<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
---------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
FOR THE PERIOD ENDED OCTOBER 31, 1998
OR
Transition report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
COMMISSION FILE NUMBER: 0-14338
AUTODESK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2819853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 MCINNIS PARKWAY
SAN RAFAEL, CALIFORNIA 94903
(Address of principal executive offices)
TELEPHONE NUMBER (415) 507-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- -----
As of December 9, 1998, there were 46,897,000 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE>
AUTODESK, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
<S> <C>
Condensed Consolidated Statement of Operations
Three and nine months ended October 31, 1998 and 1997... 3
Condensed Consolidated Balance Sheet
October 31, 1998 and January 31, 1998................... 4
Condensed Consolidated Statement of Cash Flows
Nine months ended October 31, 1998 and 1997............. 6
Notes to Condensed Consolidated Financial Statements.... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 12
</TABLE>
PART II. OTHER INFORMATION
<TABLE>
<S> <C> <C>
Item 1. LEGAL PROCEEDINGS................................... 23
ITEM 5. OTHER INFORMATION................................... 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................... 23
SIGNATURES.......................................... 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------- --------------------
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Revenues $177,178 $162,195 $551,022 $435,275
Costs and expenses:
Cost of revenues 18,146 17,512 56,129 52,278
Marketing and sales 63,910 60,215 194,608 171,571
Research and development 37,259 33,050 107,769 91,085
General and administrative 28,840 21,292 84,306 60,455
Nonrecurring charges - - 37,692 58,087
Litigation accrual reversal - - (18,200) -
-------- -------- -------- --------
148,155 132,069 462,304 433,476
-------- -------- -------- --------
Income from operations 29,023 30,126 88,718 1,799
Interest and other income, net 2,340 2,617 10,986 7,391
-------- -------- -------- --------
Income before income taxes 31,363 32,743 99,704 9,190
Provision for income taxes 10,663 11,787 42,251 23,144
-------- -------- -------- --------
Net income (loss) $ 20,700 $ 20,956 $ 57,453 $(13,954)
======== ======== ======== ========
Basic net income (loss) per share $0.45 $0.44 $1.24 $(0.30)
======== ======== ======== ========
Diluted net income (loss) per share $0.44 $0.41 $1.18 $(0.30)
======== ======== ======== ========
Shares used in computing
basic net income (loss) per share 46,510 47,160 46,510 47,050
======== ======== ======== ========
Shares used in computing
diluted net income (loss) per share 47,360 51,480 48,760 47,050
======== ======== ======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(In thousands)
<TABLE>
<CAPTION>
October 31, 1998 January 31, 1998
---------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 76,640 $ 96,089
Marketable securities 261,032 100,399
Accounts receivable, net 89,603 60,856
Inventories 6,667 7,351
Deferred income taxes 25,296 27,577
Prepaid expenses and other current assets 19,842 15,430
-------- --------
Total current assets 479,080 307,702
-------- --------
Marketable securities, including a restricted
balance of $18,000 at January 31, 1998 - 104,831
Computer equipment, furniture, and leasehold improvements, at cost:
Computer equipment and furniture 125,344 117,434
Leasehold improvements 22,647 20,505
Less accumulated depreciation (108,831) (98,800)
-------- --------
Net computer equipment, furniture, and leasehold improvements 39,160 39,139
Purchased technologies and capitalized software, net 33,949 31,553
Goodwill, net 35,054 16,995
Deferred income taxes 14,786 13,782
Other assets 22,656 19,681
-------- --------
624,685 $533,683
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
October 31, 1998 January 31, 1998
----------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 29,660 $ 26,417
Accrued compensation 37,940 34,962
Accrued income taxes 92,685 76,465
Deferred revenues 16,735 18,934
Other accrued liabilities 50,507 42,709
-------- --------
Total current liabilities 227,527 199,487
-------- --------
Deferred income taxes 499 481
Litigation accrual - 29,328
Other liabilities 2,120 1,255
Stockholders' equity:
Common stock 345,735 299,315
Retained earnings 49,406 20,472
Foreign currency translation adjustment (602) (16,655)
-------- --------
Total stockholders' equity 394,539 303,132
-------- --------
$624,685 $533,683
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) $ 57,453 $ (13,954)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Charge for acquired in-process research and development 28,806 58,087
Depreciation and amortization 33,196 31,540
Litigation accrual reversal (20,900) -
Net gain on disposition of business unit (1,307) -
Write-off of purchased technology 2,233 -
Changes in operating assets and liabilities (11,674) 26,344
--------- ---------
Net cash provided by operating activities 87,807 102,017
--------- ---------
Investing activities
Net purchases of marketable securities (55,802) (45,580)
Business combinations, net of cash acquired (69,279) (5,766)
Net purchases of computer equipment, furniture, and leasehold improvements (11,369) (10,520)
Proceeds from disposition of business unit 5,137 -
Purchases of software technologies, capitalization of software costs, and other (7,632) (11,302)
--------- ---------
Net cash used in investing activities (138,945) (73,168)
--------- ---------
Financing activities
Proceeds from issuance of common stock 74,677 74,327
Repurchase of common stock (48,866) (116,132)
Dividends paid (8,394) (8,557)
--------- ---------
Net cash provided by (used in) financing activities 17,417 (50,362)
--------- ---------
Effect of exchange rate changes on cash 14,272 (277)
--------- ---------
Net decrease in cash and cash equivalents (19,449) (21,790)
Cash and cash equivalents at beginning of year 96,089 64,814
--------- ---------
Cash and cash equivalents at end of quarter $ 76,640 $ 43,024
========= =========
Supplemental cash flow information:
Cash paid during the period for income taxes $ 6,642 $ 5,071
========= =========
Supplemental noncash information:
Common stock received in relation to the
equity collar (see Note 5) $ 4,265 $ -
========= =========
Common stock issued in connection with the
acquisition of Softdesk, Inc. $ - $ 92,021
========= =========
</TABLE>
See accompanying notes.
6
<PAGE>
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The condensed consolidated financial statements at October 31, 1998 and for the
three- and nine- month periods then ended are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements at October 31, 1998 should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Annual Report to Stockholders
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1998. The results of operations for the three and
nine months ended October 31, 1998 are not necessarily indicative of the results
for the entire fiscal year ending January 31, 1999.
2. Nonrecurring Charges
--------------------
Acquisition
On May 4, 1998, the Company entered into an agreement with Genius CAD Software
GmbH ("Genius"), a German limited liability company to purchase various
mechanical computer-aided-design ("CAD") software applications and technologies
(the "acquisition"). In consideration for this acquisition, the Company paid
Genius approximately $69 million in cash. The acquisition has been accounted for
using the purchase method of accounting with the purchase price being allocated
as follows:
<TABLE>
<S> <C>
(In thousands)
Inventory $ 200
Net fixed assets 200
Purchased in-process research and development charged to operations in the quarter ended
July 31, 1998 29,000
Purchased technology and other intangible assets 14,500
Goodwill 25,400
Liabilities assumed (400)
-------
Total purchase consideration $68,900
=======
</TABLE>
Amortization of these purchased intangibles is provided on the straight-line
basis over the respective useful lives of the assets, ranging from three to
seven years. The operating results of Genius, which have not been material in
relation to those of the Company, have been included in Autodesk's consolidated
financial statements from the acquisition date.
