000.
Subsequent to the Atari field trials, the Company has entered into a non
disclosure agreement with a major US corporation relating to the potential
use of the 3D projection display including the arcade market. The Company has
loaned a 3D projection display to this Company with a view to entering into a
development and licensing agreement upon successful completion of the
evaluation. The outcome of this project will also have a bearing on the
Company's decision to put further resources into the 3D projection display.
SALES AND MARKETING
The Company utilizes a number of tools and services in support of the promotion
of its products and services within its chosen target markets. These tools and
services assist the Company in attaining the appropriate profile both as a
market leading 3D technology provider and also as a public company listed on The
Alberta Stock Exchange.
The Company has already implemented a range of initiatives designed to enable
effective communication with prospective customers and licensees, investors and
press. These include a comprehensive web site, the retained services of a major
international public relations company and participation in a number of industry
trade shows and seminars targeted at specific application areas for the
Company's technologies.
THE DDD WEB SITE (HTTP://WWW.DDD.COM)
In early 1999, the Company undertook a project to revise the corporate web site;
however, the information found on the website is not part of this Registration
Statement. The objectives of the web site are:
1. To communicate products and services to prospective customers.
2. To communicate the core technologies to prospective licensees.
3. To provide background and reference material for current and prospective
investors.
4. To enable visitors to download samples of 2D compatible 3D images.
5. To be an electronic store front for the sale of software and hardware
products.
6. To assist in building a brand for the Company in the 3D marketplace.
The Company presently receives approximately 9,000 `hits' or user visits per
month. This generates an average of 50 inquires per month for information on the
Company and its products.
30
The majority of users who visit the site are based in the United States (60%)
with the Australia, Japan, the United Kingdom, and Canada being the most active
behind the USA.
PUBLIC RELATIONS
The Company has retained the services of Daniel J. Edelman Public Relations, an
international public relations company. The relationship is managed by the
Dallas, TX office of Edelman Public Relations.
The PR campaign has been focused on raising the profile of DDD in industry and
trade press. This has resulted in articles concerning DDD's technologies being
published in a variety of industry publications.
The Company, in conjunction with IMAGICA USA, previously retained the
services of a Giant Screen IMAX-Registered Trademark- film media specialist
that resulted in further industry and trade press exposure.
The primary focus of the Public Relations activities is centered upon creating
presence in the North American market. The Company also undertakes international
PR, particularly in Australia and Canada.
Press releases containing forward looking statements and information that is
material to the Company are authorized by The Alberta Stock Exchange prior to
release.
INVESTOR RELATIONS
As a public company listed on The Alberta Stock Exchange, the Company has
undertaken Investor specific Public Relations, initially targeted toward the
Canadian investment community. The Company has recently appointed Daniel J.
Edelman Public Relations for Investor Relations activities.
TRADE SHOWS AND EXHIBITIONS
The Company attends and exhibits at trade shows in key markets. Company
representatives attend industry seminars and participate as guest speakers.
Where appropriate, the Company partners with potential licensees and strategic
partners in presenting the Company's technologies and solutions at trade shows
and exhibitions.
DDD has recently participated in the following Conferences and Exhibitions :
National Association of Broadcasters, Las Vegas, Exhibited in conjunction with Hughes/JVC
NV
Western Cable Show, Anaheim, CA Attended in conjunction with National Digital
Television Center
International Space Theater Consortium, Sydney, Exhibited in conjunction with IMAGICA
Australia
31
Large Format Cinematographers Association, Los Exhibited in conjunction with IMAGICA
Angeles, CA
EuroMAX, London, England Attended
International Association of Amusement Parks & Exhibited
Attractions, TX
Digital Content Creation, Los Angeles, CA Attended
Electronic Entertainment Expo (E3), Los Angeles, Attended
CA
SPIE 99, San Jose, CA Attended as guest speaker
SIGGRAPH, Los Angeles, CA Exhibited in conjunction with Intel Corporation
MARKETING MATERIALS
The Company has created initial brochures and literature to support the sales
and marketing activities and corporate promotion.
The Company has focused on the Web Site as the primary mechanism for
disseminating information concerning the Company's products and services since
it is a highly effective international marketing medium. As both hardware and
software products are released, marketing materials including brochures and data
specification sheets will be introduced to support the sales and marketing
initiatives.
The Company will advertise and promote the availability of the products in
appropriate publications.
INTERNATIONAL MARKETING ACTIVITIES
In certain countries where the Company does not maintain a local office, the
Company intends to enter into representation agreements with local organizations
to provide licensee support and assist in marketing the technologies.
Representative partners will be selected based upon their local contacts and
their prior knowledge and involvement in 3D projects and activities.
On June 14, 1999, the Company entered into an agreement with AiCube Co. Ltd. of
Tokyo, Japan to provide local sales support and marketing activities for the
company's products and services in Japan.
RESEARCH AND DEVELOPMENT
The Company's development efforts during 1998, 1997 and 1996 were devoted to the
design and development of its products and technologies. Research and
development costs, including those development costs capitalized as deferred in
Fiscal 1998 and Fiscal 1997, were approximately $930,025 for Fiscal 1998,
$957,700 for Fiscal 1997 and $567,000 for Fiscal 1996. This latter amount
represents expenditure related to materials and components together with
external manufacturing. It does not include any labor, labor oncost or other
overhead component. As a result it would incorrectly appear that there was a
substantial increase in expenditure during Fiscal 1997. The 1999 research and
development plan calls for approximate expenditure of $1,280,000
32
in development costs. For the nine months ended March 31, 1999, the Company
incurred $976,300 in research and development costs.
GOVERNMENT REGULATION
The hardware products designed and intended for manufacture by the Company and
their licensees are subject to government regulation concerning electromagnetic
interference ("EMI") and electrical safety standards which will impose
compliance burdens on the Company. In the United States for example,
non-prototype products may be required to conform with Federal Communications
Commission (FCC) regulations governing electromagnetic radiation suppression and
Underwriters Laboratory (UL) approval for electrical safety standards.
Facilities are available in Australia to test hardware to the standards required
globally. The Company has submitted several of its products for testing and has
received verbal confirmation of compliance on the submitted hardware. The
Company is unaware of any issues that would prevent compliance of any of its
planned hardware product, although there can be no assurance that all of the
Company's products will be able to comply with such regulations.
In many countries where the Company's products may be sold, similar equivalents
to these standards exist such as CE in Europe and Canadian Standards Authority
(CSA) in Canada. The Company will submit products for testing to appropriate
local specifications in each case where this is a prerequisite to marketing the
product in the country concerned. There can be no assurance that the Company's
products will be able to comply with such regulations.
The technology contained in the Company's products may be subject to United
States export restrictions. While the Company does not believe that any of its
current products are subject to the restrictions, there can be no assurance that
such export controls, either in their current form or as may be subsequently
enacted, will not delay introduction of new products or limit the Company's
ability to distribute products outside of the United States. Further, various
countries may regulate the import of certain technologies contained in the
Company's products. Any such export or import restrictions, new legislation or
regulation or government enforcement of existing regulations could have a
material adverse effect on the Company's business, operating results and/or
financial condition. There can be no assurance that the Company will be able to
comply with additional applicable laws and regulations without excessive cost or
business interruption, if at all, and failure to comply could have a material
adverse effect on the Company.
Under the Australian Customs Act 1901 part VI "the exportation of goods division
1--prohibited exports" the Governor General may by regulation prohibit the
exportation of goods from Australia absolutely, in specified circumstances, to a
specified place or unless specified conditions or restrictions are complied
with. Without limiting the generality of that power of prohibition the
regulations may provide that the exportation of the goods is prohibited unless a
license, permission, consent or approval has been granted. The Customs
(Prohibited Exports) Regulations by regulation 13E provide that an officer of
Customs or the Department of Defense may grant a license or permission to export
from Australia goods listed in the Defense and Strategic Goods List ("DSGL").
The exportation from Australia of goods specified in the DSGL is prohibited
unless a license or permission in writing has been granted by an authorized
person. The only categories of goods listed in DSGL which appear to have any
potential relevance to the
33
technology of the Australian subsidiaries of the Company are goods having a dual
use (military/civilian) being certain types of software as listed. None of the
Company's technology falls into any of the categories of software currently
listed in the DSGL.
COMPETITION
The market for digital media manipulation and stereoscopic 3D display technology
is rapidly evolving, highly competitive and recently characterized by the
frequent introduction of new products based upon rapidly developing
technologies.
In order to understand where the Company believes competition will occur, it is
first necessary to differentiate `stereoscopic' 3D from the heavily marketed
term "3D" used extensively in the present-day video game and PC software
markets. Enhanced or "stereoscopic 3D", as created by the Company's Dynamic
Depth Cueing process, allows the viewer to see the images in lifelike 3D by
adding the appearance of depth to the image. Stereoscopic 3D involves displaying
two or more slightly different left and right eye views of the image which the
viewer then perceives to be a `real' 3D image with enhanced depth. The benefit
of stereoscopic 3D is that it provides a visually richer image to the viewer
allowing objects and characters to appear behind the surface of the display
screen and also, importantly, to appear to move off the screen towards the
viewer under certain circumstances.
The term `3D' as it is used in today's video game and PC software markets simply
implies that a three dimensional computer graphics model of a character or
object is created by the computer. This allows the viewer to see the object from
a number of viewpoints as they navigate around it or manipulate it on screen.
The object is generally viewed in 2D however. In light of this difference, the
Company does not believe that its products and services compete with the
majority of '3D' based products.
A number of the organizations with which the Company may compete are
well-established manufacturers and developers of video hardware and software
publishers. Some of the Company's competitors possess substantially greater
financial, marketing, personnel and other resources than the Company, have
established reputations relating to product design, development, manufacture,
marketing and service of digital media manipulation and stereoscopic 3D display
products and have significant budgets to permit them to implement extensive
advertising and promotional campaigns to market new products in response to
competitors.
Competition to the Company's 2D to 3D DeepSee-TM- conversion technologies also
comes from the origination of 3D film, videos and live broadcasts using 3D
cameras. A number of films and movies have been created using conventional 3D
camera equipment, however it is the complex equipment and time consuming
techniques that deter most film makers from creating 3D productions.
The Company's objective is to deliver content that can be viewed in 2D or 3D.
The Company anticipates that the unique 2D compatible 3D nature of the
transmission process will allow 3D films to be processed and delivered in 2D
compatible 3D format. The Company therefore views the 3D origination of content
as complementary to providing a solution to creating 3D content.
34
The Company expects that competition to its proprietary hardware and software
solutions may come from a number of existing and emerging sources that vary
between the following markets.
PC/Internet Provision of 2D compatible 3D media via the Internet
Broadcast Television Provision of 2D compatible 3D broadcast media
DVD Movies 2D compatible 3D movies for Digital Versatile Disc (DVD)
Movie Films Conversion of 2D films to 3D for theatrical release
Computer Animation Simplifying the process of creating computer generated 3D movies
Video Games Creating enhanced visual quality for DVD based video games
Professional Audio Visual Professional video processor and 3D display technologies
Arcade Games 3D arcade display
COMPETITION IN THE PC/INTERNET MARKET
Competition to the Company's products and solutions in the PC/Internet market
may come in any of the following areas:
- - Conversion of photographic images from 2D to 3D for display in 3D on PCs
- - Conversion of streaming video and movies from 2D to 3D for display in 3D on
PCs
- - Low bandwidth encoding of 3D images to allow display in 2D or 3D
PHOTOGRAPHIC IMAGES
The Company is aware of a small number of organizations based in the United
States and Asia who offer technologies capable of converting photographic images
to 3D. These companies include Wooboo and APEC based in Korea and Taiwan
respectively and VREX based in the United States. These competitive products
presently suffer from a number of drawbacks that deliver images of lower quality
than those created by DeepSee-TM-. APEC and Wooboo use rudimentary pixel
shifting techniques that can produce distorted 3D versions of 2D images while
VREX appear to only be able to create 3D from pictures captured with a 3D camera
or originated using computer graphics modeling packages. The Company's
DeepSee-TM- software conversion products are capable of manipulating existing 2D
images with a high degree of accuracy. This delivers high quality, low
distortion 3D images that may be created from 2D photographs or 3D computer
models.
STREAMING VIDEO AND MOVIES
The Company is only presently aware of one organization, Synthonics Inc., a
United States company, whose technology could be applied to converting streaming
video and movie files to 3D. The Synthonics technique involves constructing a
computer wire frame model from a 2D image and utilizing this to create a stereo
3D image. This technology requires a minimum of two images from which to create
the 3D image therefore allowing it to be used on successive frames of a movie or
video. The Company believes that the requirement to create a wire frame model
from a comparison of two images makes the Synthonics process less efficient than
the depth cueing process employed in DeepSee-TM-.
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2D COMPATIBLE 3D TRANSMISSION AND DELIVERY
The Company has seen demonstrations of a number of compression and encoding
techniques for the delivery of 3D broadcast programming. None of these have
taken the approach of delivering 2D compatible 3D media by compressing the 3D
data and reinserting it into the original unaltered 2D image for subsequent
distribution. This technique is subject of a number of patents applied for by
the Company covering use in both the analog and digital broadcasting markets.
The majority of techniques used to deliver 3D media involve the delivery of
3D-only images such as those used by US 3D broadcasting company C3Digital, of
Salt Lake City, UT and 3D display manufacturer Visualabs of Calgary, Canada. The
3D-only field sequential transmissions offered by C3D Digital can only be viewed
with a proprietary decoder box and are not viewable in 2D on standard television
sets. The 3D signal used by the Visualabs 3D display is 2D compatible, however
it is proprietary to the decoder in the Visualabs display and may not be viewed
in 3D on a conventional television set. Alternative techniques produce 3D-only
images that are at best 15% larger than their 2D equivalents whereas the
compression techniques used in DeepSee-TM- typically deliver images that are 1%
larger than their 2D counterpart and may be viewed in 2D or 3D.
COMPETITION IN THE BROADCAST MARKET
Competition to the Company's products and solutions in the Broadcast market may
come in any of the following areas:
- - Conversion of broadcast quality video and movies from 2D to 3D for display in
3D on televisions
- - Low bandwidth encoding of 3D images to allow broadcast transmission and
display in 2D or 3D
- - Real time conversion of broadcast video signals to 3D at the viewpoint. (See
Professional Audio Visual: Real Time Converter)
CONVERTING 2D BROADCAST CONTENT INTO 3D
As described in the PC/Internet Streaming Video and Movies section, Synthonics
Inc. can convert certain material from 2D to 3D. This technology could be
applied to conversion of 3D-only broadcast content.
2D COMPATIBLE 3D TRANSMISSION AND DELIVERY
The Company has seen demonstrations of a number of compression and encoding
techniques for the delivery of 3D broadcast programming. None of these have
taken the approach of delivering 2D compatible 3D media by compressing the 3D
data and reinserting it into the original unaltered 2D image for subsequent
distribution. This technique is subject of a number of patents applied for by
the Company covering use in both the analog and digital broadcasting markets.
The majority of techniques used to deliver 3D media involve the delivery of
3D-only images such as those used by US 3D broadcasting company C3Digital, of
Salt Lake City, UT and 3D display manufacturer Visualabs of Calgary, Canada.
These 3D-only transmissions can only be viewed with a proprietary
36
decoder box and are not viewable in 2D on standard television sets. Alternative
techniques produce 3D-only images that are at best 15% larger than their 2D
equivalents whereas the compression techniques used in DeepSee-TM- typically
deliver images that are 1% larger than their 2D counterpart and may be viewed in
2D or 3D.
REAL TIME 3D CONVERSION AT THE VIEWPOINT
A small number of companies offer devices capable of providing rudimentary 3D
images on television sets. They use techniques including motion analysis of the
incoming video signal or a single depth cue template to give the appearance of
3D depth to a scene. Consequently the 3D effect produced is inconsistent and
potentially non-existent for scenes with no movement characteristics present.
C3Digital also uses a real time converter to create 3D-only broadcast material
for distribution to their 3D channel subscribers. Due to the inherent drawbacks
of real time 3D generation (the limited 3D depth and the fact that 3D cannot
presently be automatically generated for scenes containing no motion), the
off-line 3D conversion process offered by DeepSee-TM- provides a more
comprehensive 3D result and allows the content owner to exercise full control
over the 3D effect in each scene, including those with no movement
characteristics present.
COMPETITION IN THE DVD MOVIE MARKET
Competition to the Company's products and solutions in the DVD market may come
in any of the following areas:
- - Conversion of broadcast quality video and movies from 2D to 3D for display in
3D on televisions
- - Low bandwidth encoding of 3D images to allow delivery on DVD and display in 2D
or 3D
- - Real time conversion of broadcast video signals to 3D at the viewpoint. (see
Professional Audio Visual : Real Time 3D Converter)
CONVERTING 2D DVD VIDEO CONTENT TO 3D
As described in the PC/Internet Streaming Video and Movies section, Synthonics
Inc. can convert certain material from 2D to 3D. This technology could be
applied to conversion of 3D-only DVD video content.
2D COMPATIBLE 3D DVD DELIVERY
The Company is not aware of any organization that is presently endeavoring to
deliver 2D compatible 3D DVD discs. This technique is subject of a number of
patents applied for by the Company. The Company is aware of a number of encoding
techniques for the delivery of 3D-only DVD movies. None of these have taken the
approach of delivering 2D compatible 3D media by compressing the 3D data and
reinserting it into the original unaltered 2D image for subsequent distribution.
These 3D-only DVDs can only be viewed with a proprietary decoder box and are not
viewable in 2D on standard television sets.
37
REAL TIME 3D CONVERSION AT THE VIEWPOINT
As described in the Broadcasting, Real Time 3D Conversion at the Viewpoint
section, a small number of companies provide real time 3D converters capable of
providing rudimentary 3D images from video signals. These can be used with DVD
players.
COMPETITION IN THE FILM MARKET
Competition to the Company's products and solutions in the Film market may
come from the conversion of 35 or 70mm movies from 2D to 3D.
The Company is aware that, in addition to Synthonics, Inc., IMAX-Registered
Trademark- Corporation of Toronto, Canada is endeavoring to deliver a
solution for converting 2D film to 3D. The IMAX-Registered Trademark-
process, as demonstrated at a recent industry conference, uses techniques
that require certain movement characteristics in the scene to achieve a 3D
effect. The sophisticated 3D algorithms employed in DeepSee-TM-Studio Pro are
not limited in this manner, and therefore offer greater capabilities to film
makers at this time.
IMAX-Registered Trademark- Corporation is also heavily involved in the
sponsorship of 70mm 3D films for which it provides custom 3D camera
equipment, leased to film makers. As previously identified, the size and
technical limitations of 3D camera equipment prevents film makers from
capturing certain shots. The use of a 2D camera in conjunction with the
DeepSee-TM- process removes such restrictions from film producers.
The Company is not aware of any instance where the Synthonics process has
been used to convert 35 or 70mm film to 3D.
COMPETITION IN THE COMPUTER ANIMATION MARKET
Competition to the Company's products and solutions in the Computer Animation
market may come from the present day approach of creating stereo 3D from
computer graphic wire frame models. Animation packages are used to produce
content ranging from IMAX-Registered Trademark- movies to PC streaming video.
3D productions including `T-Rex Back to the Cretaceous' and `Encounter in the
Third Dimension' have been created using these techniques.
Users of many 3D computer graphic modeling packages may produce stereo 3D
images of an existing production. Presently, this process is time consuming,
since it requires a second image to be rendered from the wire frame models.
