SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark one)
[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal year ended ____________
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
-----------------------------------
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
17,989,762 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................................................48
ITEM 3 LEGAL PROCEEDINGS......................................................48
ITEM 4 CONTROL OF REGISTRANT..................................................48
ITEM 5 NATURE OF TRADING MARKET...............................................49
ITEM 6 EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS.......................................................................50
ITEM 7 TAXATION...............................................................52
ITEM 8 SELECTED FINANCIAL DATA................................................57
ITEM 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.........................................................59
ITEM 9A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............66
ITEM 10 DIRECTORS AND OFFICERS OF REGISTRANT..................................67
ITEM 11 COMPENSATION OF DIRECTORS AND OFFICERS...............................71
ITEM 12 OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR
SUBSIDIARIES..................................................................71
ITEM 13 INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS........................73
ITEM 14 DESCRIPTION OF SECURITIES TO BE REGISTERED............................75
ITEM 15 DEFAULTS UPON SENIOR SECURITIES.......................................75
ITEM 16 CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES....................................................................75
i
ITEM 17 FINANCIAL STATEMENTS..................................................75
ITEM 19 FINANCIAL STATEMENTS AND EXHIBITS.....................................76
ii
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 August 4, 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 $0.6712 = $1.00 Canadian.
iii
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.
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.
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(R).
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.
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.
iv
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 telephone
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.
v
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 use in a broad range of markets including Internet, cable,
satellite or terrestrial broadcasting, film and prerecorded DVD markets.
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 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.
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)
1
3D movies for theatrical release
Interactive Games Software applications
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 the optimal 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 on
conventional display hardware including PC monitors or television sets.
DeepSee-TM- comprises 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 pursuant to the provisions of the Business
Corporations Act (Alberta) on February 4, 1987 as an oil and gas exploration
company with a listing of its Common Shares on The Alberta Stock Exchange (ASE)
on April 27, 1987. 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".
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 Australia Pty. Ltd.) and Xenotech Research Pty. Ltd. (now known as
Dynamic Digital Depth Research Pty. Ltd.).
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
2
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.
The following chart sets forth the Company's corporate structure, including its
subsidiaries and the percentage of voting securities or ownership held by the
Company:
--------------------------
Dynamic Digital Depth Inc.
(Alberta, Canada)
--------------------------
/
/
/
---------------------------------------------------
100% 100% 100%
--------------------- --------------------- ---------------------
Dynamic Digital Depth Dynamic Digital Depth Dynamic Digital Depth
Australia Pty. Ltd. USA, Inc. Research Pty. Ltd.
(Western Australia, (Delaware, USA) (Western Australia,
Australia) Australia)
--------------------- --------------------- ---------------------
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 key
factor 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 providing a complete end to end solution.
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. During the 1950's over 150 million tickets
were sold for early 3D 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 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.
Presently 3D theaters represent 20% of IMAX's installed
3
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(R) system and this is forecast to triple over the next five years.
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. The published ratings generated
from these brief 3D segments has demonstrated that there is an interest in
viewing 3D at the consumer level.
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, in conjunction with Liquid
Crystal Display 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 maximize the benefit of the licensing strategy described in this
document, 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. The agreements
are expected to yield marketing partnerships with organizations of substantial
market presence and expertise with well-established sales channels.
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.
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
leading worldwide provider of integrated and interactive broadband access
solutions, teaming with its business partners to lead the 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
4
Instrument's range of consumer television advanced set top boxes and broadcast
head-end encoder systems.
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 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 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 DDC 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.
5
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 allowing 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 allowing 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.
GLASSES-FREE 3D PROJECTION DISPLAY
The glasses-free 3D projection display 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 glasses allow
owners of PAL and NTSC television sets to view 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.
6
PATENT LIBRARY STATUS
This is 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 INVENTION NAME STATUS PRIORITY DATE
NUMBERS
- --------------------------------------------------------------------------------
PCT WO 94/25899 3D Stereoscopic Registered - USA May 4, 1993
Display Unit Registered - Australia
Registered - Singapore
- --------------------------------------------------------------------------------
PCT/AU95/00843 Head Tracking Unit Pending PCT Dec. 13, 1994
- --------------------------------------------------------------------------------
PCT/AU96/00820 Dynamic Depth Cueing Pending PCT Dec. 22, 1995
US 102,247 (DDC) (2D to 3D
Conversion - Offline
- 3D Camera - 2D
Compatible 3D
Transmission)
- --------------------------------------------------------------------------------
PCT/AU97/00353 Video Display System Pending PCT June 4, 1996
(Multiviewer)
- -------------------------------------------------------------------------------
PCT/AU/00028 Method & Apparatus Pending PCT Jan. 22, 1997
for Producing
Stereoscopic Images
(3D Glasses)
- -------------------------------------------------------------------------------
PCT/AU98/00716 Image Processing Pending PCT Sept. 2, 1997
Method & Apparatus
(2D to 3D Conversion
Realtime)(DDC Layers)
- -------------------------------------------------------------------------------
PCT/AU98/00969 Eye Tracking Pending PCT Nov. 21,1997
Apparatus
- -------------------------------------------------------------------------------
PCT/AU98/01005 DDC / 2 Pending PCT Dec. 2, 1997
Improvements to PCT
/AU96/00820
Improvements to PCT
/AU98/00716
- -------------------------------------------------------------------------------
PP7275 Teleconferencing Provisional Nov 23, 1998
System
- -------------------------------------------------------------------------------
PQ1018 Image Enhancement Provisional 17 June 1999
System
- -------------------------------------------------------------------------------
PQ1197 Image Conversion Provisional 25 June 1999
and Encoding
Techniques(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 AND SERVICES
The Product Development strategy adopted by the Company is designed to deliver a
focused range of hardware and software products that are based upon the
Company's core intellectual properties. 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 used its best efforts to create features that are anticipated
to be of benefit and value to end users.
7
The Product Development plans of DDD are based upon the following products and
potential products:
DeepSee-TM- Viewer - a software based 3D decoder for use on PCs and Set Top
Boxes
DeepSee-TM- Photo - a software application capable of creating 3D digital
photographic images
DeepSee-TM- Movie - a software application capable of creating 3D digital
movies and video
DeepSee-TM- Studio Pro - a professional software application capable of
converting digitized 2D film and broadcast quality
video material to 3D
3D Demultiplexer - a DDD Video Processor hardware device for use with 3D
projection systems
Video Line Doubler - a DDD Video Processor hardware device capable of
increasing the visual resolution of PAL and NTSC
television video signals
Real Time 3D Generator - a DDD Video Processor hardware device capable of
converting 2D video images to 3D in real time
3D DDC Decoder - a DDD Video Processor hardware device capable of
decoding embedded DDC data from analog and digital
video signals
3D Projection Display - a 3D glasses-free large screen projection display for
use in arcade game outlets and Theme Park sites.
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.
8
SOFTWARE PRODUCTS
The following is a summary of the Company's software products and their intended
markets.
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
DEEPSEE-TM- VIEWER
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 may either be implemented as a
software-based application, or as a hardware application.
Targeted for introduction in the last quarter of 1999, DeepSee-TM- Viewer is
intended for use primarily on the PC platform to support the Company's Internet
and video game products and also in cable and satellite television set top
boxes. The Company intends to follow the trend in the Internet browser and media
player market established by organizations such as Netscape, Microsoft, Apple
and RealNetworks. Users will be able to download a limited function version of
the Viewer for free in order to explore and view images that have been prepared
using the Company's 3D image authoring tools. Comparable product distribution
models include Apple Quicktime and Adobe Acrobat.
DeepSee-TM- Viewer will be made available as a software `plug-in' module for use
with popular Internet browsers and media players including Microsoft Internet
Explorer, Netscape Navigator, Apple Quicktime and RealNetworks RealPlayer.
9
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 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.
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.
Images can be viewed in 3D on PC or television screens using low cost `anaglyph'
red and blue glasses or consumer priced Liquid Crystal Display `shutter'
glasses.
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.
In the Set Top Box broadcast applications, pursuant to a development agreement
dated June 17, 1999, the Company has entered into an agreement with General
Instrument Corporation, Horsham, Pennsylvania, USA. The agreement includes the
integration of DeepSee-TM- Viewer technologies for use on digital set top boxes.
DEEPSEE-TM- PHOTO
Targeted for introduction in the fourth quarter of 1999, DeepSee-TM- Photo is a
PC based software application capable of being used to convert popular PC
photographic image files from 2D to 3D. The objective of DeepSee-TM- Photo is to
enable consumer users to enhance digitized 2D photographs created using scanning
or digital camera technology. DeepSee-TM- Photo provides 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. DeepSee-TM-
Photo 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.
Multiview 3D generation allows DeepSee-TM- Photo to create a Quicktime Movie
file from a single scanned 2D 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 3D photographs to be created. The
Company intends to license this capability to leading organizations in the
consumer photo processing market.
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.
10
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.
In addition to the distribution of boxed shrink-wrap products, the Company
also expects DeepSee-TM- Photo to be distributed through Internet based
e-commerce. Here, 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.
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 introduction between October 1999 and
July 2001.
Users who download the zero cost `freeware' DeepSee-TM- Photo will receive
limited functions, primarily aimed at generating 3D images using the lowest cost
`anaglyph' red/blue glasses. For those users who wish to obtain more advanced
features in manipulating the 3D image and also use more advanced 3D image
systems such as LCD shutter glasses, an upgrade to a chargeable DeepSee-TM-
Photo will be required.
DEEPSEE-TM- MOVIE
Targeted for availability in the fourth quarter of 1999, DeepSee-TM- Movie is 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 provides 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.
DeepSee-TM- Movie has been developed in Java, 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 RealNetworks G2 or Adobe Photoshop products 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.
11
In addition to the distribution of boxed 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.
The Company has not yet set a general release date for the launch of
DeepSee-TM- Movie. The Company is seeking to maximize the value of
DeepSee-TM- Movie by offering Internet Movie and Streaming Video conversion
as a service by the Company in the short term.
