<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 April 30, 1999
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 June 8, 1999 there were 58,949,205 shares of the Registrant's Common Stock
outstanding.
================================================================================
<PAGE>
AUTODESK, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page No.
--------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statement of Operations
Three months ended April 30, 1999 and 1998................. 3
Condensed Consolidated Balance Sheet
April 30, 1999 and January 31, 1999........................ 4
Condensed Consolidated Statement of Cash Flows
Three months ended April 30, 1999 and 1998................. 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 4. Submission of Matters to a Vote of Security Holders......... 25
Item 6. Exhibits and Reports on Form 8-K............................ 25
Signatures.................................................. 25
</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
April 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Net revenues $194,939 $222,918
Costs and expenses:
Cost of revenues 32,408 34,022
Marketing and sales 80,693 73,823
Research and development 38,598 39,280
General and administrative 34,454 26,971
Amortization of goodwill and purchased intangibles 7,214 6,538
Nonrecurring charges 21,781 -
Litigation accrual reversal - (405)
-------- --------
215,148 180,229
-------- --------
Income (loss) from operations (20,209) 42,689
Interest and other income, net 4,496 2,022
-------- --------
Income (loss) before income taxes (15,713) 44,711
Provision for income taxes 1,431 15,978
-------- --------
Net income (loss) $(17,144) $ 28,733
======== ========
Basic net income (loss) per share $ (0.29) $ 0.51
======== ========
Diluted net income (loss) per share $ ( 0.29) $ 0.48
======== ========
Shares used in computing basic net income (loss) per share 58,930 55,984
======== ========
Shares used in computing diluted net income (loss) per share 58,930 60,426
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(In thousands)
<TABLE>
<CAPTION>
April 30, 1999 January 31, 1999
-------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 193,333 $ 258,941
Marketable securities 233,478 102,756
Accounts receivable, net 127,493 114,901
Inventories 22,593 23,169
Deferred income taxes 20,794 20,323
Prepaid expenses and other current assets 26,976 24,325
--------- ---------
Total current assets 624,667 544,415
--------- ---------
Marketable securities 85,859 66,265
Computer equipment, furniture, and leasehold improvements, at cost:
Computer equipment and furniture 143,405 140,513
Leasehold improvements 24,623 24,767
Less accumulated depreciation (121,088) (116,625)
--------- ---------
Net computer equipment, furniture, and leasehold improvements 46,940 48,655
Purchased technologies and capitalized software, net 42,696 40,630
Goodwill, net 91,611 85,546
Deferred income taxes 14,560 12,147
Other assets 23,962 25,602
--------- ---------
$ 930,295 $ 823,260
========= =========
</TABLE>
See accompanying notes.
4
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
April 30, 1999 January 31, 1999
-------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 41,953 $ 49,053
Accrued compensation 38,389 49,592
Accrued income taxes 93,193 96,731
Deferred revenues 40,879 24,833
Other accrued liabilities 67,317 58,905
-------- --------
Total current liabilities 281,731 279,114
-------- --------
Deferred income taxes 2,585 3,333
Other liabilities 1,369 3,486
Stockholders' equity:
Common stock 605,038 470,801
Deferred compensation (353) (551)
Retained earnings 55,450 81,209
Accumulated other comprehensive loss (15,525) (14,132)
-------- --------
Total stockholders' equity 644,610 537,327
-------- --------
$930,295 $823,260
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
April 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities
Net income (loss) $ (17,144) $ 28,733
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Charge for acquired in-process research and development 3,287 -
Depreciation and amortization 16,794 18,493
Net loss on fixed assets disposals 408 -
Changes in operating assets and liabilities (15,068) (3,966)
--------- --------
Net cash provided by (used in) operating activities (11,723) 43,260
--------- --------
Investing activities
Net purchases of marketable securities (150,316) (37,571)
Business combinations, net of cash acquired (25,642) -
Capital purchases of computer equipment, furniture, and leasehold improvements (3,548) (8,288)
Proceeds from disposition of fixed assets 232 -
Purchases of software technologies, capitalization of software costs, and other (1,145) 3,777
--------- --------
Net cash used in investing activities (180,419) (42,082)
--------- --------
Financing activities
Proceeds from issuance of common stock, net of issuance costs 133,967 57,036
Dividends paid (3,593) (2,810)
Change in notes payable and short-term borrowings, net (1,589) -
--------- --------
Net cash provided by financing activities 128,785 54,226
--------- --------
Effect of exchange rate changes on cash & cash equivalents (2,571) (3,957)
--------- --------
Discreet Logic activity for the one month ended January 31, 1999 (see Note 2) 320 -
--------- --------
Net increase (decrease) in cash and cash equivalents (65,608) 51,447
Cash and cash equivalents at beginning of year 258,941 108,738
--------- --------
Cash and cash equivalents at end of quarter $ 193,333 $160,185
========= ========
Supplemental cash flow information:
Cash paid during the period for income taxes $ 5,140 $ 1,647
========= ========
Supplemental noncash information:
Common stock received in relation to the equity collar $ - $ 4,265
========= ========
</TABLE>
See accompanying notes.
6
<PAGE>
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The condensed consolidated financial statements of Autodesk, Inc. ("Autodesk" or
the "Company") at April 30, 1999 and 1998 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 April 30, 1999 should be read in
conjunction with the consolidated financial statements, as restated, 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, 1999 and the Company's supplemental
consolidated financial statements (formed as a result of the consolidation of
Autodesk and Discreet Logic Inc.) on Form 8-K/A for the fiscal year ended
January 31, 1999. The results of operations for the three months ended April 30,
1999 are not necessarily indicative of the results for the entire fiscal year
ending January 31, 2000.
2. Business Combinations
---------------------
Discreet Logic Inc.
On March 16, 1999, Autodesk's indirect wholly-owned subsidiary, Autodesk
Development B.V., acquired all voting shares of the successor company to
Discreet Logic Inc. ("New Discreet") resulting from the Amalgamation (as defined
below) by way of an amalgamation under the Companies Act of Quebec by and among
Discreet and certain indirect wholly owned subsidiaries of Autodesk (the
"Amalgamation") and certain related transactions described below (together with
the Amalgamation, the "Acquisition"). As a result of the Acquisition, New
Discreet became an indirect subsidiary of Autodesk. In connection with the
Acquisition, an aggregate of approximately 10 million shares of Autodesk common
stock, par value $0.01 per share (the "Autodesk Common Stock"), and New Discreet
shares exchangeable for Autodesk Common Stock ("New Discreet Exchangeable
Shares"), were issued in exchange for all common shares of former Discreet Logic
Inc., no par value per share (the "Discreet Common Shares"), issued and
outstanding immediately prior to the Amalgamation. Each Discreet Common Share
outstanding immediately prior to the Amalgamation was converted, through a
series of steps, at the election of its holder, into either (i) 0.33 shares of
Autodesk Common Stock, or (ii) 0.33 New Discreet Exchangeable Shares. Each New
Discreet Exchangeable Share may be exchanged at the election of the holder for
one share of Autodesk Common Stock.