The rendering stage is processor intensive and time consuming, doubling the
time taken to create the 3D version in comparison to the 2D counterpart. The
DeepSee-TM-process allows a depth cue to be automatically created from wire
frames. The Depth Cues may then be used to create the stereo 3D image without
requiring a full render of a second image. This substantially reduces the
time taken to produce the stereo 3D image in comparison to the time taken
using conventional techniques.
COMPETITION IN THE VIDEO GAME MARKET
38
Competition to the Company's products and solutions in the Video Game market may
come from any of the following areas:
- - Extraction of depth cues from streaming video and movies for compositing and
display in 3D on PCs
- - Low bandwidth encoding of depth cue data on DVD disc to allow display in 2D or
3D
The Company is aware of two organizations, Synthonics Inc. and Synapix Inc., two
United States companies, whose technology could be applied to extracting depth
cue information from video material. The Synapix technique involves constructing
a depth cue from a 2D image and utilizing this to facilitate compositing. This
technology requires a minimum of two images from which to create the depth cue
therefore allowing it to be used on successive frames of a movie or video.
As described in the PC/Internet Streaming Video and Movies section, Synthonics
Inc. can convert certain material from 2D to 3D. This technology could be
applied to conversion of 3D-only video content.
In all the products identified as potential competitors to the Company's media
conversion capabilities, none have taken the approach of delivering 2D
compatible 3D media by compressing the 3D data and reinserting it into the
original unaltered 2D image for subsequent distribution. This technique is
subject of a number of patents applied for by the Company.
COMPETITION IN THE PROFESSIONAL AUDIO/VISUAL MARKET
The Company produces four products intended for use in the Professional Audio
Visual market.
DEPTH CUE DECODING FOR SET TOP BOXES, DVD PLAYERS AND ACCESSORIES
The Company's depth cue data format is proprietary to the Company and subject to
patent applications filed by the Company. The Company is aware of no other
organization presently offering or planning to offer a hardware based depth cue
decoder for 3D image generation under license or otherwise.
3D DEMULTIPLEXER TO 3D PROJECTION SYSTEMS
A number of organizations presently supply 3D Demultiplexer hardware systems.
These include VRex and QD Technologies, two United States organizations. These
hardware systems are offered in a variety of specifications that offer
equivalent performance to those offered by the Company.
REAL TIME 3D CONVERTER
Sanyo Corporation offers a real time converter that is marketed in the medical
imaging market in the United States. A similar product is marketed by C3D
Digital as a real time converter for use
39
with videocassettes and DVD players in the United States. These hardware systems
are offered in a variety of specifications that offer equivalent performance to
those offered by the Company. Since real time 3D can only be created in a
rudimentary manner based upon certain types of movement in a scene it is
therefore of a substantially lower quality than the depth cue based 3D created
with DeepSee-TM- Studio Pro.
LINE DOUBLING FOR VIDEO SIGNALS
A number of organizations including Faroudja, Vidikron, DWIN, Runco and QD
Technologies manufacture and license line doubling and quadrupling technologies.
These are aimed at the professional audio visual and home theater markets. These
hardware systems are offered in a variety of specifications that offer
equivalent performance to those offered by the Company.
COMPETITION IN THE ARCADE GAME MARKET
Competition to the Company's products and solutions in the Arcade Game market
may come from any company offering the display of 3D images.
A number of 3D display technologies are available in the arcade game industry
including virtual reality headsets and 3D display screen lenses. Virtual Reality
game participation requires the player to wear a headset. This is seen as a
deterrent to some players for health and safety reasons as well as a process
that reduces player throughput as the headset is put on and taken off between
each game. The unique, patented headset free head tracking technology used in
the Company's 3D projection display is seen as a major advantage over virtual
reality headsets since it does not compromise player throughput.
3D glasses free display lenses have recently been previewed at video game shows
however they suffer from image distortion since they employ curved display
lenses. The Company is not aware of any glasses-free display lens that has been
introduced in an arcade product. None of the 3D glasses free lenses offer a
giant display screen possible with the Company's 3D projection display system.
EMPLOYEES
As of December 1, 1999, the Company had 20 employees, 12 of whom are engaged in
engineering, research and development, 3 of whom are engaged in marketing and
sales activities and 5 of whom are in administration. The Company also contracts
the services of qualified hardware and software engineers on a project by
project basis. For 2D to 3D media conversion services, the Company has trained
12 computer operators who work under contract to the Company on a project by
project basis. None of the Company's employees is represented by a labor union.
The Company considers its employee relations to be satisfactory.
BUSINESS RISKS
40
This Registration Statement contains forward-looking statements which involve
risks and uncertainties. When used in this filing, the words "may," "will,"
"expect," "anticipate," "believe," "continue," "estimate," "project," "intend,"
and similar expressions are intended to identify forward-looking statements
regarding events, conditions and financial trends which may affect the Company's
future plans of operations, business strategy, operating results and financial
position. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. Such
statements are not guarantees of future performance and are subject to risks and
uncertainties and actual results may differ materially from those included
within the forward-looking statements as a result of certain factors, including
those set forth in the following risk factors and elsewhere in this Registration
Statement. In addition to the other information in this Registration Statement,
the following risk factors should be considered carefully in evaluating the
Company and its business.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; EXPLANATION OF GOING CONCERN
An investment in the Company should be viewed in light of the risks and
uncertainties inherently faced by a company in the early stages of development,
particularly given the evolving and highly competitive technology market in
which the Company competes. The Company concluded its reorganization and
commenced operations in respect of the 3D display technology in May 1994 and has
incurred net losses in each quarter since its reorganization. As to date the
Company has been engaged in product research and development and establishing
its technology development strategy. The Technologies are just beginning to
become available for marketing release and licensing. Accordingly, the Company
has a limited operating history on which an evaluation of the Company's
prospects can be made. The Company and its prospects must be considered in light
of the risks, expenses and difficulties frequently encountered in the
establishment of a business in an industry with evolving standards, and the
development and commercialization of new products based on innovative
technology.
The Company incurred net losses of approximately $1,599,100, $2,256,900 and
$6,066,200 in Fiscal 1997, 1998 and 1999, respectively. As of June 30, 1999,
the Company had an accumulated deficit of approximately $11,896,400. In
addition, the Company intends over time to continue its level of expenditures
in the areas of research and development and increase its level of
expenditures in the areas of sales and marketing. As a result, the Company
anticipates that it will incur net losses for the foreseeable future, and
there can be no assurance that the Company will ever become profitable. There
can be no assurance that the Company's revenues will increase in future
periods, that the Company will become profitable, if at all, on a quarterly
or annual basis in the future or that any such profitability can be sustained.
To the extent that funds generated from operations, existing working capital
resources and the proposed financing discussed above are insufficient, the
Company will have to raise additional working capital. No assurance can be given
that additional financing will be available, or if available, will be on terms
acceptable to the Company. If adequate working capital is not available, the
Company may be required to curtail its operations.
41
Due to these uncertainties, the reports of the Company's independent auditors
for the years ended June 30, 1999, 1998 and 1997 contain an explanatory
paragraph as to the substantial doubt about the Company's ability to continue as
a going concern. The Company's long-term viability and growth will depend upon
the successful commercialization of its technologies and its ability to obtain
adequate financing, as to which there can be no assurances.
IMMEDIATE NEED FOR ADDITIONAL FUNDS; DILUTION TO EXISTING SHAREHOLDERS
The Company requires substantial working capital to fund its business,
particularly in light of its expected continued operating losses. Although the
Company believes its existing cash balances and cash flow expected to be
generated from future operations should be sufficient to meet the Company's
working capital requirements for at least six (6) months, there can be no
assurance that such funds will be sufficient. To the extent that such funds are
insufficient to finance the Company's working capital requirements, the Company
will be required to raise additional funds through private or public equity or
debt financing. Such additional financing could result in dilution to existing
stockholders. There can be no assurance that the additional equity or debt
financing, if required, will be available on acceptable terms, on a timely basis
or at all. In the event that additional financing is unavailable, the Company
may be required to reduce its sales and marketing efforts.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS; LENGTHY SALES CYCLE
The Company's operating results have fluctuated significantly in the past, and
are likely to continue to fluctuate in the future, on a quarterly and on an
annual basis as a result of a wide variety of factors, many of which are beyond
the Company's control. Certain factors that may affect the Company's operating
results in the future include demand for the Company's products and services;
size and timing of specific sales; level of product and price competition;
timing and market acceptance of new product introductions and product
enhancements by the Company and its competitors; changes in pricing policies by
the Company or its competitors; the Company's ability to hire, train and retain
personnel; the length of sales cycles; the Company's ability to establish and
maintain strategic relationships with third parties; delay of customer purchases
caused by announcement of new technology or otherwise; mix of distribution
channels through which products are sold; changes in the Company's sales force
incentives; software defects and other product quality problems; personnel
changes; changes in the Company's strategy; general domestic and international
economic and political conditions; economic conditions specific to the Internet,
Internet media and cable television industries; and budgeting cycles of the
Company's customers. As a result of the foregoing and other factors, including
the factors identified below, the Company anticipates that it may experience
material fluctuations in operating results on a quarterly basis.
Sales of the Company's products generally require the Company to engage in a
relatively lengthy sales effort. As a result of the length of its sales cycle,
the Company has a limited ability to forecast the timing and amount of specific
sales. Because the timing of individual sales is difficult to predict, large
individual sales may occur in quarters other than those anticipated by the
Company. Any shortfall from anticipated revenues could result in significant
variations in
42
operating results from quarter to quarter. The Company's business, operating
results and financial condition could be materially adversely affected by any
revenue shortfall in a particular quarter.
Based on the risk identified in this and other risk factors contained herein,
the Company believes that future revenues, expenses and operating results are
likely to vary significantly from period to period. In particular, because the
Company is at an early stage of development, period to period comparisons of
operating results are not necessarily meaningful or indicative of future
performance.
DEPENDENCE ON OTHERS TO INTRODUCE, MARKET AND PROMOTE DDD-BASED PRODUCTS AND
SERVICES FOR INFORMATION APPLIANCES
To date, DDD-based products and services have only been used in connection with
the conversion of 35mm and 70mm film and professional video media and computer
animations from 2D to 3D. For DDD-based products and services to gain widespread
market acceptance and for the Company to succeed, the Company must enter into
customer agreements with a number of companies in a variety of industries,
including but not limited to Cable Television Operators, Internet Content
Providers, Graphic Software Publishers, Photographic Image Processors, Web
Developers, Television Content Providers, Film Content Providers and Film
Library Owners. Such companies must successfully introduce, market and promote
DDD-based products and services for the markets in which they operate.
Although the Company's success depends on the successful and timely introduction
of DDD-based products and services by its customers, none of the Company's
customers are contractually obligated to introduce, market or promote DDD-based
products and services nor are any of the Company's customers contractually
required to achieve any specific introduction schedule. The Company's failure to
enter into customer agreements with additional customers or the failure of the
Company's customers to timely and successfully introduce, market and promote
DDD-based products and services for the markets in which they operate or the
failure of DDD-based products and services to gain widespread market acceptance
would have a material adverse effect on the Company's business, operating
results and financial condition.
DEPENDENCE ON HARDWARE MANUFACTURERS
Because the Company does not intend to manufacture hardware components, but
instead to license its technology to Set Top Box Manufacturers, PC Peripheral
Manufacturers, DVD Player Manufacturers and Digital Camera/Camcorder
Manufacturers, the Company's success will depend, in part, upon its ability to
enter into agreements with various hardware manufacturers to manufacture
products incorporating the Company's technology, and upon the successful
introduction and commercial acceptance of such products into the market. The
Company does not anticipate that agreements with any of these manufacturers will
require the manufacturers to manufacture or distribute products incorporating
the Company's software platform into products. The failure of the Company to
enter into agreements with manufacturers that incorporate the Company's software
into products that achieve broad market acceptance with consumers and businesses
will have a material adverse affect on the Company's business, operating results
and financial position.
43
COMPETITION
The market for the Company's products is new, competitive, subject to rapid
technological change and evolving standards and significantly affected by new
product introductions and other market activities of industry participants. The
Company believes competition will intensify as the markets it has targeted
develop and competitors focus on additional product and service offerings.
Increased competition could result in price reductions, fewer customer orders,
reduced gross margins, longer sales cycles and loss of market share, any of
which would materially adversely affect the Company's business, operating
results and financial condition.
Many of the Company's existing and potential competitors have longer operating
histories, longer customer relationships, greater name recognition and
significantly greater financial, technical, sales and marketing and other
resources than the Company. Such competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sales of their products than
the Company. Further, current or potential customers may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing their ability to address the needs of the
Company's current or prospective customers. The Company's current or future
indirect channel partners may establish cooperative relationships with current
or potential competitors of the Company, thereby limiting the Company's ability
to sell its products through particular distribution channels. Accordingly, it
is possible that new competitors or alliances among current competitors may
emerge and rapidly gain significant market share. There can be no assurance that
existing or future competitors will not develop or offer technologies that
provide significant economic, technological, creative or strategic advantages
over those offered by the Company.
The Company's ability to retain its existing customers and attract new customers
depends on the quality of its products and services, the speed of its
technological developments, the price of its products and services, its quality
of marketing, its reputation in the industry and its ability to maintain
customer satisfaction. To that end, the Company must continue to develop
appropriate marketing solutions, incorporate new technological capabilities,
meet time sensitive deadlines and devise appropriate pricing strategies. To the
extent that the Company's competitors are perceived as providing superior
products and services, or to the extent that the Company's customers are
dissatisfied with the Company's products and services, the Company's business,
operating results and financial condition could be materially adversely
affected.
LACK OF MARKET ACCEPTANCE OF COMPANY PRODUCTS; RAPID TECHNOLOGICAL CHANGE; RISKS
ASSOCIATED WITH PRODUCT DEVELOPMENT, INTRODUCTIONS AND ANNOUNCEMENTS
The market for the Company's products is characterized by evolving industry
standards, rapid technological change and frequent new product introductions and
enhancements. A key component of the Company's business is to enable businesses
to deliver a new generation of interactive digital content and applications to
users. Accordingly, some of the Company's success will depend upon its ability
to adhere to and adapt its products to evolving Internet, DVD and broadcast
protocols and standards so that users may obtain popular content.
44
The Company's operating results will therefore depend to a significant extent on
its ability to successfully develop and introduce new products that meet
changing customer requirements and emerging industry standards on a timely basis
and to reduce costs of existing products. There can be no assurance that the
Company's current or future products will achieve market acceptance or that the
Company will successfully identify new product opportunities and develop and
bring new products to market in a timely manner, that products developed by
others will not render the Company's products or technologies obsolete or
noncompetitive, or that the Company's products will be selected for design into
the products of manufacturers. The failure of any of the Company's product
development efforts could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company may experience delays in completing development and introduction of
new software products. In addition, from time-to-time, the Company or others may
announce products, features or technologies that have the potential to shorten
the life cycle of or replace the Company's then-existing products. Such
announcements could cause existing and potential customers to defer the decision
to buy or determine not to buy the Company's products, and such decisions would
have a material adverse effect on the Company's business, operating results and
financial condition.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
The company relies primarily on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. In addition, the company has several patent
applications pending. there can be no assurance that any patents will be issued
pursuant to these applications or that, if granted, such patents would survive a
legal challenge to their validity or provide significant protection for the
company. The company has also taken steps to avoid disclosure of its trade
secrets, including adopting a corporate policy on confidentiality that applies
to all employees, requiring non-employees with access to proprietary information
to enter into written confidentiality agreements with the company and
contractually restricting customer access to the company's source code.
Despite the Company's efforts to protect its proprietary rights, there can be no
assurance that the steps taken by the Company will be adequate to deter
misappropriation of its proprietary information, that the Company will be able
to detect unauthorized use and take appropriate steps to enforce its
intellectual property rights or that the Company's competitors will not
independently develop similar technology. In addition, the laws of many
countries do not protect the Company's proprietary rights to as great an extent
as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology. Any
failure by the Company to meaningfully protect its intellectual property could
have a material adverse effect on the Company's business, operating results and
financial condition.
In the future, the Company may receive notice of claims of infringement of other
parties' intellectual property rights. Although the Company does not believe
that its products infringe on the intellectual property rights of third parties,
there can be no assurance that such a claim will not
45
be asserted against the Company in the future, that the assertion of such a
claim will not result in litigation or that the Company would prevail in such
litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms.
Further, the Company acknowledges that software product developers may
increasingly be subject to infringement claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps.
RISK RELATED TO EVOLVING DISTRIBUTION CHANNELS
The Company intends to reach its customers through distribution agreements and
strategic partnerships. The development of these indirect channels will require
the investment of significant Company resources, which could materially
adversely affect the Company's business, operating results and financial
condition if the Company's efforts do not generate significant license revenues.
There can be no assurance that the Company will be able to attract strategic
partners that will be able to effectively market the Company's products and
services. The failure to recruit strategic partners that are able to
successfully market the Company's products and services could adversely affect
the Company's business, operating results and financial condition. In addition,
if it is successful in selling products and services through this channel, the
Company's gross margins will be negatively affected due to discounts offered to
such strategic partners.
DEPENDENCE ON THE INTERNET
Market acceptance of the Company's products and solutions is partially dependent
upon the pervasive adoption of the Internet for entertainment. As is typical in
the case of an emerging industry characterized by rapidly changing technology,
evolving industry standards and frequent new product and service introductions,
demand for and market acceptance of recently introduced Internet products and
services are subject to a high level of uncertainty. In addition, critical
issues concerning the commercial use of the Internet remain unresolved and may
affect the growth of Internet use, especially in the enterprise and consumer
markets targeted by the Company.
The adoption of the Internet for entertainment and access to content,
particularly by those individuals and enterprises that have historically relied
upon alternative means of entertainment and access to content, generally
requires understanding and acceptance of a new way of conducting business and
exchanging information. In particular, enterprises that have already invested
substantial resources in other means of providing entertainment content may be
reluctant and slow to adopt a new strategy. If the market fails to develop or
develops more slowly than expected, or if market competition increases, the
Company's business, operating results and financial condition may be materially
adversely affected.
To the extent that the Internet continues to experience an increase in users, an
increase in frequency of use or an increase in the bandwidth requirements of
users, there can be no assurance that the Internet infrastructure will be able
to support the demands placed upon it. In addition, the Internet could lose its
viability as a commercial medium due to delays in development or adoption of new
standards or protocols required to handle increased levels of Internet activity,
or due to increased government regulation. Changes in, or insufficient
availability of, telecommunications
46
or similar services to support the Internet also could result in slower response
times and could adversely affect use of the Internet generally.
If use of the Internet does not continue to grow or grows more slowly than
expected, or if the Internet infrastructure, standards, protocols or
complementary products, services or facilities do not effectively support any
growth that may occur, the Company's business, operating results (attributable
to that portion of the Company's business derived from Internet based products
and services) and financial condition would be materially adversely affected.
RISK OF SOFTWARE DEFECTS
Software products as complex as those offered by the Company may contain defects
or failures that may be detected at any point in the product's life. The Company
may experience delays or lost revenue to correct such defects in the future.
Despite testing by the Company, errors may still be found in new products or
releases of commercial shipment, resulting in loss of or delay in revenues, loss
of market share, failure to achieve market acceptance, diversion of development
resources and harm to the Company's reputation. Any such occurrence could have a
material adverse effect on the Company's business, operating results and
financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries or otherwise
be able to distinguish 21st century dates from 20th century dates. As a result,
in less than one year, computer systems and software used by many companies and
organizations in a wide variety of industries will experience operating
difficulties unless they are modified or upgraded to process information related
to the century change adequately. Significant uncertainty exists in the software
and other industries concerning the scope and magnitude of problems associated
with the century change.