In-Process Research and Development
Management estimates that $29 million of the purchase price represents purchased
in-process technology that has not yet reached technological feasibility and has
no alternative future use. Accordingly, this amount was expensed in the second
quarter of the current fiscal year following consummation of the acquisition.
The value assigned to purchased in-process technology, based on a valuation
prepared by an independent third-party appraiser, was determined by identifying
research projects in areas for which technological feasibility had not been
achieved. The value was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows from such projects, and discounting the net cash
flows back to their present value. The discount rate included a factor that took
into account the uncertainty surrounding the successful development of the
purchased in-process technology projects.
7
<PAGE>
Developed technology
To determine the value of the developed technology ($13.4 million), the expected
future cash flows of the existing developed technologies were discounted taking
into account the characteristics and applications of the product, the size of
existing markets, growth rates of existing and future markets as well as an
evaluation of past and anticipated product-life cycles.
Assembled work force
To determine the value of the assembled work force ($1.0 million), the Company
evaluated the work force in place at the acquisition date and utilized the cost
approach to estimate the value of replacing the work force. Costs considered in
replacing the work force included costs to recruit and interview candidates, as
well as the cost to train new employees.
Other nonrecurring charges
During the second quarter of fiscal year 1999, Autodesk recorded charges of
approximately $8.9 million relating primarily to restructuring charges
associated with the consolidation of certain development centers ($1.5 million);
the write-off of purchased technologies associated with these operations ($2.2
million); staff reductions in Asia Pacific in response to current economic
conditions in the region ($1.7 million); costs in relation to potential legal
settlements ($2.5 million); and the write-down to fair market value of older
computer equipment that the Company planned to dispose of ($1.0 million).
Prior year transactions
On March 31, 1997, the Company exchanged 2.9 million shares of its common stock
for all of the outstanding stock of Softdesk, Inc. Based on the value of
Autodesk stock and options exchanged, the transaction, including transaction
costs, was valued at approximately $94 million. This transaction was accounted
for using the purchase method of accounting with the purchase price being
principally allocated to capitalized software, purchased technologies, and
intangible assets. Approximately $55.1 million of the total purchase price
represented the value of in-process research and development that had not yet
reached technological feasibility and had no alternative future use.
Approximately $3.0 million of technology acquired from 3D/Eye during the first
quarter of fiscal year 1998 also represented the value of in-process research
and development that had not yet reached technological feasibility and had no
alternative future use. The $55.1 million and the $3.0 million were charged to
operations in the first quarter of fiscal year 1998.
3. Litigation accrual reversal
---------------------------
In December 1994, a $25.5 million judgment was entered into against the Company
on a claim of trade-secret misappropriation brought by Vermont Microsystems, Inc
("VMI"). The initial judgment and related expenses were accrued in fiscal year
1995, as well as interest expense in subsequent periods in accordance with this
judgment. The Company appealed this decision, and in May 1998, final judgment
was entered in the VMI litigation in the amount of $7.8 million plus accrued
interest. Following entry of judgment, the Company made a final payment of
approximately $8.4 million, including interest, to VMI. During the second
quarter of fiscal year 1999, the Company recognized $18.2 million and $2.7
million as operating income and interest income, respectively, to reflect the
remaining unutilized litigation and related interest accruals.
8
<PAGE>
4. Recently Issued Accounting Standards
------------------------------------
In the first quarter of fiscal year 1999, the Company adopted the provisions of
the American Institute of Certified Public Accountants' Statement of Position
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This standard requires companies to capitalize qualifying
computer software costs which are incurred during the application development
stage and amortize them over the software's estimated useful life. The adoption
of this standard did not have a material effect on the Company's consolidated
operating results or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This Statement requires Autodesk to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. SFAS 133 is effective as of the beginning of the
Company's fiscal year 2001. Autodesk is currently evaluating the impact of SFAS
133 on its financial statements and related disclosures.
5. Common Stock Repurchase Programs
--------------------------------
The Company sold put warrants to an independent third party in December 1997
that entitled the holder of the warrants to sell 1.5 million shares of common
stock to the Company at $38.12 per share. Additionally, the Company purchased
call options from the same independent third party that entitled the Company to
buy 1 million shares at $39.88 per share. The premiums received with respect to
the equity options totaled $4.5 million and equaled the premiums paid.
Consequently, there was no exchange of cash. At any given date, the amounts
potentially subject to market risk were generally limited to the amount by which
the per share price of the put warrants exceeds the market value of the
Company's common stock. The put warrants permitted a net share settlement at
the Company's option. In March 1998, the Company exercised the call option,
electing the net share settlement option and retired approximately 97,000 shares
of its common stock. The put warrants expired unexercised. In connection with
the proposed acquisition of Discreet Logic Inc. (see Note 9 to the condensed
consolidated financial statements), the Company's Board of Directors has
rescinded and terminated all stock repurchase programs.
9
<PAGE>
6. Net Income Per Share
--------------------
Basic net income (loss) per share is calculated using the weighted average
number of common shares outstanding. Diluted net income (loss) per share is
computed using the weighted average number of common shares outstanding and
dilutive common stock equivalents outstanding during the period. A
reconciliation of the numerators and denominators used in the basic and diluted
net income (loss) per share amounts follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
------------------- ------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
(In thousands)
Numerator:
Numerator for basic
and diluted per share
amounts--net income (loss) $ 20,700 $ 20,956 $ 57,453 $(13,954)
========= ======== ======== ========
Denominator:
Denominator for basic
net income (loss) per share--
weighted average shares 46,510 47,160 46,510 47,050
Effect of dilutive common
stock options 850 4,320 2,250 -
--------- -------- -------- --------
Denominator for
dilutive net income (loss)
per share 47,360 51,480 48,760 47,050
========= ======== ======== ========
</TABLE>
7. Comprehensive Income
--------------------
Effective February 1, 1998, Autodesk adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of SFAS 130 had no impact on the Company's
net income or stockholders' equity. This Statement requires unrealized gains or
losses on the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.
Autodesk's total comprehensive income was as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
-------------------- ---------------------
1998 1997 1998 1997
-------- --------- -------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Net income (loss) $20,700 $20,956 $57,453 $(13,954)
Other comprehensive income (loss) 18,454 (1,259) 16,336 1,738
------- ------- ------- --------
Total comprehensive income (loss) $39,154 $19,697 $73,789 $(12,216)
======= ======= ======= ========
</TABLE>
10
<PAGE>
8. Restructuring Charges
---------------------
During the second quarter of fiscal year 1999, the Company's management approved
restructuring plans, which include initiatives to address current economic
conditions in the Asia Pacific region, consolidate duplicative facilities and
reduce overhead. These plans resulted in a charge of $5.4 million, which
includes $2.3 million for the cost of involuntary employee separation benefits
relating to approximately 87 employees. Employee separation benefits include
severance, medical and other benefits. Employee separation will affect certain
engineers and sales and marketing employees. The remaining charge of $3.1
million relates to other exit costs, namely the write-off of purchased
technologies, lease termination buyout costs, the disposal of fixed assets in
these regions, and professional fees. As of October 31, 1998, the number of
employee separations due to restructuring actions was 74 and actual employee
termination benefit payments of approximately $1.5 million have been made.