Prior to the acquisition, Discreet's fiscal year ended December 31. As a
result, the financial statements for the fiscal quarter ended April 30, 1998
combine Autodesk's historical financial statements with Discreet's financial
statements for the quarter ended March 31, 1998. Separate results of the
combined entities for the three months ended April 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
(In millions) April 30, 1999 April 30, 1998
------------------ ------------------
<S> <C> <C>
Net revenues:
Autodesk $170.0 $187.2
Discreet 24.9 35.7
------ ------
$194.9 $222.9
====== ======
Net income (loss):
Autodesk $ (7.3) $ 25.8
Discreet (9.8) 2.9
------ ------
$(17.1) $ 28.7
====== ======
</TABLE>
7
<PAGE>
In connection with the acquisition, the Company recorded nonrecurring charges of
$18.5 million, consisting of transaction costs ($15.1 million), restructuring
costs ($3.0 million), and other one-time costs ($0.4 million). Transaction
costs consisted primarily of fees for investment bankers, attorneys, financial
printing, accountants, and other related costs. Restructuring costs included
severance and exit costs (see Note 7 for further information).
Results of Discreet for the one-month period ended January 31, 1999, have been
excluded from the reported results of the combined entity as a result of
changing Discreet's year-end to January 31, 1999. A summary of these results is
as follows (in thousands):
Sales $3,807
Net loss (5,022)
There were no other significant changes in stockholders' equity for the period
excluded from the reported results of operations.
VISION* Solutions
On April 22, 1999, the Company acquired VISION* Solutions ("VISION"), a leading-
edge vendor of enterprise automated mapping/facilities management/geographic
information systems (AM/FM/GIS) solutions from MCI Systemhouse Corporation, a
Subsidiary of MCI WorldCom Inc., for approximately $26 million in cash.
Approximately $3.3 million of the VISION purchase price represented the value of
in-process research and development that had not yet reached technological
feasibility and had no alternative future use, and as such, was charged to
nonrecurring charges in the first quarter of fiscal year 2000. The remaining
purchase price was allocated, based on the Company's preliminary estimates,
primarily to assets acquired, developed technology, and other intangibles.
Specifically, costs of $13.4 million and $2.1 million were allocated to
preliminary goodwill and other intangibles and are being amortized over periods
of three to seven years. The operating results of VISION, which have not been
material in relation to those of the Company, have been included in the
accompanying condensed consolidated financial statements since the date of
acquisition.
3. Recently Issued Accounting Standards
------------------------------------
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.
4. Common Stock Repurchase Programs
--------------------------------
In connection with the acquisition of Discreet (see Note 2 to the condensed
consolidated financial statements), the Company's Board of Directors has
rescinded and terminated all stock repurchase programs.
8
<PAGE>
5. Net Income Per Share
--------------------
Basic net income per share is calculated using the weighted average number of
common shares outstanding. Diluted net income 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
April 30,
--------------------------
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
Numerator:
Numerator for basic and diluted
per share amounts - net income (loss) $(17,144) $28,733
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 58,930 55,984
Effect of dilutive common stock options - 4,442
-------- -------
Denominator for dilutive net income (loss) per share 58,930 60,426
======== =======
</TABLE>
In accordance with SFAS No. 128, in periods that the Company incurs a net loss,
all outstanding options are excluded from the calculation of diluted EPS. Had
the Company not been in a loss position in the three months ended April 30,
1999, dilutive options of 2.8 million would have been added to compute diluted
EPS. In the three months ended April 30, 1999 and 1998, antidilutive weighted
shares of 3.6 million and 1.6 million respectively, have been excluded from the
computation of diluted EPS.
6. 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
(loss) 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 (loss) was as follows:
<TABLE>
<CAPTION>
Three months ended
April 30,
--------------------------
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
Net income (loss) $(17,144) $28,733
Other comprehensive loss (1,393) (582)
-------- -------
Total comprehensive income (loss) $(18,537) $28,151
======== =======
</TABLE>
9
<PAGE>
7. Restructuring Charges
---------------------
In connection with the Company's acquisition of Discreet on March 16, 1999 (see
Note 2), Autodesk's management approved restructuring plans to eliminate
duplicative legal entities and to reduce overhead. These plans resulted in a
charge of $3 million, which includes $1.7 million for the cost of involuntary
employee separation benefits. Employee separation benefits include severance,
medical and other benefits. The remaining charge of $1.3 million relates to
other exit costs, primarily to eliminate duplicate legal entities.
8. Common Stock Follow-on Offering
-------------------------------
In order to qualify for pooling of interests treatment in the Discreet
acquisition (see Note 2), on March 16, 1999, Autodesk completed a follow-on
offering of 3,000,000 shares of Autodesk common stock at $41 per share for net
proceeds of $5.3 million.
9. Segments
--------
The Company operates in three segments--the Design Solutions segment (consisting
of the MCAD, AECAD, and GIS market groups), the Personal Solutions Group
("PSG"), and Discreet (consisting of the Discreet and Kinetix market groups).
The Design Solutions segment derives revenues from the sales of design software
products whose end users include architects, engineers, construction firms,
designers, and drafters. The Personal Solutions Group develops and sells design
software products for professionals, occasional users, or consumers who design,
draft, and diagram. Finally, Discreet derives revenues from the sale of its
products to creative professionals for a variety of applications, including
feature films, television programs, commercials, music and corporate videos,
interactive game production, live broadcasting and Web design. All segments
primarily distribute their respective products through authorized dealers and
distributors. The PSG and Discreet segments also sell their products directly to
end users.
Autodesk evaluates each segment's performance on the basis of income from
operations before income taxes. The Company currently does not separately
accumulate and report asset information by market group. Information concerning
the operations of the Company's reportable segments is as follows:
<TABLE>
<CAPTION>
Three months ended April 30,
----------------------------
(In millions) 1999 1998
-------- --------
<S> <C> <C>
Net revenues:
Design Solutions $128.4 $145.2
Personal Solutions Group 32.6 32.3
Discreet 33.9 45.4
------ ------
$194.9 $222.9
====== ======
Income (loss) from operations:
Design Solutions $ 58.3 $ 76.0
Personal Solutions Group 18.6 21.5
Discreet (24.7) 5.6
Unallocated amounts/1/ (72.4) (60.4)
------ ------
$(20.2) $ 42.7
====== ======
</TABLE>
/1/ Unallocated amounts in the quarter ended April 30, 1999 and April 30, 1998
are attributed primarily to other geographic costs and expenses which are
managed outside the reportable segments.
