Discreet Logic Inc.

5505, Boulevard St. Laurent
Suite 5200
Montreal, Quebec H2T 1S6
Canada
(514) 272-0525
Fax: (514) 272-0585
Web site: http://www.discreet.com

Public Company
Incorporated: 1991
Employees: 275
Sales: $83.99 million (1996)
Stock Exchanges: NASDAQ
SICs: 3577 Computer Peripheral Equipment, Not Elsewhere Classified; 3571 Electronic Computers; 7372 Prepackaged Software; 7819 Services Allied to Motion Pictures

Montreal-based Discreet Logic Inc. is a leading developer and distributor of open-platform digital imaging processing software. The company’s programs, designed to run on Silicon Graphics workstations and often packaged as turnkey systems including SGI workstations, scaleable disk arrays, and other peripherals, enable the nonlinear, online creation, editing, and compositing of visual imagery and special effects for film, video, and broadcast productions. Under the names Flame, Flint, Fire, Inferno, Frost, Vapour, Riot, Stone, Sparks, and others, the company’s software systems have provided the special effects wizardry to such films as Jurassic Park, Star Trek: First Contact, Independence Day, Speed, Mission: Impossible, Dragonheart, The Nutty Professor, and Twister, television programs such as “Star Trek: Voyager” and “Lois and Clark: The New Adventures of Superman”; commercials for clients including Coca-Cola, Pepsi, Budweiser, and Honda; music videos for the Rolling Stones, the Spice Girls, the Beatles, Michael Jackson, and others; and live broadcast productions such as coverage of the 1996 Presidential Election, the Eurovision Song Contest, the NCAA basketball tournament, and the 1996 Olympic Games, as well as daily television news programming around the world. Sales of Discreet Logic’s systems reached $84 million in 1996; approximately 57 percent of the company’s sales were recorded outside of North America. Discreet Logic cofounder Richard Szalwinski serves as the company’s chairman and CEO, and holds some 21 percent of the company’s stock.

Discreet Logic systems support three principal segments of the film, video, and entertainment industry: visual effects, editing, and broadcast production. In visual effects, the company’s products offer artists a wide-ranging set of image manipulation features such as perspective matching; image warping; simultaneous, multilevel animation tools; shadowing, lighting, skewing, and scaling and other 2D and 3D effects; paint, filter, and animation effects; color manipulation; and blue screen and compositing tools. Using Discreet Logic systems, artists are able to integrate special effects into film, video, and other projects to the extent where the effects seem “real.” Discreet Logic systems were at work, for example, in creating the dinosaurs of Jurassic Park, and in the handshake between actor Tom Hanks and President Kennedy in Forrest Gump.

Flame, the company’s flagship program and chief revenuegenerator, offers real-time, online, resolution-independent digital production capabilities for creating visual effects, compositing, editing, and advanced image processing. Because Flame processes film and video in a digital environment, artists are able to work in a nonlinear fashion, achieving greater flexibility over former analog or tape and film-based editing systems, while working online, that is, receiving near-immediate image processing. As an open-ended application, Flame often functions at the center of digital processing software suites supporting additional Discreet Logic and third-party programs. In mid-1996, the purchase price for the Flame software package was $175,000; as part of a turnkey system including a fourprocessor Silicon Graphics workstation, the purchase price was $450,000. Flame users typically rent time on Flame systems owned by production studios and others, with hourly rates ranging from $800 per hour to $1000 per hour or more. Similar to Flame is Flint, which provides an offline digital compositing and special effects environment with most of Flame’s capabilities. Effects created with Flint can be fed into Flame for real-time viewing and manipulation.

The youngest member of the Discreet Logic visual effects family is Inferno, introduced in late 1995. The Inferno system is a fully integrated suite of image enhancement, motion tracking, and effects tools incorporating the capabilities of Flame while providing enhanced resolution and color processing capabilities. A turnkey Inferno system lists at $700,000; software-only Inferno systems sell for $225,000. Also among Discreet Logic’s visual effects offerings is the company’s Riot system, which provides film image scanning, image processing, and set-up, calibration, and control capacity for peripherals including monitors, film scanners and recorders, and tape drives.

While visual effects have been the core of Discreet Logic’s sales, the company has branched out to offer editing and broadcast production systems as well. Fire, which began beta testing in 1996, offers online, non-compressed digital video editing capabilities, as well as professional audio features and limited special effects features. The company’s Stone offers disk-based storage systems for video and film applications, while Wire offers networking and data transport capabilities. Discreet Logic has also entered broadcast production with the acquisition of Vapour, a system for creating the “virtual sets” used in live news, sports and other broadcasts, and Frost, which provides broadcasters with 3D modeling, animation, and rendering tools.

Growth Pains in the 1990s

Discreet Logic was founded in 1991 by Richard Szalwinski, former director of sales for Montreal-based Softimage, along with two Softimage coworkers, Simon Mowbray, and Diana Shearwood. Discreet Logic’s first business was as a licensed distributor and developer for Eddie, a two-dimensional software program developed by Animal Logic Pty. Ltd. At the end of 1992, however, the company abandoned Eddie, reassigning the rights to that product to Animal Logic and Softimage. Instead, the company hitched its wagon to a new product, called Flame, bringing the company into the booming visual effects field. Flame, which took advantage of the advances being made in computer processing power, digital transfer techniques, and increases in storage and memory capacity, had been developed by Gary G. Tregaskis; as part of the rights assignment agreement with Discreet Logic, Tregaskis became a company shareholder and joined Discreet Logic as director of advanced products.