9. Business Combinations
---------------------
On August 20, 1998, the Company announced a definitive agreement to acquire
Discreet Logic Inc. ("Discreet"), a company that develops, assembles, markets
and supports non-linear, digital systems and software for creating, editing and
compositing imagery and special effects for film, video, and HDTV. On September
23, 1998 and November 18, 1998, respectively, the Company, Discreet, and certain
affiliates of the Company amended and restated the acquisition agreement. Under
the terms of the amended agreement, the Company will exchange 0.48 shares of its
common stock, or 0.48 exchangeable shares (which can be exchanged, at the
holder's election, for one share of the Company's common stock), for each
outstanding share of Discreet, which reduces the original exchange ratio of
0.525 shares. Based on the number of Discreet Common Shares outstanding and the
number of Discreet Common Shares issuable upon exercise of outstanding Discreet
Share Options as of October 31, 1998, the transaction is expected to result in
the issuance of approximately 14.4 million shares of Autodesk common stock. The
transaction, which will be accounted for using the pooling of interests method,
is expected to be completed during the Company's fourth fiscal quarter, subject
to certain regulatory approvals and the approval of Discreet and Autodesk
shareholders.
In September and October 1998, Discreet notified the Company that it and certain
of its directors had been named as defendants in two purported class action
lawsuits filed in California Superior Court for the County of Marin on behalf of
owners of Discreet's common stock. The complaints allege that the defendants
breached their fiduciary duties in connection with the previously announced
acquisition transaction with the Company. Discreet believes the claims asserted
in the complaints are without merit and intends to vigorously contest them. The
Company does not expect the lawsuits to affect consummation of the transaction
with Discreet.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE DISCUSSION IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" CONTAINS TREND ANALYSES AND OTHER FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. ALL STATEMENTS, TREND
ANALYSES AND OTHER INFORMATION CONTAINED HEREIN RELATIVE TO MARKETS FOR
AUTODESK'S PRODUCTS AND TRENDS IN REVENUE, AS WELL AS OTHER STATEMENTS INCLUDING
SUCH WORDS AS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE," "EXPECT," "GOAL," AND
"INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING STATEMENTS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND ECONOMIC RISKS, AND
AUTODESK'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FACTORS SET FORTH ELSEWHERE
HEREIN, INCLUDING "CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING
RESULTS," PAGE 17, AS WELL AS FACTORS SET FORTH IN AUTODESK'S ANNUAL REPORT ON
FORM 10-K.
RESULTS OF OPERATIONS
Three Months Ended October 31, 1998 and 1997
- --------------------------------------------
Net revenues. The Company's third quarter net revenues of $177.2 million
increased 9 percent from the third quarter of the prior fiscal year. The
Company achieved significant net revenue growth in the Americas and Europe when
compared to the same period in the prior fiscal year, while net revenues
decreased in Asia Pacific. The Company recorded net revenues in the Americas
of $86.1 million, a 10 percent increase from the same period in the prior fiscal
year, and net revenues in Europe of $66.5 million, an increase of 27 percent.
This net revenue growth was the result of strong demand for products offered by
the Company's Design Solutions and Personal Solutions operating segments,
including software products such as AutoCAD Mechanical Desktop 3.0, AutoCAD
LT98, Architectural Desktop, and incremental software revenues associated with
the May 1998 acquisition of Genius (see Note 2 to the condensed consolidated
financial statements). Sales of AutoCAD and AutoCAD upgrades accounted for
approximately 59 percent and 72 percent of the Company's consolidated net
revenues in the third quarter of fiscal years 1999 and 1998, respectively. The
value of the US dollar, relative to certain international currencies, had an
insignificant impact on net revenues in the third quarter of the current fiscal
year compared to the same period in the prior fiscal year. International sales,
including exports from the U.S., accounted for approximately 58 percent of the
Company's revenues in the third quarter of fiscal year 1999 as compared to 52
percent in the same period of the prior fiscal year.
The Company experienced a decline in Asia Pacific net revenues during the third
quarter of fiscal year 1999 compared to the corresponding period of the prior
year due to weak economic conditions in the region. The Company expects that
these adverse conditions in Asia Pacific will continue in the short term, and
that they may continue to adversely affect the Company's revenue and earnings.
The Company derives a substantial portion of its revenues from sales of AutoCAD
software, AutoCAD upgrades, and adjacent products which are interoperable with
AutoCAD, and expects this trend to continue. As such, any factor adversely
affecting sales of AutoCAD and AutoCAD upgrades, including such factors as
product life cycle, market acceptance, product performance and reliability,
reputation, price competition, and the availability of third-party applications,
could have a material adverse effect on the Company's business and consolidated
results of operations. Additionally, slowdowns in any of the Company's
geographical markets could also have a material adverse impact on the Company's
business and consolidated results of operations.
12
<PAGE>
Product returns, consisting principally of stock rotation, are recorded as a
reduction of revenues and represented approximately 4 percent and 6 percent of
consolidated revenues in the third quarter of fiscal years 1999 and 1998,
respectively. The decrease in product returns as a percentage of revenues is
primarily due to the Company's continued focus on channel inventory management,
sell through sales activities and programs, and the absence of performance or
quality issues with the Company's software products. Although product returns
decreased as a percentage of consolidated revenues, comparing the third quarter
of fiscal year 1999 to the same period in the prior year, management anticipates
that the level of product returns in future periods will continue to be impacted
by the timing of new product releases, as well as the quality and market
acceptance of new products.
Cost of revenues. When expressed as a percentage of net revenues, cost of
revenues decreased from 11 percent of net revenues in the third quarter of
fiscal year 1998 to 10 percent of net revenues in the corresponding period of
the current fiscal year. This reduction is largely due to efficiencies in
production and distribution and to a reduction in royalties paid by the Company
as a result of the Company's having acquired the rights to certain multimedia
products during the latter part of the third quarter of fiscal year 1998. Cost
of revenues as a percentage of net revenues has been and may continue to be
impacted by the mix of product sales, software amortization costs, royalty rates
for licensed technology embedded in Autodesk's products, and the geographic
distribution of sales.
Marketing and sales. Marketing and sales expenses were 36 percent and 37
percent of net revenues in the third quarter of fiscal years 1999 and 1998,
respectively. Actual spending increased 6 percent primarily as a result of
higher employee costs. The Company expects to continue to invest in marketing
and sales of its products, to develop market opportunities, and to promote
Autodesk's competitive position. Accordingly, the Company expects marketing and
sales expenses to continue to be significant, both in absolute dollars and as a
percentage of net revenues.