10
<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 15 as well as factors set forth in Autodesk's Annual Report on
Form 10-K.
On March 16, 1999, Autodesk acquired Discreet Logic Inc. ("Discreet"), hereafter
collectively referred to as the Company, in a business combination accounted for
as a pooling of interests. Accordingly, all prior period consolidated financial
statements presented have been restated to include the combined results of
operations, financial position, and cash flows of Discreet as though it had
always been a part of Autodesk. In the acquisition, Autodesk acquired all of
the voting stock of Discreet, a company that develops, assembles, markets, and
supports nonlinear digital systems and software for creating, editing, and
compositing imagery and special effects for film, video, and HDTV, and issued
0.33 shares of Autodesk's common stock, or 0.33 exchangeable shares (which can
be exchanged, at the holder's election, for one share of Autodesk's common
stock), for each outstanding share of Discreet. The transaction resulted in the
issuance of an aggregate of approximately 10 million shares of Autodesk common
stock and exchangeable shares (see Note 2).
Prior to the acquisition, Discreet's fiscal year ended December 31. As a
result, the financial statements for the fiscal quarter ended April 30, 1998
combine Autodesk's historical financial statements with Discreet's financial
statements for the quarter ended March 31, 1998.
Results of Operations
Three Months Ended April 30, 1999 and 1998
- ------------------------------------------
Net revenues. Autodesk's first quarter net revenues of $194.9 million
decreased 13 percent from the first quarter of the prior fiscal year. Net
revenues in the Americas decreased 27 percent compared to the same period in the
prior fiscal year, slightly offset by an increase in Asia Pacific net revenues
of 11 percent. Net revenues in Europe remained relatively flat. The decrease in
net revenue was due to product transition issues related to AutoCAD 2000, which
began shipping during the current quarter and Design 2000 products due to ship
later in the fiscal year. Sales of AutoCAD and AutoCAD upgrades accounted for
approximately 52 percent and 58 percent of Autodesk's consolidated net revenues
in the first quarter of fiscal years 2000 and 1999, respectively. On a stand-
alone basis, AutoCAD and AutoCAD upgrades were 42% percent and 49% percent of
consolidated revenues in the first quarter of fiscal years 2000 and 1999,
respectively. The value of the US dollar, relative to international currencies,
had no significant impact on net revenues in the first 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 66 percent
of Autodesk's revenues in the first quarter of fiscal year 2000 as compared
to 59 percent in the same period of the prior fiscal year.
Autodesk derives a substantial portion of its revenues from sales of AutoCAD
software, AutoCAD upgrades, and adjacent products which are interoperable with
AutoCAD, and expects this trend to continue. As such, any factor adversely
affecting sales of AutoCAD and AutoCAD upgrades, including such factors as
product life cycle, market acceptance, product performance and reliability,
reputation, price competition, and the availability of third-party applications,
could have a material adverse effect on Autodesk's business and consolidated
results of operations. Additionally, slowdowns in any of Autodesk's
geographical markets could also have a material adverse impact on Autodesk's
business and consolidated results of operations.
11
<PAGE>
Product returns, consisting principally of stock rotation, are recorded as a
reduction of revenues and represented approximately 4 percent of consolidated
revenues in the first quarter of fiscal years 2000 and 1999. 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 increased from 15 percent of net revenues in the first quarter of
fiscal year 1999 to 17 percent of net revenues in the corresponding period of
the current fiscal year. This increase is largely due to increases in royalties
incurred. 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 41 percent and 33
percent of net revenues in the first quarter of fiscal years 2000 and 1999,
respectively. Actual spending increased 9 percent primarily as a result of
higher advertising and promotion costs related to the launch of AutoCAD 2000 in
March 1999 and higher employee costs. Autodesk expects to continue to invest in
marketing and sales of its products, to develop market opportunities, and to
promote its competitive position. Accordingly, Autodesk expects marketing and
sales expenses to continue to be significant, both in absolute dollars and as a
percentage of net revenues.
Research and development. Research and development expenses represented 20
percent and 18 percent of net revenues in the first quarter of fiscal years 2000
and 1999, respectively. Actual research and development spending (including
capitalized software costs of $4.7 million recorded during the current quarter)
increased 10 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 (which occurred in the second quarter of fiscal year
1999), and costs associated with the development of new and enhanced products,
including AutoCAD 2000 which was released in March, 1999. Autodesk anticipates
that research and development expenses will increase in future periods as a
result of product development efforts by Autodesk's market groups and
incremental personnel costs. Additionally, Autodesk intends to continue
recruiting and hiring experienced software developers and to consider the
licensing and acquisition of complementary software technologies and businesses.
General and administrative. General and administrative expenses were 18 percent
of net revenues in the first quarter of fiscal year 2000 as compared to 13
percent of net revenues in the first quarter of the prior fiscal year. In
absolute dollar terms, general and administrative expenses increased 28 percent
from the same period of the prior fiscal year, resulting primarily from
increased employee-related expenses (a $3 million increase) and professional
fees related to Autodesk's information technology infrastructure (a $2.6 million
increase). The Company currently expects that general and administrative
expenses will continue to be significant in future periods to support spending
on infrastructure, including continued investment in Autodesk's worldwide
information systems.
Amortization of goodwill and purchased intangibles. Amortization of goodwill and
purchased intangibles was $7.2 million in the first quarter of fiscal year 2000
compared to $6.5 million in the corresponding quarter of the prior fiscal year.
The increase was largely due to incremental amortization associated with the
acquisition of Genius.
Nonrecurring charges -- Discreet acquisition. In March, 1999, Autodesk acquired
all of the voting stock of Discreet, a company that develops, assembles,
markets, and supports nonlinear digital systems and software for creating,
editing, and compositing imagery and special effects for film, video, and HDTV,
and issued 0.33 shares of Autodesk's common stock, or 0.33 exchangeable shares
(which can be exchanged, at the holder's election, for one share of Autodesk's
common stock), for each outstanding share of Discreet. The transaction resulted
in the issuance of an aggregate of approximately 10 million shares of Autodesk
common stock and exchangeable shares. In connection with the acquisition, the
Company recorded nonrecurring charges of $18.5 million, consisting of
transaction costs ($15.1 million), restructuring costs ($3.0 million), and other
one-time costs ($0.4 million). Transaction costs consisted primarily of fees for
12
<PAGE>
investment bankers, attorneys, financial printing, accountants, and other
related costs. Restructuring costs included severance and exit costs (see Note 7
to the condensed consolidated financial statements for further information).
