<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q/A
-----------
(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.
--------
<S> <C>
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(RESTATED -- SEE NOTE 1):
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...................... 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................... 28
ITEM 5. OTHER INFORMATION......................................... 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 28
SIGNATURES................................................ 28
</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)
(RESTATED)
<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 18,250 17,656 56,648 52,614
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 31,132 22,976 90,718 64,384
Nonrecurring charges - - 21,985 22,187
Litigation accrual reversal - - (18,200) -
-------- -------- -------- --------
150,551 133,897 453,528 401,841
-------- -------- -------- --------
Income from operations 26,627 28,298 97,494 33,434
Interest and other income, net 2,340 2,617 10,986 7,391
-------- -------- -------- --------
Income before income taxes 28,967 30,915 108,480 40,825
Provision for income taxes 10,593 11,787 42,974 23,144
-------- -------- -------- --------
Net income $ 18,374 $ 19,128 $ 65,506 $ 17,681
======== ======== ======== ========
Basic net income per share $0.40 $0.41 $1.41 $0.38
======== ======== ======== ========
Diluted net income per share $0.39 $0.37 $1.34 $0.35
======== ======== ======== ========
Shares used in computing
basic net income per share 46,510 47,160 46,510 47,050
======== ======== ======== ========
Shares used in computing
diluted net income per share 47,360 51,480 48,760 50,350
======== ======== ======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(In thousands)
(Restated)
<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 34,640 33,373
Goodwill, net 72,946 44,982
Deferred income taxes 14,063 13,782
Other assets 22,656 19,681
--------- --------
$ 662,545 $563,490
========= ========
</TABLE>
See accompanying notes.
4
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands)
(Restated)
<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 87,266 50,279
Foreign currency translation adjustment (602) (16,655)
-------- --------
Total stockholders' equity 432,399 332,939
-------- --------
$662,545 $563,490
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
(RESTATED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating activities
Net income $ 65,506 $ 17,681
Adjustments to reconcile net income to net cash
provided by operating activities:
Charge for acquired in-process research and development 13,100 22,187
Depreciation and amortization 40,127 35,805
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 (10,952) 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, 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/A 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.
On March 31, 1997, Autodesk acquired Softdesk, Inc. ("Softdesk"), a leading
supplier of AutoCAD-based applications software for the architecture,
engineering, and construction market, and on May 4, 1998, acquired from Genius
CAD Software GmbH ("Genius") various mechanical computer-aided-design software
and technologies. Both of these acquisitions were accounted for as business
combinations using the purchase method of accounting. In accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations," the costs of these acquisitions were allocated to the assets
acquired and the liabilities assumed (including in-process research and
development) based on their estimated fair values using valuation methods
believed to be appropriate at the time. The amounts allocated to in-process
research and development of $55.1 and $28.8 million for Softdesk and Genius,
respectively, were expensed in the periods in which the acquisitions were
consummated in accordance with FASB Interpretation No. 4, "Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase Method."
Subsequent to the Securities and Exchange Commission's letter to the AICPA dated
September 9, 1998, regarding its views on in-process research and development
("IPR&D"), the Company has re-evaluated its IPR&D charges on the Softdesk and
Genius acquisitions, revised the purchase price allocations and restated its
financial statements. As a result, Autodesk has made adjustments to decrease the
amounts previously expensed as in-process research and development and increase
the amounts capitalized as goodwill and other intangibles relating to the
Softdesk and Genius acquisitions by $35.9 million and $15.7 million,
respectively.