Research and development. Research and development expenses represented 21
percent and 20 percent of net revenues in the third quarter of fiscal years 1999
and 1998, respectively. Actual research and development spending increased by
13 percent from the same period in the prior fiscal year due to the addition of
software engineers, incremental costs associated with the acquisition of Genius
(see Note 2), and costs associated with the development of new and enhanced
products, including the next release of AutoCAD. The Company anticipates that
research and development expenses will increase in future periods as a result of
product development efforts by the Company's market groups and incremental
personnel costs. Additionally, the Company intends to continue recruiting and
hiring experienced software developers and to consider the licensing and
acquisition of complementary software technologies and businesses.
General and administrative. General and administrative expenses were 16 percent
of net revenues in the third quarter of fiscal year 1999 as compared to 13
percent of net revenues in the third quarter of the prior fiscal year. In
absolute dollar terms, general and administrative expenses increased 35 percent
from the same period of the prior fiscal year, resulting primarily from
increased employee-related expenses (a $3 million increase), amortization of
intangibles recorded in connection with the acquisition of Genius (see Note 2 of
the condensed consolidated financial statements) ($1.1 million), costs related
to the Company's Year 2000 compliance program ($1 million), and costs associated
with the ongoing nonpublic Federal Trade Commission investigation of Autodesk's
business practices ($0.4 million). The Company currently expects that general
and administrative expenses will increase in future periods to support spending
on infrastructure, including continued investment in Autodesk's worldwide
information systems and making any additional corrections to the Company's
infrastructure in connection with its Year 2000 compliance program.
Interest and other income. Interest and other income remained relatively
constant between the third quarter of fiscal year 1998 and the corresponding
period of the current fiscal year. Interest and other income was $2.3 million
in the third quarter of fiscal year 1999 compared to $2.6 million in the
corresponding period of the prior fiscal year.
13
<PAGE>
Provision for income taxes. The Company's effective income tax rate was 34
percent in the third quarter of fiscal year 1999 compared to 36 percent in the
same quarter of the prior fiscal year. The decrease in the effective income tax
rate was due to incremental tax benefits associated with the Company's foreign
sales corporation and foreign earnings that are taxed at rates different than
the U.S. statutory rate.
The Company's United States income tax returns for fiscal years ended January
31, 1992 through 1996, are under examination by the Internal Revenue Service
("IRS"). On August 27, 1997, the IRS issued a Notice of Deficiency proposing
increases to the amount of the Company's federal income taxes for fiscal years
1992 and 1993. On November 25, 1997, the Company filed a petition with the
United States Tax Court to contest these alleged tax deficiencies. The
resolution of these alleged tax deficiencies and any adjustments that may
ultimately result from these examinations are not expected to have a material
adverse impact on the Company's consolidated results of operations or its
financial position.
RESULTS OF OPERATIONS
Nine Months Ended October 31, 1998 and 1997
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Net revenues. Autodesk's net revenues for the nine months ended October 31,
1998 were $551.0 million, which represented a 27 percent increase from the same
period of the prior fiscal year. The increase resulted primarily from higher
sales of vertical products offered by the Company's Design Solutions and
Personal Solutions operating segments.
Cost of revenues. Cost of revenues as a percentage of net revenues for the nine
months ended October 31, 1998 was 10 percent, compared to 12 percent in the same
period in the prior fiscal year. This reduction is largely due to efficiencies
in production and distribution activities and lower royalties paid by the
Company as a result of the Company's having acquired the rights to certain
multimedia products during the third quarter of fiscal year 1998. Cost of
revenues as a percentage of net revenues has been and may continue to be
impacted by the mix of product sales, software amortization, royalty rates for
licensed technology embedded in Autodesk's products, and the geographic
distribution of sales.
Marketing and sales. As a percentage of net revenues, marketing and sales
expenses decreased to 35 percent of net revenues in the third quarter of fiscal
year 1999 from 39 percent in the nine months ended October 31, 1998. Actual
spending for this period increased 13 percent as a result of higher employee
costs and increased marketing costs associated with new and enhanced product
offerings.
Research and development. Research and development expenses as a percentage of
net revenues for the nine months ended October 31, 1998 decreased to 20 percent
from 21 percent for the same period in the prior fiscal year. Actual research
and development spending (including capitalized software costs of $2.2 million
recorded during the first half of fiscal year 1998) increased 16 percent as
compared to the same period in the prior fiscal year. The absolute dollar
increase is due primarily to the addition of software engineers, expenses
associated with the development and translation of new products, and incremental
research and development personnel expenses associated with the acquisition of
Genius during May, 1998.
General and administrative. General and administrative expenses were 15 percent
of net revenues for the nine months ended October 31, 1998, and 14 percent of
net revenues in the same period of the prior fiscal year. In absolute dollar
terms, general and administrative expenses increased 40 percent for the nine
months ended October 31, 1998 from the same period of the prior fiscal year,
primarily because of increased employee-related expenses ($8 million increase),
amortization of intangibles recorded in connection with the acquisition of
Genius and the Softdesk merger ($3 million increase), other depreciation and
amortization expenses ($2 million increase), costs incurred to ensure that the
Company's infrastructure is year 2000 compliant ($3 million), and costs incurred
in the ongoing nonpublic FTC investigation ($1.1 million).
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Nonrecurring charges--Genius acquisition. On May 4, 1998, Autodesk entered into
an agreement with Genius CAD Software GmbH ("Genius"), a German limited
liability company to purchase various mechanical computer-aided-design ("CAD")
software applications and technologies (the "acquisition"). In consideration
for this acquisition, Autodesk paid Genius approximately $69 million in cash.
The acquisition has been accounted for using the purchase method of accounting.
In connection with the acquisition, the Company recorded a charge for in-process
research and development of $29 million, all of which was recorded during the
six months ended July 31, 1998. The value was computed using a discounted cash
flow analysis on the anticipated income stream of the related product sales.
The discounted cash flow analysis was based on management's forecast of future
revenues, cost of revenues and operating expenses related to the products and
technologies purchased from Genius which represent the process and expertise
employed to develop mechanical design application software designed to work in
conjunction with Autodesk's mechanical CAD products. The Genius technology and
product families identified include Genius Desktop, Genius AutoCAD, and Genius
AutoCAD LT.
Revenues and related expenses for the in-process technology were estimated from
the acquisition date through the end of Autodesk's fiscal year 2004.
Management's analysis considered anticipated product release dates for
Autodesk's mechanical CAD products, as well as release dates for the various
acquired Genius products and technologies which are interoperable with
Autodesk's mechanical CAD products. The overall technology life was estimated
to be approximately three years for the Genius Desktop products, and
approximately six years for all other Genius products and technologies purchased
by Autodesk. Management's aggregate projections reflect moderate revenue
growth. The growth rates contained in the first five years of the projections
are greater than those historically experienced by Autodesk and result in large
part from the expansion of the Genius products into Autodesk's existing
worldwide sales channels, particularly in North America and Asia Pacific, which
historically have not contributed significant revenues to Genius. Revenue
growth rates thereafter are assumed to be approximately 20 percent.