The Company has recently implemented procedures to ensure that its software
products are Year 2000 compliant. Although the Company believes that its
products are substantially Year 2000 compliant, it will test and review its
products and continue to make additional enhancements to ensure all products are
Year 2000 compliant before December 31, 1999. However, there can be no assurance
that the Company will be successful in making its products fully Year 2000
compliant by such date or that actual internal or external personnel and
resources required to achieve such compliance will not materially exceed the
Company's current estimates.
In addition, the Company utilizes third-party equipment and software that may
not be Year 2000 compliant. Failure of such third-party equipment or software to
operate properly with regard to the Year 2000 and thereafter could require the
Company to incur unanticipated expenses to remedy any problems, which could have
a material adverse affect on the Company's business, operating results and
financial condition. Any failure by the Company to make its products Year 2000
compliant could result in a decrease in sales of the Company's products, an
increase in the allocation of resources to address Year 2000 problems of the
Company's customers without
47
additional revenue commensurate with such dedication of resources and an
increase in litigation costs relating to losses suffered by the Company's
customers due to such Year 2000 problems.
Furthermore, the purchasing patterns of the Company's enterprise customers or
potential enterprise customers may be affected by Year 2000 issues as businesses
expend significant resources to correct their current systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
products and services such as those offered by the Company, which could have a
material adverse affect on the Company's business, operating results and
financial condition.
MANAGEMENT OF GROWTH
The Company's rapid growth has placed, and is expected to continue to place, a
significant strain on the Company's managerial, operational and financial
resources. Moreover, the Company expects to significantly expand its operations
by, among other things, expanding the number of employees in professional
services, research and development and sales and marketing. This additional
growth will place a significant strain on its limited personnel, financial and
other resources. The Company's future success will depend, in part, upon the
ability of its senior management to manage growth effectively. This will require
the Company to implement additional management information systems, to further
develop its operating, administrative, financial and accounting systems and
controls, to hire additional personnel, to develop additional levels of
management within the Company, to locate additional office space in the United
States and internationally and to maintain close coordination among its
development, accounting, finance, sales and marketing, consulting services and
customer service and support organizations. The failure of the Company to manage
its future growth successfully would have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
The Company's future success depends in large part on the continued service of
its senior management and other key technical, sales and marketing personnel.
The loss of the services of any key employee could have a material adverse
effect on the Company's business, operating results and financial condition. If
one or more members of the Company's senior management or any of the Company's
key employees were to resign from the Company, particularly to join a competitor
or to form a competitor of the Company, the loss of such personnel and any
resulting loss of existing or potential customers to any such competitor could
have a material adverse effect on the Company's business, operating results and
financial condition. In addition, there can be no
48
assurance that, in such an event, the Company would be able to recruit personnel
to replace such senior management on terms that are acceptable to the Company.
Further, the Company maintains no key-person life insurance.
The Company's future success also depends to a significant degree on its ability
to attract, assimilate and retain highly qualified technical, sales and
management personnel. Competition for such personnel is intense and the process
of locating key technical, sales and management personnel with the combination
of skills and attributes required to execute the Company's strategy is often
lengthy. There can be no assurance that the Company will continue to attract,
assimilate and retain key personnel, and the failure to do so will have a
material adverse effect on the Company's business, operating results and
financial condition.
CONTROL BY EXISTING OFFICERS AND DIRECTORS.
The Company's executive officers and directors currently own an aggregate of
1,937,858 options, warrants and issued Common Shares, which represents
approximately 11% of the outstanding Common Shares as of the date hereof.
CONFLICTS OF INTEREST.
Certain of the directors and officers of the Company are also directors and/or
officers and/or shareholders of other high-tech companies, or of other companies
with whom the Company has contractual relations. If any conflicts arise whereby
directors have interests in companies or in business activities which are in
competition with the business of the Company, such conflicts will be subject to
and governed by the laws applicable to directors and officers in conflict of
interest, including the procedures described in the Business Corporations Act
(Alberta) which are set forth in Item 13 Interests of Management in Certain
Transaction hereof.
DIVIDENDS.
All of the Company's available funds will be invested to finance the growth of
the Company's business and, therefore, investors cannot expect and should not
anticipate receiving a dividend on the Common Shares in the foreseeable future.
ENFORCEMENT OF CIVIL LIABILITIES.
As substantially all of the assets of the Company and its subsidiaries are
located outside of Canada, it may be difficult or impossible to enforce
judgments granted by a court in Canada against the assets of the Company and its
subsidiaries or the directors and officers of the Company resident outside of
Canada.
GOVERNMENT REGULATIONS; SAFETY ASPECTS.
The Company is commercially active in a number of countries with different
legislation pertaining to the regulation of the Company's products. Full
compliance in one jurisdiction is not a guarantee that products do not violate
regulations or exceed safety limits in other jurisdictions.
49
Although the Company's licensees are generally responsible for compliance with
safety and other laws in each country to which licensed products are supplied,
there can be no absolute guarantee that product liability can be isolated to the
licensees of the Company or that the Company's prototypes could not cause
litigation in case of accidental malfunction or breach of safety standards.
There can be no assurance that the claims against the Company can be
successfully defended or that the consequences of such litigation may not have a
material effect on the business or financial results of the Company.
CURRENCY FLUCTUATIONS.
The Company currently bills only in United States and Australian dollars with
its revenues and expenses, and its assets and liabilities recorded in its
subsidiary company's functional currency which are translated to Canadian
dollars for reporting purposes. Exchange rates for these currencies often
fluctuate in relation to the Canadian dollar and such fluctuations may effect
the Company's assets and liabilities when they are translated to Canadian
dollars. The Company does not currently engage in any hedging transactions in
international currencies.
PRODUCT SAFETY STANDARDS
Prior to introducing the hardware products in certain countries, the Company may
be required to submit products for testing to local electrical and
electromagnetic interference safety standards. Failure to be able to meet the
local safety standards may result in the Company not being approved to sell the
products in the country concerned. There can be no assurance that the Company
will be able to comply with such regulations.
ITEM 2 DESCRIPTION OF PROPERTY
Dynamic Digital Depth Australia Pty. Ltd. ("DDD Australia Pty. Ltd.")
exercised an option deed on a building comprising 1,711 square meters located
at 6-8 Brodie Hall Drive, Technology Park, Bentley, Western Australia. DDD
Australia Pty. Ltd. currently occupies Unit 1 comprised of 758 square meters
of this building and is actively seeking purchasers for the building on a
suite by suite basis. As of December 30, 1999, the Company has sold two Units
of this building, including Unit 1. Dynamic Digital Depth Australia Pty Ltd
has entered into a ten year lease with the purchaser an annual rental of
A$121,280.
Dynamic Digital Depth Inc. maintains one office suite comprising approximately
1,000 square feet in California at an annual cost of U.S. $30,000. In order to
accommodate the planned expansion of the USA office, the Company has executed
a lease for 5,637 square feet in Santa Monica, California to replace the
existing office suite. The term of the lease is sixty months commencing upon
completion of certain improvements to the property with an annual base rent
of US $216,460 secured by a letter of credit.
ITEM 3 LEGAL PROCEEDINGS
On January 22, 1999 Angus Duncan Richards ("Richards") served a notice of
dispute on the Company related to the terms of a Consulting Agreement between
the Company and Richards. Richards alleges that the Company has breached the
Consulting Agreement through the failure to
50
make payments to Richards out of the gross annual income receipts and capital
funds raised in connection with the exploitation of certain technologies which
Richards assisted to develop. Richards also alleges that the Company has failed
to use its best endeavors to commercially exploit the technology. Richards also
alleges that the certain intellectual property which was assigned to Dynamic
Digital Depth Research Pty. Ltd. be returned to Richards. In the event that
Richards was to succeed in his claim the Company would be exposed to a liability
to pay to Richards AUS $99,053 together with further payments not exceeding AUS
$200,000 per annum contingent upon the extent to which the Company derives
revenue and capital from commercial exploitation of certain technologies which
Richards assisted to develop. The dispute is subject to arbitration for which no
date has been set. The Company refutes all of the allegations and intends to
rigorously defend this matter.
On December 20, 1998, Richards commenced litigation in The Court of Queen's
Bench of Alberta, Judicial District of Calgary, in Alberta, Canada seeking
monetary damages of $227,500 plus interest and court costs. Richards alleges
that the Company failed to permit him to exercise options to purchase 182,000
Common Shares at an exercise price $1.25 per share. The Company refused to
permit Richards to exercise the options based upon a determination that the
options had expired prior to Richards attempt to exercise the options. The
Company filed a Statement of Defense on February 10, 1999. The litigation is
currently in the discovery phase. The Company refutes all of the allegations and
intends to rigorously defend this matter.
ITEM 4 CONTROL OF REGISTRANT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 1, 1999 by each person
who, to the knowledge of the Company, beneficially owned more than 10% of the
Common Stock.
- -------------------------- ------------------------------ --------------------
NAME AND PLACE OF NUMBER OF COMMON SHARES PERCENTAGE OF
RESIDENCE OWNED OR CONTROLLED AS AT OUTSTANDING
THE EFFECTIVE DATE(1) COMMON SHARES
- -------------------------- ------------------------------ --------------------
The Liverpool Limited 3,375,479 18.8%
Partnership
Bermuda
- -------------------------- ------------------------------ --------------------
Westgate International, 3,375,480 18.8%
L.P.
Cayman Islands
- -------------------------- ------------------------------ --------------------
(1) Information as to beneficial shareholdings has been provided to the
Corporation by these beneficial shareholders. The general partners of these
beneficial shareholders are Liverpool Associates, Ltd. and Hambledon, Inc.
respectively. The Company has no information as to the identity of the limited
partners of these entities.
ITEM 5 NATURE OF TRADING MARKET
51
The Common Shares are listed and posted for trading on the ASE under the stock
symbol "DDE." The following table sets forth the high and low closing bid prices
on the ASE and the volume of Common Shares traded for each Fiscal quarter for
the period indicated. All financial figures are expressed in Canadian Dollars.
FISCAL PERIOD HIGH (CAD$) LOW (CAD$) VOLUME
(JUNE 30 YEAR-END)
2000
First Quarter $9.25 $2.50 1,124,548
1999
Fourth Quarter $3.80 $1.15 939,164
Third Quarter $1.50 $0.80 121,720
Second Quarter $2.05 $1.10 223,437
First Quarter $2.20 $1.65 886,478
1998
Fourth Quarter $2.25 $1.20 1,605,107
Third Quarter $1.90 $0.75 421,963
Second Quarter $2.00 $1.25 523,799
First Quarter $2.30 $1.15 852,689
(prices and volume for periods prior to August 1998 have been restated to give
effect to a one-for-five reverse stock split)
On December 20, 1999, the closing bid price of the Common Shares on the ASE
was $7.50 per share.
To the best of the Company's knowledge, as of June 28, 1999, 2,962,302 Common
Shares were held by 7 registered holders in the United States. The Common Shares
currently are not listed for trading on any securities exchange in the United
States. The Common Shares are not registered to trade in the United States in
the form of American Depository Receipts or similar certificates.
ITEM 6 EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no governmental laws, decrees or regulations in Canada relating to
restrictions on the export or import of capital, or affecting the remittance of
interest, dividends or other payments by the Company to non-residents. Dividends
paid to United States residents, however, are subject to a 15% withholding tax
or a 5% withholding tax for dividends if the shareholder is a corporation owning
at least 10% of the outstanding voting shares of the corporation pursuant to
Article X of the reciprocal tax treaty between Canada and the United States.
(See "Item 7 - Taxation")
In addition, there are no limitations specific to the rights of non-Canadians to
hold or vote the Common Shares under the laws of Canada or the Province of
Alberta, or in the charter documents of the Company.
52
Management of the Company believes that the Investment Canada Act (the "Act")
which governs the basis on which non-Canadians may invest in Canadian
businesses, does not apply in the case of the Company, as the Company does not
(a) have a place of business in Canada; (b) employ individuals in Canada in
connection with its business; and (c) have assets in Canada which are used in
carrying on the Company's business.
ITEM 7 TAXATION
CANADIAN TAXATION ISSUES
The following is a summary of the principal Canadian federal income tax
considerations generally applicable in respect of the Common Shares. The tax
consequences to any particular holders of Common Shares will vary according to
the status of that holder as an individual, trust, corporation or member of a
partnership, the jurisdiction in which that holder is subject to taxation, the
place where that holder is resident and, generally, according to that holder's
particular circumstances.
This summary is applicable only to holders who are resident in the United
States, have never been resident in Canada, hold their Common Shares as capital
assets and will not use or hold the Common Shares in carrying on business in
Canada.
The following general discussion in respect of taxation is based upon the
Company's understanding of the rules. No opinion was requested by the Company or
provided by its auditors and lawyers.
Generally, dividends paid by Canadian corporations to non-resident shareholders
are subject to a withholding tax of 25% of the gross amount of such dividends.
However, Article X of the tax treaty between Canada and the United States
reduces to 15% the withholding tax on the gross amount of dividends paid to
residents of the United States. A further reduction in the withholding tax rate
on the gross amount of dividends to 5% for dividends paid in 1997 and thereafter
where a United States corporation owns at least 10% of the voting stock of the
Canadian corporation paying the dividends.
A non-resident who holds Common Shares as a capital asset will not be subject to
taxes on capital gains realized on the disposition of such Common Shares unless
such Common Shares are "taxable Canadian property" within the meaning of the
Income Tax Act (Canada) and no relief is afforded under any applicable tax
treaty. The Common Shares would be taxable Canadian property of a non-resident
if, at any time during the five year period immediately preceding a disposition
by the non-resident of such Common Shares not less than 25% of the issued shares
of any class of the Company belonged to the non-resident, the person with whom
the non-resident did not deal at arm's length, or to the non-resident and any
person with whom the non-resident did not deal at arm's length. Article XIII of
the tax treaty between Canada and the United States provides relief from
Canadian tax on capital gains from the sale of Common Shares which are "taxable
Canadian property" unless the person who disposes of the Common Shares:
a) was resident in Canada for 120 months in the 20 years preceding the
disposition;
53
b) was resident in Canada at any time in the 10 years preceding the
disposition; and
c) the Common Shares were owned at the time the person ceased to be resident
in Canada.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain United States federal income
tax consequences that may apply to a "U.S. Holder" (as defined below) of Common
Shares. This discussion is based upon the sections of the Internal Revenue Code
of 1986, as amended (the "Code"), the Treasury Department regulations
promulgated thereunder (the "Regulations"), published Internal Revenue Service
("IRS") rulings, published administrative positions of the IRS, and court
decisions that are currently applicable, any or all of which could materially
and adversely change at any time, possibly on a retroactive basis. In addition,
the discussion does not consider the potential effects, both adverse and
beneficial, of any proposed legislation which, if enacted, could be applied at
any time, possibly on a retroactive basis. The following discussion is not
intended to be, nor should it be construed to be, legal or tax advice to any
holder or prospective holder of Common Shares. No opinion was requested by the
Company, or is provided by its lawyers and/or auditors, with respect to the
United States federal income tax consequences described in the following
discussion. Accordingly, holders and prospective holders of Common Shares should
consult their own tax advisors about the United States federal, state, local and
foreign tax consequences of purchasing, owning, and disposing of Common Shares.
U.S. HOLDERS
As used herein, a "U.S. Holder" includes a holder of Common Shares who is a
citizen or resident of the United States, a corporation or partnership created
or organized in or under the laws of the United States or of any political
subdivision thereof, certain defined trusts and estates, and any other person or
entity whose ownership of Common Shares is effectively connected with the
conduct of a trade or business in the United States. A U.S. Holder does not
include persons subject to special provisions of Federal income tax law, such as
tax-exempt organizations, qualified retirement plans, financial institutions,
insurance companies, real estate investment trusts, regulated investment
companies, broker-dealers, non-resident alien individuals or foreign
corporations whose ownership of Common Shares is not effectively connected with
the conduct of a trade or business in the United States and shareholders who
acquired their stock through the exercise of employee stock options or otherwise
as compensation.
DISTRIBUTIONS ON COMMON SHARES
U.S. Holders receiving dividend distributions (including constructive dividends)
with respect to Common Shares are required to include in gross income for United
States federal income tax purposes the gross amount of such distributions to the
extent that the Company has current or accumulated earnings and profits, without
reduction for any Canadian income tax withheld from such distributions. Such
Canadian tax withheld may be credited, subject to certain limitations, against
the U.S. Holder's United States federal income tax liability or, alternatively,
may be deducted in computing the U.S. Holder's United States federal taxable
income by those who
54
itemize deductions. (See the detailed discussion at "Foreign Tax Credit" below).
To the extent that distributions exceed current or accumulated earnings and
profits of the Company, they will be treated first as a return of capital up to
the U.S. Holder's adjusted basis in the Common Shares (and not subject to tax)
and thereafter as gain from the sale or exchange of the Common Shares (which is
taxable as capital gains). Preferential tax rates for long-term capital gains
may apply to certain U.S. Holders who satisfy minimum holding period and other
requirements. There are currently no preferential tax rates for long-term
capital gains for a U.S. Holder that is a corporation.
Dividends paid on the Common Shares generally will not be eligible for the
dividends-received deduction available to corporations receiving dividends from
certain United States corporations. A U.S. Holder which is a corporation may,
under certain circumstances, be entitled to a 70% deduction of the United States
source portion of dividends received from the Company (unless the Company
qualifies as a "foreign personal holding company" or a "passive foreign
investment company," as defined below) if such U.S. Holder owns shares
representing at least 10% of the voting power and value of the Company. The
availability of this deduction is subject to several complex limitations which
are beyond the scope of this discussion.
FOREIGN TAX CREDIT
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of Common Shares of the Company may be entitled,
at the option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Furthermore, a US Holder which is a domestic
corporation may claim a deemed paid foreign tax credit based on the underlying
income taxes of the Company.
Generally, it will be more advantageous to claim a credit because a credit
reduces United States federal income taxes on a dollar-for-dollar basis, while a
deduction merely reduces the taxpayer's income subject to tax. This election is
made on a year-by-year basis and applies to all foreign income taxes (or taxes
in lieu of income tax) paid by (or withheld from) the U.S. Holder during the
year. There are significant and complex limitations which apply to the credit,
among which is the general limitation that the credit cannot exceed the
proportionate share of the U.S. Holder's United States federal income tax
liability that the U.S. Holder's foreign source income bears to his/her or its
worldwide taxable income. In the determination of the application of this
limitation, the various items of income and deduction must be allocated to
foreign and domestic sources. Complex rules govern this allocation process.
There are further limitations on the foreign tax credit for certain types of
income such as "passive income," "high withholding tax interest," "financial
services income," "shipping income," and certain other classifications of
income. The availability of the foreign tax credit, the deemed paid foreign tax
credit, and the application of the limitations on the credit are fact-specific
and holders and prospective holders of Common Shares should consult their own
tax advisors regarding their individual circumstances.