Nonrecurring charges -- VISION acquisition. On April 22, 1999, Autodesk acquired
VISION* Solutions ("VISION"), a leading-edge vendor of enterprise automated
mapping/facilities management/geographic information systems (AM/FM/GIS)
solutions from MCI Systemhouse Corporation for approximately $26 million in
cash. Approximately $3.3 million of the VISION purchase price represented the
value of in-process research and development that had not yet reached
technological feasibility and had no alternative future use, and as such, was
charged to nonrecurring charges in the first quarter of fiscal year 2000.
The research and development projects in-process as of the acquisition date
consisted of the development of the following products:
<TABLE>
<CAPTION>
Estimated Anticipated
Percent cost to Introduction
Vision in-process technologies completed complete date
- -------------------------------- --------- --------- ------------
(in millions)
<S> <C> <C> <C>
Vision 6.x product 60% 1.2 late 1999
Electric 3.x product 39% 1.4 late 1999
</TABLE>
The projected financial results used in the valuation were based on expectations
for Vision on a stand-alone basis that any third party acquirer may expect
excluding the specific synergistic benefits that Autodesk expects to achieve
after the acquisition.
The rate used to discount the net cash flows back to their present values is
based on the weighted average costs of capital, or "WACC". A discount rate of
25% was used for valuing the in-process research and development. In utilizing
a discount rate greater than Autodesk's WACC, management has reflected
the risk premium associated with achieving the forecasted cash flows with these
projects.
Interest and other income. Interest and other income was $4.5 million in the
first quarter of fiscal year 2000 compared to $2.0 million in the corresponding
period of the prior fiscal year. The increase was primarily due to higher
interest income related to higher cash, cash equivalents, and marketable
securities balances and a higher average interest rate.
Provision for income taxes. Excluding the impact of nonrecurring charges, the
Company's effective income tax rate was 32 percent in the first quarter of
fiscal year 2000 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 earnings that are taxed at rates
different than the U.S. statutory rate. No tax benefit has been recorded with
respect to the nonrecurring charges incurred in connection with the Discreet and
Vision acquisitions in the first quarter of fiscal year 2000.
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 for 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. In May 1999,
Autodesk resolved substantially all of the alleged deficiencies for fiscal years
ended January 31, 1992 through 1996. The resolution of these alleged tax
deficiencies and any remaining 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.
13
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In-process research and development for prior period acquisitions. On May 4,
1998, Autodesk entered into an agreement with Genius, a German limited liability
company, to purchase various mechanical computer-aided design software
applications and technologies. The acquisition was accounted for using the
purchase method of accounting and resulted in a non-recurring charge for in-
process research and development of $13.1 million, all of which was recorded
during the three months ended July 31, 1998.
As of April 30, 1999, the following are the estimated completion percentages and
projected introduction dates for the acquired in-process technologies:
<TABLE>
<CAPTION>
Percent Introduction
Genius in-process technologies completed date
- -------------------------------- ---------- --------------
<S> <C> <C>
Genius AutoCad Version R15 80-90% August 1999
Genius Vario Version R15 80-90% August 1999
Genius Modules Version R15 80-90% August 1999
Genius Desktop Version 3.0 100% September 1998
Genius AutoCAD LT 1998 100% October 1998
</TABLE>
Failure to complete the development of these projects in their entirety, or in a
timely manner, could have an adverse impact on Autodesk's operating results,
financial condition, and results of operations. Additionally, the value of other
intangible assets acquired from Genius may become impaired.
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 its control. The following discussion highlights
some of these risks and the possible impact of these factors on future results
of operations.
Competition. The software industry has limited barriers to entry, and the
availability of desktop computers with continually expanding capabilities at
progressively lower prices contributes to the ease of market entry. Because of
these and other factors, competitive conditions in the industry are likely to
intensify in the future. Increased competition could result in price reductions,
reduced revenues and profit margins, and loss of market share, any of which
could adversely affect Autodesk's business, consolidated results of operations,
and financial condition. The design software market in particular is
characterized by vigorous competition in each of the vertical markets in which
Autodesk and its individual market groups compete, both by entry of competitors
with innovative technologies and by consolidation of companies with
complementary products and technologies.
The Architecture, Engineering, and Construction family of products competes
directly with software offered by companies such as Bentley Systems, Inc.
("Bentley"); Computervision Corporation (a subsidiary of Parametric Technology
Corporation) ("Computervision"); CADAM Systems Company, Inc.; Diehl Graphsoft,
Inc.; Eagle Point Software; International Microcomputer Software, Inc. ("IMSI");
Intergraph Corporation; Nemetschek Systems, Inc.; and Visio Corporation
("Visio"). Autodesk's MCAD products compete with products offered by Bentley;
Visionary Design Systems; Hewlett-Packard Corporation; Parametric Technology
Corporation; Structural Dynamics Research Corporation; Unigraphics;
Computervision; Dassault Systemes ("Dassault"); Solidworks Corporation (a
subsidiary of Dassault); Baystate Technologies, Inc.; and think3. Autodesk's GIS
Market Group faces competition from Bentley; Intergraph; MapInfo Corporation;
Environmental Systems Research Institute ("ESRI"); and Smallworldwide plc.
Discreet product offerings compete with products offered by Quantel Limited
("Quantel"), Avid, Sony Corporation, Adobe Systems Inc., and Media 100 Inc.
Kinetix(R) product offerings compete with products offered by other multimedia
companies such as Adobe Systems Inc.; Macromedia, Inc.; Silicon Graphics, Inc.;
and Avid Technology, Inc. The Personal Solutions Group family of products
competes with IMSI; The Learning Company; Visio; Micrografx Inc.; and others.
Certain of the competitors of Autodesk have greater financial, technical, sales
and marketing, and other resources than Autodesk.
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<PAGE>
The future financial performance of Autodesk's Discreet business unit will
depend in part on the successful development, introduction, and customer
acceptance of existing and new or enhanced products. In addition, in order for
the unit to achieve sustained growth, the market for its systems and software
must continue to develop, and Autodesk must expand this market to include
additional applications within the film and video industries and develop or
acquire new products for use in related markets. Autodesk may not be successful
in marketing its existing or new or enhanced products. In addition, as Autodesk
enters new markets, distribution channels, technical requirements, and levels
and bases of competition may be different from those in Autodesk's current
markets; Autodesk may not be able to compete favorably.
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 depends, in part, upon its
continued ability to enhance existing products and to develop and market new
products.
In April 1998, Autodesk received notice that the 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 Autodesk's current business
practices or policies, nor have any charges been filed. Autodesk intends to
cooperate fully with the FTC in its inquiry. Autodesk does not believe that the
investigation will have a material impact on its business or consolidated
results of operations.