Management's revenue growth rates for the projection period also considered the
anticipated growth expected in the overall mechanical CAD market.
The cost to complete the in-process technology was also based on management's
estimates, which considered the number of man-months required to reach
technological feasibility for each of the Genius projects classified as "in-
process," the type of professional and engineering staff involved in the
completion process and their fully burdened monthly salaries. Management
estimated the direct costs to achieve technological feasibility to be
approximately $2.5 million, covering a period of time extending into the first
half of the Company's fiscal year 2000. Beyond this period, management
estimates significantly less expense in supporting and maintaining active
products identified at the acquisition date to be in-process technology.
Management's projections for related operating expenses (expressed as a
percentage of revenues), are considerably less than that historically
experienced by Autodesk. The estimates used in management's projections
considered the cost structure of Genius and the ability to leverage much of the
Company's existing worldwide infrastructure to support the nondevelopment
operations of Genius which resulted in projected operating margins in excess of
60 percent. The effective tax rate utilized in the analysis of in-process
technology was 34 percent, which reflects Autodesk's current combined federal
and state statutory tax rate, exclusive of nonrecurring charges.
Management discounted the net cash flows of the in-process technology to its
present value using a discount rate of 20 percent, which was determined to be
higher than Autodesk's weighted average cost of capital ("WACC") due to the fact
that the technology had not yet reached technological feasibility as of the date
of valuation. In utilizing a discount rate greater than Autodesk's WACC,
management has reflected the risk premium associated with achieving the
forecasted cash flows associated with these projects.
To date, revenues and operating expenses attributable to in-process technology
associated with the Genius acquisition are consistent with management's
projections. Based upon factors currently known, management believes the
revenues and operating expense associated with these in-process technologies
will favorably impact Autodesk's consolidated results of operations and
financial position. If the in-process projects contemplated in management's
forecast are not successfully developed, future revenue and profitability of the
Company may be adversely affected. Additionally, the value of other intangible
assets acquired from Genius may become impaired.
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Revenues for developed technology were estimated by management for the remainder
of fiscal year 1999 through fiscal year 2004. Management's estimates reflect a
gradual decline in revenues from developed technologies after considering
historical product life cycles and anticipated product release dates. While
revenues derived from both developed and in-process technologies are estimated
to decline over the next several fiscal years, overall revenues attributable to
the Genius products and technologies are anticipated to grow in absolute dollars
and as a percentage of aggregate revenue to reflect the growth of future (yet-
to-be-developed) technologies. Operating expenses, including general and
administrative, marketing and sales, were based on anticipated costs after the
Genius operations were merged into the Company's operating structure. Because
Autodesk and Genius share the same marketing and distribution channel, operating
expenses related to the developed technology were estimated to be lower than the
historical operating expense structure of the Company.
Management discounted the net cash flows for developed technology to its present
value using a discount rate of 15 percent which reflects Autodesk's current
WACC.
If the projects contemplated in management's forecast are not successfully
developed, future revenue and profitability of Autodesk may be adversely
affected. Additionally, the value of other intangible assets acquired from
Genius may become impaired.
Nonrecurring charges--Other. During the second fiscal quarter, Autodesk recorded
charges of approximately $8.9 million relating primarily to restructuring
charges associated with the consolidation of certain development centers ($1.5
million); the write-off of purchased technologies associated with these
operations ($2.2 million); staff reduction in Asia Pacific in response to
current economic conditions in the region ($1.7 million); costs in relation to
potential legal settlements ($2.5 million); and the write-down to fair market
value of older computer equipment that the Company planned to dispose of ($1.0
million). These charges reduced income after tax by approximately $5.9 million
($0.12 per share on a diluted basis). The restructurings noted above are
expected to be completed by the end of Autodesk's fiscal year ending January 31,
1999. See Note 8 to the condensed consolidated financial statements for further
explanation.
Nonrecurring charges--prior year transactions
On March 31, 1997, the Company exchanged 2.9 million shares of its common stock
for all of the outstanding stock of Softdesk, Inc. Based on the value of
Autodesk stock and options exchanged, the transaction, including transaction
costs, was valued at approximately $94 million. This transaction was accounted
for using the purchase method of accounting with the purchase price being
principally allocated to capitalized software, purchased technologies, and
intangible assets. Approximately $55.1 million of the total purchase price
represented the value of in-process research and development that had not yet
reached technological feasibility and had no alternative future use.
Approximately $3.0 million of technology acquired from 3D/Eye during the first
quarter of fiscal year 1998 also represented the value of in-process research
and development that had not yet reached technological feasibility and had no
alternative future use. The $55.1 million and the $3.0 million were charged to
operations in the first quarter of fiscal year 1998. These charges reduced net
income for the period by approximately $57 million ($1.26 per share on a diluted
basis) and reflect the fact the one-time charge for acquired in-process research
and development recorded in connection with the Softdesk transaction was not
deductible for income tax purposes.
Litigation accrual reversal. The Company recorded a $25.5 million nonrecurring
charge during fiscal year 1995 on a claim of trade-secret misappropriation
brought by Vermont Microsystems, Inc. ("VMI"). As of the end of the first
quarter of fiscal year 1999, the total amount accrued related to the initial
judgment plus accrued interest was approximately $29.3 million. The Company
appealed this decision, and in May 1998, final judgment was entered in the VMI
litigation and a corresponding final payment of approximately $8.4 million was
made to VMI. During the second quarter of fiscal year 1999, the Company
recognized $18.2 million and $2.7 million to operating income and interest
income, respectively, to reflect the remaining unutilized litigation and related
interest accruals.
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Interest and other income. Interest and other income for the nine months ended
October 31, 1998 was $11.0 million as compared to $7.4 million for the same
period in the prior fiscal year. The increase is largely due to the interest
portion of the VMI settlement (see Note 3 to the condensed consolidated
financial statements) and the net gain on the disposition of one of the
Company's business units.
Provision for income taxes. The Company's effective income tax rate, excluding
the impact of nonrecurring charges, was 34 percent for the first nine months of
fiscal year 1999 as compared to 36 percent for the same period in the prior
fiscal year. The decrease in the effective income tax rate was due to
incremental tax benefits associated with the Company's foreign sales corporation
and foreign earnings that are taxed at rates different than the U.S. statutory
rate. The $1.6 million benefit from the $29 million charge in the second
quarter of fiscal year 1999 for in-process research and development associated
with the acquisition of Genius is less than the U.S. statutory rate as a portion
of it will not be deductible for U.S. tax purposes. Additionally, a valuation
allowance has been established for a portion of the deferred tax asset which is
deductible for U.S. tax purposes over an extended period of time.