DISPOSITION OF COMMON SHARES
A U.S. Holder will recognize gain or loss upon the sale of Common Shares equal
to the difference, if any, between (i) the amount of cash plus the fair market
value of any property
55
received, and (ii) the shareholder's tax basis in the Common Shares. This gain
or loss will be capital gain or loss if the Common Shares are a capital asset in
the hands of the U.S. Holder, which will be a short-term or long-term capital
gain or loss depending upon the holding period of the U.S. Holder. Gains and
losses are netted and combined according to special rules in arriving at the
overall capital gain or loss for a particular tax year. Deductions for net
capital losses are subject to significant limitations. For U.S. Holders who are
individuals, any unused portion of such net capital loss may be carried over to
be used in later tax years until such net capital loss is thereby exhausted. For
U.S. Holders that are corporations (other than corporations subject to
Subchapter S of the Code), an unused net capital loss may be carried back three
years from the loss year and carried forward five years from the loss year to be
offset against capital gains until such net capital loss is thereby exhausted.
AUSTRALIAN TAXATION ISSUES
The shareholders of the Company are not directly subject to any Australian
income taxes, however, the Company is subject to the following tax laws related
to its Australian subsidiaries.
The Australian subsidiaries of the Company will be assessed separately to
Australian income tax on all income sourced worldwide. The Australian tax year
runs from July 1 to June 30, however permission can be sought for a substituted
tax year to coincide with the tax year of an overseas holding company. Trading
profits and other income of the subsidiaries is taxable at the rate of 36%. The
Federal Government of Australia is presently considering introducing a goods and
services tax ("GST") which, if introduced, may coincide with a reduction in the
corporate rate of income tax, but will increase the tax expense for the
subsidiaries of goods and services consumed by them. Capital gains are taxed at
the ordinary company income tax rate. Dividends paid by the Australian
subsidiaries to the Company will be free from dividend withholding tax in
Australia only to the extent that the relevant subsidiary has paid Australian
tax on profits from which the dividends are paid (called "franked" dividends).
Where a dividend paid by the relevant subsidiary to the Company is not
"franked", a 15% withholding tax is payable under the Canada-Australia double
tax treaty provided that the Company does not maintain a permanent establishment
in Australia or a fixed base for the performance of independent personal
services and the holding giving rise to the dividend is "effectively connected"
with the permanent establishment or fixed base.
The trading losses of the subsidiaries incurred in the 1989/1990 financial year
and subsequent years can be carried forward indefinitely and offset against
future assessable income provided that the subsidiaries satisfy at least one of
the tests of continuity of more than 50% of shareholding and control or
continuity of carrying on the same business.
Since the Company holds more than 15% of the equity, control or income of the
subsidiaries any interest bearing loans made by the Company to the subsidiaries
must not exceed the ratio of 2:1 debt/equity or the subsidiaries will be denied
a tax deduction for interest paid on the debt to the extent that the ratio is
exceeded. Australian withholding tax on interest is at the rate of 10%.
56
Intercompany pricing rules apply to enable the Australian Commissioner of
Taxation to adjust prices, with respect to underpriced receivables from foreign
associates of Australian companies and overpriced revenue payable to such
associates, back to arms length prices.
Companies are assessed for Australian income tax separately notwithstanding that
they are part of a group of companies however intergroup losses can be
transferred where there is 100% common ownership of the Australian resident
companies by an ultimate corporate shareholder throughout the period of the
relevant year or years of income.
OTHER CONSIDERATIONS
In the following four circumstances, the above sections of the discussion may
not describe the United States federal income tax consequences resulting from
the holding and disposition of Common Shares of the Company. However, on the
basis of (a) the number of shareholders of its Common Shares, (b) the majority
ownership of its shares by Canadian and other non-U.S. residents, and (c) the
fact that the majority of its assets are actively managed (not passively held),
the Company believes that it is neither a "Foreign Personal Holding Company,"
"Foreign Investment Company," "Passive Foreign Investment Company," nor a
"Controlled Foreign Company."
FOREIGN PERSONAL HOLDING COMPANY
If at any time during a taxable year more than fifty percent (50%) of the total
combined voting power or the total value of the Company's outstanding shares is
owned, actually or constructively, by five or fewer individuals who are citizens
or residents of the United States, and sixty percent (60%) or more of the
Company's gross income for such year was derived from certain passive sources
(e.g. from dividends received from its subsidiaries), the Company would be
treated as a "foreign personal holding company" for United States federal income
tax purposes. In that event, U.S. Holders that hold Common Shares would be
required to include in gross income for such year their allowable portions of
such passive income to the extent the Company does not actually distribute such
income.
FOREIGN INVESTMENT COMPANY
If fifty percent (50%) or more of the combined voting power or total value of
the Company's outstanding shares is held, actually or constructively, by
citizens or residents of the United States, United States domestic partnerships
or corporations, or estates or trusts (as defined by Code Section 7701(a)(30)),
and the Company is found to be engaged primarily in the business of investing,
reinvesting, or trading in securities, commodities, or any interest therein, it
is possible that the Company might be treated as a "foreign investment company"
as defined in Section 1246 of the Code, causing all or part of any gain realized
by a U.S. Holder selling or exchanging Common Shares to be treated as ordinary
income rather than capital gains.
PASSIVE FOREIGN INVESTMENT COMPANY
As a foreign corporation with U.S. Holders, the Company could potentially be
treated as a passive foreign investment company ("PFIC"), as defined in Section
1297 of the Code, depending upon
57
the percentage of the Company's income which is passive, or the percentage of
the Company's assets which are held for the purpose of producing passive income.
The rules governing PFICs can have significant tax effects on U.S. shareholders
of foreign corporations. Section 1297(a) of the Code defines a PFIC as a
corporation that is not formed in the United States and, for any taxable year,
either (i) seventy-five percent (75%) or more of its gross income is "passive
income", which includes interest, dividends and certain rents and royalties or
(ii) the average percentage, by fair market value (or, if the company is a
controlled foreign corporation or makes an election, by adjusted tax basis), of
its assets that produce or are held for the production of "passive income" is
fifty percent (50%) or more. The taxation of a U.S. shareholder who owns stock
in a PFIC is extremely complex and is therefore beyond the scope of this
discussion. U.S. persons should consult with their own tax advisors with regard
to the impact of these rules.
CONTROLLED FOREIGN COMPANY
If more than fifty percent (50%) of the voting power of all classes of stock or
the total value of the stock of the Company is owned, directly or indirectly, by
citizens or residents of the United States, United States domestic partnerships
and corporations or estates or trusts other than foreign estates or trusts, each
of whom own 10% or more of the total combined voting power of all classes of
stock of the Company or the total value of the stock of the Company ("United
States shareholders"), the Company could be treated as a controlled foreign
corporation under Subpart F of the Code.
This classification would trigger the application of many complex results
including the required inclusion by such United States shareholders in income of
their pro rata share of "Subpart F income" (as specifically defined by the Code)
of the Company and the Company's earnings invested in U.S. property. In
addition, regardless of the classification of the Company as a Controlled
Foreign Corporation under Section 1248 of the Code, gain from the sale or
exchange of Common Shares by a U.S. person who is or was a United States
shareholder (as defined above) at any time during the five-year period ending
with the sale or exchange is treated as ordinary dividend income to the extent
of earnings and profits of the Company attributable to the stock sold or
exchanged. Because of the complexity of Subpart F and Section 1248, and because
it is not clear that the Company is a controlled foreign corporation, a more
detailed review of these rules is outside of the scope of this discussion.
58
ITEM 8 SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Financial Statements and Notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data included elsewhere in this Annual Report. The consolidated
statements of loss and deficit for the years ended June 30, 1997, 1998 and 1999
and the balance sheet data at June 30, 1998 and 1999, are derived from audited
consolidated financial statements included elsewhere in this Annual Report. The
Company's audited consolidated financial statements are prepared in Canadian
generally accepted accounting principles which vary in certain respects from
United States generally accepted accounting principles. See Note 16 to the
financial statements for a discussion of the significant differences between
Canadian and U.S. generally accepted accounting principles as they apply to the
Company for the periods presented therein.
Historical results are not necessarily indicative of future results.
Year Ended June 30th
1999 1998 1997
$000's
INCOME LOSS AND DEFICIT
Total revenue 199 368 279
Net loss from period (6,066) (2,257) (1,599)
Per share (0.38) (0.21) (0.19)
BALANCE SHEET DATA (AT PERIOD END)
Total assets 5,706 9,203 2,274
Total long-term debt 64 88 980
Cash dividends declared per share 0.00 0.00 0.00
U.S. GAAP RECONCILED AMOUNTS
Net loss for period (6,077) (3,026) (2,459)
Per share (0.37) (0.29) (0.28)
Total assets 5,666 7,547 1,414
ITEM 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED CONSOLIDATED
FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS ANNUAL REPORT. THIS DISCUSSION AND ANALYSIS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND
ASSUMPTIONS. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING,
BUT NOT LIMITED TO, THOSE SET FORTH UNDER "BUSINESS RISKS" AND ELSEWHERE IN
THIS ANNUAL REPORT.
BACKGROUND AND BASIS OF PRESENTATION
59
Dynamic Digital Depth Inc. ("DDD" or the "Company") is a software and hardware
developer engaged in the development and commercialization of effective,
affordable 3D content, services and delivery technologies for mass-market
applications. DDD has developed a range of patented software and hardware
applications centered upon the emerging demand and technical feasibility of
displaying still and moving images in "stereoscopic 3D." The Company's solutions
are designed for use in a broad range of markets including Internet, cable,
satellite or terrestrial broadcasting, film and prerecorded video and DVD
markets.
To date, the Company has had limited commercial revenues while its efforts have
focused of the development of its technologies and products. Since inception,
the Company has incurred operating losses of approximately $11.9 million related
to the development of its technologies. The Company anticipates significant
product introductions in late 1999 and early 2000 which should begin to generate
revenue in Fiscal 2000, transforming the Company from principally a research and
development company to a technology-based marketing, licensing and distribution
company. The rate at which this transformation will occur is dependent on a
number of factors, many of which are beyond the Company's control. These include
the willingness of production companies to make their content available in 3D,
the willingness of broadcasters and cable system operators to invest in the
Company's technologies, and the willingness of consumers to buy and use the
ancillary equipment needed to view 3D images using the Company's technologies,
such as LCD shutter or red/blue anaglyph glasses.
The Consolidated Financial Statements of the Company include the accounts of
Dynamic Digital Depth Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The Company's
research and development operations and executive offices are located in Perth,
Australia. The Company is incorporated under the laws of Canada and it prepares
its financial statements in Canadian dollars and in accordance with Canadian
Generally Accepted Accounting Principles ("Canadian GAAP"). The notes to the
Consolidated Financial Statements include a note which describes the principal
differences between Canadian GAAP and Generally Accepted Accounting Principles
in the United States ("US GAAP").
In August 1998 the Company effected a one for five reverse stock split. In this
Annual Report, all references to numbers of shares and purchase or exercise
prices per share have been adjusted to give effect to the reverse stock split.
RESULTS OF OPERATIONS
During the financial years ended June 30, 1997 ("Fiscal 1997"), June 30, 1998
("Fiscal 1998") and June 30, 1999 ("Fiscal 1999") the Company's results of
operations reflect a continuing focus on its research and development program
together with an expansion of marketing activities as its technologies were
developed to a level where they could begin to be commercialized.
REVENUES
During Fiscal 1997, 1998 and 1999 revenues were derived from the following
sources:
60
------------------------------ ---------------------------------------------------------------
YEAR ENDED 30 JUNE
------------------------------ ---------------------------------------------------------------
------------------------------ -------------------- -------------------- ---------------------
1999 $CAD 1998 $CAD 1997 $CAD
------------------------------ -------------------- -------------------- ---------------------
Interest received 110,583 31,321 22,242
------------------------------ -------------------- -------------------- ---------------------
Government subsidies 36,319 31,114 156,259
------------------------------ -------------------- -------------------- ---------------------
Revenues derived from 29,545 299,099 85,922
technologies
------------------------------ -------------------- -------------------- ---------------------
Other income 22,379 6,531 14,405
------------------------------ -------------------- -------------------- ---------------------
TOTAL 198,826 368,065 278,828
------------------------------ -------------------- -------------------- ---------------------
Interest was earned from cash balances invested in cash management accounts. The
amount of interest received for Fiscal 1999 was considerably more than that
received for Fiscal 1998, Fiscal 1997 and Fiscal 1996 as a result of the
investment of funds received from the May 1998 private placement of common
shares.
Government subsidies represent amounts received by the Australian subsidiary,
Dynamic Digital Depth Australia Pty Ltd. by way of Export Market Development
Grants from the Federal Government of Australia. These grants are provided to
Australian companies to assist them in developing export markets and are based
upon both export revenues earned and expenses incurred in developing export
markets. From the fourth year of claims the maximum grant payable is calculated
by reference to export market development expenditure incurred up to a specified
percentage of export revenues earned. This specified percentage reduces with
each year of claim until no further claims are payable after the eighth year of
claim. The grants are paid in the year following the occurrence of the revenue
or expenditure. To date the most substantial grant received was during Fiscal
1997 that was based upon comparatively significant export earnings during Fiscal
1996. Grants received during Fiscal 1998 and 1999 reflect a combination of
reduced export revenue earnings and a reduction in the percentage used to
calculate the grant.
Revenues derived from technologies represent amounts received from activities
undertaken by the Company whereby it has charged and been paid for services
performed and undertaken pursuant to agreements entered into with third parties
who were or are considered to be potentially long-term customers of the Company.
The work involved using the Company's technologies in order to establish whether
or not they were suitable for large-scale commercialization. The table below
details revenues received from technologies for the Fiscal 1997, 1998 and 1999
years.
--------------------------- -------------------------------------------------
Year ended 30 June
--------------------------- -------------------------------------------------
1999 1998 1997
--------------------------- ---------------- ----------------- --------------
$CAD $CAD $CAD
--------------------------- ---------------- ----------------- --------------
License Fees 14,340 250,014 85,922
--------------------------- ---------------- ----------------- --------------
Conversion Services 15,205 4,309 -
--------------------------- ---------------- ----------------- --------------
Sale of Prototypes - 44,776 -
--------------------------- ---------------- ----------------- --------------
Total 29,545 299,099 85,922
--------------------------- ---------------- ----------------- --------------
61
License fees represent amounts received from several corporations including
Video Applications Inc., Tomen Corporation, Imagica Corporation (Japan) and
Imagica USA and Carl Zeiss in relation to agreements entered into with those
organizations that allowed them to evaluate the suitability of the Company's
technologies in the context of their own business operations. The decrease in
revenues during Fiscal 1999 as compared to the prior periods was primarily due
to the completion of several large format film conversion projects in Fiscal
1998 and the Company's shift in focus away from conversion services to the
commercialization of its products.
License fee revenues received during Fiscal 1997 were derived from Tomen
($59,207) and Zeiss ($26,715), during Fiscal 1998 from Tomen ($65,554), Imagica
Japan ($99,375) and Imagica USA ($85,085) and during Fiscal 1999 from Video
Applications Inc.
With the exception of that with Video Applications Inc., none of the agreements
referred to above that have generated revenues in the periods covered by this
document are currently in force.
In the overall context of its past operations the Company has not consistently
achieved substantial revenues from the commercialization of its technologies.
This reflects the policies employed by the Company in that it has tended to
focus on the development of the technologies in order to bring them to the
appropriate level of sophistication and marketability required for their
successful commercialization.
OPERATING EXPENSES
The following table sets forth financial data relating to operating expenditure
for the periods indicated:
-------------------------------------- ----------------------------------------------------------
YEAR ENDED 30 JUNE
-------------------------------------- ----------------------------------------------------------
1999 $CAD 1998 $CAD 1997$CAD
-------------------------------------- ------------------- ------------------ -------------------
Amortization 137,230 42,225 69,725
-------------------------------------- ------------------- ------------------ -------------------
General and administrative 2,280,180 1,510,458 1,096,167
-------------------------------------- ------------------- ------------------ -------------------
Interest Expense - 264,633 -
-------------------------------------- ------------------- ------------------ -------------------
Market development 210,023 306,324 169,242
-------------------------------------- ------------------- ------------------ -------------------
Project costs 18,803 32,883 33,338
-------------------------------------- ------------------- ------------------ -------------------
Salaries and wages 1,023,180 468,435 509,467
-------------------------------------- ------------------- ------------------ -------------------
Development costs 2,595,619 - -
-------------------------------------- ------------------- ------------------ -------------------
TOTAL 6,265,035 2,624,958 1,877,939
-------------------------------------- ------------------- ------------------ -------------------
FISCAL 1999 COMPARED TO FISCAL 1998
The increase in amortization expense resulted from the acquisition of additional
leased and owned assets during the last quarter of Fiscal 1998 incurring a full
years amortization during Fiscal 1999, together with further acquisitions of
leased and owned assets during Fiscal 1999 including those associated with the
establishment of operations in the United State of America.
The increase in general and administrative expenses was a net result of a number
of significant developments during the period. These were:
$CAD
000's
- - In May 1998 the USA subsidiary Dynamic Digital Depth USA
62
commenced operations, including opening an office in Los Angeles. This has
resulted in a full year increase in expenditure of:
286
- - The use of external consultants to assist with the establishment of a
corporate database, preparation of marketing plans and submissions to
government bodies and general advice and assistance on administrative and
accounting matters resulted in an increase in expenditure of:
95
- - The appointment of public relations and investor relations firms to assist
with the establishment and promotion of the of the Company's profile in the
United States with potential customers and investors resulted in an
increase in expenditure of:
129
- - The establishment of the offices of the USA subsidiary resulted increased rental
expenditure of: 113
- - The lease of new office premises in Perth, Western Australia (including a
period of time during which an extensive fit-out was undertaken and the new
premises were unoccupied) resulted in an increase in expenditure of:
135
- - The commencement of operations by the US subsidiary created additional
travel and accommodation costs which resulted in a net increase in
expenditure of:
58
- - The net result of movements in exchange rates between the Canadian,
Australian and United States dollars coupled with activities occurring in
those three countries resulted in a net increase in foreign exchange gains
of: (340)
- - As a result of production projects undertaken in the latter half of Fiscal
1999 there was an increase in Sub-Contractor costs (not related to research
and development) of: 191
- - With the establishment of an office in the USA and the increase in activities there
has a substantial growth in the usage of telecommunications resulting in an increase in
expenditure of: 78
- - Payment of Director's fees 25
----------
- - Net comparative increase in expenditure
770
----------
----------
No interest expense was incurred during Fiscal 1999 as the promissory notes,
together with accrued interest were converted into common stock and warrants in
May 1998 in connection with the Company's private placement.
The commencement of operations in the USA and the employment of full time staff
has resulted in a reduction in comparative Marketing expenditure of $77,000 as
much of what was previously done by external parties is now done "in-house".
Project costs have reduced as those projects requiring outsourced materials, etc
have been wound back and other projects that are more labour intensive have
developed.
63
In addition to other increases in operating expenses outlined above, the
commencement of operations in the USA by Dynamic Digital Depth USA Inc. also
resulted in an increase in salaries and wages of approximately $361,000. The
balance of the increase in this expenditure gained by comparing the two periods
of approximately $193,000 resulted from salary increases awarded to staff
employed by the Australian subsidiaries, together with the employment of
additional personnel in those subsidiaries.
As referred to elsewhere in this statement, commencing on July 1, 1996, the
Company began a program of identification of development expenditure incurred
during each of the subsequent Fiscal years for which it was considered
appropriate within Canadian GAAP guidelines to be capitalized as deferred. This
practice was continued up to and including the Interim Period ended March 31,
1999. Since this latter date and June 30, 1999 the Company has reviewed this
policy and is now of the opinion that it is no longer appropriate to continue to
carry such deferred costs. This decision was arrived after taking into account
the nature of such expenditures, the status of the various projects for which
expenditure had been deferred and the future directions the Company was taking
with regard to the marketing and commercialization of its technologies. Having
undertaken this evaluation and determining that previously capitalized
development costs of $2,595,619 (including those amounts capitalized during the
Interim Period to March 31, 1999 of $987,399) no longer met the criteria for
deferment it was decided to write back that amount as a charge against Fiscal
1999.