The effect of these adjustments on previously reported consolidated financial
statements for the three and nine months ended October 31, 1998 and 1997 are
as follows (in thousands except per share data):
<TABLE>
<CAPTION>
Three months ended Three months ended
October 31, 1998 October 31, 1997
--------------------- ------------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Nonrecurring charges.......................... $ - $ - $ - $ -
General and administrative.................... 28,840 31,132 21,292 22,976
Cost of revenues.............................. 18,146 18,250 17,512 17,656
Income from operations........................ 29,023 26,627 30,126 28,298
Provision for income taxes.................... 10,663 10,593 11,787 11,787
Net income.................................... 20,700 18,374 20,956 19,128
Basic net income per share.................... $ 0.45 $ 0.40 $ 0.44 $ 0.41
Diluted net income per share.................. $ 0.44 $ 0.39 $ 0.41 $ 0.37
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Nine months ended
October 31, 1998 October 31, 1997
--------------------- ------------------
<S> <C> <C> <C> <C>
As Reported Restated As Reported Restated
----------- -------- ----------- --------
Nonrecurring charges.......................... $37,692 $21,985 $ 58,087 $22,187
General and administrative.................... 84,306 90,718 60,455 64,384
Cost of revenues.............................. 56,129 56,648 52,278 52,614
Income from operations........................ 88,718 97,494 1,799 33,434
Provision for income taxes.................... 42,251 42,974 23,144 23,144
Net income (loss)............................. 57,453 65,506 (13,954) 17,681
Basic net income (loss) per share............. $ 1.24 $ 1.41 $ (0.30) $ 0.38
Diluted net income (loss) per share........... $ 1.18 $ 1.34 $ (0.30) $ 0.35
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
As of As of
October 31, 1998 October 31, 1997
---------------- ----------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Purchased technologies and
capitalized software, net ................... $33,949 $34,640 $ 33,998 $35,962
Goodwill, net................................. 35,054 72,946 18,545 48,216
Deferred income taxes (non-current asset)..... 14,786 14,063 ---- ----
Retained earnings............................. 49,406 87,266 42,598 74,233
</TABLE>
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>
<CAPTION>
(In thousands)
<S> <C>
Inventory $ 200
Net fixed assets 200
Purchased in-process research and development charged to operations in the quarter ended
July 31, 1998 13,100
Purchased technology and other intangible assets 13,800
Goodwill 41,600
-------
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 $13.1 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 was
determined by identifying research projects in areas for which technological
feasibility had not been achieved. The calculations of value were adjusted to
reflect the value creation efforts of Genius prior to the close of the
acquisition. The value was determined by estimating the costs remaining 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.
Purchased technology
To determine the value of the purchased technology ($12.7 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.
8
<PAGE>
Assembled work force
To determine the value of the assembled work force ($1.1 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 $19.2 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 $19.2 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.
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.
9
<PAGE>
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.
6. 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 per share amounts
follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands)
Numerator:
<S> <C> <C> <C> <C>
Numerator for basic
and diluted per share
amounts--net income $ 18,374 $ 19,128 $ 65,506 $17,681
========= ======== ======== =======
Denominator:
Denominator for basic
net income per share--
weighted average shares 46,510 47,160 46,510 47,050
Effect of dilutive common
stock options 850 4,320 2,250 3,300
------ ------ ------ ------
Denominator for dilutive net income
per share 47,360 51,480 48,760 50,350
========= ======== ======== =======
</TABLE>
10
<PAGE>
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 $18,374 $19,128 $65,506 $17,681
Other comprehensive income 18,454 (1,259) 16,336 1,738
------- ------- ------- -------
Total comprehensive income $36,828 $17,869 $81,842 $19,419
======= ======= ======= =======
</TABLE>
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, November 18, 1998, December 18, 1998, and January 18, 1999,
respectively, the Company, Discreet, and certain affiliates of the Company
amended the acquisition agreement. Under the terms of the amended agreement, the
Company will exchange 0.33 shares of its common stock, or 0.33 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. 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 9.9 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 first quarter of fiscal year 2000, subject
to certain regulatory approvals and the approval of Discreet and Autodesk
shareholders.
11
<PAGE>
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.
12
<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 22, AS WELL AS FACTORS SET FORTH IN AUTODESK'S ANNUAL REPORT ON
FORM 10-K/A.
RESTATEMENT OF FINANCIAL STATEMENTS
On March 31, 1997, Autodesk acquired Softdesk, Inc. ("Softdesk"), a leading
supplier of AutoCAD-based applications software for the architecture,
engineering, and construction market, and on May 4, 1998, acquired from Genius
CAD Software GmbH ("Genius") various mechanical computer-aided-design software
and technologies. Both of these acquisitions were accounted for as business
combinations using the purchase method of accounting. In accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations," the costs of these acquisitions were allocated to the assets
acquired and the liabilities assumed (including in-process research and
development) based on their estimated fair values using valuation methods
believed to be appropriate at the time. The amounts allocated to in-process
research and development of $55.1 and $28.8 million for Softdesk and Genius,
respectively, were expensed in the periods in which the acquisitions were
consummated in accordance with FASB Interpretation No. 4, "Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase Method."