DEEPSEE-TM- STUDIO PRO
Targeted for introduction in the fourth quarter of 1999, 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 into Internet video files, digital and analog
broadcast signals for cable, satellite and terrestrial distribution and DVD
video discs.
In these markets, the resolution of detail in each frame of film or field of
video requires an advanced set of pixel accurate object identification and
tracking techniques in addition to highly efficient, operator independent depth
analysis and depth cue generation algorithms.
In order to support these features, and the necessity for rapid turnaround of
media for broadcast applications, 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;
- - A powerful Intel Xeon or Merced 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 high value, 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.
This involves 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.
12
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 Merced 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.
DeepSee-TM- Studio Pro is intended to be a high end software package that is
comparable to AVID broadcast products in terms of pricing and distribution. The
Company is considering third parties for the distribution and support of
DeepSee-TM- Studio Pro and is investigating licensing the functions to a
specialist professional media software publisher. The Company is also
investigating distributing and supporting the product from within the Company.
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.
HARDWARE PRODUCTS
The following is a summary of the Company's hardware products and their intended
markets.
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
DDD VIDEO PROCESSOR
During the development of the 3D Projection Display and the 2D to 3D software
conversion process, the Company has engineered a digitally reprogrammable Video
Processor platform based upon a Field Programmable Gate Array (FPGA). This
provides a flexible underlying platform with the added advantage that any
functionality attained using the FPGA can be easily transferred to create an
Application Specific Integrated Circuit (ASIC) chip set. The primary functions
of the Video Processor are:
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3D Depth Cue Decoder - a device capable of decoding embedded depth cue
data from analog and digital video signals.
3D Demultiplexer - a device for use with 3D projection systems
Real Time 3D Converter - a device capable of converting 2D video images
to basic 3D in real time
2D Video Line Doubler - a device capable of increasing the visual
resolution of PAL and NTSC video signals
The Video Processor has a number of discrete functions that are designed to
bring solutions to specific requirements. These are:
DYNAMIC DEPTH CUE DECODING
In situations where DeepSee-TM- Viewer software may not be used to decode depth
cue data, the Company has developed a hardware-based depth cue decoder. This
allows the decoding of DDD's proprietary depth cue data for the real time
generation of a 3D image from depth cue encoded media.
This hardware based depth cue data decoder may be embedded in chip sets of set
top boxes, set top box accessories, DVD players, DVD player accessories and PC
cards.
The system processes an incoming analog or digital video stream for DVD, PC and
set top box applications. The depth cue data is extracted from the video stream
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 with
DeepSee-TM- Studio Pro, the 2D image and depth cue data may be combined in real
time and displayed on a monitor. This allows the operator to dynamically refine
the depth cue 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 third quarter of 1999. The Company
intends to demonstrate the hardware-based depth cue decoding to prospective
licensees in the set top box, DVD player and PC card manufacturing markets.
3D DEMULTIPLEXER FOR PROJECTION SYSTEMS
The 3D Demultiplexer processes incoming field sequential video signals for use
with 3D projection systems. This allows twin projector systems to be operated
from one media player alleviating the synchronization issues of using two
videocassette 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
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`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.
Since this approach uses the alternate fields in the videotape to store left and
right eye 3D images, the image provided is half the resolution of a normal
videotape. Consequently, the Video Processor also provides the capability to
`line double' the output image. Here the video processor uses a combination of
digital line interpolation algorithms to create additional lines in the output
signal based upon the comparison of input line pairs. This digitally synthesizes
the image and gives the appearance that the left and right eye 3D output fields
are a full resolution image.
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. Modifications to the prototype
may be required in order to permit sale of the product in volume.
REAL TIME 3D CONVERTER
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.
This allows any video transmission played from a videocassette, DVD or broadcast
signal to be converted to a simple form of 3D in real time. The advantage of the
real time converter is that it can handle any media, without the need for the
media to be preprocessed. The basic 3D result does not possess the same quality
or consistency of a 3D image produced using the DeepSee-TM- Studio Pro
post-production conversion process.
The Company intends to provide evaluation systems to companies in Japan to
consider manufacturing as a PC add-on card accessory. Modifications to the
prototype may be required in order to permit license and sale of the product in
volume.
2D LINE DOUBLING FOR VIDEO SIGNALS
While the line doubling feature is a requirement of a 3D signal demultiplexer,
it also provides some useful benefits when used with conventional media players
in non 3D applications. Many of today's consumer applications for DVD players
and set top boxes are converging television technologies with PC displays.
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
15
of the image on the TV screen. The viewer then sees an image comprising between
400 and 500 lines of resolution.
Many PC monitors are capable of displaying images of 800 x 600 lines of
resolution, considerably higher than that of a television set. Consequently,
when videocassette tapes or DVDs are played on a PC monitor, the image quality
is that of a television set and therefore less than the display capability of
the PC monitor. The DDD video processor is capable of `line doubling' an
incoming video signal and displaying it on a PC monitor at a higher resolution
and with greater clarity than otherwise possible. Here the video processor uses
a combination of 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 and gives the
appearance that the image is of a higher resolution approaching that of High
Definition.
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. Modifications to the
prototype may be required in order to permit sale of the product in volume.
3D PROJECTION DISPLAY
The origins of Dynamic Digital Depth 3D Projection Display lie in the design and
manufacture of a prototype glasses free stereo 3D display system. 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 3D image on a large display
screen without the need for the viewer to wear glasses or a headset.
The Company has targeted the display system toward the international arcade game
industry as a deluxe game configuration.
The capability of playing a video game in true life like 3D, without impacting
on the throughput, and therefore the earning capacity of the game, is seen as a
considerable advantage in maintaining the desire among game players to visit
family entertainment centers. The large 3D display yields an experience that is
not presently available at home.
The 3D Projection Display was launched at the 1998 International Association of
Amusement Parks and Attractions Show (IAAPA) in Dallas, TX.
The Company is in the process of providing solutions to the requirements
identified in field trials. This includes a redesign of the eye tracking and
projection system to reduce the number of components and moving parts. Also
required is a projection system capable of delivering higher resolution images.
The Company intends to undertake a value engineering exercise to reduce the cost
of the system to licensees to yield a viable volume market.
Management has focused the Company's limited engineering resources on the high
volume opportunities in consumer broadcasting and the Internet/PC market rather
than on the arcade game display. The Company will apply resources to the 3D
projection display enhancements in the latter half of the calendar year 1999.
16
2D TO 3D MEDIA CONVERSION SERVICES
The Company also offers a 2D to 3D media conversion service. The Company has
identified three discrete market segments within the 3D market where it is
actively focusing effort: (a) Giant Screen `IMAX(R)' theaters; (b) Video
Theater, Special Events, Advertising & Promotion; and (c) Computer Generated
Animation. The Company's Australian subsidiary, Dynamic Digital Depth Australia
Pty. Ltd. is actively undertaking chargeable 2D to 3D conversion projects.
IMAX(R) FILM CONVERSION
In the giant screen market, over 36 `IMAX(R)' 3D theaters already exist
worldwide. 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 and related equipment are required that substantially
increase the size and weight of the additional camera hardware making certain
conventional shots impossible to film and reducing the number of takes possible
during an average day on location. These factors make the process of producing a
3D giant screen film expensive with production budgets almost double that of a
conventional 2D film.
By processing digitized giant screen 70mm film with DeepSee-TM- Studio Pro,
it becomes possible to create a 3D movie using conventional 2D camera
equipment and to generate the 3D equivalent in post-production. A wider
variety of shots can be made in less time with a 2D camera and there is no
need for synchronization of film speeds or lenses. Filmmakers using
conventional 3D techniques and equipment also benefit from depth cueing. By
applying the DeepSee-TM- Studio Pro to the film, 3D shots which are unusable
due to technical problems can be manipulated digitally and recreated in 3D
from a single film source and thus rescued.
The Company has a relationship with IMAGICA USA to explore the potential for
such a 3D service in the giant screen market. The DeepSee-TM- Studio Pro
process is of sufficient quality to be projected on IMAX(R) screens up to 80
feet high and 100 feet wide.
The Company has successfully converted the 45 second trailer of MacGillivray
Freeman's blockbuster IMAX(R) movie `Everest' and has been shown to giant screen
film producers at industry seminars.
The Company has recently completed a project to convert segments of the Magic
Box Productions LLC IMAX(R) film `Sigfried & Roy'. DDD and IMAGICA USA are also
working on test conversions for Showscan Entertainment's theme park ridefilm
library. In addition, the two companies have also converted six 10 second test
images for a proposed new IMAX(R) movie entitled 'Ocean of Light'.
35MM FILM AND PROFESSIONAL VIDEO CONVERSION
The DeepSee-TM- Studio Pro toolkit may be used to convert 35mm film and
professional video media with equal success. The Company has a relationship
with IMAGICA Corporation of Japan to provide conversion services for 35mm
film and professional video media.
The benefits the DDD process brings to film and video producers are identical to
those found in IMAX(R) conversions. Films may be created in 2D, using 2D camera
equipment and then converted to
17
3D in post-production. The process is also being used to convert existing 35mm
film and professional video libraries and library footage to 3D.
The Company has undertaken test conversion work for IMAGICA Corporation of
Japan. This has resulted in commercial conversion contracts for the conversion
of video resolution media for Kaichu-Sanpo in Japan.
The Company has also converted `Natures Symphony' a VHS video production
designed for sale with Ilixco Inc.'s LCD shutter glasses.
SPECIAL EVENTS, ADVERTISING & PROMOTION
The Company has identified the niche market of Special Events, Advertising and
Promotion. Temporary 3D video projection installations have widespread use in
advertising and promotions and at special events such as trade shows and
conferences. The Company believes that this offers the opportunity to provide
short 3D movies designed to support product launches or promotional drives.