FISCAL 1998 COMPARED TO FISCAL 1997
In comparing these two Fiscal years it should be noted that in both years
expenditures incurred in respect of ongoing development were capitalized as
deferred in accordance with Canadian GAAP. From July 1, 1997 until March 31,
1999, the Company adopted a change in accounting in relation to such
development costs to be deferred. The Company implemented new systems that
permitted a more precise allocation of those costs that related directly to
development to be included within the costs capitalized for the period. The
effect of those changes is estimated to have increased capitalized
development costs by approximately $270,000 for Fiscal 1998 over Fiscal 1997
which were subsequently written off in 1999.
The amount of amortization expense for Fiscal 1998 is $28,000 less than Fiscal
1997 due to the adjustments discussed above. The deferred development
expenditure for Fiscal 1997 did not include the amortization of fixed assets
whereas the figure capitalized at June 30, 1998 did. Some $65,000 of
amortization expense was included in deferred development expenditure and
capitalized during Fiscal 1998.
The increase in general and administrative expenses was a net result of a number
of developments during the period. These were:
$CAD
000's
- - The commencement of operations (including the opening of an office in Los Angeles)
by the US subsidiary, Dynamic Digital Depth USA Inc., in May 1998 resulted in an
increase in expenditure of: 21
- - The use of external consultants to assist with the preparation of marketing plans
and submissions to government bodies and general
64
advice and assistance on administrative and accounting matters resulted in an
increase in expenditure of: 50
- - During Fiscal 1998 substantial legal costs were incurred relating to various share
placements and capital raisings, preliminary contract negotiations entered into with a
number of potential customers, the establishment of the US subsidiary Dynamic Digital
Depth USA Inc. and the commencement of business in the USA and the preparation of an
earlier Form 20-F. These activities resulted in an increase in expenditure of: 342
- - Increased activity in the development of the Company's technologies resulted in an
increase in expenditure relating to the use of sub-contractors of: 77
- - During Fiscal 1997 there was extensive travel undertaken between Australia
and destinations in Europe, Asia and the United States to market the
Company's technologies. This level of expense was not continued during
Fiscal 1998 as contact had already been established with potential
customers and the same degree of travel was not required. This led to a
reduction in expenditure of: (159)
- - During Fiscal 1998 there was a reduction in the level of expenditure
incurred in respect of professional fees compared to Fiscal 1997. This was
due to more of the work being performed "in-house" by the Company resulting
in an overall reduction in expenditure of: (78)
- - As a result of common share placements in May 1998 there was a significant
variation in the calculation of unrealized foreign exchange losses resulting in a
notional increase in expenditure of: 249
- - Due to the more precise calculation of deferred developmental expenditure
previously referred to, a greater proportion of overhead expenditure was capitalized
during Fiscal 1998 when compared to Fiscal 1997: (88)
----------
- - Net comparative increase in general and administrative expenditure: $414
----------
----------
Interest expense refers to the interest accrued on promissory notes issued
during Fiscal 1998 by the Company which were subsequently converted in May 1998
into common stock and warrants.
During Fiscal 1998 it was considered that the then current technologies being
developed were approaching commercialization. Consequently increased expenditure
was incurred in an attempt to develop markets for that technology, particularly
in the United States of America. During the greater part of Fiscal 1998 the
Company did not maintain an office in the USA and therefore use was made of
external marketing consultants, etc. This resulted in an increase of $137,000 in
expenditure over that incurred in Fiscal 1997.
Salaries and wages for Fiscal 1997 included an amount of approximately $55,000
described as management fees. There was no equivalent expense incurred for
Fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
65
For the year ended June 30, 1999, the Company incurred a net loss of
approximately $6.1 million, with an operating cash flow deficit averaging
approximately $419,000 per month. The operating cash flow deficit does not
include the effects of the net funds raised of $2,682,000 from the issuance of
share capital throughout the year, nor the outlay of $509,000 in connection with
the acquisition of the new building in Perth, Western Australia. With the
exception of the write back of the accumulated deferred development expenditure
of $2,596,000 the net losses principally reflect the pre-commercial operations
of the Company's business and corporate overhead. As of June 30, 1999, the
Company had net working capital of approximately $4.0 million, including a cash
balance of $3,769,000. Through June 30, 1999, the Company had an accumulated
deficit of approximately $11.9 million.
During the latter half of Fiscal 1999 the Company made significant progress
towards full commercial operation. Product introductions and expanded marketing
will require significant additional expenditures in Fiscal 2000. As a result, it
can be expected that short-term operating losses could accelerate from those
experienced over the past year. In addition, the Company expects to require
approximately $1.0 million in capital expenditures during Fiscal 2000.
Historically, the Company has met its working capital requirements through
financing transactions involving the private placement of equity securities or
equity equivalents.
In June 1999, the Company entered into a Development Agreement with General
Instrument Corporation ("GI"), a major manufacturer of cable headend equipment
and television set-top boxes. In connection with this Agreement, GI purchased
1.5 million common shares and 1.0 million common share purchase warrants for net
proceeds of approximately $2.8 million. At the same time, the Company received a
co-investment from a third party with net proceeds of $930,000, in exchange for
500,000 common shares and 500,000 common share purchase warrants. The common
share purchase warrants issued to GI and the co-investor are exercisable over a
three year term with increasing exercise prices ranging from $3.50 to $5.50 per
share. Under the Development Agreement, $US250,000 will be used to pay GI for
equipment and engineering services to integrate the Company's 2D-compatible 3D
technology and GI's digital set-top terminals.
During 1998, the Company completed private placements of convertible notes,
common shares and common share purchase warrants, yielding net proceeds of
approximately $8.6 million.
During Fiscal 1998, the Company used $2.0 million in cash for its operating
activities, reflecting primarily the net loss for the year of $2.3 million
adjusted for net non-cash expenses that were approximately $258,000.
Investing activities used $2.1 million in Fiscal 1999, primarily for development
and patent costs (approximately $1.2 million), purchase of capital assets
(approximately $400,000) and the payment of a non-refundable option fee of
$500,000 in respect of the building occupied by the Company's Australian
subsidiaries in Perth, Australia. See Item 2 - Description of Property.
Investing activities used net cash of $1.2 million during Fiscal 1998. These
funds were again primarily used for development and patent costs (approximately
$840,000) and the purchase of capital assets of approximately $340,000.
66
During Fiscal 1999 financing activities used approximately $1.5 million of the
proceeds of the May 1998 private placement to repurchase 741,174 common shares.
The repurchase of shares was recommended and financed by the investors in the
private placement to provide liquidity in the market for the Company's shares
reducing the impact of sales by smaller investors which had depressed the
Company's share price. The Company believed that it was in the best interests of
shareholders to enhance liquidity in the common shares and to acquire the shares
available at a price below management's view of the fair market price of the
common shares. Such repurchases were completed in November 1998. Also during
Fiscal 1999, the Company raised approximately $3.7 million in financing from GI
and a co-investor together with another $494,000 from the exercise of options
and warrants.
Financing activities provided net cash to the Company of $7.0 million during
Fiscal 1998. These funds were generated primarily by the sale of the convertible
notes, common shares and common share purchase warrants as previously described
above.
The Company does not believe that its available cash resources and cash flow
from operations will be sufficient to meet its liquidity needs through Fiscal
2000. The Company expects that it will require additional financing which may
take the form of private placements of debt or equity securities with financing
sources or from development partners. The Company is in discussions with a
number of potential financing sources, including investment banking firms and
strategic partners, regarding transactions which would provide the Company with
sufficient resources to meet its working capital requirements for the next
twelve months. However, these discussions have not resulted in any definitive
agreements. Accordingly, there can be no assurance that such financing will be
available on attractive terms to the Company, if at all. If the Company is
unsuccessful in obtaining financing it may be required to seek to license its
technologies to third parties who are financially better able to exploit the
technologies or may be required to curtail operations.
EVENTS SUBSEQUENT TO JUNE 30, 1999
On September 30th, 1999, the Company exercised its option to purchase an
office building located at 6-8 Brodie Hall Drive, Technology Park, Bentley,
Western Australia at $A2,000,000. The purchase of the building was completed
on October 15th, 1999 and was financed by a loan facility for $A2,000,000 to
Dynamic Digital Depth Australia Pty Ltd from the Bank of Western Australia
Ltd. (the "Bank") secured over the property and guaranteed by the Company.
The loan was originally repayable on December 31, 1999, however the term of
the loan is in the process of being renegotiated with the Bank to extend the
term to June 30, 2000. The Bank has indicated its willingness to extend the
loan period and the Company expects that the extension will be completed
within the first several weeks of January 2000. Repayment of the loan is
being financed from sales of Units in the building, including that occupied
by the Company and its subsidiaries. The current balance outstanding on the
loan facility is $A560,000.
Dynamic Digital Depth Australia Pty Ltd entered into two separate Contracts
of Sale that have generated $A1,600,000 in gross sales and expects to achieve
sales of the remaining Units prior to the expiration of the extended loan
period. The sale of the Unit occupied by the Company and its subsidiaries was
completed on November 25th, 1999 and of the net proceeds of the sale
amounting to $A1,267,000, some $A1,250,000 was applied against the
aforementioned loan facility. The sale of another Unit in the building was
completed on December 20, 1999 and of the net proceeds of $A286,000, some
$A200,000 was applied against the loan facility. In the event that the sales
of additional Units have not been finalized by the date that the short term
loan facility expires, the facility will again be renegotiated to cover any
outstanding loan balance. Funds generated by sales proceeds in excess of
those amounts required to repay the short term loan facility and associated
costs will be available for working capital requirements. There is no surety
as to when this may occur and the
67
amount of such funds is dependent upon satisfactory sales prices being obtained
for the remaining units.
The two Australian subsidiaries of the Company, Dynamic Digital Depth Australia
Pty. Ltd. and Dynamic Digital Depth Research Pty. Ltd., currently occupy Unit 1
of the building. Prior to exercising the Option and acquiring ownership of the
building the subsidiaries were paying rent of $A20,000 per month pursuant to a
lease with the owner and Option holder, Boston Tower Pty Ltd. Upon the sale of
Unit 1, Dynamic Digital Depth Australia Pty Ltd has entered into a ten year
lease with the purchaser at an annual rental of $A121,280. The remainder of the
building not already sold will be disposed of on a Unit by Unit basis.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 (effectiveness date revised in June 1999), the Financial Accounting
Standards Board issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, which is required to be adopted in years beginning after
June 15, 2000. The Statement will require the Company 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
will either be offset against the change in fair value of the hedged 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. The Company has not yet determined what the effect on
Statement 133 will be on the earnings and financial position of the Company.
YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two-digit year entries in the date code field. Consequently, on
January 1, 2000, many of these systems could fail or malfunction because they
may not be able to distinguish 21st Century dates from 20th Century dates. As a
result, computer systems and software used by many companies, including the
Company, its customers and potential customers, may need to be upgraded to
comply with such "Year 2000" requirements. The Company has developed and
implemented a program to identify and remedy the Year 2000 issues. The scope of
its Year 2000 readiness program includes the review and evaluation of
- the Company's information technology (IT) systems, such as
hardware and software utilized in the operation of its business;
- its non-IT systems and imbedded technology, such as
micro-controllers contained in various equipment and facilities;
- the readiness of third parties, including customers, suppliers
and other key vendors; and
- the Company's hardware and software products.
68
The Company has inventoried is principal internal information technology
systems and believes they are Year 2000 compliant. The Company has completed
its certification of these systems in December, 1999. The Company has also
certified most of its non-critical systems and believes that the failure of
any systems which have not been tested will not have a material adverse
effect upon the Company. The Company has received Year 2000 compliance
statements from the suppliers of most of its principal internal systems, and
has sought similar statements from other vendors. The Company has received
written assurances confirming Year 2000 compliance from a significant number
of the companies it has contacted. The Company is of the opinion that it is
not materially reliant upon the parties who have not yet responded to the
Company's inquires regarding Year 2000 compliance and a failure in Year 2000
compliance by any, or all, of these companies would not have a material
adverse affect upon the Company. The Company is reliant upon public utilities
to continue to provide electricity and other services. A failure at a public
utility would adversely affect the Company during the period of such failure
and could result in delays in bringing the Company's products to market.
However, in the event of an extended failure, the Company believes that it
could shift its operations away from the effected location to its operations
in other parts of the world.
Because the Company is substantially dependent upon the proper functioning of
its computer systems, a failure of its system to be Year 2000 compliant could
materially disrupt its operations which could seriously harm its business. The
Company has tested its hardware and software products to determine that they are
Year 2000 compliant, when configured and used in accordance with the related
documentation. The Company has performed operational tests for each of its
products by testing various future dates in the products' functional areas. In
addition, the transition from Year 1999 to Year 2000 was simulated for its
software. According to the results of its tests, the Company's products should
not abnormally end and/or provide incorrect or invalid results due to date data,
including dates that were represented in different century, provided that the
underlying operating system and customer hardware platform are Year 2000
compliant.
The Year 2000 problem may also affect third party software products that are
incorporated into the Company's products, applications and other software
products that its modifies and licenses to its customers. When the Company
incorporates third party software products into our products, it generally
discusses Year 2000 issues with these third parties and sometimes performs
internal testing on their products. It does not, however, guarantee or certify
that the software licensed by these suppliers is Year 2000 compliant. Any
failure by parties to provide Year 2000 compliant software products that the
Company incorporates into our products could result in financial loss, harm to
its reputation and liability to others and could seriously harm its business.
The Company has funded its Year 2000 plan from operating cash flows and has not
separately accounted for those costs in the past. To date, these costs have not
been material and the Company does not believe that any additional costs will be
material. The Company may incur additional costs related to Year 2000 compliance
for administrative personnel to manage the testing, review and remediation and
outside vendor and contractor assistance.
69
ITEM 9A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in any hedging or currency trading activities
although the Company bills in U.S. and Australian dollars, with its revenues
and expenses, and its assets and liabilities recorded in Canadian dollars.
ITEM 10 DIRECTORS AND OFFICERS OF REGISTRANT
The names and positions with the Company of each director and executive
officer of the Company as of the date of this registration are as follows:
NAME POSITION(S) DATE ELECTED OR APPOINTED
------ ------------- ---------------------------
Neil W. Speakman Chairman of the Board of Directors March 1994
President and Chief Executive Officer
Paul Kristensen Non-executive Director May 1996
Paul G. Jeffrey Non-executive Director March 1994
Ian Macintosh Non-executive Director April 1994
James K. Alford Non-executive Director September 1997
Phil Harman Chief Technology Officer June 1999
Chris Yewdall Vice President of Sales and Marketing September 1998
Mark Schwartz Chief Financial Officer December 1999
Sara Lane Sirey Secretary September 1997
70
The Company's directors are elected by shareholders at each annual meeting or
in the event of a vacancy, appointed by the Board of Directors then in
office, to serve until the next annual meeting or until their successors are
duly elected and qualified. The Company's executive officers are appointed by
the Board of Directors and serve at the discretion of the Board of Directors.
No family relationship exists between any Director or Executive Officer and
any other Director or Executive Officer.
In connection with the recapitalization of the Company in May 1998, an
Investment Agreement ("Investment Agreement") and a Voting and Disposition
Agreement (the "Voting Agreement"). between the Company and Westgate
International, L.P. ("Westgate") and The Liverpool Limited Partnership
("Liverpool," and together with Westgate, the "Investors"), were entered
into. The Voting Agreement provides that the Investors have the right to
nominate two individuals to the board of directors of the Corporation,
subject only to regulatory approval. As of July 1, 1999, the investors have
not nominated anyone to the Board of Directors.
PROFILES OF DIRECTORS AND EXECUTIVE OFFICERS
The following are profiles of the directors and executive officers, including
their principal occupations during the five years prior to the date hereof.
NEIL W. SPEAKMAN - CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND PRESIDENT
Mr. Speakman was appointed a director of the company in March 1994, and has
served as Chairman since that date. He provided financial consulting services
to the company until May 1, 1998, when he undertook full-time employment as
Chairman and Chief Financial Officer, based in Santa Monica, USA. He assumed
the positions of Chief Executive Officer and President in December 1999.
Prior to becoming a director of the Company, Mr. Speakman worked mainly with
small companies with technologies that have global applications, and has
developed those companies to the stage of public acceptance and
commercialization.
Mr. Speakman founded the company now known as Advanced Material Technologies
Inc. in 1989, a leading company in the provision of rare earth materials from
China. The company is listed on Toronto Stock Exchange. In 1995 Mr. Speakman
was a founder director of Turbo Genset Inc. and Compact Power Holdings
Limited, which are both publicly listed companies in Canada. Mr. Speakman was
also a director of FAS International Holdings Limited in 1997, listed upon
The Alberta Stock Exchange. Due to the full-time involvement with DDD, these
directorships have been relinquished.
After graduating from the University of Melbourne in Australia, Mr. Speakman
qualified as a chartered accountant with Price Waterhouse in 1967. Mr. Speakman
held various positions with Morgan Grenfell and Co. in London in 1969 to 1972,
and Ord Minnett in Hong Kong in 1972 to 1975, before founding his own practice
in Hong Kong in 1975.
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PAUL KRISTENSEN - DIRECTOR
Mr. Kristensen was appointed non-executive director of DDD in May 1996. Mr.
Kristensen is a director of a number of technology companies. He is the
President of Capital Technologies Pty. Ltd., which operates as a seed capital
management company, assisting selected inventions and business ventures from the
idea stage through to the international marketing of products or technology
licenses. Mr. Kristensen has been a founding director of a range of other
technology companies in Western Australia, including E.R.G. Limited, Arbortech
Pty. Ltd., Towerhill Holdings Pty. Ltd./Kinetic Limited and - in recent years,
Xenotech Australia Pty. Ltd., ECE Technology Pty. Ltd. and Structural Monitoring
Systems Ltd.
PAUL G. JEFFREY - DIRECTOR
Mr. Jeffrey was appointed a non-executive director of DDD in August 1994. He is
currently a non-executive director of a number of other Canadian public
companies, namely Azcar Technologies, Wild Horse Resources Ltd. and Turbo Genset
Inc.
Mr. Jeffrey was a principal shareholder and non-executive director of FH Deacon
Hodgson Inc. which later merged with Nesbitt Thompson and then was controlled by
the Bank of Montreal. In addition, he has served as an officer in organizations
such as the Young Presidents Organization, University Club of Toronto, Council
of the Ontario College of Art and the Investment Advisory Committee of Bloorview
Children's Hospital.
IAN MACINTOSH - DIRECTOR
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Mr. Macintosh was appointed a non-executive director of DDD in August 1994. He
is also currently a non-executive director of Turbo Genset Inc., a Canadian
public company.
Mr. Macintosh was an insurance broker since 1950 (now retired), and is an
investor and director of St. Andrew's Valley Golf Club Limited. His community
involvement includes 30 years of service as a member of the Board of The
Arthritis Society of Canada and as a member of the Board of Governors of North
York General Hospital for over 20 years.
JAMES K. ALFORD - DIRECTOR
Mr. Alford was appointed a non-executive director of DDD on September 12, 1997.