New technology made it possible not only to reduce the time and cost of producing special effects, but also introduced a whole new range of effects possibilities. Discreet Logic also looked to the rise of sophisticated, powerful computer workstations and related peripherals for its products. Where other visual effects systems producers, such as chief competitor Quantex, were developing proprietary hardware-based systems, Discreet Logic began designing its products for Silicon Graphics workstations. The open-ended nature of Discreet Logic’s software meant that its customers could incorporate in-house and third-party programs into an integrated studio system based around Discreet Logic’s products. Discreet Logic also developed more intuitive, graphical interfaces for its products, enabling artists to concentrate on the creative aspects, rather than the technical basis, of their work.

Sales neared $900,000 by the company’s year-end in July 1992, although these sales were generated almost entirely by the Eddie package. By November 1992, however, the company began shipping a beta version of Flame; the full commercial release followed in January 1993. In July of that year, the company introduced the beta of Flint, shipping the full commercial release of this offline version of the Flame system by December 1993. Sales for that year reached $2.6 million.

Flame, and Flint, soon began to capture the attention of the film and video industry. Sales began to take off, aided by the success of such films as The Mask, True Lies, Interview with a Vampire, Clear and Present Danger, and others incorporating special effects generated on the Flame system. By year-end in 1994, revenues had jumped past $15 million. Soon after, the company brought in David Macrae, former director of the Softimage division, which had been acquired by Microsoft Advanced Technology, to serve as its president and CEO. Szalwinski was named the company’s chairman, overseeing long-term strategy and new product development, while Macrae concentrated on the Discreet Logic’s day-to-day activities, and particularly on expanding its sales and distribution systems.

The film and video industry’s designers were quickly sold on the power and flexibility of the Flame and Flint systems. Use of Discreet Logic’s products spread through the advertising, television, and film and video industries. Sales were further driven by audience demand: wowed by the effects in films such as Apollo 13 and Batman Forever, audiences were bowled over by the near-lifelike dinosaurs of Jurassic Park, and the film industry raced to provide newer, more daring special effects to satisfy public demand. But it was the blockbuster hit Forrest Gump, perhaps more than any other film, that took the demand for Flame to new heights. By mid-1995, Flame had become the market leader among special effects applications. In June 1995, Discreet Logic went public, and the graphics designers’ excitement spread to the investment community, which boosted the company stock from an opening price of $21 per share to $33 on the first day of trading. By year-end 1995 Discreet Logic’s sales had more than quadrupled over the previous year, reaching $64.5 million and generating a net income of nearly $8 million.

Company Perspectives:

Discreet Logic is committed to independence: in ideas, expression and action. We develop high quality creative tools to empower the imagination and solve creative challenges. We’re listening, evolving the technology to fit our clients’ needs, and together, we’re changing visual entertainment.

With the market for its Flame and Flint systems inherently small—there were only some 2,500 production studios in the world—Discreet Logic began looking to expand its product line. In August 1995 the company unveiled its high-end Inferno system, and readied the launch of Fire to the video post-production community for the following month. Then in October 1995, Discreet Logic acquired Innsbruck, Austria-based Computer-und-Serviceverwaltungs AG (COSS) and assets of IMP Innovative Medientechnik-und-Planungs-GmbH, which was based in Gletendork/Kaltenberg, Germany, bringing in these companies’ Vapour and Frost real-time broadcast production technologies; this acquisition followed up on the May 1995 acquisition of Brughetti Corporation, which added a number of software products initially marketed by Discreet Logic under the names Air, Pure, Slice, and Diplomat.

By the beginning of 1996, however, Discreet Logic began to show signs of growing pains. Macrae left the company, without explanation, and Szalwinski took over as interim and then permanent CEO and president. Next, the company faced the fickleness of the investment community, as the love affair with so-called high technology stocks turned sour. Despite continued growth of Discreet Logic’s sales, the company’s stock plunged as its earnings projections fell. The chief cause for this was the announcement of a new Silicon Graphics workstation, dubbed InfiniteReality, which in turn caused customers to hold off on purchases of Discreet Logic turnkey and software systems. Discreet Logic was forced to discount its Flame and Flint sales. While demand for Flame slumped, customers shied away from the company’s new Fire program, which had proven to be “buggy” in its initial release. By year-end 1996, sales growth had slowed, to $84 million, while the company posted a net loss of $44 million, including a $15 million charge for a restructuring begun late in that fiscal year.

The company announced an even more extensive restructuring for its 1997 fiscal year. Discreet Logic reorganized its activities into three major areas: product development, sales and marketing, and finance. Staff was cut by some 28 percent, or 105 employees, as the company shut down a number of its offices, including its Cambridge, Massachusetts office, sales offices in New York and Boca Raton, Florida, and a manufacturing and integration facility in Ireland. The company’s research and development activities, which represented nearly $17 million of the company’s operating expenses, were consolidated at its Montreal base. The company also stopped development of the products added through its Brughetti acquisition.

Despite its growth pains, the young company remained a key player in the post-production industry. The incorporation of Vapour and Frost allowed it to extend its product range—and customer base—into the live broadcast production arena, while new product announcements, for the Stone, Wire, Sparks, and other software systems enhanced its capabilities in the video and film industries. Adapting its products to the Silicon Graphics InfiniteReality workstations, Discreet Logic unveiled the newest versions of its Inferno, Flame, and Flint systems in May 1997. In the face of increased competition from Quantex and Avid Technology, the upgraded systems were greeted enthusiastically by the post-production design community. With the loyal support of graphics artists, and consumer demand for larger and ever more exciting special effects, Discreet Logic was poised to retain its position as the industry’s market leader.