The Company has identified a number of parties who are active in the
corporate and promotional video market and is seeking to establish service
and license relationships with them in order to exploit DDD's 3D conversion
capabilities in this field. Accordingly the Company has entered into a
Memorandum of Understanding with Video Applications Inc., of Tustin, CA.
Video Applications Inc. is a partner of Hughes-JVC for electronic projection
systems for trade show and special event use. 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 use of twin 3D projections systems also provides the opportunity for the
Company to sell its 3D video signal Demultiplexer to users in this market.
COMPUTER GENERATED ANIMATION
A growing number of productions, from IMAX(R) 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'
and Dreamworks' `Antz'.
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.
The DDD process yields some considerable advantages to those who wish to release
their 2D animated content in 3D. Conventional techniques require the graphic
artist to recreate the second `stereo' 3D frame by re-rendering each scene from
the computer a second time. This doubles the time taken to create the 3D
production compared to the original 2D production.
18
DeepSee-TM- Studio Pro is capable of creating highly accurate depth cues
directly from wire frame models, with minimal operator involvement. Once the
depth cue data is created, the second stereo frame can be generated much more
efficiently by combining the depth cue with the existing 2D animated image.
The end result is a process that not only allows the graphic artist to fine
tune the 3D effect of each scene without the need to render two frames, but
also reduces the time taken to create the stereo 3D equivalent to one fifth
of the time taken with current techniques.
The Company has recently undertaken its first Computer Generated Animation 3D
conversion projects on behalf of Showscan Entertainment and Hasbro Interactive.
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.DDD3D.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.
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(R) film media specialist that resulted in further
industry and trade press exposure.
19
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
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 Proposed exhibition in conjunction with Intel
Corporation in August 1999
MARKETING COLLATERAL
The Company has created initial marketing collateral 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
20
medium. As both hardware and software products are released, marketing
collateral 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.
PRINCIPAL MARKET SEGMENTS
The Company focuses on the worldwide entertainment and multimedia markets. This
has resulted in product development and marketing efforts in the following
market segments:
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
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. 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 320,000 sites offering
streaming video content with major sites such as Broadcast.com receiving 800,000
visitors daily. Over 200,000 hours of Internet video content is produced weekly
available to the 57 million users of RealNetworks RealPlayer software or the 50
million users of Apple Corporation's Quicktime software.
The Company is in the process of delivering a series of tools designed to be
used on standard Intel and Apple PCs where conventional PC display screens
provide clear 3D images. These include DeepSee-TM- Photo and DeepSee-TM-
Movie software applications used to convert 2D images and movies to 3D and
21
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
actively targeting these companies as potential strategic partners and/or
licensees.
The Company is delivering 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.
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.
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. The companies involved in delivering technology include Intel,
Broadcom, Motorola, 3Dfx, @Home, Microsoft and Sony. Their principal customers
are the consumer set top box manufacturers including General Instrument,
Scientific Atlanta, WebTV and Motorola. The Company is actively targeting these
companies as potential strategic partners and/or licensees and, as previously
stated, has entered into an agreement with General Instrument.
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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 delivering 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.
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 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.
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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.
The DVD player decodes the depth cue data and applies it to the 2D image to
create the 3D version as the movie is played. This allows standard television
sets to display 3D images through the use of glasses worn by the viewer.
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 DeepSee-TM- Studio Pro software allows the video to be digitally processed,
using advanced proprietary algorithms, to create depth cue information for each
frame of the video. 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 DVD video signal along with the original, unaltered 2D
picture.
The Company is delivering the following products intended for use in 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.
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(R)' theaters, Digital & Electronic
Cinema and Special Events, Advertising & Promotion.
GIANT SCREEN `IMAX(R)' FILMS
This market is mainly occupied by IMAX(R) Corporation, Showscan Entertainment
and iWERKS. Presently 3D theaters represent 20% of IMAX(R)'s installed base.
Currently there are 28 IMAX(R) 3D theaters and this is forecast to grow by a
further 65 over the next three years. In 1998 over 70 million people saw films
shown on IMAX(R) screens and this is forecast to triple over the next five
years. Giant screen theaters include purpose built theme park and commercial
"ridefilms" and dedicated screens located in museums and science centers.
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
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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(R) movie in post production. This reduces
production costs on-set and provides for a 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(R)
blockbuster film `Everest'.
The Company is actively targeting companies including IMAGICA USA, IMAX(R) and
Cinesite as potential strategic partners and/or licensees of DeepSee-TM- Studio
Pro in the giant screen film market.
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 - 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.
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.
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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.
The Company is delivering the following products intended for use in the film
and video market
DeepSee-TM- Studio Pro Converting film and video content from 2D to 3D for
creating 2D compatible 3D and custom '3D only' film and
video material.
COMPUTER ANIMATION
A growing number of productions, from IMAX(R) 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(R) recently concluded an
agreement with Mainframe Entertainment Inc. to bring computer animated 2D
productions to the IMAX(R) screen.
Computer animated productions are created from detailed computer models of the
characters and scenery. Sophisticated animation tools create wire frame
representations of the characters and objects onto which highly detailed
computer graphic images are placed. This creates realistic scenes making it
difficult for the viewer to distinguish computer animation from live action
footage.
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.
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DeepSee-TM- Studio Pro is capable of creating highly accurate depth cues
directly from wire frame models, with minimal operator involvement. Once the
data is created, the second stereo 3D frame can be generated much more
efficiently. By combining the depth cue with the existing 2D image, the graphic
artist may fine tune the 3D effect of each scene without the need to render two
frames. This significantly reduces the time taken to create the stereo 3D
equivalent.
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.
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 is delivering the following products 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.
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 gameplay 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.
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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 delivering 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.
PROFESSIONAL AUDIO VISUAL
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 underlying
platform with the added advantage that any functionality attained using the FPGA
can be easily transferred to create a highly customized Application Specific
Integrated Circuit (ASIC) chipset.
DEPTH CUE DECODING 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 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.
The Company intends to license the hardware chip to Broadcast Set Top Box, DVD
player and PC MPEG card manufacturers. 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.
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.
The 3D Demultiplexer allows a single videocassette or DVD player to be used to
supply both video feeds, alleviating the complex synchronization requirements.
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3D media produced using DeepSee-TM- Studio Pro may be recorded onto a
videocassette tape or DVD in `field sequential' format. The demultiplexer
identifies the successive left and right eye images recorded sequentially on the
videotape or DVD and redirects the appropriate image to each projector.
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.
REAL TIME 3D CONVERTER
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 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 release 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.
2D 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 digitized streaming 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. 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.
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ARCADE GAMES
The Company has developed a glasses-free `autostereoscopic' 3D projection
display targeted at the arcade video games industry. The 3D display creates an 8
foot 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.
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 capability of playing a video game in true life like 3D, without impacting
on player throughput, and therefore the earning capacity of the game, is seen as
a considerable advantage in gaining acceptance with owners of family
entertainment centers and theme parks. The 8 foot 3D display yields an
experience that is not presently available at home.
The Company has demonstrated the 3D display system to the major international
manufacturers of arcade games including SEGA, Konami and NAMCO in Japan and
Atari Games Corporation in the United States. The 3D Projection Display was
launched at the 1998 International Association of Amusement Parks and
Attractions Show ("IAAPA") in Dallas, TX.
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. Total research and
development expense for 1998, 1997 and 1996 was approximately $1,021,500,
$957,700 and $567,000 respectively. The 1999 research and development plan calls
for approximately $1,280,000 in development costs. For the nine months ended
March 31, 1999, the Company incurred approximately $955,800 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 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. There can be no
assurance that the Company's products will be able to comply with such
regulations.
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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 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.
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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.
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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 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
34
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 motion analysis of the incoming video signal
to give the appearance of 3D depth to a scene. Consequently, the 3D effect
produced is inconsistent and non-existent for scenes with no movement
characteristics present. C3Digital markets these devices to consumers to enable
them to convert any television program to 3D. 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 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.
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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(R) Corporation
of Toronto, Canada is endeavoring to deliver a solution for converting 2D film
to 3D. The IMAX(R) 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(R) 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(R) 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.
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COMPETITION IN THE VIDEO GAME MARKET
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 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.
37
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 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.
2D 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 July 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.
38
BUSINESS RISKS
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. The Company
undertakes no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events. 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 $1,222,900, $1,599,100 and
$2,062,400 million in Fiscal 1996, 1997 and 1998, respectively, and
approximately $2,300,900 for the nine months ended March 31, 1999. As of March
31, 1999, the Company had an accumulated deficit of approximately $7,936,600. 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.
39
Due to these uncertainties, the reports of the Company's independent auditors
for the years ended June 30, 1998, 1997 and 1996 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.
ADDITIONAL CAPITAL REQUIREMENTS
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 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.
40
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.
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
41
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.
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.
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
42
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 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
To date, the Company has sold its products and services principally through its
direct sales force. In the future, the Company intends to expand the number and
reach of its indirect channel partners through distribution agreements. These
indirect channels are intended to increase the proportion of the
43
Company's customers licensed through indirect channels. 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 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
44
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 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.
The Company has conducted a preliminary review of its internal computer systems
to identify the systems that could be affected by the Year 2000 issue. Based on
this preliminary review, the Company has determined that certain of its internal
systems are not currently Year 2000 compliant. The Company has developed a plan
to make such systems compliant before December 31, 1999. If the Company fails to
make such systems Year 2000 compliant before December 31, 1999, or if the cost
of making such systems Year 2000 compliant exceed the Company's preliminary
estimates, the Company's business, operating results and financial condition
could be materially adversely effected.
45
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 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
46
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).
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. 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.