Mr. Alford has been a partner in the law firm Vorys, Sater, Seymour and Pease
LLP, for the past eight (8) years. He has represented a number of European,
Asian and other companies and clients in merger, acquisition, licensing, joint
venture, corporation start-up and other commercial activities involving legal,
financial, tax, and operational structuring.
PHIL HARMAN - CHIEF TECHNOLOGY OFFICER
Mr. Harman joined the Company's Perth, Australia operations in May 1996 and
primarily manages the Research and Development process. He has been the primary
technology innovator and a major contributor to the development of the Company's
portfolio of technologies and products. Additionally, he manages the
intellectual property portfolio to ensure patent protection. Mr. Harman also
reviews new ideas, patents and concepts presented to the company and recommends
appropriate action. Mr. Harman was appointed Chief Technology Officer of DDD
effective July 1, 1999.
From 1989 to 1996, Mr. Harman held the position of Information Technology
Manager for the Water Authority of Western Australia. Among other duties he was
responsible for developing and managing their state-wide computer and
communications network.
Prior to this position, Mr. Harman was a self-employed Communications and
Information Technology Consultant. He also co-founded an electronics and
communications company that became a leader in the provision of Fire Monitoring
and general Telemetry systems.
Upon immigrating to Australia from the UK in 1980, Mr. Harman was employed as a
Communications Engineer by the Western Australian Fire Brigades Board, where he
developed a number of new fire monitoring systems and communications networks.
In the United Kingdom Mr. Harman worked as a research scientist for the
Government Communications Centre in Milton Keynes.
Mr. Harman holds a Bachelor of Science (Hons 1) in Electrical and Electronic
Engineering from the University of Bath in the United Kingdom.
CHRIS YEWDALL - VICE PRESIDENT SALES AND MARKETING
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Mr. Yewdall has held the position of Vice President of Sales and Marketing of
the Company since September 1998 and was appointed President and CEO of the
Company's United States subsidiary effective on July 1, 1999. Prior to joining
the Company, Mr. Yewdall held the position of Vice President, Business
Development of C-Dilla Limited, an anti-piracy software provider to desktop and
entertainment software developers. From February 1991 through March 1997, Mr.
Yewdall was the General Manager and Vice President of Sales of Virtuality, Inc.
an immersive virtual reality 3D technologies company with offices in Europe and
North America.
Prior to this, Mr. Yewdall worked as a technical consultant and subsequently
sales executive with Manager Software Products, a systems development software
provider for IBM mainframe computers. Mr. Yewdall also worked at Jaguar Cars,
Coventry, UK where Mr. Yewdall was responsible for installing computer aided
design systems.
Mr. Yewdall graduated from North Staffordshire University, Stafford, England
with an Honors Degree in Information Systems.
MARK SCHWARTZ: CHIEF FINANCIAL OFFICER
Mark joined the Company in December 1999 as Chief Financial Officer. He
has an extensive background in investment banking and early stage growth
companies.
Prior to joining the Company, he was the Chief Financial Officer of
Bodega Latina Corporation, a Los Angeles-based retail grocery company geared
toward the Latino market. Mark co-founded the company in January 1993 and helped
navigate it to an over $50 million revenue company with 300 employees, and one
of the highest sales per square foot in the Southern California grocery
industry.
Before founding Bodega Latina, Mark was an investment banker for 12
years from February 1987 through July 1991, with Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and CS First Boston Corporation. He has worked on
all facets of corporate finance and mergers and acquisitions transactions, and
has raised in excess of $500 million of equity capital and advised on over $10
billion of merger transactions. While at DLJ he assisted Starbucks Corporation
in raising its first round of institutional equity and served on the Starbucks
board of directors.
Mark received a Bachelor of Arts, cum laude from Claremont McKenna
College and a Master of Business Administration, with honors from Harvard
Business School.
SARA LANE SIREY - CORPORATE SECRETARY
Ms. Sirey has served as the Corporate Secretary since September 1997.
Ms. Sirey is a partner of Armstrong Perkins Hudson, Barristers and Solicitors.
She has been specializing in securities law with Armstrong Perkins Hudson,
Barristers and Solicitors, for the past five years during which time she has
been involved in the establishment, financing and the public listing of a number
of industrial companies.
ITEM 11 COMPENSATION OF DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION
The Company has five (5) directors, one (1) of whom is an executive officer.
The Company also has a corporate secretary. The total cash remuneration paid
or accrued during Fiscal 1999 to all members of management (all executive
officers and any other key personnel who were employed by the Company or its
subsidiaries or retained on a consulting basis) was $915,656. No directors of
the Company received any fees for providing services as directors during the
Company's 1998 Fiscal year.
The Company has in place a stock option plan, which was approved by the
Company's shareholders at the annual general meeting of shareholders held on
December 18, 1998 (the "Plan"). The Plan has been established to provide
incentives to qualified parties to increase their proprietary interest in the
Company and thereby encourage their continuing association with the Company. The
Plan is administered by the Directors of the Company. The Plan provides that
options will be issued to directors, officers, employees and consultants of the
Company or its subsidiaries pursuant to option agreements in substantially the
form appended to the Plans (the "Option Agreements"). The Option Agreements
provide for the expiration of such options on a date not later than five years
after the issuance of such option.
74
Options issued pursuant to the Plan have an exercise price as determined by the
Board of Directors of the Company, provided that the exercise price shall not be
less than the price permitted by any stock exchange on which the Common Shares
are then listed.
In the 1998 Fiscal year, options were granted to directors, officers and
employees to acquire up to an aggregate of 485,000 Common Shares.
The Company does not have a pension, retirement, or similar plan.
ITEM 12 OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
STOCK OPTION GRANTS
The following table sets forth details with respect to the outstanding options
and warrants as of December 30, 1999.
MARKET VALUE
NUMBER OF COMMON OF SECURITIES
SHARES UNDERLYING
RESERVED EXERCISE OPTIONS ON
OPTIONEE CATEGORY DATE OF GRANT EXPIRATION DATE UNDER OPTION(1) PRICE(1) DATE OF GRANT(1)
----------------- ------------- --------------- --------------- -------- ----------------
Directors (of the Company or its Nov. 27, 1996 Nov. 27, 2001 40,000 $1.35 $1.40
subsidiaries) who are not
Executive Officers. Dec. 20, 1997 Dec. 20, 2002 60,000 $1.30 $1.50
July 7, 1999 July 7, 2004 4,000 $2.47 $3.00
Executive Officers Nov. 27, 1996 Nov. 27.2001 20,000 $1.35 $1.40
Dec. 20, 1997 Dec. 20, 2002 15,000 $1.30 $1.50
Sept. 7, 1998 Sept. 7 2003 200,000 $1.50 $1.75
June 7, 1999 June 7, 2004 20,000 $2.80 $3.18
Nov. 1, 1999 Nov. 1, 2004 400,000 $5.03 $5.30
Employees May 10, 1996 May 10, 2001 40,000 $1.25 $1.10
Dec. 10, 1997 Dec. 20, 2002 100,000 $1.30 $1.50
Investors May 19, 1998 May 19, 2000 2,500,000 (2) $2.00 $2.20
June 17, 1999 June 17, 2002 500,000 (3) $3.50 to $2.75
$5.50
Strategic Partnerships June 17, 1999 June 17, 2002 1,000,000 $3.50 to $2.75
$5.50
Former Officer May 10, 1996 Dec. 31, 2000 80,000 $1.25 $1.10
Nov. 27, 1996 Dec. 31, 2000 200,000 $1.35 $1.40
Dec. 20, 1997 Dec. 31, 2000 250,000 $1.30 $1.50
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(1) Number of Options and Warrants, Exercise Price and Market Value of
underlying securities have been restated to give effect to a
one-for-five reverse stock split.
(2) These warrants were issued to Westgate and Liverpool. See "Other
Rights to Purchase Securities of the Company or its subsidiaries."
(3) These warrants were issued to Banco del Gottardo in the June 17,
1999 Private Placement.
As of October 31, 1999, the directors and officers of the Company and its
subsidiaries collectively held stock options and warrants to acquire an
aggregate of 689,000 Common Shares.
OTHER RIGHTS TO PURCHASE SECURITIES OF THE COMPANY OR ITS SUBSIDIARIES
Effective May 19, 1998, the Company and the Investors closed a transaction to
effect a recapitalization of the Company pursuant to the terms of the Investment
Agreement. The Investment Agreement provided for the purchase by the Investors
of 5,000,000 units (the "Units") for cash equal to the US dollar equivalent of
CAD$7,500,000. Each Unit was comprised of one Common Share and one warrant (a
"Warrant") to purchase from the Company one-half of a Common Share at a price of
$2.00 per Common Share for a period of two years from the date of issuance (the
"Closing Date").
Pursuant to the Investment Agreement, the Company granted the Investors a right
of first refusal with respect to any capital raising transaction or series of
transactions involving the Company or any subsidiary, other than any Permitted
Equity Investment (as hereinafter defined), for so long as the Investors hold at
least 50% of the Common Shares acquired as a result of the transactions
contemplated by the Investment Agreement. The Company is required to provide to
the Investors written notice of the terms of any transaction that is subject to
the right of first refusal promptly after the receipt thereof. The Investors may
exercise the right of first refusal by issuing a written counternotice of their
intention to exercise the right of first refusal within 30 days of receipt of
the Company's notice, and by consummating the transaction by the later of (a)
the time provided in the original bona fide third party offer to the Company,
and (b) 30 days after receipt by the Company of the Investors' counternotice.
For purposes of the Investment Agreement, a "Permitted Equity Investment" means
(a) a sale of Common Shares to an individual or group of individuals, which sale
shall not, when aggregated with any other such sales, exceed 9.9% of the Common
Shares outstanding on the date of the Investment Agreement, (b) a sale of equity
of a newly created subsidiary of the Company to an individual or group of
individuals in an amount not to exceed 50% of the equity of such newly created
subsidiary, or 50% of the Company's ownership interest in such newly created
subsidiary if it is a joint venture, or (c) a public sale of Common Shares.
ITEM 13 INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
TRANSACTIONS WITH THE INVESTORS
76
On June 30, 1997, the Company, received loans from the Investors of U.S.
$500,000 each for a total of U.S. $1,000,000, and executed convertible
promissory notes to the Investors (the "Notes"). The Notes carried an interest
rate of five percent (5%) per annum. The outstanding principal balance and all
accrued interest on the Notes was convertible at any time and from time to time
by the Investors for Common Shares at an initial conversion price of U.S. $1.00
per Share (as adjusted to reflect the 5-1 stock split). In connection with the
loans, the Company issued to the Investors warrants to purchase 200,000 shares
of the Company's Common Shares at a purchase price of $1.00. These notes were
converted into Common Shares in May 1998 as described below.
The Notes were executed and delivered by the Company pursuant to a certain
Convertible Note Purchase Agreement, dated as of June 30, 1997, by and between
the Company and Investors (the "Note Purchase Agreement"). The Company's
obligations under the Notes were secured by a pledge of the capital stock of the
Company's subsidiaries pursuant to a Pledge Agreement, dated as of the same
date, by and between the Investors and the Company (the "Pledge Agreement"). In
addition, the Common Shares issued upon conversion of the Notes are entitled to
the benefits of the registration rights set forth in a Registration Rights and
Qualification Rights Agreement, dated as of the date of the Notes, by and
between the Investors and the Company (the "Registration Rights Agreement").
On February 9, 1998, the Company received loans of U.S. $250,000 each from the
Investors, and executed additional convertible promissory notes with the
Investors (the "Second Notes"). The Second Notes carried an interest rate of
five percent (5%) per annum. The outstanding principal balance and accrued
interest on the Second Notes was convertible at any time and from time to time
by the Investors for Common Shares at an initial conversion price of U.S. $1.00
per Share. The Second Notes were converted into Common Shares in May 1998 as
described below.
Effective May 19, 1998, the Company and the Investors closed a transaction to
effect a recapitalization of the Company pursuant to the terms of the Investment
Agreement. The Investment Agreement provided for the purchase by the Investors
of 5,000,000 Units.
The Investment Agreement provided that each Investor would convert the
outstanding principal balance and all accrued and unpaid interest under the
Notes into 1,550,959 Common Shares effective as of the Closing Date, and that
the Notes, the existing Registration Rights Agreement and the Pledge Agreement
would be canceled.
Pursuant to the Investment Agreement, the Company granted the Investors a right
of first refusal with respect to any capital raising transaction or series of
transactions involving the Company or any subsidiary, other than any Permitted
Equity Investment. See - Options to Purchase Securities from Registrant or
Subsidiaries - Other Rights to Purchase Securities of the Company or its
Subsidiaries.
Pursuant to the Investment Agreement, the Investors entered into a Voting and
Disposition Agreement (the "Voting Agreement"). The Voting Agreement provides
that at any time on or after the Closing Date, the Investors will have the right
to nominate two individuals to the board of directors of the Company, subject
only to regulatory approval, and the Company will take all
77
necessary action to effect the appointment of such individuals to the Company's
board of directors. The Investors also entered into a second registration rights
agreement covering the Units.
OPTION TO ACQUIRE SHARES AND WARRANTS ISSUED TO THE INVESTORS
Red Reef Limited, a British Virgin Islands company ("Red Reef"), has been
granted an option by the Investors to acquire up to 1,000,000 Common Shares (the
"Share Option") and up to 1,000,000 Warrants (the "Warrant Option") issued as
Units in conjunction with the May 1998 private placement under certain
conditions. These conditions include an effective registration under the United
States Securities Act of 1933 for the resale of the securities and the Common
Shares being listed for trading on the NASDAQ National Market System or SmallCap
System.
The Share Option is exercisable at $6.00 as to 500,000 Common Shares and $9.00
as to 500,000 Common Shares. The Warrant Option is exercisable as to 900,000
Warrants at $0.05, 800,000 Warrants at $1.00 and 800,000 Warrants at $2.00. The
Warrants issuable upon exercise of the Warrant Option are exercisable at a price
of $2.00 per Common Share.
The Warrant Option was subsequently assigned by Red Reef to approximately
thirteen members of the Company's management and staff including Messrs.
Speakman, Baker, Harman and Yewdall.
ESCROW SECURITIES
Pursuant to escrow agreements dated August 4, 1994 made among the Company,
certain shareholders of the Company and Montreal Trust Company of Canada, a
total of 1,561,949 Common Shares are currently held in escrow.
The Escrow Shares are subject to release in accordance with the policies of the
ASE. As of the date of this registration, the number of Escrow Shares
outstanding represent 8.7% of the issued and outstanding shares of the Company.
The escrow agreement provides that the shares held in escrow were to be canceled
upon the expiration of the escrow agreement on August 4, 1999 , however, the
terms of the escrow have been extended pending approval by the shareholders of
the Company at the next annual meeting of shareholders.
TRANSACTIONS WITH A FORMER OFFICER/DIRECTOR
On December 10, 1999, Robert Baker resigned from the positions of President,
CEO and Director of the Company to pursue other interests. In satisfaction of
all obligations under the employment agreement, Mr. Baker shall receive
US$75,000 payable in ten equal monthly installments.
BUSINESS CORPORATIONS ACT (ALBERTA)
The Company believes that the terms of these transactions were completed on
terms no less favorable than those available from unrelated parties. Pursuant to
the Business Corporations Act (Alberta), a director or officer of the
Corporation who is party to a material contract or proposed material contract
with the Corporation, or is a director or an officer of or has a material
interest in any person who is a party to a material contract or proposed
material contract with the Corporation, must disclose in writing to the
Corporation or request to have entered in the minutes of meetings of directors,
the nature and extent of his interest.
78
Any director having such a material interest shall not vote on any resolution to
approve the contract, unless the contract is:
a) an arrangement by way of security for money lent to or obligations
undertaken by him, or by a body corporate in which he has an interest,
for the benefit of the Corporation.
b) a contract relating primarily to his remuneration as a director,
officer, employee or agent of the Corporation or an affiliate;
c) a contract for indemnity or insurance, or a contract with an affiliate.
If a director or officer of the Corporation fails to disclose his interest in a
material contract, the Court of Queens Bench of Alberta may, on the application
of the Corporation or a shareholder of the Corporation, set aside the contract
on any terms it deems fit.
CORPORATE GOVERNANCE
The Corporation believes that it has implemented internal corporate governance
procedures which adequately protect shareholders against the Corporation
entering into transactions with affiliated parties on less than commercially
acceptable terms. In addition to adhering to the provisions of the BUSINESS
CORPORATIONS ACT (Alberta), which apply in respect of conflicts of and the
Policies of The Alberta Stock Exchange, as they pertain to non-arms length
transactions, the board of directors of the Corporation has been organized such
that the majority of its members are outside directors to ensure that all
matters brought before the board receive consideration independent of inside
directors. All proposed transactions between the Corporation and an affiliated
party, regardless of the size of the transaction, must be brought before the
board of the Corporation for consideration and approval. Members of the board,
as a matter of corporate policy, are entitled to engage independent professional
advisors in respect of any such matter brought before the board of directors.
PART II
ITEM 14 DESCRIPTION OF SECURITIES TO BE REGISTERED
The Company has an authorized capital consisting of an unlimited number of
Common Shares of which 18,034,762 are issued and outstanding as of the date
of this registration statement.
The holders of Common Shares are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors
can elect all of the directors. Holders of Common Shares are entitled to
receive dividends when, as and if declared by the Board of Directors in its
discretion, out of funds legally available therefor. In the event of
liquidation, dissolution, or winding up of the Company, the holders of Common
Shares are entitled to share ratably in the assets of the Company, if any,
legally available for distribution to them after payment of debts and
liabilities of the Company
79
after provision has been made for each class of stock, if any, having
liquidation preference over the Common Shares. Holders of Common Shares have
no conversion, preemptive or other subscription rights, and there are no
redemption or sinking fund provisions applicable to the Common Shares. All of
the outstanding Common Shares are fully paid and non-assessable.
The Company is also authorized to issue an unlimited number of non-voting
First Preferred Shares and non-voting Second Preferred Shares (the "Preferred
Shares"). The Preferred Shares are issuable with such rights, preferences,
maturity dates and similar matters as the Board of Directors of the Company
may from time to time determine without any further vote or action by the
Company's stockholders. No Preferred Shares are currently outstanding.
ITEM 15 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 16 CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
Not Applicable
ITEM 17 FINANCIAL STATEMENTS
See pages F-1 through F-15 incorporated hereby by reference.
ITEM 19 FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements of Dynamic Digital Depth, Inc.
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors F-1
Consolidated Statement of Loss and Deficit for the years ended 30 June F-3
1998 1997 and 1996 and the unaudited nine month periods ended 31 March
1999 and 1998
Consolidated Balance Sheets at 30 June 1997 and 1998 and unaudited at F-2
31 March 1999 and 1998
Consolidated Statement of Cash Flows for the years ended 30 June 1998, F-4
1997 and 1996 and the unaudited nine month periods ended 31 March
1999 and 1998
Notes to and forming part of the Financial Statements F-5
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(b) Exhibits
1(1) Articles of Incorporation - Mirabeau Resources Limited (1)
1(2) Articles of Incorporation - Mirabeau Resources Limited (1)
1(3) Certificate of Amendment - Mirabeau 88 Limited (1)
1(4) Certificate of Amendment - name change to Xenotech, Inc. (1)
1(5) Name Change Xenotech to Dynamic Digital Depth Incorporated (1)
1(6) Application for Release of Escrowed Shares (1)
1(7) Bylaws (1)
2(1) Voting Trust Agreement - Xenotech Inc./Trustee/Red Reef Ltd. (1)
2(2) Escrow Agreement - Mirabeau/Montreal Trust Co. of Canada (1)
2(3) Escrow Agreement - Mirabeau/Montreal Trust Co. of Canada/ Salamander (1)
Resources Ltd.