The Company's United States income tax returns for fiscal years ended January
31, 1992 through 1996, are under examination by the Internal Revenue Service
("IRS"). On August 27, 1997, the IRS issued a Notice of Deficiency proposing
increases to the amount of the Company's federal income taxes for fiscal years
1992 and 1993. On November 25, 1997, the Company filed a petition with the
United States Tax Court to contest these alleged tax deficiencies. Resolution
of these alleged tax deficiencies and any adjustments that may ultimately result
from these examinations are not expected to have a material adverse impact on
the Company's consolidated results of operations or its financial position.
CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
Autodesk operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. The following discussion
highlights some of these risks and the possible impact of these factors on
future results of operations.
Competition. The software industry has limited barriers to entry, and the
availability of desktop computers with continually expanding capabilities at
progressively lower prices contributes to the ease of market entry. Because of
these and other factors, competitive conditions in the industry are likely to
intensify in the future. Increased competition could result in price
reductions, reduced revenues and profit margins, and loss of market share, any
of which could adversely affect Autodesk's business, consolidated results of
operations, and financial condition. The design software market in particular
is characterized by vigorous competition in each of the vertical markets in
which the Company competes, both by entry of competitors with innovative
technologies and by consolidation of companies with complementary products and
technologies.
The AEC family of products competes directly with software offered by companies
such as Bentley Systems, Inc. ("Bentley"); Computervision Corporation (a
subsidiary of Parametric Technologies, Inc.) ("Computervision"); CADAM Systems
Company, Inc.; Diehl Graphsoft, Inc.; EaglePoint Software; International
Microcomputer Software, Inc. ("IMSI"); Intergraph Corporation; Ketiv
Technologies; Nemetschek Systems, Inc. and Visio Corporation ("Visio").
Autodesk's MCAD products compete with products offered by Bentley Visionary
Design Systems; Hewlett-Packard Corporation; Parametric Technologies, Inc.;
Structural Dynamics Research Corporation; Unigraphics; Computervision; Dassault
Systemes ("Dassault"); Solidworks Corporation (a subsidiary of Dassault); and
Baystate Technologies, Inc. Audodesk's GIS Market Group faces competition from
Bentley; Intergraph; MapInfo Corporation; Earth Sciences Research Institute
("ESRI"); and MCI Systemhouse. Kinetix product offerings compete with products
offered by other multimedia companies such as Adobe Systems Inc.; Macromedia,
Inc.; and Silicon Graphics, Inc. The Personal Solutions Group family of
products compete with IMSI; The Learning Company; Visio; Micrografx Inc.; and
others. Certain of the competitors of Autodesk have greater financial,
technical, sales and marketing, and other resources than Autodesk.
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Autodesk believes that the principal factors affecting competition in its
markets are product reliability, performance, ease of use, range of useful
features, continuing product enhancements, reputation, price and training. In
addition, the availability of third-party application software is a competitive
factor within the CAD market. Autodesk believes that it competes favorably in
these areas and that its competitive position will depend, in part, upon its
continued ability to enhance existing products, and to develop and market new
products.
In April 1998, the Company received notice that the Federal Trade Commission
("FTC") has undertaken a nonpublic investigation to determine whether Autodesk
or others have engaged in or are engaging in unfair methods of competition. The
FTC has not made any claims or allegations regarding the Company's current
business practices or policies, nor have any charges been filed. Autodesk
intends to cooperate fully with the FTC in its inquiry. The Company does not
believe that the investigation will have a material adverse impact on its
business or consolidated results of operations.
Fluctuations in quarterly operating results. Autodesk has experienced
fluctuations in operating results in interim periods in certain geographic
regions due to seasonality. The Company's operating results in Europe during
the third fiscal quarter are usually impacted by a slow summer period while the
Asia Pacific operations typically experience seasonal slowing in the third and
fourth fiscal quarters.
The technology industry is particularly susceptible to fluctuations in operating
results within a quarter. While Autodesk experienced more linear operating
results within the current quarter compared to prior years, historically the
majority of its orders within a fiscal quarter have frequently been concentrated
within the last weeks or days of that quarter. These fluctuations are caused by
a number of factors, including the relatively long sales cycle of some of
Autodesk's products, the timing of the introduction of new products by Autodesk
or its competitors, and other economic factors experienced by the Company's
customers and the geographic regions in which Autodesk does business.
Additionally, Autodesk's operating expenses are based in part on its
expectations for future revenues and are relatively fixed in the short term.
Accordingly, any revenue shortfall below expectations could have an immediate
and significant adverse effect on the Company's consolidated results of
operations and financial condition.
Similarly, shortfalls in Autodesk's revenues or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock. Moreover, the Company's stock
price is subject to the volatility generally associated with technology stocks
and may also be affected by broader market trends unrelated to performance.
Product concentration. Autodesk derives a substantial portion of its revenues
from sales of AutoCAD software, AutoCAD upgrades, and adjacent products which
are interoperable with AutoCAD. As such, any factor adversely affecting sales of
AutoCAD and AutoCAD upgrades, including such factors as product life cycle,
market acceptance, product performance and reliability, reputation, price
competition, and the availability of third-party applications, could have a
material adverse effect on the Company's business and consolidated results of
operations.
Product development and introduction. The software industry is characterized by
rapid technological change as well as changes in customer requirements and
preferences. The software products offered by the Company are complex and,
despite extensive testing and quality control, may contain errors or defects
("bugs"), especially when first introduced. There can be no assurance that
defects or errors will not occur in future releases of AutoCAD or other software
products offered by the Company. Such defects or errors could result in
corrective releases to the Company's software products, damage to Autodesk's
reputation, loss of revenues, an increase in product returns, or lack of market
acceptance of its products, any of which could have a material and adverse
effect on the Company's business and consolidated results of operations.
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The Company believes that its future results will depend largely upon its
ability to offer products that compete favorably with respect to reliability,
performance, ease of use, range of useful features, continuing product
enhancements, reputation, price and training. Delays or difficulties may result
in the delay or cancellation of planned development projects, and could have a
material and adverse effect on Autodesk's business and consolidated results of
operations. Further, increased competition in the market for design, mapping, or
multimedia software products could also have a negative impact on the Company's
business and consolidated results of operations. More specifically, gross
margins may be adversely affected if sales of low-end CAD products, which
historically have had lower margins, grow at a faster rate than the Company's
higher-margin products.
Certain of the Company's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. Autodesk generally either owns or licenses the
software developed by third parties. Because talented development personnel are
in high demand, there can be no assurance that independent developers, including
those who have developed products for the Company in the past, will be able to
provide development support to the Company in the future. Similarly, there can
be no assurance that the Company will be able to obtain and renew license
agreements on favorable terms, if at all, and any failure to do so could have a
material adverse effect on the Company's business and consolidated results of
operations.
Autodesk's business strategy has historically depended in large part on its
relationships with third-party developers, who provide products that expand the
functionality of the Company's design software. There can be no assurance that
certain developers will not elect to support other products or otherwise
experience disruption in product development and delivery cycles. Such
disruption in particular markets could negatively impact these third-party
developers and end users, which could have a material adverse effect on
Autodesk's business and consolidated results of operations. Further, increased
merger and acquisition activity currently experienced in the technology industry
could affect relationships with other third-party developers, and thus adversely
affect operating results.