47
ITEM 2 DESCRIPTION OF PROPERTY
Dynamic Digital Depth Australia Pty. Ltd. ("DDD Australia Pty. Ltd.") entered
into an option deed on January 13, 1999 which provides DDD Australia Pty. Ltd. a
call option over a building comprising 1,711 square meters located at 6-8 Brodie
Hall Drive, Technology Park, Bentley, Western Australia. DDD Australia Pty. Ltd.
has paid a non-refundable option fee of A$500,000. The option is exercisable at
A$2,000,000 through November 1999. The option deed also provides a put option
between December 1, 1999 through December 14, 1999 whereby the owner may put the
building back to DDD Australia Pty. Ltd. at the exercise price.
DDD Australia Pty. Ltd. currently occupies 758 square meters of this building at
a cost of A$10,107 per month. DDD Australia Pty. Ltd. is actively seeking
purchasers for the building on a suite by suite basis. DDD Australia Pty. Ltd.
has received an offer to purchase the area DDD occupies for A$1,300,000. The
offer is conditional upon the offeror receiving financing and entering into a
lease with DDD Australia Pty. Ltd.
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 is presently
seeking alternative premises of between 2,500 and 3,500 square feet. It is
anticipated that this new office space will replace the existing office suite at
an approximate annual cost of between U.S. $97,500 and $136,500.
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 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 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 18, 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
48
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 20, 1999 by each person who,
to the knowledge of the Company, beneficially owned more than 10% of the Common
Stock.
- --------------------------------- ------------------------------------- ---------------------------
NAME AND PLACE OF RESIDENCE NUMBER OF COMMON SHARES PERCENTAGE OF
OWNED OR CONTROLLED AS AT OUTSTANDING
THE EFFECTIVE DATE (1) COMMON SHARES
- --------------------------------- ------------------------------------- ---------------------------
- --------------------------------- ------------------------------------- ---------------------------
The Liverpool Limited 3,375,479 18.8%
Partnership
Bermuda
- --------------------------------- ------------------------------------- ---------------------------
- --------------------------------- ------------------------------------- ---------------------------
Westgate International, L.P. 3,375,480 18.8%
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
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)
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 August 3, 1999, the closing bid price of the Common Shares on the ASE was
$6.50 per share.
49
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
CANADIAN EXCHANGE CONTROLS
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 to non-residents. Dividends paid to United
States residents, however, are subject to a 15% withholding tax or a 5%
withholding tax for dividends paid in 1997 and thereafter, 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")
Except as provided in the Investment Canada Act (the "Act"), which has
provisions that restrict the holding of voting shares by non-Canadians, 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.
Management of the Company believes that the following general summary fairly
describes those provisions of the Act pertinent to an investment in the Company
by a person who is not a Canadian resident (a "non-Canadian").
The Act requires a non-Canadian making an investment which would result in the
acquisition of control of a Canadian business, the gross value of the assets of
which exceed certain thresholds to either notify, or file an application for
review with, Investment Canada, the federal agency created by the Act.
The notification procedure involves a brief statement of information about the
investment on a prescribed form which is required to be filed with Investment
Canada by the investor at any time up to 30 days following implementation of the
investment. It is intended that investments requiring only notification will
proceed without government intervention unless the investment is in a specific
type of business activity related to Canada's cultural heritage and national
identity.
If an investment is reviewable under the Act, an application for review in the
form prescribed is normally required to be filed with Investment Canada prior to
the investment taking place and the investment may not be implemented until the
review has been completed and the Minister responsible for Investment Canada is
satisfied that the investment is likely to be of net benefit to Canada. If the
Minister is not satisfied that the investment is likely to be of net benefit to
Canada, the non-Canadian must not implement the investment or, if the investment
has been implemented, may be required to divest himself of control of the
business that is the subject of the investment.
50
The following investments by non-Canadians are subject to notification under the
Act:
1. An investment to establish a new Canadian business; and
2. An investment to acquire control of a Canadian business that is
not reviewable pursuant to the Act.
The following investments by a non-Canadian are subject to review under the Act:
1. Direct acquisitions of control of Canadian businesses with assets
of $5 million or more, unless the acquisition is being made by a
World Trade Organization ("WTO") member country investor (the
United States being a member of the WTO);
2. Direct acquisitions of control of Canadian businesses with assets
of $160 million or more by a WTO investor;
3. Indirect acquisitions of control of Canadian businesses with
assets of $5 million or more if such assets represent more than
50% of the total value of the assets of the entities the control
of which is being acquired, unless the acquisition is being made
by a WTO investor, in which case there is no review;
4. Indirect acquisitions of control of Canadian businesses with
assets of $50 million or more even if such assets represent less
than 50% of the total value of the assets of the entities the
control of which is being acquired, unless the acquisition is
being made by a WTO investor, in which case there is no review;
and
5. An investment subject to notification that would not otherwise be
reviewable if the Canadian business engages in the activity of
publication, distribution or sale of books, magazines,
periodicals, newspapers, film or video recordings, audio or video
music recordings, or music in print or machine-readable form.
Generally speaking, an acquisition is direct if it involves the acquisition of
control of the Canadian business or of its direct or indirect Canadian parent
and an acquisition is indirect if it involves the acquisition of control of a
non-Canadian direct or indirect parent of an entity carrying on the Canadian
business. Control may be acquired through the acquisition of substantially all
of the assets of the Canadian business. No change of voting control will be
deemed to have occurred if less than one-third of the voting control of a
Canadian corporation is acquired by an investor.
A WTO investor, as defined in the Act, includes an individual who is a national
or a member country of the WTO or who has the right of permanent residence in
relation to that WTO member, a government or government agency of a WTO
investor-controlled corporation, limited partnership, trust or joint venture
that is neither WTO-investor controlled or Canadian controlled of which
two-thirds of its board of directors, general partners or trustees, as the case
may be, are any combination of Canadians and WTO investors.
The higher thresholds for WTO investors do not apply if the Canadian business
engages in activities in certain sectors such as uranium, financial services
(except insurance), transportation services or media activities.
51
The Act specifically exempts certain transactions from either notification or
review. Included among this category of transactions is the acquisition of
voting shares or other voting interests by any person in the ordinary course of
that person's business as a trader or dealer in securities.
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.
CERTAIN 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
52
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 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 thereafter as gain from the sale or exchange of the Common Shares.
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.
53
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 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,
54
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. Unfranked dividends paid by the subsidiaries to the Company
will be subject to a withholding tax of 15% fixed 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. Fully franked
dividends paid by the subsidiaries to the Company will be exempt from tax in
Australia.
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 subsidiaries are not public companies they are subject to Division 7A
of the Income Tax Assessment Act which will in certain circumstances deem a
loan, payment or debt forgiveness made to the Company, being the shareholder of
the subsidiaries, or to any associate of the Company to be an unfranked
dividend.
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%.
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
55
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 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
56
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.
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 Registration Statement. The
consolidated statements of loss and deficit for the years ended June 30, 1996,
1997 and 1998 and the balance sheet data at June 30, 1997 and 1998, are derived
from audited consolidated financial statements included elsewhere in this
Registration Statement. The consolidated statements of loss and deficit for the
year ended June 30, 1995 and 1996 and the balance sheet data at June 30, 1995
and 1996 are derived from audited consolidated financial statements not included
elsewhere in this Registration Statement. The consolidated statement of loss and
deficit and balance sheet data for the year ended June 30, 1994, are derived
from unaudited consolidated financial statements not appearing elsewhere in this
Registration Statement. The consolidated statement of loss and deficit and
balance sheet data for the nine months ended March 31, 1999 and 1998 are derived
from unaudited consolidated financial statements included elsewhere in this
Registration Statement. The unaudited financial information contained herein, in
the opinion of management, reflect all normal recurring adjustments that the
Company considers necessary for a fair presentation of such information in
accordance with Canadian generally accepted accounting principles. 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 and the results for interim periods are not necessarily
indicative of results to be expected for the entire year.
Nine Months Ended Year Ended June 30th
March 31st
1999 1998 1998 1997 1996 1995 1994
$000's $000's
INCOME LOSS AND DEFICIT
Total revenue 138 254 368 279 912 377 -
Net loss from period (2,439) (1,529) (2,257) (1,599) (1,223) (628) (86)
Per share (0.15) (0.16) (0.21) (0.19) (0.18) (0.10) -
BALANCE SHEET DATA (AT PERIOD END)
Total assets 5,286 2,306 9,203 2,274 844 337 143
Total long-term debt 92 1,974 88 980 - - -
Cash dividends declared per share - - 0.00 0.00 0.00 0.00 0.00
U.S. GAAP RECONCILED AMOUNTS
Net loss for period (3,499) (2,006) (3,026) (2,459)
57
Per share (0.22) (0.21) (0.29) (0.28)
Total assets 2,654 938 7,547 1,414
58
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 REGISTRATION STATEMENT. 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 "RISK FACTORS" AND ELSEWHERE IN THIS
REGISTRATION STATEMENT.
BACKGROUND AND BASIS OF PRESENTATION
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 $8.3 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").
59
In August 1998 the Company effected a one for five reverse stock split. In this
Registration Statement, 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, 1996 ("Fiscal 1996"), June 30, 1997
("Fiscal 1997") and June 30, 1998 ("Fiscal 1998") and the nine month periods
ended March 31, 1998 ("1998 Interim Period") and March 31, 1999 ("1999 Interim
Period") 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 1996, 1997 and 1998 and the 1999 and 1998 Interim Periods revenues
were derived from the following sources:
-----------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) YEAR ENDED 30 JUNE
NINE MONTHS
ENDED 31 MARCH
-----------------------------------------------------------------------------------------------------------------------------
1999 CAD$ 1998 CAD$ 1998 CAD$ 1997 CAD$ 1996 CAD$
-----------------------------------------------------------------------------------------------------------------------------
Interest received on cash balances 105,778 2,137 31,321 22,242 8,343
-----------------------------------------------------------------------------------------------------------------------------
Government subsidies - - 31,114 156,259 18,672
-----------------------------------------------------------------------------------------------------------------------------
Revenues derived from technologies 15,138 250,263 299,099 85,922 863,572
-----------------------------------------------------------------------------------------------------------------------------
Miscellaneous income 16,913 1,103 6,531 14,405 21,838
-----------------------------------------------------------------------------------------------------------------------------
TOTAL 137,829 253,503 368,065 278,828 912,425
-----------------------------------------------------------------------------------------------------------------------------
Interest was earned from cash balances invested in cash management accounts. The
amount of interest received for the 1999 Interim Period was considerably more
than that received for Fiscal 1998 the 1998 Interim Period, 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
calculated by reference to both export revenues earned and expenses incurred in
developing export markets. The grants are paid in the year following the
occurrence of the revenue or expenditure. The amount received for Fiscal 1997
was higher than that for Fiscal 1998 as export revenues for the 1996 Fiscal year
were higher than those for the Fiscal 1997. Similarly, the amount received for
Fiscal 1996 was lower than that for Fiscal 1997 because export revenues in
Fiscal 1995 were not as high as those received in Fiscal 1996.