Subsequent to the Securities and Exchange Commission's letter to the AICPA dated
September 9, 1998, regarding its views on in-process research and development
("IPR&D"), the Company has re-evaluated its IPR&D charges on the Softdesk and
Genius acquisitions, revised the purchase price allocations and restated its
financial statements. As a result, Autodesk has made adjustments to decrease the
amounts previously expensed as in-process research and development and increase
the amounts capitalized as goodwill and other intangibles relating to the
Softdesk and Genius acquisitions by $35.9 million and $15.7 million,
respectively.
The effect of these adjustments on previously reported consolidated financial
statements for the three and nine months ended October 31, 1998 and 1997 are as
follows (in thousands except per share data):
<TABLE>
<CAPTION>
Three months ended Three months ended
October 31, 1998 October 31, 1997
--------------------- ------------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Nonrecurring charges.......................... $ - $ - $ - $ -
General and administrative.................... 28,840 31,132 21,292 22,976
Cost of revenues.............................. 18,146 18,250 17,512 17,656
Income from operations........................ 29,023 26,627 30,126 28,298
Provision for income taxes.................... 10,663 10,593 11,787 11,787
Net income.................................... 20,700 18,374 20,956 19,128
Basic net income per share.................... $ 0.45 $ 0.40 $ 0.44 $ 0.41
Diluted net income per share.................. $ 0.44 $ 0.39 $ 0.41 $ 0.37
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Nine months ended
October 31, 1998 October 31, 1997
--------------------- ---------------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Nonrecurring charges.......................... $37,692 $21,985 $ 58,087 $22,187
General and administrative.................... 84,306 90,718 60,455 64,384
Cost of revenues.............................. 56,129 56,648 52,278 52,614
Income from operations........................ 88,718 97,494 1,799 33,434
Provision for income taxes.................... 42,251 42,974 23,144 23,144
Net income (loss)............................. 57,453 65,506 (13,954) 17,681
Basic net income (loss) per share............. $ 1.24 $ 1.41 $ (0.30) $ 0.38
Diluted net income (loss) per share........... $ 1.18 $ 1.34 $ (0.30) $ 0.35
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
As of As of
October 31, 1998 October 31, 1997
---------------- ----------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Purchased technologies and
capitalized software, net ................... $33,949 $34,640 $33,998 $35,962
Goodwill, net................................. 35,054 72,946 18,545 48,216
Deferred income taxes (non-current asset)..... 14,786 14,063 ---- ----
Retained earnings............................. 49,406 87,266 42,598 74,233
</TABLE>
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.
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.
14
<PAGE>
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 18 percent
of net revenues in the third quarter of fiscal year 1999 as compared to 14
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) ($1.7 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.
Provision for income taxes. The Company's effective income tax rate was 36.5
percent in the third quarter of fiscal year 1999 compared to 38 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.
15
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended October 31, 1998 and 1997
- -------------------------------------------
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, 1997. 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 16 percent
of net revenues for the nine months ended October 31, 1998, and 15 percent of
net revenues in the same period of the prior fiscal year. In absolute dollar
terms, general and administrative expenses increased 41 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 ($5.1 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).
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 $13.1 million, all of which was recorded during the
three months ended July 31, 1998.
IN-PROCESS TECHNOLOGIES OVERVIEW
The nature of the efforts required to develop the acquired in-process technology
into commercially viable products principally relate to the completion of all
planning, designing and testing activities that are necessary to establish that
the product or service can be produced to meet its design requirements,
including functions, features and technical performance requirements.
16
<PAGE>
As of the acquisition date, Genius had initiated the research and development
effort related to the product features and functionality that will reside in the
next versions of the (i) Genius AutoCAD, (ii) Genius Desktop, (iii) Genius
Vario, and (iv) Genius Modules product families.
With respect to the acquired in-process technologies, the calculations of value
were adjusted to reflect the value creation efforts of Genius prior to the close
of the acquisition. Following are the estimated completion percentages,
estimated technology lives and projected introduction dates:
<TABLE>
<CAPTION>
PERCENT TECHNOLOGY INTRODUCTION
GENIUS IN-PROCESS TECHNOLOGIES COMPLETED LIFE DATES
- ---------------------------------------- -------------------------------------------------
<S> <C> <C> <C>
Genius AutoCAD Version R15 45% 6 years mid/late 1999
Genius Desktop Version 3.0 40% 4 years Sept. 1998
Genius AutoCAD LT 1998 20% 5 years mid/late 1999
Genius Vario Version R15 20% 3 years mid/late 1999
Genius Modules Version R15 20% 3 years mid/late 1999
</TABLE>
A brief description of the acquired in-process projects is set forth below:
Genius AutoCAD and Genius Desktop
- ---------------------------------
The substantial technological improvements under development at the time of the
acquisition included modernizing the code and significantly improving the ease
of use of the products.