2(4) Investment Agreement - Xenotech, Inc./Westgate Int'l., L.P. and Liverpool (1)
Limited Partnership
2(5) Common Share Purchase Warrant - Liverpool Limited Partnership (1)
2(6) Common Share Purchase Warrant - Westgate Int'l., L.P. (1)
2(7) Warrant Option Agreement between Westgate Int'l., L.P. and Liverpool Limited (1)
Partnership and Red Reef Limited
2(8) Share Option Agreement between Westgate Int'l., L.P. and Liverpool Limited (1)
Partnership and Red Reef Limited
2(9) Voting and Disposition Agreement between Westgate Int'l., L.P. and Liverpool (1)
Limited Partnership and Neil W. Speakman, Robert Baker and Red Reef Limited
2(10) Registration Rights Agreement (1)
2(11) Stock Option Plan (1)
2(12) Form of Stock Option Agreement (1)
3(1) Memorandum of Understanding between Dynamic Digital Depth USA Inc. and (1)
Video Applications Inc.
3(2)* Development Agreement by and between Dynamic Digital Depth Research Pty. (1)
Ltd. and General Instrument Corporation
3(3)* Statement of Work by and between Dynamic Digital Depth Research Pty. Ltd. (1)
and General Instrument Corporation
3(4) Consultancy Agreement with Angus Ducan Richards (1)
3(5) Deed of Compromise and Release with Angus Duncan Richards (1)
3(6) Deed of Assignment with Angus Duncan Richards (1)
3(7) License Agreement with Angus Duncan Richards (1)
3(8) Deed between Dynamic Digital Depth Australia Pyt. Ltd. and Boston Tower Pty. (1)
Ltd. regarding 6-8 Brodie Hall Drive Technology Park
3(9) Lease between Dynamic Digital Depth Australia Pyt. Ltd. and Boston Tower (1)
81
Pty. Ltd. regarding 6-8 Brodie Hall Drive Technology Park
3(10) Lease Agreement with Barrister Executive Suites, Inc. regarding Suite 550, (1)
MOM Plaza, 2450 Broadway, Santa Monica, California, 90404
3(11) Employment Agreement with Neil W. Speakman (1)
3(12) Employment Agreement with Robert G. Baker (1)
3(13) Employment Agreement with Chris Yewdall (1)
3(14) Employment Agreement with Phil Harman (1)
3(15) Consultancy Agreement with AiCube Co. Ltd. (2)
(1) Previously filed with the registrant's registration statement on Form
20-F filed August 9, 1999.
(2) Previously filed with the registrant's amendment number 1 to
form 20-F filed on November 5, 1999.
* Confidential treatment requested with respect to portions thereof.
Such portions have been separately filed with the Securities and
Exchange Commission.
82
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of
1934, as amended, the Registrant certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused this annual report
to be signed on its behalf by the undersigned, thereto duly authorized.
DYNAMIC DIGITAL DEPTH, INC.
Date: January 3, 2000 By: /s/ Neil W. Speakman
------------------------------
Neil W. Speakman
Chairman, President and Chief
Executive Officer
83
DYNAMIC DIGITAL DEPTH INC.
(FORMERLY XENOTECH INC.)
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT....................................................................................F-1
CONSOLIDATED BALANCE SHEETS AT 30 JUNE 1999 AND 1998............................................................F-2
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT FOR THE YEARS ENDED 30 JUNE 1999, 1998
AND 1997........................................................................................................F-3
CONSOLIDATED STATEMENTS OF CHANGE IN FINANCIAL POSITION FOR THE YEARS ENDED
30 JUNE 1999, 1998 AND 1997.....................................................................................F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................................................................F-5
84
AUDITORS' REPORT
To the Shareholders of
DYNAMIC DIGITAL DEPTH INC. (FORMERLY XENOTECH INC.)
We have audited the consolidated balance sheet of Dynamic Digital Depth Inc. as
at June 30, 1999 and 1998, and the consolidated statement of loss and deficit
and the consolidated statements of changes in financial position for each of the
years in the three year period then ended. 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 auditing standards generally accepted
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at June 30, 1999 and
1998 and the results of its operations and the changes in its financial position
for each of the years in the three year period then ended in accordance with
accounting principles generally accepted in Canada.
Perth, Australia Ernst & Young
December 19, 1999 Chartered Accountants
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
Note 1 to the financial statements. Our report to the shareholders dated
November 2, 1999 is expressed in accordance with Canadian reporting standards
which do not permit a reference to such events and conditions in the auditor's
report when these are adequately disclosed in the financial statements.
Perth, Australia Ernst & Young
December 19, 1999 Chartered Accountants
F-1
DYNAMIC DIGITAL DEPTH INC.
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONSOLIDATED BALANCE SHEETS
[SEE NATURE OF BUSINESS AND BASIS OF PRESENTATION - NOTE 1]
As at June 30
1999 1998
$CAD $CAD
------------------------------
ASSETS
CURRENT
Cash 3,768,936 5,006,173
Accounts receivable 72,626 23,514
Security deposits and prepayments 199,017 136,250
------------------------------
4,040,579 5,165,937
DEPOSITS [NOTE 9] 508,508 -
CAPITAL ASSETS [NOTE 3] 684,527 436,864
PATENTS [NOTE 4] 472,358 256,112
DEVELOPMENT COSTS [NOTE 4] - 1,615,945
RESTRICTED CASH - 1,727,660
------------------------------
5,705,972 9,202,518
------------------------------
------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities 330,478 631,694
Current portion of obligation under capital leases [NOTE 6] 43,655 63,186
------------------------------
374,133 694,880
------------------------------
OBLIGATION UNDER CAPITAL LEASES [NOTE 6] 63,594 87,967
------------------------------
COMMITMENTS AND CONTINGENCIES [NOTE 6 & 13]
SHAREHOLDERS' EQUITY
Share capital [NOTE 7] 16,513,405 13,831,568
Contributed surplus [NOTE 5] 491,471 491,471
Deficit (11,896,391) (5,830,182)
Cumulative translation adjustment 159,760 (73,186)
------------------------------
5,268,245 8,419,671
------------------------------
------------------------------
5,705,972 9,202,518
------------------------------
------------------------------
SEE ACCOMPANYING NOTES
F-2
DYNAMIC DIGITAL DEPTH INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
Year ended June 30
1999 1998 1997
$CAD $CAD $CAD
---------------------------------------------
REVENUE
Technology Revenue 29,545 299,099 85,922
Grant income - 31,114 156,259
Interest Income 110,583 31,321 22,242
Other 58,698 6,531 14,405
---------------------------------------------
198,826 368,065 278,828
---------------------------------------------
EXPENSES
Amortisation - capital assets 115,667 34,100 64,406
Amortisation - patent costs 21,563 8,125 5,319
General and administrative [NOTE 8] 2,280,180 1,510,458 1,096,167
Interest - promissory notes [NOTE 5] - 264,633 -
Market development 210,023 306,324 169,242
Project costs 18,803 32,883 33,338
Salaries and wages 1,023,180 468,435 509,467
Development costs [NOTE 4] 2,595,619 - -
---------------------------------------------
---------------------------------------------
6,265,035 2,624,958 1,877,939
---------------------------------------------
LOSS [NOTE 10] (6,066,209) (2,256,893) (1,599,111)
DEFICIT, BEGINNING OF YEAR (5,830,182) (3,573,289) (1,974,178)
---------------------------------------------
DEFICIT, END OF YEAR (11,896,391) (5,830,182) (3,573,289)
---------------------------------------------
LOSS PER SHARE [NOTE 7] (0.38) (0.21) (0.19)
---------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 15,846,239 10,608,563 8,637,550
---------------------------------------------
SEE ACCOMPANYING NOTES
F-3
DYNAMIC DIGITAL DEPTH INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN FINANCIAL POSITION
Year ended June 30
1999 1998 1997
$CAD $CAD $CAD
---------------------------------------------
OPERATING ACTIVITIES
Net loss (6,066,209) (2,256,893) (1,599,111)
Add item not requiring a cash payment
Amortisation 95,790 42,225 69,725
Development costs written off 2,595,619 - -
Interest imputed on promissory notes - 215,350 -
Net change in non-cash working capital (107,029) 168,741 505,612
---------------------------------------------
(3,481,829) (1,830,577) (1,023,774)
---------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (404,770) (350,696) (112,120
Proceeds of sale of capital assets - 8,209 -
Deposit [NOTE 11] (508,508) - -
Patent costs (237,809) (159,044) (52,815)
Development costs incurred (962,376) (680,672) (859,885)
---------------------------------------------
(2,113,463) (1,182,203) (1,024,820)
---------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of share capital 2,681,837 8,031,348 1,341,133
Proceeds from issuance of promissory notes - 698,679 841,890
Increase in contributed surplus - 49,283 400,461
Capital lease principal reductions (51,442) (66,815) (32,872)
Restricted cash 1,727,660 (1,727,660) -
---------------------------------------------
4,358,055 6,984,835 2,550,612
---------------------------------------------
NET (DECREASE)/INCREASE IN CASH (1,237,237) 3,972,055 502,018
CASH, BEGINNING OF YEAR 5,006,173 1,034,118 532,100
---------------------------------------------
CASH, END OF YEAR 3,768,936 5,006,173 1,034,118
---------------------------------------------
---------------------------------------------
SEE ACCOMPANYING NOTES
Development costs incurred during the year include $41,440 (1998 : $75,388) of
depreciation which is a non-cash movement.
F-4
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
The Company, through its wholly owned subsidiaries, Dynamic Digital Depth
Australia Pty Ltd., Dynamic Digital Depth Research Pty Ltd, Dynamic Digital
Depth USA Inc. and Dynamic Digital Depth TV Inc., specialises in the business of
research and development and marketing of technologies in 3D television and
related areas, such as the conversion to 3D of existing 2D film and video
material, auto-stereoscopic 3D computer displays, 3D video arcade game displays,
3D viewing glasses, 3D special effects software and 3D camera adaptor. The
Company changed its name from Xenotech Inc. to Dynamic Digital Depth Inc. on
August 17, 1998.
The consolidated financial statements include the accounts of Dynamic Digital
Depth Inc. ("DDD") and its wholly-owned subsidiaries Dynamic Digital Depth
Australia Pty. Ltd. ("Australia"), Dynamic Digital Depth Research Pty. Ltd.
("Research") and Dynamic Digital Depth USA Inc. ("USA"). The consolidated
financial statements are presented in Canadian dollars ($CAD) unless otherwise
specified.
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realisation of assets and the discharge of
liabilities in the normal course of business for the foreseeable future. The
Company has not attained commercial production and has incurred a significant
deficit to June 30, 1999. The ability of the Company to continue as a going
concern is dependent on reaching satisfactory commercial production levels in
order to produce a positive cash flow.
The outcome of these matters cannot be predicted at this time. These financial
statements do not give effect to any adjustment to the classifications and
amounts of assets and liabilities that might be necessary should the Company be
unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in Canada. Because a precise
determination of many assets and liabilities is dependent upon future events,
the preparation of financial statements for a period necessarily involves the
use of estimates and approximations which have been made using careful judgment.
The financial statements have, in management's opinion, been properly prepared
within reasonable limits of materiality and within the framework of the
accounting policies summarised below.
CHANGE IN ACCOUNTING ESTIMATES
The accounting estimates adopted are consistent with those of the previous year
except for the accounting estimate in respect to the development costs for the
year ended June 30, 1998.
The company has implemented new systems which permit a more precise allocation
of certain overhead costs to development costs capitalised in accordance with
section 3450 `Research and development costs.' The change has increased
development costs by $CAD269,262 for the year ended June 30, 1998 over the
amount which could have been capitalised under previous systems.
REVENUE RECOGNITION
Technology revenue from the granting of licenses under license agreements in
specific geographical areas is recognised in full in the year in which the
license is granted.
Technology revenue from conversion services is recognised in full in the period
in which the service is provided.
Revenue from government research and development grants is recognised in full in
the period in which it is received.
F-5
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITAL ASSETS
Capital assets are carried in the accounts at cost less amortisation.
Amortisation is calculated on a straight line basis using the following rates:
Furniture and fixtures 13% - 27%
Office equipment 13% - 27%
Equipment under capital lease over remaining levase term
Technical equipment 13% - 27%
Automotive equipment 25%
Capital assets of the subsidiary based in the United States are amortised using
the double declining balance method. The total cost value of assets subject to
this method is $CAD 75,763.
Leased assets that transfer substantially all of the benefits and risks of
ownership related to the leased asset from the lessor to the lessee are
accounted for as a capital lease. Under a capital lease, the asset is
capitalized and the present value of the related lease payments is recorded as a
liability. Amortization of capitalized leased assets is computed using the
straight line method over the lesser of the remaining lease term and economic
life. The lease agreements have an implicit interest rate varying between 7.95%
and 17.20%.
PATENTS, RESEARCH AND DEVELOPMENT COSTS
Costs relating to acquiring and establishing patents in 3D television and
related areas, such as the conversion to 3D of existing 2D film and video
material, auto-stereoscopic 3D computer displays, 3D video arcade game displays,
3D viewing glasses, 3D special effects software and 3D camera adaptor are
recorded at cost and are being amortised over twenty years.
Research costs are expensed as incurred. Development costs that meet specific
criteria related to technical, market and financial feasibility are capitalised.
Amortisation of development costs will start upon commencement of commercial
production. The costs will be amortised on a straight-line basis over a period
of three years. In the event the costs are determined not to be of continuing
benefit to the Company, these amounts will be written off.
FINANCIAL INSTRUMENTS
Financial instruments of the Company consist mainly of cash, accounts
receivable, accounts payable and accrued liabilities, and capital lease
obligations. As at June 30, 1999 and 1998, there are no significant differences
between the carrying amounts of these instruments, and their estimated fair
values. Compound financial instruments containing both a liability and equity
component are recorded in their component parts based on the fair values of such
parts on the date the instrument was created.
MEASUREMENT UNCERTAINTY
The amounts recorded for patents represent accumulated costs and are not
intended to reflect present or future values. The recoverability of these
amounts is dependent upon the ability of the Company to successfully complete
their development and upon future profitable operations and hence are subject to
measurement uncertainty and the impact on the financial statements of future
periods could be material.
F-6
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN EXCHANGE
The Company's Australian and USA subsidiaries are self sustaining foreign
operations (1998 : self sustaining foreign operations) for foreign currency
translation purposes. Accordingly, assets and liabilities of the subsidiaries
are translated at the year-end exchange rate and revenues and expenses are
translated at average exchange rates. Gains and losses arising from the
translation of the financial statements of the subsidiaries are recorded in a
"Cumulative Translation Adjustment" account in shareholders' equity.
TAXATION
Income taxes are accounted for using the deferral method whereby taxes relating
to timing differences between accounting income and taxable income are recorded
as deferred income taxes.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents , term cash deposits and
other receivables. The Company's cash and cash equivalents are placed with high
quality major Australian, Canadian and American banking institutions, limiting
its exposure to credit risk. At 30 June 1999, the receivables balance disclosed
on the balance sheet consists of a number of amounts including security deposits
and sundry debtors which are receivable from a number of debtors.
3. CAPITAL ASSETS
1999
--------------------------------------------------
ACCUMULATED NET BOOK VALUE
COST AMORTISATION
$CAD $CAD $CAD
--------------------------------------------------
Furniture and fixtures 68,430 22,647 45,783
Office equipment 29,508 14,909 14,599
Equipment under capital lease 271,662 155,792 115,870
Technical equipment 467,994 174,387 293,607
Automotive equipment 79,205 30,204 49,001
Leasehold improvements 174,386 8,719 165,667
--------------------------------------------------
1,091,185 406,658 684,527
--------------------------------------------------
1998
--------------------------------------------------
ACCUMULATED NET BOOK VALUE
COST AMORTISATION
$CAD $CAD $CAD
--------------------------------------------------
Furniture and fixtures 36,843 13,836 23,007
Office equipment 22,022 9,446 12,576
Equipment under capital lease 257,082 81,598 175,484
Technical equipment 229,931 82,610 147,321
Automotive equipment 78,476 - 78,476
--------------------------------------------------
624,354 187,490 436,864
--------------------------------------------------
F-7
4. PATENTS AND DEVELOPMENT COSTS
1999 1998
--------------------------------- ---------------------------------
ACCUMULATED ACCUMULATED
COST AMORTISATION COST AMORTISATION
$CAD $CAD $CAD $CAD
--------------------------------- ---------------------------------
Patents 507,534 35,176 269,556 13,444
--------------------------------- ---------------------------------
Net book value 472,358 256,112
--------------------------------- ---------------------------------
Total research and development costs incurred during the year were $1,281,639
and $1,021,478 for the years ended June 30, 1999 and 1998 respectively.
During the year, the Company reviewed its capitalised development costs and
found that they no longer met the criteria for deferment, this resulted in
$2,595,619 of capitalised development costs being written off.
5. PROMISSORY NOTES
In February 1998, the Company issued promissory notes to a value of $US500,000,
convertible at the holders option into common shares on the basis of $US1.00 per
share. The notes bore interest at 5% per annum.
The Company has calculated the debt component of the note issue as the present
value of the required interest and principal payments discounted at a rate
approximating the interest rate that would have been applicable to
non-convertible debt at the time of its issuance. The difference between the
face amount of the loan and the calculated debt component has been recorded as
contributed surplus.
In May 1998, the $US500,000 of promissory notes together with $US1,000,000 of
notes (issued on June 30, 1997) and interest unpaid on the notes were converted
to common shares. The notes were converted on the basis of $US1.00 per share.
6. COMMITMENTS AND CONTINGENCIES
The following is a schedule of future minimum lease payments under the capital
leases:
1999 1998
$CAD $CAD
------------- -------------
1999 - 71,734
2000 51,864 43,694
2001 48,828 40,751
2002 19,032 18,012
------------- -------------
Total minimum lease payments 119,724 174,191
Less amount representing interest (12,475) (23,038)
------------- -------------
Present value of minimum lease payments 107,249 151,153
------------- -------------
------------- -------------
Total rental expense on operating leases approximated $CAD 65,000, $CAD 90,000
and $CAD 289,000 for years ended June 30, 1997, 1998 and 1999 respectively.
F-8
6. PATENTS AND DEVELOPMENT COSTS (CONTINUED)
In June 1999 the Company entered into a Development Agreement with General
Instruments Corporation, a major manufacturer of cable headend equipment and
television set-top boxes. Under the Development Agreement, the Company will pay
$US250,000 to General Instruments Corporation for equipment and engineering
services to integrate the Company's 2D-3D compatible technology and General
Instrument's digital set-top terminals.
LITIGATION
a) In January 1999 Angus Duncan Richards ("Richards") served a notice of
dispute on the Company relating to the terms of a Consulting Agreement
between the Company and Richards. The dispute is subject to arbitration
for which no date has been set. The Company refutes all of the
allegations and intends to vigorously defend this matter.
b) In December 1998 Angus Duncan Richards ("Richards") commenced litigation
in Alberta, Canada seeking monetary damages for $CAD227,500 plus interest
and court costs. Richards alleges the Company failed to permit him to
exercise options to purchase 182,000 common shares at an exercise price
of $1.25 per share based upon the determination that the options had
expired. (Amounts based on post reverse stock split) The Company filed a
Statement of Defence in February 1999. The Company refutes all of the
allegations and intends to vigorously defend this matter.
c) The Company is currently defending a claim for $US60,798 plus interest
made by Mallory Factors Inc., the Company's former public relations
contractor relating to services rendered. The claim is pending before the
American Arbitration Association in New York. The Company intends to
vigorously defend this matter.