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. Generally, for the
years and periods referred to, there were no significant revenues derived from
commercial activities except during
60
Fiscal 1996 when substantial revenues were earned from License fees received
from the development and manufacture of prototype autostereoscopic 3D units. The
contract to manufacture the prototypes concluded during the 1996 Fiscal year.
In the overall context of its past operations and with the exception of the 1996
Fiscal year, the Company has not consistently achieved substantial revenues from
the commercialization of its technologies. This in itself 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 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:
- --------------------------------------------------------------------------------------------------------------------
(UNAUDITED) YEAR ENDED 30 JUNE
NINE MONTHS ENDED 31 MARCH
- --------------------------------------------------------------------------------------------------------------------
1999 CAD$ 1998 CAD$ 1998 CAD$ 1997 CAD$ 1996 CAD$
- --------------------------------------------------------------------------------------------------------------------
Amortization 59,171 33,484 42,225 69,725 32,699
- --------------------------------------------------------------------------------------------------------------------
General and administrative 1,475,805 909,791 1,510,458 1,096,167 790,738
- --------------------------------------------------------------------------------------------------------------------
Interest expense - 241,836 264,633 - -
- --------------------------------------------------------------------------------------------------------------------
Market development 225,526 228,124 306,324 169,242 223,524
- --------------------------------------------------------------------------------------------------------------------
Project costs 6,997 16,509 32,883 33,338 567,014
- --------------------------------------------------------------------------------------------------------------------
Salaries and wages 809,817 353,159 468,435 509,467 521,397
- --------------------------------------------------------------------------------------------------------------------
TOTAL 2,577,319 1,782,903 2,624,958 1,877,939 2,135,372
- --------------------------------------------------------------------------------------------------------------------
1999 INTERIM PERIOD COMPARED TO 1998 INTERIM PERIOD
The increase in amortization expense resulted from the acquisition of additional
leased and owned assets during the last quarter of Fiscal 1998.
The increase in general and administrative expenses was a net result of a number
of significant developments including the commencement of operations (including
the opening of an office in Los Angeles) by the USA subsidiary Dynamic Digital
Depth USA Inc., in May 1998, 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, the appointment of a public relations
firm to assist with the establishment and promotion of the of the Company's
profile in the United States and a general increase in the business activity of
the Company during the 1999 Interim Period as compared to the 1998 Interim
Period.
Interest expense was not incurred during the 1999 Interim Period 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.
In addition to other increases in operating expenses outlined above, the
commencement of operations in the United states by Dynamic Digital Depth USA
Inc. also resulted in an increase in salaries and wages of approximately
$398,000. The balance of the increase in this expenditure gained by comparing
the two periods of approximately $59,000 resulted from salary increases awarded
to staff
61
employed by the Australian subsidiaries, together with the employment of
additional personnel in those subsidiaries.
FISCAL 1998 COMPARED TO FISCAL 1997
In comparing these two Fiscal years it should be noted that in both years the
expenditures incurred in respect of ongoing research and development were
capitalized as deferred research and development in accordance with Canadian
GAAP. Since July 1, 1997 the Company has adopted a change in accounting
estimate in relation to development costs capitalized. The Company has
implemented new systems which permit a more precise allocation of certain
costs that relate directly to development within the costs capitalized for
the period. The effect of the change in estimate is to increase capitalized
development costs by approximately $CAD 270,000 for the year ended June 30,
1998. Apart from any variances referred to hereunder, it is considered that
there were no significant variances of a material nature between the two
years.
The increase in general and administrative expenses was a net result of a number
of significant developments including the commencement of operations (including
the opening of an office in Los Angeles) by the USA subsidiary Dynamic Digital
Depth USA Inc., in May 1998, 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, increased legal expenses, travel costs
associated with the Company's increased marketing activities, and the general
increase in the business activity of the Company during Fiscal 1998 as compared
to Fiscal 1997.
Interest expense refers to the interest on promissory notes issued by the
Company which were subsequently converted in May 1998, along with the accrued
interest into common stock and warrants.
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.
62
FISCAL 1997 COMPARED TO FISCAL 1996
In comparing these two financial years it should be noted that the Company
met the deferral criteria in relation to research and development expenditure
and for the year ended June 30, 1997 these costs were capitalized in
accordance with Canadian GAAP. Previously such expenditure was expensed in
the period incurred. The change was brought about as it became apparent that
research and development projects were beginning to approach commercial
feasibility.
The increase in amortization in Fiscal 1997 over Fiscal 1996 results from two
reasons. Firstly, assets have been used for a full year (the great majority of
Fiscal 1996 additions were made in the latter six months of the year) and
secondly, there have been further additions during the Fiscal 1997 year.
The increase in general and administrative expenses in Fiscal 1997 over Fiscal
1996 was a net result of a number of developments including an increase in
taxation consulting fees, an increase in travel and accommodation costs which
reflected the increased activity in the marketing of the Company's technologies
involving extensive travel in Japan, Europe and the USA and an increase in legal
fees resulting from the preparation of draft licensing agreements.
Market development expenses reduced from Fiscal 1996 to Fiscal 1997 as less work
was required in developing markets and more effort was made in attempting to
commercialize the technologies. Whilst significant efforts were made to achieve
this commercialization it did not meet with the success hoped for.
Salaries and project expenses have reduced between Fiscal 1996 and Fiscal 1997
because costs were capitalized during the year as projects began to develop into
potentially commercially feasible products and technologies.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 1998, the Company incurred a net loss of
approximately $2.3 million, with an operating cash flow deficit averaging
approximately $300,000 per month. These losses increased in the nine months
ended March 31, 1999 to approximately $2.4 million, resulting in a monthly
operating cash flow deficit approaching $500,000 per month. The net losses
principally reflect the pre-commercial operations of the Company' business and
corporate overhead. As of March 31, 1999, the Company had net working capital of
approximately $1 million, including a cash balance of $783,000. Through March
31, 1999, the Company had an accumulated deficit of approximately $8.3 million.
During 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
63
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. 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.
In June 1999, the Company entered into a Development Agreement with General
Instrument Corporation ("GI"), 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, US$250,000 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 Fiscal 1998, the Company used $1.8 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 $426,000. Operating
activities in the 1999 Interim Period used $2.2 million in cash, also reflecting
principally the net loss for the period adjusted for net non-cash expenses that
were approximately $200,000.
Investing activities used net cash of $1.3 million during Fiscal 1998. These
funds were primarily used for development and patent costs (approximately
$900,000) and the purchase of capital assets of approximately $300,000.
Investing activities used $2.0 million in the 1999 Interim Period, again
primarily used for development and patent costs (approximately $1.1 million),
purchase of capital assets (approximately $360,000) 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.
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 described
above. During the 1999 Interim period Financing activities used approximately
$1.7 million of the proceeds of the May 1998 private placement to repurchase
821,974 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.
Subsequent to March 31, 1999, the Company completed approximately $3.7 million
in financing from GI and a co-investor.
64
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. 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.
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.
Although the Company has inventoried is principal internal information
technology systems and believes they are Year 2000 compliant, some of its
internal information technology systems are not yet certified. The Company
anticipates that it will complete its certification of these systems by
November 1, 1999. The Company has received Year 2000 compliance statements
from the suppliers of some of
65
its principal internal systems, and has sought similar statements from other
vendors. Its review of the internal systems of third parties with whom the
Company has material interactions is ongoing.
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 200 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. 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.
Although it is not fully developed, the Company expects to complete its Year
2000 contingency plan well in advance of December 31, 1999. The Company is
designing its Year 2000 contingency plan to address situations that may result
if it were unable to achieve Year 2000 readiness for its critical operations.
The costs of developing and implementing the plan are not considered to be
significant.
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.
66
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 and March 1994
Chief Financial Officer
Robert G. Baker President, Chief Executive Officer and October 1995
Director
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
Sara Lane Sirey Secretary September 1997
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.
67
NEIL W. SPEAKMAN - CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF FINANCIAL
OFFICER
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.
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.
ROBERT BAKER - PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. Baker joined the Company in June 1995 as Managing Director of the Company's
Australian subsidiaries and in October 1995 was appointed President and CEO of
the Group responsible for all operations. As Managing Director / CEO of Computer
Protocol Pty Ltd from 1986-91, Mr. Baker established the start-up company in
Asia, Australia and the UK. Mr. Baker later negotiated the takeover and
integration of this company into the Datacraft Group of Companies and in January
1991 relocated to Hong Kong as Marketing Director with Datacraft Asia Pty Ltd.
Mr. Baker was responsible for all marketing activities in the Asian region and
was involved in the establishment of operations in many Asian countries as well
as being involved in the successful public listing on the Singapore Stock
Exchange. Datacraft Asia Pty Ltd. is a communications systems integrator with
revenues in excess of $300 million.
Prior to his involvement in technology companies, Mr. Baker held senior
management positions with consumer product companies including: East Asiatic
Trading Company - Denmark (Plumrose Pty Ltd); Gillette Corporation as General
Manager, Sales & Marketing; Tempo Marketing Pty Ltd, which Mr. Baker founded and
the Peter's Group of Companies as General Manager.