International operations. The Company anticipates that international operations
will continue to account for a significant portion of its consolidated revenues.
Risks inherent in the Company's international operations include the following:
unexpected changes in regulatory practices and tariffs; difficulties in staffing
and managing foreign operations; longer collection cycles; potential changes in
tax laws; greater difficulty in protecting intellectual property; and the impact
of fluctuating exchange rates between the U.S. dollar and foreign currencies in
markets where Autodesk does business. During the first nine months of fiscal
year 1999, changes in exchange rates from the same period of the prior fiscal
year positively impacted revenues, principally due to changes in the rate of
exchange between the U.S. dollar and the German mark and the British pound. The
Company's risk management strategy uses derivative financial instruments in the
form of forward foreign exchange contracts for the purpose of hedging foreign
currency market exposures of underlying assets, liabilities, and other
obligations which exist as a part of its ongoing business operations. Autodesk
does not enter into derivative contracts for the purpose of trading or
speculative transactions. The Company's international results may also be
impacted by general economic and political conditions in these foreign markets.
The Company's international results have been impacted by recent unfavorable
economic and political conditions in the Asian markets as described above under
"Results of Operations - Net Revenues." There can be no assurance that the
economic crisis and currency issues currently being experienced in these markets
will not have a material adverse effect on the Company's future international
operations and consequently, on the Company's business and consolidated results
of operations.
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Dependence on distribution channels. The Company sells its software products
primarily to distributors and resellers (value-added resellers, or "VARs").
Autodesk's ability to effectively distribute products depends in part upon the
financial and business condition of its VAR network. Although the Company has
not to date experienced any material problems with its VAR network, computer
software dealers and distributors are typically not highly capitalized and have
experienced difficulties during times of economic contraction and may do so in
the future. The loss of or a significant reduction in business with any one of
the Company's major international distributors or large U.S. resellers could
have a material adverse effect on the Company's business and consolidated
results of operations in future periods. Autodesk's largest international
distributor is Computer 2000 AG in Germany. Autodesk's largest resellers and
distributors in the United States are Ingram, Avatech and DLT.
Product returns. With the exception of certain European distributors,
agreements with the Company's VARs do not contain specific product-return
privileges. However, Autodesk permits its VARs to return product in certain
instances, generally during periods of product transition and during update
cycles. Although product returns, comparing the third quarter of fiscal 1999 to
the same period in the prior year, decreased as a percentage of consolidated
revenues, management anticipates that product returns in future periods will
continue to be impacted by product update cycles, new product releases, and
software quality.
Autodesk establishes reserves, including reserves for stock balancing and
product rotation, based on estimated future returns of product and after taking
into account channel inventory levels, the timing of new product introductions,
and other factors. While the Company maintains strict measures to monitor
channel inventories and to provide appropriate reserves, actual product returns
may differ from the Company's reserve estimates, and such differences could be
material to Autodesk's consolidated financial statements.
Intellectual property. The Company relies on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality procedures, and contractual
provisions to protect its proprietary rights. Despite such efforts to protect
the Company's proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's software products or to obtain and use information that
Autodesk regards as proprietary. Policing unauthorized use of the Company's
software products is time-consuming and costly. Although the Company is unable
to fully measure the extent to which piracy of its software products exists,
software piracy can be expected to be a persistent problem. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that its competitors will not independently develop similar
technology. The Company expects that software product developers will be
increasingly subject to infringement claims as the number of products and
competitors in its industry segments grows and the functionality of products in
different industry segments overlap. There can be no assurance that infringement
or invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted against the Company or that any such assertions
will not have a material adverse effect on its business. Any such claims,
whether with or without merit, could be time-consuming, result in costly
litigation and diversion of resources, cause product shipment delays, or require
the Company to enter into royalty or licensing agreements. In addition, such
royalty or license agreements, if required, may not be available on acceptable
terms, if at all, which could have a material adverse effect on the Company's
business and consolidated results of operations.
The Company also relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in its products to perform key functions. There can be no assurance that
these third-party software licenses will continue to be available on
commercially reasonable terms, or that the software will be appropriately
supported, maintained, or enhanced by the licensors. The loss of licenses, or
inability to support, maintain, and enhance any such software, could result in
increased costs, or in delays or reductions in product shipments until
equivalent software could be developed, identified, licensed, and integrated,
which could have a material adverse effect on the Company's business and
consolidated results of operations.
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Risks associated with recent acquisitions and investments. The Company
periodically acquires or invests in businesses, software products and
technologies which are complementary to the Company's business through strategic
alliances, debt and equity investments, joint ventures and the like. The risks
associated with such acquisitions or investments include, among others, the
difficulty of assimilating the operations and personnel of the companies, the
failure to realize anticipated synergies and the diversion of management's time
and attention. In addition, such investments and acquisitions may involve
significant transaction-related costs. There can be no assurance that the
Company will be successful in overcoming such risks or that such investments and
acquisitions will not have a material adverse impact upon the Company's
business, financial condition or results of operations. In addition, such
investments and acquisitions may contribute to potential fluctuations in
quarterly results of operations due to merger-related costs and charges
associated with eliminating redundant expenses or write-offs of impaired assets
recorded in connection with acquisitions, any of which could negatively impact
results of operations for a given period or cause lack of linearity quarter to
quarter in the Company's operating results or financial condition.
As further described in Note 2 to the condensed consolidated financial
statements, on May 4, 1998, the Company acquired the mechanical applications
business of Genius for approximately $69 million in cash, which includes fees
and expenses. As discussed in Note 9, on November 18, 1998, the Company
announced an amended agreement to acquire Discreet by the issuance of 0.48
shares of Autodesk's common stock or 0.48 exchangeable shares (which can be
exchanged, at the holder' election, for one share of the Company's common
stock), in exchange for each outstanding share of Discreet. There can be no
assurance that the anticipated benefits of the Genius acquisition, the Discreet
acquisition, or any future acquisitions will be realized.
Attraction and Retention of Employees. The continued growth and success of the
Company depends significantly on the continued service of highly skilled
employees. Competition for these employees in today's marketplace, especially
in the technology industries, is intense. The Company's ability to attract and
retain employees is dependent on a number of factors including its continued
ability to grant stock incentive awards. There can be no assurance that the
Company will be successful in continuing to recruit new personnel and to retain
existing personnel. The loss of one or more key employees or the Company's
inability to maintain existing employees or recruit new employees could have a
material adverse impact on the Company. In addition, the Company may experience
increased compensation costs to attract and retain skilled personnel.