Fluctuations in quarterly operating results. From time to time, Autodesk
experiences fluctuations in its quarterly operations as a result of periodic
release cycles, competitive factors and general economic conditions among other
things. In addition, Autodesk has experienced fluctuations in operating results
in interim periods in certain geographic regions due to seasonality. In
particular, Autodesk's operating results in Europe during the third fiscal
quarter are usually impacted by a slow summer period, and 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. These fluctuations are caused by a number of factors
including the timing of the introduction of new products by Autodesk or its
competitors and other economic factors experienced by Autodesk's customers in
the geographic regions in which Autodesk does business.
The operating results of Autodesk's recently acquired Discreet business unit
could vary significantly from quarter to quarter. A limited number of system
sales may account for a substantial percentage of Discreet's quarterly revenue
because of the high average sales price of Discreet's products and the timing of
purchase orders. Historically, Discreet has generally experienced greater
revenues during the period following the completion of the NAB trade show, which
typically is held in April. In addition, the timing of revenue is influenced by
a number of other factors, including the timing of individual orders and
shipments, other industry trade shows, competition, seasonal customer buying
patterns, changes in customer buying patterns in response to platform changes
and changes in product development, and sales and marketing expenditures.
Additionally, Autodesk's operating expenses are based in part on its
expectations for future revenues and are relatively fixed in the short term.
Accordingly, any revenue shortfall below expectations could have an immediate
and significant adverse effect on Autodesk's consolidated results of operations
and financial condition.
Similarly, shortfalls in Autodesk's revenues or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of Autodesk's common stock. Moreover, Autodesk's stock price
is subject to the volatility generally associated with technology stocks and may
also be affected by broader market trends unrelated to performance.
15
<PAGE>
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 Autodesk'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 Autodesk are internally complex,
and despite extensive testing and quality control, may contain errors or defects
("bugs"). Defects or errors may occur in future releases of AutoCAD or other
software products offered by Autodesk. Such defects or errors could result in
corrective releases to Autodesk's software products, damage to Autodesk's
reputation, loss of revenues, an increase in product returns, or lack of market
acceptance of its products, any of which could have a material and adverse
effect on Autodesk's business and consolidated results of operations.
Autodesk believes that its future results will depend largely upon its ability
to offer products that compete favorably with respect to reliability,
performance, ease of use, range of useful features, continuing product
enhancements, reputation, price, and training. Delays or difficulties may result
in the delay or cancellation of planned development projects and could have a
material and adverse effect on Autodesk's business and consolidated results of
operations. Further, increased competition in the market for design, drafting,
mapping, or multimedia software products could also have a negative impact on
Autodesk's business and consolidated results of operations. More specifically,
gross margins may be adversely affected if sales of low-end CAD products and
AutoCAD upgrades, which historically have had lower margins, grow at a faster
rate than Autodesk's higher-margin products.
The success of Autodesk's Discreet business unit will depend in part upon
Autodesk's ability to enhance Discreet's existing systems and software and to
develop and introduce new products and features which meet changing customer
requirements and emerging industry standards on a timely basis. In addition, in
connection with Discreet's recent acquisitions, Autodesk must fully integrate
the edit* (formerly D-Vision OnLine), effect* (formerly Flint and Illuminaire
Composition), paint* (formerly Illuminaire Paint), and light* (formerly
Lightscape) products into its product line and operations. Discreet from time to
time experienced delays in introducing new products and product enhancements,
and the Discreet business unit may experience difficulties that could delay or
prevent the successful development, introduction, and marketing of new products
or product enhancements. In addition, such new products or product enhancements
may not meet the requirements of the marketplace and achieve market acceptance.
Any such failure could have a material adverse effect on Autodesk's business and
consolidated results of operations. From time to time the Discreet business unit
or others may announce products, features or technologies which have the
potential to shorten the life cycle of or replace its then existing products.
Such announcements could cause customers to defer the decision to buy or
determine not to buy its products or cause its distributors to seek to return
products to the Discreet business unit, any of which could have a material
adverse effect on Autodesk's business and consolidated results of operations. In
addition, product announcements by Silicon Graphics, Inc. ("SGI") and others in
the past have caused customers to defer their decision to buy or determine not
to buy Discreet's products. In addition, products or technologies developed by
others may render the Discreet business unit's products or technology
noncompetitive or obsolete.
Certain of Autodesk's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. Autodesk generally either owns or licenses the
software developed by third parties. Because talented development personnel are
in high demand, independent developers, including those who have developed
products for Autodesk in the past, may not be able to provide development
support to Autodesk in the future. Similarly, Autodesk may not be able to obtain
and renew license agreements on favorable terms, if at all, and any failure to
do so could have a material adverse effect on Autodesk's business and
consolidated results of operations.
16
<PAGE>
Autodesk's business strategy has historically depended in large part on its
relationships with third-party developers, who provide products that expand the
functionality of Autodesk's design software. Certain developers may elect to
support other products or otherwise experience disruption in product development
and delivery cycles. Such disruption in particular markets could negatively
impact these third-party developers and end users, which could have a material
adverse effect on Autodesk's business and consolidated results of operations.
Further, increased merger and acquisition activity currently experienced in the
technology industry could affect relationships with other third-party developers
and thus adversely affect operating results.
International operations. Autodesk anticipates that international operations
will continue to account for a significant portion of its consolidated revenues.
Risks inherent in Autodesk's international operations include the following:
unexpected changes in regulatory practices and tariffs; difficulties in staffing
and managing foreign operations; longer collection cycles for accounts
receivable; 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 quarter of fiscal year 2000, changes in exchange rates from the
same period of the prior fiscal year had an insignificant impact on net
revenues. Autodesk's risk management strategy uses derivative financial
instruments in the form of forward foreign exchange contracts for the purpose of
hedging foreign currency market exposures of underlying assets, liabilities, and
other obligations which exist as a part of its ongoing business operations.
Autodesk does not enter into derivative contracts for the purpose of trading or
speculative transactions. Autodesk's international results may also be impacted
by general economic and political conditions in these foreign markets, including
the ongoing economic volatility currently experienced in certain Asia Pacific
countries. These and other factors may have a material adverse effect on
Autodesk's future international operations and consequently on Autodesk's
business and consolidated results of operations.
Dependence on distribution channels. Autodesk sells its software products
primarily to distributors and resellers (value-added resellers, or "VARs").