Mr. Baker graduated from the University of New South Wales in Australia, with a
degree in Business Administration, major in Marketing. He is a qualified auditor
for ISO 9000 International Quality Management Systems.
PAUL KRISTENSEN - DIRECTOR
68
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
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.
69
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
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.
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.
70
ITEM 11 COMPENSATION OF DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION
The Company has six (6) directors, two (2) of whom are executive officers. The
Company also has a corporate secretary. The total cash remuneration paid or
accrued during Fiscal 1998 to all members of management (all directors,
executive officers and any other key personnel who were employed by the Company
or its subsidiaries or retained on a consulting basis) was $330,873. Directors
of the Company acting in such capacity received no compensation for providing
such services 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.
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 July 30, 1999.
MARKET VALUE OF
NUMBER OF SECURITIES
COMMON SHARES UNDERLYING
EXPIRATION RESERVED EXERCISE OPTIONS ON
OPTIONEE CATEGORY DATE OF GRANT 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 May 10, 1996 May 10, 2001 80,000 $1.25 $1.10
71
Nov. 27, 1996 Nov. 27, 2001 40,000 $1.35 $1.40
Dec. 20, 1997 Dec. 20, 2002 270,000 $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
Employees May 10, 1996 May 10, 2001 48,000 $1.25 $1.10
Dec. 20, 1997 Dec. 20, 2002 100,000 $1.30 $1.50
Investors May 19, 1998 May 19, 2000 2,500,000 $2.00 $2.20
June 17, 1999 June 17, 2002 500,000 $3.50 $2.75
to
$5.50
July 7, 1999 July 7, 2004 4,000 $2.47 $3.00
Strategic Partnerships June 17, 1999 June 17, 2002 1,000,000 $3.50 $2.75
to
$5.50
(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 Options are under review by the Company in connection with the
termination of certain consulting agreements.
(3) The Common Shares were not trading on any exchange on August 3, 1994.
The Common Shares were reinstated on the ASE on September 9, 1994.
As of August 3, 1999, the directors and officers of the Company and its
subsidiaries collectively held stock options and warrants to acquire an
aggregate of 694,000 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
72
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
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.
73
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 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 2,500,000 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.
OTHER TRANSACTIONS
Consulting, management and finder's fees of approximately $145,000 were paid by
the Company during Fiscal 1998 to two companies whose directors are also
directors of the Company.
74
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 17,926,992 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 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.
75
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
1998, 1997 and 1996 and the unaudited nine month periods ended 31 March
1999 and 1998 F-3
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,
1997 and 1996 and the unaudited nine month periods ended 31 March
1999 and 1998 F-4
Notes to and forming part of the Financial Statements F-5
(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
76
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 Duncan 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)
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)
* Confidential treatment requested with respect to portions thereof.
77
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 registration statement to be signed
on its behalf by the undersigned, thereto duly authorized.
DYNAMIC DIGITAL DEPTH, INC.
Date: August 9, 1999 By: /s/ Neil W. Speakman
----------------------------------------
Neil W. Speakman
Chairman and Chief Financial Officer
78
DYNAMIC DIGITAL DEPTH INC.
(FORMERLY XENOTECH INC.)
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS....................................................................................... F-1
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT FOR THE YEARS ENDED JUNE 30, 1998,
1997 AND 1996 AND THE UNAUDITED NINE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998................................... F-3
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1998 AND 1997 AND UNAUDITED AT
MARCH 31, 1999 AND 1998............................................................................................ F-2
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND
1996 AND THE UNAUDITED NINE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998............................................ F-4
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS................................................................ F-5
AUDITOR'S REPORT
To the Shareholders
of Dynamic Digital Depth Inc. (formerly Xenotech Inc.)
We have audited the consolidated balance sheets of Dynamic Digital Depth Inc. as
at June 30, 1998 and 1997, and the consolidated statements of loss and deficit,
and 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, 1998 and
1997, 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
October 31, 1998
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 October
31, 1998 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
October 31, 1998
Chartered Accountants
F-1
DYNAMIC DIGITAL DEPTH INC.
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONSOLIDATED BALANCE SHEETS
SEE BASIS OF PRESENTATION -NOTE 1
----------------------------- -----------------------------
(UNAUDITED)
31 MARCH 30 JUNE
----------------------------- -----------------------------
1999 1998 1998 1997
$CAD $CAD $CAD $CAD
----------------------------- -----------------------------
ASSETS
CURRENT
Cash 783,254 310,764 5,006,173 1,034,118
Accounts receivable - other 189,432 107,565 159,764 45,990
----------------------------- -----------------------------
972,686 418,329 5,165,937 1,080,108
DEPOSITS [NOTE 11F] 529,917 - - -
CAPITAL ASSETS [NOTE 4] 710,411 299,993 436,864 228,692
RESTRICTED CASH [NOTE 7] - - 1,727,660 -
PATENTS [NOTE 5] 441,345 219,946 256,112 105,193
DEVELOPMENT COSTS [NOTE 5] 2,631,439 1,367,539 1,615,945 859,885
----------------------------- -----------------------------
5,285,798 2,305,807 9,202,518 2,273,878
----------------------------- -----------------------------
----------------------------- -----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities [NOTE 10] 403,937 391,422 631,694 361,992
Current portion of obligation under capital leases 24,939 73,141 63,186 80,768
----------------------------- -----------------------------
428,876 464,563 694,880 442,760
----------------------------- -----------------------------
PROMISSORY NOTES PAYABLE [NOTE 6] - 1,894,029 - 980,000
-----------------------------
-----------------------------
OBLIGATION UNDER CAPITAL LEASES [NOTE 7] 92,126 79,727 87,967 -
----------------------------- -----------------------------
COMMITMENTS AND CONTINGENCIES [NOTE 7,11]
SHAREHOLDERS' EQUITY/(DEFICIENCY)
Share capital [NOTE 8] 12,347,385 4,686,554 13,831,568 4,018,531
Contributed surplus [NOTE 6,15] 491,471 491,471 491,471 442,188
Deficit (8,269,672) (5,102,689) (5,830,182) (3,573,289)
Cumulative translation adjustment 195,612 (207,848) (73,186) (36,312)
----------------------------- -----------------------------
4,764,796 (132,512) 8,419,671 851,118
----------------------------- -----------------------------
5,285,798 2,305,807 9,202,518 2,273,878
----------------------------- -----------------------------
----------------------------- -----------------------------
SEE ACCOMPANYING NOTES
F-2
DYNAMIC DIGITAL DEPTH INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
----------------------------- -------------------------------------------
(UNAUDITED)
NINE MONTHS ENDED YEAR ENDED 30 JUNE
31 MARCH
1999 1998 1998 1997 1996
$CAD $CAD $CAD $CAD $CAD
----------------------------- -----------------------------------------
REVENUE
Technology Revenue 15,138 250,263 299,099 85,922 863,572
Grant income - - 31,114 156,259 18,672
Interest Income 105,778 2,137 31,321 22,242 8,343
Other 16,913 1,103 6,531 14,405 21,838
----------------------------- -------------------------------------------
137,829 253,503 368,065 278,828 912,425
----------------------------- -------------------------------------------
EXPENSES
Amortisation 43,940 27,811 34,100 64,406 32,699
Amortisation - patent costs 15,231 5,673 8,125 5,319 -
General and administrative [NOTE 10] 1,475,808 909,791 1,510,458 1,096,167 790,738
Interest - promissory notes - 241,836 264,633 - -
Market development 225,526 228,124 306,324 169,242 223,524
Project costs 6,997 16,509 32,883 33,338 567,014
Salaries and wages 809,817 353,159 468,435 509,467 521,397
----------------------------- -------------------------------------------
2,577,319 1,782,903 2,624,958 1,877,939 2,135,372
----------------------------- -------------------------------------------
NET LOSS FOR THE PERIOD (2,439,490) (1,529,400) (2,256,893) (1,599,111) (1,222,947)
INCOME TAXES [NOTE 12] - - - - -
----------------------------- -------------------------------------------
NET LOSS FOR THE PERIOD (2,439,490) (1,529,400) (2,256,893) (1,599,111) (1,222,947)
DEFICIT, BEGINNING OF PERIOD (5,830,182) (3,573,289) (3,573,289) (1,974,178) (751,231)
----------------------------- -------------------------------------------
DEFICIT, END OF PERIOD (8,269,672) (5,102,689) (5,830,182) (3,573,289) (1,974,178)
----------------------------- -------------------------------------------
----------------------------- -------------------------------------------
NET LOSS PER SHARE [NOTE 9] (0.15) (0.16) (0.21) (0.19) (0.18)
----------------------------- -------------------------------------------
----------------------------- -------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 15,835,057 9,726,007 10,608,563 8,637,550 6,932,986
----------------------------- -------------------------------------------
----------------------------- -------------------------------------------
NOTE : THE FIGURE FOR THE WEIGHTED AVERAGE NUMBER OF SHARES PRIOR TO 30 JUNE
1998 HAVE BEEN ADJUSTED FOR THE EFFECT OF A ONE FOR FIVE REVERSE STOCK SPLIT
WHICH OCCURRED IN AUGUST 1998.