F-9
7. SHARE CAPITAL
AUTHORISED
Unlimited number of voting common shares
Unlimited number of non-voting first and second preferred shares, issuable in
series
ISSUED - COMMON SHARES
NUMBER OF
SHARES $CAD
-------------------------------
Balance at June 30, 1997 - common voting shares 9,308,976 4,018,531
Issued for cash through private placements, net of issuance costs 5,359,791 7,873,135
Issued on conversion of promissory notes 1,550,959 1,894,029
Issued on exercise of stock options 109,770 143,213
Issued on exercise of warrants 100,000 75,000
Shares acquired through normal course issuer bid (80,800) (172,340)
-------------------------------
Balance at June 30, 1998 - common voting shares 16,348,696 13,831,568
Issued for cash through private placements, net of issuance costs 2,000,000 3,684,327
Issued on exercise of stock options 159,470 200,532
Issued on exercise of warrants 200,000 293,771
Shares acquired through normal course issuer bid (741,174) (1,496,793)
-------------------------------
Balance at June 30, 1999 - common voting shares 17,966,992 16,513,405
-------------------------------
Note: The figures for the number of shares and loss per share have been
retroactively adjusted for the effect of a one for five reverse stock split
which occurred in August 1998.
OPTIONS
The Company has established a stock option plan for its directors, officers and
employees and has granted the following options:
NUMBER OF OPTIONS OUTSTANDING AT EXERCISE PRICE
JUNE 30, 1999 $CAD EXPIRY DATE
- ----------------------------------- -------------------------------- --------------------------------
62,770 1.25 AUGUST 3, 1999
128,000 1.25 MAY 10, 2001
80,000 1.35 NOVEMBER 27, 2001
430,000 1.30 DECEMBER 20, 2002
200,000 1.50 SEPTEMBER 7, 2003
200,000 2.80 JUNE 7, 2004
F-10
7. SHARE CAPITAL (CONTINUED)
WARRANTS
On June 25, 1999, the 200,000 share purchase warrants with options to purchase
common shares on a 1:1 basis issued for $US1.00 were exercised. These warrants
were issued on June 30, 1997 in conjunction with the $US1,000,000 promissory
notes as disclosed in note 5. The warrants were due to expire on June 30, 1999.
In connection with private placements during 1999, the Company issued 1,500,000
share purchase warrants with options to purchase common shares on a 1:1 basis at
a price of $CAD3.50 from June 17, 1999 to June 17, 2000, or $CAD4.50 from June
17, 2000 to June 17, 2001, or $CAD 5.50 from June 17, 2001 to June 17, 2002.
In connection with private placements during 1998, the Company issued 5,000,000
share purchase warrants with options to purchase common shares on a 2:1 basis at
a price of $CAD2.00 per share. These warrants expire on May 19, 2000,
notwithstanding this, the expiry date will be extended to May 19, 2001 if the
Company lists its shares for trading in the United States.
The party who holds these share purchase warrants has granted options over
certain of these warrants to another party who in turn have granted options over
these warrants for the benefit of certain members of management and employees of
the Company. The options granted to members of management and employees cannot
be exercised unless the Company is NASDAQ listed. Details of the options granted
are listed below:
NUMBER OF OPTIONS OUTSTANDING AT EXERCISE PRICE
JUNE 30, 1999 $CAD EXPIRY DATE
- ----------------------------------- -------------------------------- --------------------------------
750,000 2.05 APRIL 24, 2000
630,000 3.00 APRIL 24, 2000
720,000 4.00 APRIL 24, 2000
An assumed conversion of the options and warrants to purchase common shares and
the resultant imputed interest savings would have an anti-dilutive effect on
loss per share.
8. RELATED PARTY TRANSACTIONS
Consulting, management and finders fees of $35,436 (1998 - $145,147) were paid
by the Company to companies whose directors are also directors of the Company.
These fees are presented at their exchange amount.
9. SUBSEQUENT EVENTS
Dynamic Digital Depth Australia Pty. Ltd. ("DDDA") entered into an option deed
on January 13, 1999 which provided DDDA with a call option over a building
comprising 1,711 square meters. DDDA paid a non-refundable option fee of
$A500,000. The option was exercised at $A2,000,000 on September 30th, 1999 and
settlement of the property took place on October 15, 1999. The purchase of the
building was financed by a short term loan facility for $A2,000,000 to DDDA from
the Bank of Western Australia Ltd. collateralised by the property and guaranteed
by the Company. This loan is repayable by no later than December 31, 1999.
Repayment of the loan will be financed from sales of suites in the building,
including that occupied by the Company and its subsidiaries. DDDA has entered
into two separate unconditional Contracts of Sale that will generate $A1,600,000
in gross sales and expects to achieve sales of the remaining suites prior to the
expiration of the loan period. On November 25, 1999 suite 1 was settled for
$AUS1.3m. In the event that the sale of the remaining suites has not been
finalized by that date the short term loan facility will be renegotiated to
cover any outstanding loan balance.
F-11
9. SUBSEQUENT EVENTS (CONTINUED)
The company has issued 67,770 common shares based on the conversion of options
issued prior to June 30, 1999. The date and number of options converted are
detailed below.
August 3, 1999 62,770
October 18, 1999 5,000
The company has issued 44,000 options over common shares, exercisable on or
before July 7, 2004 at an exercise price of $CAD 2.47. The company has issued
80,000 options over common shares, exercisable on or before October 28, 2004 at
an exercise price of $CAD 5.66.
10. LOSS CARRYFORWARD
The Company has non-capital accumulated losses carried forward for income tax
purposes amounting to $12,379,579, the benefit of which has not been reflected
in the accounts. The losses of the Canadian subsidiary of $127,878, $199,320,
$371,867, $446,852, $470,346 must be utilised by June 30, 2002, 2003, 2004, 2005
and 2006 respectively. The carried forward losses of the United States
subsidiary of $191,184 and $1,354,449 must be utilised by 2013 and 2014
respectively. The remaining losses carried forward of $9,217,683 from the
Australian subsidiaries can be carried forward indefinitely.
11. GEOGRAPHIC SEGMENTS
AUSTRALIA USA CANADA ELIMINATIONS CONSOLIDATED
1999 $CAD $CAD $CAD $CAD $CAD
- -----------------------------------------------------------------------------------------------------------------
REVENUE 97,369 79,273 22,184 - 198,826
--------------------------------------------- ------------------
LOSS (4,378,295) (299,706) (1,388,208) - (6,066,209)
--------------------------------------------- ------------------
IDENTIFIABLE ASSETS 2,470,530 14,669,737 3,159,523 (14,593,818) 5,705,972
--------------------------------------------------------------------------------
AUSTRALIA USA CANADA ELIMINATIONS CONSOLIDATED
1998 $CAD $CAD $CAD $CAD $CAD
- -----------------------------------------------------------------------------------------------------------------
REVENUE 339,656 22,117 6,292 - 368,065
--------------------------------------------- ------------------
LOSS (1,061,985) (186,824) (1,008,084) - (2,256,893)
--------------------------------------------- ------------------
IDENTIFIABLE ASSETS 2,542,062 4,617,020 12,753,017 (10,709,581) 9,202,518
--------------------------------------------------------------------------------
The Company operates in one industry segment, that being the research and
development of 2D - 3D technologies.
12. COMPARATIVES
Certain prior year figures have been reclassified to conform with the financial
statement presentation of the current year.
F-12
13. YEAR 2000
The Year 2000 Issue arises because many computerised systems use two digits
rather than four to identify a year. Date-sensitive systems may recognise the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
F-13
14. STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
COMMON SHARES CONTRIBUTED CUMULATIVE DEFICIT TOTAL
SURPLUS TRANSLATION SHAREHOLDERS'
ADJUSTMENT EQUITY
SHARES $CAD $CAD $CAD $CAD $CAD
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1995 ...... 5,985,315 941,398 41,727 16,801 (751,231) 248,695
Issue of 2,300,000 shares
through private placement,
net of issuance costs ....... 2,300,000 1,736,000 -- -- -- 1,736,000
Loss on translation of foreign
controlled entities ......... -- -- -- (33,452) -- (33,452)
Net loss after tax ............ -- -- -- -- (1,222,947) (1,222,947)
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30,1996 ....... 8,285,315 2,677,398 41,727 (16,651) (1,974,178) 728,296
Issue of 855,881 shares through
private placement, net of
issuance costs .............. 855,881 1,127,783 -- -- -- 1,127,783
Issue of 17,780 shares on
exercise of stock options ... 17,780 25,850 -- -- -- 25,850
Issue of 150,000 shares on
exercise of warrants ........ 150,000 187,500 -- -- -- 187,500
Loss on translation of foreign
controlled entities ......... -- -- -- (19,661) -- (19,661)
Adjustment to contributed
surplus ..................... -- -- 400,461 -- -- 400,461
Net loss after tax ............ -- -- -- -- (1,599,111) (1,599,111)
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 ...... 9,308,976 4,018,531 442,188 (36,312) (3,573,289) 851,118
Issue of 5,359,791 shares
through private placement,
net of issuance costs ....... 5,311,791 7,813,135 -- -- -- 7,813,135
Issue of 48,000 shares in lieu
of amount payable to a
director.................... 48,000 60,000 -- -- -- 60,000
Issue of 1,550,959 shares on
conversion of promissory
notes ....................... 1,550,959 1,894,029 -- -- -- 1,894,029
Issue of 109,770 shares on
exercise of stock options ... 109,770 143,213 -- -- -- 143,213
Issue of 100,000 shares on
exercise of warrants ........ 100,000 75,000 -- -- -- 75,000
Repurchase of shares through
normal course issuer bid
(share buy-back) .............. (80,800) (172,340) -- -- -- (172,340)
Loss on translation of foreign
controlled entities ......... -- -- -- (36,874) -- (36,874)
Adjustment to contributed
surplus ..................... -- 49,283 -- -- 49,283
Net loss after tax ............ -- -- -- -- (2,256,893) (2,256,893)
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 ...... 16,348,696 13,831,568 491,471 (73,186) (5,830,182) 8,419,671
Issue of 2,000,000 shares
through private placement,
net of issuance costs ....... 2,000,000 3,684,327 -- -- -- 3,684,327
Issue of 159,470 shares on
exercise of stock options ... 159,470 200,532 -- -- -- 200,532
Issue of 200,000 shares on
exercise of warrants ........ 200,000 293,771 -- -- -- 293,771
Repurchase of shares through
normal course issuer bid
(share buy-back) .............. (741,174) (1,496,793) -- -- -- (1,496,793)
F-14
Gain on translation of foreign
controlled entities ......... -- -- -- 232,946 -- 232,946
Net loss after tax ............ -- -- -- -- (6,066,209) (6,066,209)
----------- ----------- ----------- ----------- ----------- -----------
Balance at 30 June 1999 ....... 17,966,992 16,513,405 491,471 159,760 (11,896,391) 5,268,245
----------- ----------- ----------- ----------- ----------- -----------
15. SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("US GAAP")
The Company's financial statements are prepared in accordance with Canadian
GAAP, which differ in certain significant respects from US GAAP. The significant
differences relate principally to the following items and the adjustments
necessary to reconcile the consolidated net income, shareholders' equity, and
certain balance sheet accounts in accordance with US GAAP are shown in the
schedules below.
A) DEVELOPMENT COSTS
Under Canadian GAAP development costs that meet specific criteria related to
technical, market and financial feasibility are capitalised. Amortisation of
development costs will start upon commencement of commercial production. For US
GAAP purposes, development costs are expensed in the period incurred. The
Canadian GAAP and US GAAP reconciliation includes an adjustment to expense the
capitalised development costs in the relevant year those costs were incurred. In
fiscal year ended June 30, 1999 - nil (1998 : CAD$756,060, 1997 : $CAD859,885)
of development costs have been expensed in the reconciliation to net loss under
US GAAP, representing expenditure incurred in that year. Refer to note 15 (g)
for the effect of the write off.
B) INCOME TAXES
Under US GAAP income taxes are computed using the asset and liability method.
Under the asset and liability method, deferred income tax assets and liabilities
are determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the currently enacted tax
rates and laws.
Under Canadian GAAP certain differences between the book and tax basis of assets
and liabilities are treated as permanent differences because their reversal is
not considered probable in the foreseeable future. Under US GAAP, Statement of
Financial Accounting Standards No. 109, " Accounting for Income Taxes," these
differences would be accounted for as temporary differences.
Under Canadian GAAP, the deferred tax asset in respect of income tax losses
carried forward are not recognised unless the benefit is virtually certain of
realisation. Under US GAAP, the benefit is not recognised unless realisation is
more likely than not. Based on the present circumstances, the deferred income
tax assets have not been recognised as it is more likely than not that the
benefit will not be realised.
No tax benefit has been recognized under either concept to date as the company
has incurred losses. The company has significant carry forward tax losses as
disclosed in note 10.
C) PROMISSORY NOTES
Under Canadian GAAP the debt component of the note issue is the present value of
the required interest and principal payments discounted at a rate approximating
the interest rate that would have been applicable to non-convertible debt at the
time of its issuance. The difference between the face amount of the loan and the
calculated debt component has been recorded as contributed surplus.
Under US GAAP only the warrant component is reflected in shareholders equity.
Refer to note 15 (g) for the effect of the change in GAAP.
For the purposes of this reconciliation, the company accounts for debt issued
with stock purchase warrants in accordance with APB Opinion No. 14, "Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants." The interest
expense is calculated based on the percentage attached to the convertible debt.
Refer to
F-15
note 15 (g) for the effect of the change in GAAP.
D) PATENT COSTS
Under Canadian GAAP patent costs capitalised included both internal and external
costs. Under US GAAP only external costs are capitalised. Refer not 15 (g) for
the effect of the difference in GAAP.
15. SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("US GAAP") (CONTINUED)
E) EMPLOYEE STOCK OPTIONS
For the purposes of this reconciliation, the Company accounts for stock options
granted to employees and directors in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and intends to continue to do so.
Under Canadian GAAP, stock options are only recognized when converted and the
exercise price paid is treated as issued capital. Net income has been adjusted
for the compensation expense which would be recorded under US GAAP. This
difference is disclosed in note 15g.
A summary of the status of the Company's stock option plan as of June 30, 1997
1998 and 1999, and the changes during the years ending on those dates is
presented below:
------------------------------------------------------------------------------------------
YEAR ENDED 30 JUNE
1997 1998 1999
Number of Weighted Average Number of Weighted Average Number of Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
$CAD $CAD $CAD
------------------------------------------------------------------------------------------
Outstanding - beginning
of year 387,190 1.25 512,310 1.28 885,540 1.29
Granted 160,000 1.35 485,000 1.30 400,000 2.15
Exercised (14,880) 1.25 (109,770) 1.30 (159,470) 1.27
Forfeited (20,000) 1.25 (2,000) 1.25 (25,300) 1.30
Outstanding - end of year 512,310 1.28 885,540 1.29 1,100,770 1.60
Exercisable at end of year 452,310 1.29 189,230 1.29 139,230 2.47
Weighted average fair
value of options granted
during the year $0.67 $0.72 $1.62
For the purposes of this reconciliation, below is the pro forma disclosure under
US GAAP in accordance with FAS 123. Under FAS 123 the compensation cost is
measured at the grant date based on the fair value of the award of options and
is recognized over the vesting period. The fair value is determined using an
option pricing model that takes into account the stock price at the date of
grant, the exercise price, the expected life of the option, the volatility of
the underlying stock and the expected dividends on it, and the risk free
interest rate over the expected life of the option. The fair value of each
option granted was estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions for 1997, 1998 and 1999,
respectively: risk free interest rates of 6.1, 6.0, 6.3 per cent; dividend yield
of 0 per cent for all years; expected lives of 5 years and volatility of 70, 70
and 70 per cent.
F-16
------------------------------------------
YEAR ENDED 30 JUNE
1999 1998 1997
$CAD $CAD $CAD
------------------------------------------
Net loss - as reported (6,066,209) (2,256,893) (1,599,111)
Net loss - pro forma (6,405,679) (2,377,347) (1,706,071)
Pro forma earnings per share:
Basic (0.40) (0.22) (0.20)
15. SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("US GAAP") (CONTINUED)
F) EARNINGS PER SHARE
Under Canadian GAAP, diluted earnings per share is determined by dividing the
net income adjusted to include the assumed income, net of tax, from investing
the proceeds from the exercise of outstanding share options and warrants in 180
day bank bills, by the weighted average number of ordinary shares, both on issue
and potentially dilutive options, outstanding during the financial year.
Under US GAAP, the treasury stock method would be used to compute diluted
earnings per share.
In the reconciliation below no effect has been given in the US GAAP computation
of earnings per share to potential dilutive securities as their effect is
anti-dilutive.
G) THE FOLLOWING TABLE SUMMARIZES THE EFFECT ON NET LOSS OF THE DIFFERENCES
BETWEEN CANADIAN AND US GAAP.
------------------------------------------
YEAR ENDED 30 JUNE
1999 1998 1997
$CAD $CAD $CAD
------------------------------------------
Net loss after income tax under Canadian GAAP (6,066,209) (2,256,893) (1,599,111)
Write off development costs 15 (a) - (756,060) (859,885)
Promissory notes 15 (c) - 103,370 -
Internal patent costs 15 (d) - (39,262) -
Employee stock options 15 (e) (11,334) (77,620) -
------------------------------------------
Net loss under US GAAP (6,077,543) (3,026,465) (2,458,996)
Foreign currency translation adjustment 232,946 (36,874) (19,661)
------------------------------------------
Comprehensive loss (5,844,597) (3,063,339) (2,478,657)
------------------------------------------
Basic Earnings and Diluted Earnings per share
under Canadian GAAP (0.38) (0.21) (0.19)
Basic Earnings and Diluted Earnings per share
under US GAAP (0.37) (0.29) (0.28)
The following table summarises the effect on the shareholders' equity of the
differences between Canadian and US GAAP
F-17
----------------------------
YEAR ENDED 30 JUNE
1999 1998
$CAD $CAD
----------------------------
Shareholders' equity under Canadian GAAP 5,268,245 8,419,671
Development Costs 15 (a) - (1,615,945)
Internal patent costs 15 (d) (39,262) (39,262)
----------------------------
Shareholders' equity under US GAAP 5,228,983 6,764,464
----------------------------
The following table summarizes the effect on the balance sheet of the
differences between Canadian and US GAAP
Total assets under Canadian GAAP 5,705,972 9,202,518
Development costs 15 (a) - (1,615,945)
Internal patent costs 15 (d) (39,262) (39,262)
----------------------------
Total assets under US GAAP 5,666,710 7,547,311
----------------------------
15. SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("US GAAP") (CONTINUED)
H) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
US GAAP - DERIVATIVES
In June 1998 (effectiveness date revised in June 1999), the Financial Accounting
Standards Board issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, which is required to be adopted in years beginning after
June 15, 2000. The Statement will require the Company 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
will either be offset against the change in fair value of the hedged 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. The Company has not yet determined what the effect of
Statement 133 will be on the earnings and financial position of the Company.
F-18