Impact of Year 2000. Some of the computer programs used by the Company in its
internal operations rely on time-sensitive software that was written using two
digits rather than four to identify the applicable year. These programs may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company is currently in the remediation or fourth phase of a six-phase year
2000 compliance program related to information technology ("IT") systems and
expects to complete this phase by the end of fiscal year 1999. The remaining
two phases are expected to be virtually complete by the end of the Company's
fiscal year 1999 with minor testing and risk mitigation activities being
performed through the end of calendar year 1999. As of October 31, 1998, the
Company had spent approximately $4 million on the IT year 2000 project, of which
approximately $300,000 had been capitalized. The Company expects to spend an
additional $2 million to $3 million to complete this project. All expenditures
to date have been captured either in prior year or current year budgets. The
Company believes that the key components of the IT year 2000 project have either
been replaced or remediated. Further, the Company estimates that if any
component of the current systems fail due to year 2000 related issues, the
Company would be able to divert people and systems traffic, causing delays of
between one to three days in service interruptions and processing Autodesk
information. Autodesk has a contingency plan in place in order to prevent the
loss of critical data which includes the back up of all critical data processing
interactions and a disaster recovery plan. There can be no assurance, however,
that there will not be a delay in the completion of these procedures or that the
cost of such procedures will not exceed original estimates, either of which
could have a material adverse effect on future results of operations.
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In addition to correcting the business and operating systems used by the Company
in the ordinary course of business as described above, the Company has also
reviewed its non-IT systems to determine year 2000 compliance of these systems.
The Company is in a monitoring program that continually checks the status of all
non-IT systems and does not anticipate an adverse impact on service and business
capabilities with regard to these non-IT systems. Expenditures related to these
monitoring procedures have been minimal and are not expected to be significant
in future periods.
The Company has also tested and continues to test all products it currently
produces internally for sale to third parties to determine year 2000 compliance.
As of October 31, 1998, the Company has spent approximately $300,000 on the
first two phases of a three-phase-year 2000 compliance testing program related
to its products and expects to spend an additional $1.2 to $1.7 million to
complete this project. Currently-sold products either have been found to be
compliant or are currently being tested for compliance. However, many Autodesk
products run on operating systems or hardware produced and sold by third-party
vendors. There can be no assurance that these operating systems or hardware
will be converted in a timely manner, or at all, and any failure in this regard
may cause Autodesk products not to function as designed. The Company will
continue to evaluate each product in the currently supported inventory. Any
future costs associated with ensuring that the Company's products are compliant
with the year 2000 are not expected to have a material impact on the Company's
results of operations or financial position. Furthermore, commentators have
stated that a significant amount of litigation may arise out of year 2000
compliance issues, and the Company is aware of a growing number of lawsuits
against other software vendors. Because of the unprecedented nature of such
litigation, it is uncertain whether and to what extent the Company may be
affected by it.
Single European Currency. The Company is in the process of addressing the issues
raised by the introduction of the Single European Currency ("Euro") as of
January 1, 1999 and during the transition period ending January 1, 2002. The
Company will continue to modify the internal systems that will be affected by
this conversion during fiscal year 2000, and does not expect the costs of
further system modifications to be material. There can be assurance, however,
that the Company will be able to complete such modifications to comply with
Euro requirements, which would have a material adverse effect on the Company's
operating results. The Company is currently evaluating the impact of the
introduction of the Euro on its foreign exchange and hedging activities,
functional currency designations, and pricing strategies in the new economic
environment. In addition, the Company faces risks to the extent that banks and
vendors upon whom the Company relies and their suppliers are unable to make
appropriate modifications to support the Company's operations with respect to
Euro transactions. While the Company will continue to evaluate the impact of
the Euro, management does not believe its introduction will have a material
adverse effect upon the Company's results of operations or financial
condition.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and marketable securities, which consist primarily of
high-quality municipal bonds, tax-advantaged money market instruments and U.S.
treasury notes, totaled $337.7 million at October 31, 1998, compared to $301.3
million at January 31, 1998. The $36.4 million increase in cash, cash
equivalents, and marketable securities was due primarily to cash generated from
operations of $87.8 million and proceeds from the issuance of common stock
($74.7 million). This increase was partially offset by the acquisition of
Genius ($69.3 million), payments to retire common stock ($48.9 million), and
purchases of fixed assets ($11.4 million).
The Company sold put warrants to an independent third party in December 1997
that entitled the holder of the warrants to sell 1.5 million shares of common
stock to the Company at $38.12 per share. Additionally, the Company purchased
call options from the same independent third party that entitled the Company to
buy 1 million shares at $39.88 per share. The premiums received with respect to
the equity options totaled $4.5 million and equaled the premiums paid.
Consequently, there was no exchange of cash. At any given date, the amounts
potentially subject to market risk were generally limited to the amount by which
the per share price of the put warrants exceeds the market value of the
Company's common stock. The put warrants permitted a net share settlement at
the Company's option. In March 1998, the Company exercised the call option,
electing the net share settlement option and retired approximately 97,000 shares
of its common stock. The put warrants expired unexercised.
In connection with the proposed acquisition of Discreet Logic Inc. (see Note 9
to the condensed consolidated financial statements), in August 1998, the
Company's Board of Directors has rescinded and terminated all stock repurchase
programs.
The Company has an unsecured $40 million bank line of credit, of which $20
million is guaranteed, that may be used from time to time to facilitate short-
term cash flow. At October 31, 1998, there were no borrowings outstanding under
this credit agreement, which expires in January 1999.
The Company's principal commitments at October 31, 1998 consisted of obligations
under operating leases for facilities. The Company believes that its existing
cash, cash equivalents, marketable securities, available line of credit, and
cash generated from operations will be sufficient to satisfy its currently
anticipated cash requirements for the next twelve months.
22
<PAGE>
Longer-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products including the incremental
product offerings resulting from the acquisition of Genius and enhancement of
existing products; financing anticipated growth; dividend payments; and the
acquisition of businesses, software products, or technologies complementary to
the Company's business. The Company believes that its existing cash, cash
equivalents, marketable securities, available line of credit, and cash generated
from operations will be sufficient to satisfy its currently anticipated longer-
term cash requirements.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising from the normal
course of business activities. While the outcome of these matters cannot be
predicted with certainty, in management's opinion, resolution of these matters
is not expected to have a material adverse impact on the Company's consolidated
results of operations or its financial position. However, depending on the
amount and timing, an unfavorable resolution of a matter could materially affect
the Company's future results of operations or cash flows in a particular period.
Additionally, reference is made to the Form 10-Q filed with the Securities and
Exchange Commission for the period ended July 31, 1998.
ITEM 5. OTHER INFORMATION
Reference is made to the Form 10-Q filed with the Securities and Exchange
Commission for the period ended July 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
27.0 Financial Data Schedule for the period ended October 31, 1998
Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended October 31, 1998.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: December 14, 1998
AUTODESK, INC.
(Registrant)
/S/ CAROL A. BARTZ
-------------------
Carol A. Bartz
Chairman and Chief Executive Officer
/S/ STEVE CAKEBREAD
--------------------
Steve Cakebread
Vice President and Chief Financial Officer
(Principal Financial Officer)
24
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