SEE ACCOMPANYING NOTES
F-3
DYNAMIC DIGITAL DEPTH INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN FINANCIAL POSITION
---------------------------- -----------------------------------------
(UNAUDITED)
NINE MONTHS ENDED YEAR ENDED 30 JUNE
31 MARCH
1999 1998 1998 1997 1996
$CAD $CAD $CAD $CAD $CAD
---------------------------- -----------------------------------------
OPERATING ACTIVITIES
Net loss for the period (2,439,490) (1,529,400) (2,256,893) (1,599,111) (1,222,947)
Add items not requiring a cash payment
Amortisation 59,171 33,484 42,225 69,725 32,699
Interest on promissory notes - 241,836 215,350 - -
Net change in non-cash working capital 161,655 (38,808) 168,741 505,612 (5,309)
---------------------------- -----------------------------------------
(2,218,664) (1,292,888) (1,830,577) (1,023,774) (1,195,557)
---------------------------- -----------------------------------------
INVESTING ACTIVITIES
Increase in deposits (529,917) - - - -
Purchase of capital assets (359,789) (132,235) (350,696) (112,120) (107,946)
Proceeds of sale of capital assets - - 8,209 - -
Patent costs (200,464) (120,426) (159,044) (52,815) (57,697)
Development costs (928,315) (457,152) (680,672) (859,885) -
---------------------------- -----------------------------------------
(2,018,485) (709,813) (1,182,203) (1,024,820) (165,643)
---------------------------- -----------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of share capital 12,610 608,023 8,031,348 1,341,133 1,736,000
Proceeds from issuance of promissory notes payable - 670,732 698,679 841,890 -
Increase in contributed surplus - 49,283 49,283 400,461 -
Finance lease principal (56,907) (48,691) (66,815) (32,872) (3,662)
Repurchase issued share capital (1,669,133) - - - -
Restricted Cash [Note 7] 1,727,660 - 1,727,660 - -
---------------------------- -----------------------------------------
14,230 1,279,347 6,984,835 2,550,612 1,732,338
---------------------------- -----------------------------------------
NET INCREASE/(DECREASE) IN CASH DURING THE PERIOD (4,222,919) (723,354) 3,972,055 502,018 371,138
CASH, BEGINNING OF PERIOD 5,006,173 1,034,118 1,034,118 532,100 160,962
---------------------------- -----------------------------------------
CASH, END OF PERIOD 783,254 310,764 5,006,173 1,034,118 532,100
---------------------------- -----------------------------------------
SEE ACCOMPANYING NOTES
F-4
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. and Dynamic Digital
Depth USA 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 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 significant
losses to June 30, 1998. The ability of the Company to continue as a going
concern is in substantial doubt and is dependent on reaching satisfactory
commercial production levels in order to produce a positive cash flow and or
obtaining additional financing.
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. BASIS OF PRESENTATION
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 unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in Canada
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month period 31
March 1999 are not necessarily indicative of the results that may be expected
for the year ended 30 June 1999.
3. 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 development costs.
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 capitalized under previous systems.
F-5
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Technology revenue from the granting of licenses under license agreements in
specific geographical areas is recognised in full in the period 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 grants is recognised in full in the period in which it is received.
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 leases lesser of remaining lease term and
economic life
Technical equipment 13% - 27%
Automotive equipment 25%
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
capitalised and the present value of the related lease payments is recorded as a
liability. Amortisation of capitalised 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, promissory notes payable
and capital lease obligations. As at June 30, 1998 and 1997, there are no
significant differences between the carrying amounts of cash, accounts
receivable, accounts payable and accrued liabilities, and their estimated fair
values. Compound financial instruments containing both a liability and an 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 and development costs 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 of adjustments
to carrying value on the financial statements of future periods could be
material.
F-6
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TAXATION
Incomes 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.
CONCENTRATION 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 1998, 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.
FOREIGN EXCHANGE
Dynamic Digital Depth's Australian subsidiaries and USA subsidiary are deemed
self-sustaining foreign operations for foreign currency translation purposes. As
such, the financial reports of overseas operations are translated using the
current rate method and any exchange differences are taken directly to the
cumulative translation reserve and disclosed on the balance sheet in
shareholders equity.
4. CAPITAL ASSETS
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 leases 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
--------------------------------------------------
--------------------------------------------------
1997
--------------------------------------------------
ACCUMULATED NET BOOK VALUE
COST AMORTISATION
$CAD $CAD $CAD
--------------------------------------------------
Furniture and fixtures 33,344 10,505 22,839
Office equipment 17,695 7,495 10,200
Equipment under capital lease 134,668 27,513 107,155
Technical equipment 156,545 68,047 88,498
--------------------------------------------------
342,252 113,560 228,692
--------------------------------------------------
--------------------------------------------------
F-7
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PATENTS AND DEVELOPMENT COSTS
1998 1997
---------------------------- -----------------------------
ACCUMULATED ACCUMULATED
COST AMORTISATION COST AMORTISATION
$CAD $CAD $CAD $CAD
----------------------------- -----------------------------
Patents 269,556 13,444 110,512 5,319
----------------------------- -----------------------------
Net book value 256,112 105,193
---------------------------- -----------------------------
---------------------------- -----------------------------
Development costs 1,615,945 - 859,885 -
----------------------------- -----------------------------
Net book value 1,615,945 859,885
---------------------------- -----------------------------
---------------------------- -----------------------------
Total research and development costs expensed during the year were $CAD891,732,
$CAD957,692 and $CAD1,021,478 for the years ended June 30, 1996, 1997 and 1998
respectively.
6. PROMISSORY NOTES PAYABLE
In February 1998, the Company issued promissory notes in the amount of
US$500,000 attached with 200,000 warrants. See note 8. The promissory notes bear
interest at 5% per annum and are convertible at the holders option into common
shares on the basis of US$1.00 per share.
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 which amounted to $CAD400,461 at June 30, 1997 and
$CAD49,283 at June 30, 1998. Refer to note 15 for movements in the contributed
surplus.
In May 1998, the US$500,000 of promissory notes together with US$1,000,000 of
notes (issued on June 30, 1997) and $CAD243,297 interest unpaid on the notes
were converted to 1,550,959 common shares ascribed a value of US$1.00 per share.
The maturity of the promissory notes was 31 December 1998.
7. COMMITMENTS
The following is a schedule of future minimum lease payments under the
capital leases:
1998
$CAD
-----------
1999 71,734
2000 43,694
2001 40,751
2002 18,012
-----------
Total minimum lease payments 174,191
less amount representing interest (23,038)
-----------
Present value of minimum lease payments 151,153
-----------
-----------
Total rental expense on operating leases approximated $CAD 65,000, $CAD 65,000
and $CAD 90,000 for years ended June 30, 1996, 1997 and 1998 respectively.
F-8
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS (CONTINUED)
----------------------------- -----------------------------
(UNAUDITED)
31 MARCH 30 JUNE
----------------------------- -----------------------------
1999 1998 1998 1997
$CAD $CAD $CAD $CAD
----------------------------- -----------------------------
Current portion of obligation under capital leases 24,939 73,141 63,186 80,768
Non current portion of obligation under capital leases 92,126 79,727 87,967 -
----------------------------- -----------------------------
117,065 152,858 151,153 80,768
----------------------------- -----------------------------
----------------------------- -----------------------------
At June 30, 1998, pursuant to an agreement as of May 19, 1998 in connection
with the issuance of Common Shares, the Company has agreed to allocate $CAD
1,900,000 to acquire common shares under a normal course issuer bid (share
buy back) at an average price not to exceed $CAD 2.50 per common share. In
the event that all or a portion of the funds have not been expended for the
above purpose before December 31, 1998 or such later date as the parties may
agree, the balance of the funds shall be returned to general unrestricted
cash.
8. SHARE CAPITAL
AUTHORISED
Unlimited number of voting common shares with no par value
Unlimited number of non-voting first and second preferred shares, issuable
in series
ISSUED
NUMBER OF
SHARES $CAD
-----------------------------
Balance at June 30, 1996 - common voting shares 8,285,315 2,677,398
Issued common voting shares through private placements, net of issuance costs 855,881 1,127,783
Issued common voting shares on exercise of stock options 17,780 25,850
Issued common voting shares on exercise of warrants 150,000 187,500
-----------------------------
Balance at June 30, 1997 - common voting shares 9,308,976 4,018,531
Issued common voting shares through private placements, net of issuance costs 5,359,791 7,873,135
Issued common voting shares on conversion of promissory notes 1,550,959 1,894,029
Issued common voting shares on exercise of stock options 109,770 143,213
Issued common voting shares on exercise of warrants 100,000 75,000
Normal course issuer bid (80,800) (172,340)
-----------------------------
Balance at June 30, 1998 - common voting shares 16,348,696 13,831,568
-----------------------------
-----------------------------
NOTE : THE FIGURE FOR THE NUMBER OF SHARES HAVE BEEN 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, 1997 $CAD EXPIRY DATE
- ----------------------------------- -------------------------------- --------------------------------
222,310 1.25 August 3, 1999
138,000 1.25 May 10, 2001
160,000 1.35 November 27, 2001
F-9
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHARE CAPITAL (CONTINUED)
NUMBER OF OPTIONS
OUTSTANDING AT EXERCISE PRICE
JUNE 30, 1998 $CAD EXPIRY DATE
- ----------------------------------- -------------------------------- --------------------------------
172,540 1.25 August 3, 1999
128,000 1.25 May 10, 2001
100,000 1.35 November 27, 2001
485,000 1.30 December 20, 2002
On May 19, 1998, 10,000 options that were due to expire on May 10, 2001 were
cancelled as a result of an employee leaving the company.
WARRANTS
The Company has 200,000 share purchase warrants outstanding with options to
purchase common shares on a 1:1 basis at a price of $US1.00 per share. These
warrants were granted in addition to the US$1,000,000 promissory notes that were
issued on 30 June 1997 as disclosed in note 6. The warrants were due to expire
on June 30, 1999.
Pursuant to an agreement as of May 19, 1998, the Company has 5,000,000 share
purchase warrants outstanding 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. The warrants were issued as part of a $CAD 7.5 million, 5,000,000 share
placement which is included in the 5,359,791 common voting shares issued
during the year ended 30 June 1998 as disclosed in note 8.
The party who holds these share purchase warrants has granted options over
certain of these warrants for the benefit of certain members of management of
the Company. Details of the options granted are listed below:
NUMBER OF OPTIONS
OUTSTANDING AT EXERCISE PRICE
JUNE 30, 1998 $CAD EXPIRY DATE
- ----------------------------------- -------------------------------- --------------------------------
350,000 2.05 May 19, 2000
430,000 3.00 May 19, 2000
320,000 4.00 May 19, 2000
9. LOSS PER SHARE
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.