Autodesk's ability to effectively distribute products depends in part upon the
financial and business condition of its VAR network. Although Autodesk has not
currently experienced any material problems with its VAR network, computer
software dealers and distributors are typically not highly capitalized and have
experienced difficulties during times of economic contraction and may do so in
the future. While no single customer accounted for more than 10 percent of
Autodesk's consolidated revenues in fiscal years 1999, 1998 or 1997, the loss
of or a significant reduction in business with any one of Autodesk's major
international distributors or large U.S. resellers could have a material adverse
effect on Autodesk's business and consolidated results of operations in future
periods. Autodesk's largest international distributor is Computer 2000/Datech AG
in Germany. Autodesk's largest resellers in the United States are Avatech,
Ingram Micro, and DLT Solutions, Inc.
Product returns. With the exception of certain European distributors, agreements
with Autodesk's VARs do not contain specific product-return privileges. However,
Autodesk permits its VARs to return product in certain instances, generally
during periods of product transition and during update cycles. Although
Autodesk's returns as a percentage of net revenues remained constant comparing
the first quarter of fiscal year 2000 to the same period in the prior year,
management anticipates that product returns in future periods will continue to
be impacted by product update cycles, new product releases, and software
quality.
Autodesk establishes reserves, including reserves for stock balancing and
product rotation, based on estimated future returns of product and after taking
into account channel inventory levels, the timing of new product introductions,
and other factors. While Autodesk maintains strict measures to monitor channel
inventories and to provide appropriate reserves, actual product returns may
differ from its reserve estimates, and such differences could have a material
adverse effect on Autodesk's business and consolidated results of operations.
Intellectual property. Autodesk relies on a combination of patents, copyright
and trademark laws, trade secrets, confidentiality procedures, and contractual
provisions to protect its proprietary rights. Despite such efforts to protect
its proprietary rights, unauthorized parties from time to time have copied
aspects of Autodesk's software products or have obtained and used information
that Autodesk regards as proprietary.
17
<PAGE>
Policing unauthorized use of Autodesk's software products is time-consuming and
costly. While Autodesk has received some revenues resulting from the
unauthorized use of its software products, it is unable to measure the extent to
which piracy of its software products exists, and software piracy can be
expected to be a persistent problem. Autodesk's means of protecting its
proprietary rights may not be adequate, and its competitors may independently
develop similar technology. Autodesk expects that software product developers
will be increasingly subject to infringement claims as the number of products
and competitors in its industry segments grows and as the functionality of
products in different industry segments overlaps. Infringement or invalidity
claims (or claims for indemnification resulting from infringement claims) may be
asserted against Autodesk, and any such assertions could have a material adverse
effect on its business. Any such claims, whether with or without merit, could be
time-consuming, result in costly litigation and diversion of resources, cause
product shipment delays, or require Autodesk to enter into royalty or licensing
agreements. In addition, such royalty or license agreements, if required, may
not be available on acceptable terms, if at all, which could have a material
adverse effect on Autodesk's business and consolidated results of operations.
Autodesk also relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in its products to perform key functions. These third-party software
licenses may not continue to be available on commercially reasonable terms, and
the software may not be appropriately supported, maintained, or enhanced by the
licensors. The loss of licenses to, or inability to support, maintain, and
enhance any such software could result in increased costs, or in delays or
reductions in product shipments until equivalent software could be developed,
identified, licensed, and integrated, which could have a material adverse effect
on Autodesk's business and consolidated results of operations.
Until fiscal year 1996, substantially all of Discreet's systems were sold
without written license agreements. Autodesk may be involved in litigation
relating to these sales, and the outcome of any such litigation may be more
unfavorable to Autodesk as a result of such omissions. The Discreet business
unit uses both software and hardware keys with respect to its systems and
software but otherwise does not copy-protect its systems and software. It may be
possible for unauthorized third parties to copy the Discreet business unit's
products or to reverse-engineer or obtain and use information that the Discreet
business unit regards as proprietary. Competitors may independently develop
technologies that are substantially equivalent or superior to the Discreet
business unit's technologies.
Attraction and Retention of Employees. Autodesk's 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. Autodesk's ability to attract and
retain employees is dependent on a number of factors including its continued
ability to grant stock incentive awards. Autodesk may not be successful in
continuing to recruit new personnel and to retain existing personnel. The loss
of one or more key employees or any inability to maintain existing employees or
recruit new employees could have a material adverse impact on Autodesk. In
addition, Autodesk may experience increased compensation costs to attract and
retain skilled personnel.
Impact of Year 2000. Some of the computer programs used by Autodesk in its
internal operations rely on time-sensitive software that was written using two
digits rather than four to identify the applicable year. These programs may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Autodesk is currently in the remediation and testing phase of a six-phase year
2000 compliance program related to information technology ("IT") systems. The
business continuity planning or final phase is expected to be complete by the
end of the third quarter of fiscal year 2000. During the current quarter of
fiscal year 2000, Autodesk spent approximately $0.5 million on the IT year 2000
project. Autodesk expects to spend an additional $1.4 million to $1.9 million
to complete this project. All expenditures to date have been captured either in
prior year or current year budgets. Autodesk believes that the key components
of the IT year 2000 project have either been replaced or remediated. Further,
Autodesk estimates that if any component of the current systems fail due to year
2000 related issues, Autodesk would be able to divert people and systems
traffic, causing delays of between one to three days in service
18
<PAGE>
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. However, there may be a delay in the completion of these procedures and
the cost of such procedures will not exceed original estimates, either of which
could have a material adverse effect on future results of operations.
In addition to correcting the business and operating systems used by Autodesk in
the ordinary course of business as described above, Autodesk has also reviewed
its non-IT systems to determine year 2000 compliance of these systems. Autodesk
is in a monitoring program that continually checks the status of all non-IT
systems and does not anticipate an adverse impact on service and business
capabilities with regard to these non-IT systems. Expenditures related to these
monitoring procedures have been minimal and are not expected to be significant
in future periods.
Autodesk has also tested and continues to test all products it currently
produces internally for sale to third parties to determine year 2000 compliance.
Autodesk is currently in the third phase of a three-phase year 2000 compliance
testing program related to its products. During the current quarter of fiscal
year 2000, Autodesk spent approximately $0.4 million on the product year 2000
project. Autodesk expects to spend an additional $0.4 million to $1 million to
complete this project. All expenditures to date have been captured either in
prior year or current year budgets. Currently-sold products either have been
found to be substantially compliant or are currently being tested for
compliance. However, many Autodesk products run on operating systems or hardware
produced and sold by third-party vendors. These operating systems or hardware
may not be converted in a timely manner, or at all, and any failure in this
regard may cause Autodesk products not to function as designed. Autodesk will
continue to evaluate each product in the currently supported inventory. Any
future costs associated with ensuring Autodesk's products are compliant with the
year 2000 are not expected to have a material impact on Autodesk's results of
operations or financial position. Furthermore, commentators have stated that a
significant amount of litigation may arise out of year 2000 compliance issues,
and Autodesk 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 Autodesk may be affected by it.
Single European Currency. Autodesk 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.
Autodesk 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. Autodesk may not be able to
complete such modifications to comply with Euro requirements, which could have a
material adverse effect on Autodesk's operating results. Autodesk is currently
evaluating the impact of the introduction of the Euro on its foreign exchange
and hedging activities, functional currency designations, and pricing strategies
in the new economic environment. In addition Autodesk faces risks to the extent
that banks and vendors upon whom Autodesk relies and their suppliers are unable
to make appropriate modifications to support Autodesk's operations with respect
to Euro transactions. While Autodesk will continue to evaluate the impact of the
Euro, management does not believe its introduction will have a material adverse
effect upon Autodesk's results of operations or financial condition.
Risks associated with acquisitions and investments. Autodesk periodically
acquires or invests in businesses, software products, and technologies which are
complementary to Autodesk's business through strategic alliances, debt and
equity investments, joint ventures, and the like. The risks associated with such
acquisitions or investments include, among others, the difficulty of
assimilating the operations and personnel of the companies, the failure to
realize anticipated synergies, and the diversion of management's time and
attention. In addition, such investments and acquisitions may involve
significant transaction-related costs. Autodesk may not be successful in
overcoming such risks or that such investments and acquisitions will not have a
material adverse impact on Autodesk's business, financial condition, or results
of operations. In addition, such investments and acquisitions may contribute to
potential fluctuations in quarterly results of operations due to merger-related
costs and charges associated with eliminating redundant expenses or write-offs
of impaired assets recorded in connection with acquisitions, any of which could
negatively impact results of operations for a given period or cause lack of
linearity quarter to quarter in Autodesk's operating results and financial
condition.
19
<PAGE>
Failure to achieve beneficial synergies from Discreet acquisition. Autodesk has
acquired Discreet with the expectation that the acquisition will result in
beneficial synergies. These include mutual benefits from complementary strengths
in the 3D modeling and animation tools markets, the competitive advantages
resulting from offering a comprehensive suite of integrated product offerings,
combined industry experience and market knowledge, and shared distribution
channels. Achieving these anticipated synergies will depend on a number of
factors including, without limitation, the successful integration of Autodesk's
and Discreet's operations and general and industry-specific economic factors.
Even if Autodesk and Discreet are able to integrate their operations and
economic conditions remain unchanged, the anticipated synergies may not be
achieved. The failure to achieve such synergies could have a material adverse
effect on Autodesk's business, results of operations, and financial condition.
Integration of Discreet's operations and technologies. Achieving the
anticipated benefits of the Discreet acquisition will depend in part upon
whether the integration of the two companies' businesses is accomplished in an
efficient and effective manner, and this may not occur. The combination of the
two companies will require, among other things, integration of the companies'
respective operations, products, technologies, management information systems,
distribution channels, and key personnel and the coordination of their sales,
marketing, and research and development efforts. In particular, Autodesk will be
required to integrate its existing sales channel, which consists principally of
independent resellers, with Discreet's sales force, which typically sells
product directly to customers. As a result of these and other factors, the
integration may not be accomplished smoothly or successfully, if at all. If
significant difficulties are encountered in the integration of the existing
operations, products, or technologies or the development of new products and
technologies, resources could be diverted from new product development, and
delays in new product introductions could occur. Compared to Autodesk's
products, Discreet's products have traditionally experienced longer, more
complex sales cycles. Autodesk may not be able to take full advantage of the
combined sales efforts. In addition, the difficulties of integrating Autodesk
and Discreet may be increased by the necessity of coordinating organizations
with distinct corporate cultures and widely dispersed operations in two
different countries. The integration of operations and technologies of these
entities is a significant challenge to Autodesk management and will require
substantial effort and dedication of management and other personnel, which may
distract their attention from the day-to-day business of these entities, the
development or acquisition of new technologies, and the pursuit of other
business opportunities. In addition, certain Discreet product offerings
currently include computer hardware, which may present business issues as to
which Autodesk management has limited experience. Failure to successfully
accomplish the integration of the two companies' operations, technologies, and
personnel would likely have a material adverse effect on Autodesk's business,
financial condition and results of operations. In addition, during the period of
integration, aggressive competitors may undertake initiatives to attract
customers or employees through various incentives, which could have a material
adverse effect on the business, results of operations, and financial conditions
of Autodesk.
Discreet's customers. Discreet's customers may not continue their current
buying patterns in light of the acquisition. Certain customers may defer
purchasing decisions as they evaluate the acquisition, other recent acquisitions
and product announcements in the multimedia and design software industries,
Autodesk's postacquisition product strategy, current and anticipated product
offerings of competitors, and any other outside forces which may affect customer
buying patterns. Customers may ultimately decide to purchase competitors'
products in lieu of Discreet products. Historically, Discreet and Autodesk have
had significantly different types of customers. These different customer types
may evaluate postacquisition
20
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Autodesk differently. The decision of customers to defer their purchasing
decisions or to purchase products elsewhere could have a material adverse effect
on Autodesk's business, results of operations, and financial condition.
Integration of operations of a non-U.S. company. Cross-border acquisitions
entail certain special risks beyond those normally encountered in a domestic
acquisition. These include the difficulty of integrating employees from a
different corporate culture into the acquiring organization; the need to
understand different incentives that motivate employees in a non-U.S. company;
the greater difficulty of transplanting the acquiring company's corporate
culture to an organization that is physically distant; and the difficulty and
expense of relocating employees from one country to another in the event of an
internal group restructuring following an acquisition. These factors can reduce
the likelihood of the long-term success of a cross-border acquisition. Although
Autodesk derives the majority of its revenues from non-U.S. sales and has
significant operations outside the United States, it has limited experience
integrating the management, sales, product development, and marketing
organizations of a significant non-U.S. business with its existing operations.
Although Discreet has sales and marketing operations in the United States and
derives a significant portion of its revenue from U.S. sales, its management and
product development personnel are predominantly based in Canada. Autodesk may
not be able to successfully integrate the personnel and operations of Discreet
into the existing Autodesk organization.