10. RELATED PARTY TRANSACTIONS
Consulting, management and finders fees of $CAD145,147 (June 30, 1997 -
$CAD133,530, 1996 - $CAD212,713) were paid by Dynamic Digital Depth Inc. to
companies whose directors are also directors of Dynamic Digital Depth Inc..
These transactions were based on an arms length transactions under normal
commercial terms.
Included in the accounts payable and accrued liabilities at 30 June, 1997 is an
amount $CAD64,115 due to a director of Dynamic Digital Depth Inc.. On July 1,
1997, $CAD60,000 of the amount was converted to 48,000 common shares of the
Company at $CAD1.25 per share and the remainder was repaid in cash.
F-10
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SUBSEQUENT EVENTS (UNAUDITED)
SHARES CAPITAL MOVEMENTS SUBSEQUENT TO 30 JUNE 1998
a) In June 1999, the Company entered into a Development Agreement with General
Instrument Corporation, a major manufacturer of cable headend equipment and
television set-top boxes. As part of the Agreement, General Instrument
Corporation purchased 1.5 million common shares and 1 million common share
purchase warrants for net proceeds of approximately $CAD2.8million. At the
same time, the Company received a co-investment from a third party with net
proceeds of $CAD930,000, in exchange for 500,000 common shares and 500,000
common share purchase warrants. The common share purchase warrants issued
to General Instrument Corporation and the co-investor are exerciseable over
a three year term with increasing exercise prices ranging from $CAD3.50 to
$CAD5.50 per share. Under the Development Agreement, US$250,000 will be
used to pay General Instruments Corporation for equipment and engineering
services to integrate the Company's 2D-compatible 3D technology and General
Instrument's digital set-top terminals.
b) The company has issued 159,470 common shares based on the conversion of
options issued prior to 30 June 1998. The date and number of options
converted are detailed below.
March 3, 1999 9,700
May 26, 1999 69,770
May 12, 1999 40,000
June 10, 1999 40,000
c) The company has purchased 25,300 shares and cancelled them. The date and
number of share purchased and cancelled are detailed below.
November 16, 1998 10,300
May 1, 1999 15,000
d) On June 15, 1999, 200,000 share purchase warrants referred to in note 8
were converted.
e) On September 7, 1998, 200,000 options were issued over common shares to an
executive officer of the company, exercisable on or before September 7, 2003
at an exercise price of $CAD 1.50.
f) Dynamic Digital Depth Australia Pty Ltd entered into an option deed on
January 13, 1999 which provides Dynamic Digital Depth Australia Pty Ltd a
call option over a building comprising 1,711 square meters. Dynamic Digital
Depth Australia Pty Ltd has paid a non-refundable option fee of A$500,000
(Australian Dollars). The option is exerciseable at A$2,000,000 through to
November 1999. The option deed also provides a put option over the same
building between December 1, 1999 through December 14, 1999 whereby the
owner may put the building back to Dynamic Digital Depth Australia Pty Ltd
at the exercised price.
LITIGATION
g) 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 rigorously defend this matter.
h) 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 $0.25 per
share based upon the determination that the options had expired. The Company
filed a Statement of Defence in February 1999. The Company refutes all of
the allegations and intends to rigorously defend this matter.
F-11
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LOSS CARRYFORWARD
The Company has non-capital accumulated losses carried forward for income tax
purposes amounting to $CAD7,460,938, the benefit of which has not been reflected
in the accounts. The losses of the Company of $CAD127,878, $CAD199,320,
$CAD344,244, $CAD746,968 must be utilised by June 30, 2002, 2003, 2004 and 2005
respectively. The remaining losses can be carried forward indefinitely.
13. GEOGRAPHIC SEGMENTS
AUSTRALIA USA CANADA ELIMINATIONS CONSOLIDATED
1998 $CAD $CAD $CAD $CAD $CAD
- -----------------------------------------------------------------------------------------------------------------
REVENUE 339,656 22,117 6,292 - 368,065
--------------------------------------------- ------------------
NET LOSS FOR THE YEAR (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
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AUSTRALIA CANADA ELIMINATIONS CONSOLIDATED
1997 $CAD $CAD $CAD $CAD
- --------------------------------------------------------------------------------------------------
REVENUE 257,933 20,895 - 278,828
------------------------------ -----------------
NET LOSS FOR THE YEAR (1,336,407) (262,704) - (1,599,111)
------------------------------ -----------------
------------------------------ -----------------
IDENTIFIABLE ASSETS 1,369,652 4,826,128 (3,921,902) 2,273,878
-----------------------------------------------------------------
-----------------------------------------------------------------
AUSTRALIA CANADA ELIMINATIONS CONSOLIDATED
1996 $CAD $CAD $CAD $CAD
- --------------------------------------------------------------------------------------------------
REVENUE 910,336 2,089 912,425
------------------------------ -----------------
NET LOSS FOR THE YEAR (1,054,691) (168,256) (1,222,947)
------------------------------ -----------------
------------------------------ -----------------
IDENTIFIABLE ASSETS 497,537 2,225,268 (1,879,238) 843,567
-----------------------------------------------------------------
-----------------------------------------------------------------
14. 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-12
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
ORDINARY 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 9,700 shares on
exercise of stock options..... 9,700 12,610 - - - 12,610
Repurchase of shares through
normal course issuer bid.
(share buy-back)................ (741,174) (1,496,793) - - - (1,496,793)
Gain on translation of foreign
controlled entities........... - - - 268,798 - 268,798
Net loss after tax.............. - - - - (2,439,490) (2,439,490)
------------- --------------- ----------------- --------------- --------------- -----------------
Balance at 31 March 1999
(unaudited) 15,617,222 12,347,385 491,471 195,612 (8,269,672) 4,764,796
------------- --------------- ----------------- --------------- --------------- -----------------
NOTE : THE FIGURE FOR THE NUMBER OF SHARES HAVE BEEN ADJUSTED FOR THE EFFECT OF
A ONE FOR FIVE REVERSE STOCK SPLIT WHICH OCCURRED IN AUGUST 1998.
F-13
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. 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, 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 16 (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.
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 16 (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 note 16 (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 16 (g) for
the effect of the difference in GAAP.
F-14
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. 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 recognised when converted and the
exercise price paid is treated as issued capital. Net income has been adjusted
for this difference.
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 SUMMARISES THE EFFECT ON NET LOSS OF THE DIFFERENCES
BETWEEN CANADIAN AND US GAAP.
---------------------------- ------------------------------------------
(UNAUDITED)
NINE MONTHS ENDED YEAR ENDED 30 JUNE
31 MARCH
1999 1998 1998 1997 1996
$CAD $CAD $CAD $CAD $CAD
---------------------------- ------------------------------------------
Net loss after income tax under Canadian GAAP (2,439,490) (1,529,400) (2,256,893) (1,599,111) (1,222,947)
Write off development costs 16 (a) (1,015,494) (507,654) (756,060) (859,885) -
Promissory notes 16 (c) - 94,954 103,370 - -
Internal patent costs 16 (d) - - (39,262) - -
Employee stock options 16 (e) (44,363) (63,834) (77,620) - -
---------------------------- ------------------------------------------
Net loss under US GAAP (3,499,347) (2,005,934) (3,026,465) (2,458,996) (1,222,947)
Foreign currency translation adjustment 268,798 (171,536) (36,874) (19,661) (33,452)
---------------------------- ------------------------------------------
Comprehensive loss (3,230,549) (2,177,470) (3,063,339) (2,478,657) (1,256,399)
---------------------------- ------------------------------------------
---------------------------- ------------------------------------------
Basic Earnings and Diluted Earnings per share
under Canadian GAAP (0.15) (0.16) (0.21) (0.19) (0.18)
Basic Earnings and Diluted Earnings per share
under US GAAP (0.22) (0.21) (0.29) (0.28) (0.18)
F-15
DYNAMIC DIGITAL DEPTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUMMARY OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("US GAAP") (CONTINUED)
The following table summarises the effect on the shareholders' equity of the
differences between Canadian and US GAAP
--------------------------- ---------------------------
(UNAUDITED)
NINE MONTHS ENDED YEAR ENDED 30 JUNE
31 MARCH
1999 1998 1998 1997
$CAD $CAD $CAD $CAD
--------------------------- ---------------------------
Shareholders' equity/(deficiency) under Canadian GAAP 4,764,796 (132,512) 8,419,671 851,118
Development Costs 16 (a) (2,631,439) (1,367,539) (1,615,945) (859,885)
Promissory Notes 16 (c) - (264,790) - (310,461)
Internal patent costs 16 (d) - - (39,262) -
--------------------------- ---------------------------
Shareholders' equity/(deficiency) under US GAAP 2,133,357 (1,764,841) 6,764,464 (319,228)
--------------------------- ---------------------------
--------------------------- ---------------------------
The following table summarises the effect on the balance sheet of the
differences between Canadian and US GAAP
Total assets under Canadian GAAP 5,285,798 2,305,807 9,202,518 2,273,878
Development costs 16 (a) (2,631,439) (1,367,539) (1,615,945) (859,885)
Internal patent costs 16 (d) - - (39,262) -
--------------------------- ---------------------------
Total assets under US GAAP 2,654,359 938,268 7,547,311 1,413,993
--------------------------- ---------------------------
--------------------------- ---------------------------
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 recognise 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 recognised in other
comprehensive income until the hedged item is recognised in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognised 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.
CANADIAN AND US GAAP - SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (Statement 131) and the Accounting Standards
Board of the CICA issued similar recommendations, which is effective for years
beginning after December 15, 1997. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
company will adopt the new requirements retroactively in fiscal 1999. Management
has not completed it review of Statement 131, but does not anticipate that the
adoption of this statement will have a significant effect on the Company's
reported segments.
F-16