Single market for Discreet's product offerings; risks associated with expansion
into new markets. To date, Discreet's products have been purchased primarily by
creative professionals for use in production and postproduction in the film and
video industries. In order for Autodesk's Discreet business unit to achieve
sustained growth, the market for Discreet's product offerings must continue to
develop, and Autodesk must expand this market to include additional applications
within the film and video industries and develop new products for use in related
markets. Discreet recently announced its multiplatform software initiative to
develop and market software across Apple Macintosh, Microsoft Windows NT, and
Unix operating systems, in addition to its existing real-time turnkey systems
solutions, targeted at two new market segments: institutional customers and
prosumers (professional consumers). While Autodesk believes that the market
recognition which Discreet achieved through sales of Flame/(R)/, Smoke/(R)/,
effect*, Inferno/(R)/, and Fire/(R)/ systems to creative professionals will
facilitate Autodesk's marketing efforts in new markets, Autodesk's Discreet
business unit may not be able to successfully develop and market systems and
software for other markets, and, even if it does so, such systems and software
may not be accepted at a rate, and in levels, sufficient to maintain growth.
Further, the distribution channels, technical requirements, and levels and bases
of competition in other markets are different than those in the Discreet
business unit's current market, so the Discreet business unit may not be able to
compete favorably in those markets.
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 bills, totaled $512.7 million at April 30, 1999, compared to $428.0
million at January 31, 1999. The $84.7 million increase in cash, cash
equivalents, and marketable securities was due primarily to net proceeds from
the issuance of common stock largely related to the follow-on offering ($134.0
million) (see Note 8). This increase was partially offset by the acquisition of
VISION ($26 million), cash used in operations ($11.7 million), and purchases of
software technologies and capitalization of software ($4.7 million).
Autodesk 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, Autodesk purchased call
options from the same independent third party that entitled Autodesk to buy 1
million shares at $39.88 per share. The premiums received with respect to the
equity options totaled $4.5 million and equaled the premiums paid.
Consequently, there was no exchange of cash. At any given date,
21
<PAGE>
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 Autodesk's common stock. The put warrants permitted a net share settlement at
the Company's option. In March 1998, Autodesk 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 acquisition of Discreet (see Note 2 to the condensed
consolidated financial statements), in August 1998, Autodesk's Board of
Directors rescinded and terminated all stock repurchase programs.
Autodesk's Discreet business unit has a revolving demand line of credit with its
bank, under which it may borrow up to Cdn$7,000,000 (approximately $4,739,000 at
April 30, 1999). Advances under the line accrue interest monthly at the Canadian
prime rate (6.25% at April 30, 1999) plus 0.25%. Additionally, the agreement
provides for a Cdn$600,000 (approximately $406,000 at April 30, 1999) demand
leasing facility, and a Cdn$600,000 (approximately $406,000 at April 30, 1999)
demand research and development tax credit facility. Advances under these
facilities accrue interest monthly at the Canadian prime rate (6.25% at April
30, 1999) plus 1%. The line and facilities are secured by essentially all of
Autodesk's Discreet business unit's North American assets. As additional
security, the Discreet business unit assigned to the bank its insurance on these
assets. The Discreet business unit is required to maintain certain financial
ratios, including minimum levels of working capital, debt service coverage and
equity to assets ratios. As of April 30, 1999, there were no amounts outstanding
under the demand leasing and demand research and development tax credit
facilities, however, the amount available to the Discreet business unit under
the line of credit was reduced by the letter of guarantee discussed below.
During the fiscal year ended January 31, 1999, the Discreet business unit's
Japanese subsidiary entered into a line of credit agreement with its bank. Under
this agreement, the subsidiary can borrow up to $3,000,000. Advances under this
line accrue interest at the prevailing overnight rate and are secured by a
letter of guarantee, in the amount of $3,000,000, issued by the Discreet
business unit in favor of the subsidiary's bank. As of April 30, 1999, there
were no borrowings outstanding under this credit agreement.
In March 1998, Discreet issued 645,000 Common Shares (which on a converted basis
represent 213,000 Autodesk Common Shares -- see Note 2) under a private
placement sale to Intel Corporation for proceeds of approximately $13,527,000,
net of issuance costs. During the fiscal year ended January 31, 1999, Discreet
concluded a financing arrangement related to the Lightscape Acquisition with the
Societe de Developpement Industriel du Quebec, an agency of the Quebec
provincial government. This agreement provides for an interest free (until July
2004) loan in the amount of Cdn $2,800,000 (approximately $1,895,000 at April
30, 1999). The funds were received in July 1998 and are repayable in four annual
installments of Cdn $600,000 (approximately $406,000 at April 30, 1999)
commencing in July 2004, and a final installment of Cdn $400,000 (approximately
$271,000 at April 30, 1999) in July 2008. The loan is subject to standard
covenants for these arrangements, including covenants that may require early
repayment of the loan.
Autodesk has an unsecured $40 million bank line of credit, of which $20 million
is guaranteed, that may be used from time to time to facilitate short-term cash
flow. At April 30, 1999, there were no borrowings outstanding under this credit
agreement, which expires in January 2000.
Autodesk's principal commitments at April 30, 1999 consisted of obligations
under operating leases for facilities. Autodesk believes that its existing cash,
cash equivalents, marketable securities, available line of credit, and cash
generated from operations will be sufficient to satisfy its currently
anticipated cash requirements for the next twelve months.
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 acquisitions of Discreet, Genius, and
VISION and enhancement of existing products; financing anticipated growth;
dividend payments; and the acquisition of businesses, software products, or
technologies complementary to Autodesk's business. Autodesk believes that its
existing cash, cash equivalents, marketable securities, available line of
credit, and cash generated from operations will be sufficient to satisfy its
currently anticipated longer-term cash requirements.
22
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
Autodesk is a party to various legal proceedings arising from the normal course
of business activities. While the outcome of these matters cannot be predicted
with certainty, in management's opinion, resolution of these matters is not
expected to have a material adverse impact on Autodesk's consolidated results of
operations or its financial position. However, depending on the amount and
timing, an unfavorable resolution of a matter could materially affect Autodesk's
future results of operations or cash flows in a particular period.
Additionally, reference is made to Item 3 of Autodesk's Form 10-K for the fiscal
year ended January 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
<TABLE>
<CAPTION>
Affirmative Negative Votes
Votes Votes Withheld
----------- -------- --------
<C> <S> <C> <C> <C>
1. To approve the acquisition
of Discreet 36,644,406 2,740,498 125,493
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
27.0 Financial Data Schedule for the period ended April 30, 1999
Reports on Form 8-K
-------------------
On March 1, 1999, the Company filed a report on Form 8-K describing an
amendment to the acquisition agreement related to Discreet Logic Inc.
(See Note 2 for further discussion.)
On March 31, 1999, the Company filed a report on Form 8-K describing the
acquisition of Discreet. (See Note 2.)
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: June 11, 1999
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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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 193,333
<SECURITIES> 233,478
<RECEIVABLES> 139,376
<ALLOWANCES> 11,883
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0
0
<COMMON> 605,038
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<TOTAL-LIABILITY-AND-EQUITY> 930,295
<SALES> 194,939
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<INCOME-PRETAX> (15,713)
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