Modernizing the code. Modernization of the code for Genius Desktop and Genius
AutoCAD included a complete replacement of the existing LISP based code with
modern ARX/object oriented code. The Company determined through technical due
diligence that a substantial portion of the source code in both Genius Desktop
and Genius AutoCAD was based on LISP, with remaining code based on ADS.
Replacing the LISP and ADS code was anticipated to significantly improve the
flexibility (e.g., to add additional features) and performance of the products.
It was uncertain, however, whether all of the existing features could be easily
converted to ObjectARX oriented code and what impact this conversion would have
on any new features currently being developed. Autodesk estimates that this
conversion may take several releases in order to be fully complete. Partially
completed conversions for the interim product releases are expected to rely on a
combination of source code from LISP and ObjectARX code.
Ease of use. Working through an application programming interface ("API") for
the Autodesk products, a significant issue under continual development is the
level of functionality and ease of use of the features which require access to
the Autodesk product code. As a result of the acquisition, the Company
anticipates that a significant level of effort would be required to either
expand or remove these API's to increase the functionality and usability of
features, and to improve the interoperability of the products with Autodesk's
offerings.
A significant risk factor associated with this development effort is the impact
that removal of the API may have on the functionality of a given feature, and
the additional development effort required to restore a feature to its current
functionality (before any improvements in this functionality can be made).
Similar to the development effort associated with modernizing the code, the
Company expects that it may take several releases of both of these products to
fully achieve this technological milestone. The Company estimated, for
purposes of its valuation, that at the date of the Genius acquisition,
development projects associated with the next release of Genius AutoCAD and
Genius Desktop were approximately 45 percent and 40 percent completed,
respectively. Estimated costs to be incurred to reach technological
feasibility as of the date of acquisition were less than $800,000 for Genius
AutoCAD and less than $500,000 for Genius Desktop.
17
<PAGE>
Genius AutoCAD LT
- -----------------
The most significant technological challenge for the Genius AutoCAD LT product
offering was the fact API's to AutoCAD LT (the Autodesk product on which Genius
LT runs) did not exist. To develop features for Genius AutoCAD LT, workarounds
through the Windows interface are required. Genius had reverse engineered the
AutoCAD LT product to build the Genius AutoCAD LT software product. This
resulted in a product which was extremely fragile and vulnerable to change in
AutoCAD LT and Microsoft Windows. Therefore the product is dependent on both the
AutoCAD LT releases and the Microsoft Windows releases. Expanding and improving
the features given Genius' limited access to the platform product, AutoCAD LT,
was expected to result in a substantial development effort pre-acquisition. In
addition, improving the interoperability of the Genius LT product and AutoCAD LT
also posed a significant technological challenge to Autodesk post-acquisition.
The Company estimated that the next release of Genius AutoCAD LT project, for
purposes of its valuation, was approximately 20 percent complete at the date of
the acquisition. Estimated costs to be incurred to reach technological
feasibility as of the date of acquisition were less than $200,000.
Genius Vario and Modules
- ------------------------
Genius Vario, which runs on top of AutoCAD, currently ships in a two-dimensional
version. At the date of acquisition, a three-dimensional version was under
development. The three-dimensional version is a significant shift in
technology, from handling two-dimensional drawings to three-dimensional models,
and the increasing complexity which results. Developing three-dimensional Vario
involved developing parametric modeling in three dimensions--an area which has
significant new development challenges and is far more speculative than two-
dimensional parametric modeling. In addition, the three-dimensional Vario
product is intended to provide much more Internet functionality than is
currently available. The Company estimated that the next release of Genius
Vario and Modules projects were approximately 20 percent complete at the date of
the acquisition. Estimated costs to be incurred to reach technological
feasibility for the Genius Vario and Modules projects as of the date of
acquisition were less than $25,000.
VALUATION ANALYSIS
Revenue
- -------
The revised value of the acquired in-process technology 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. Future
revenue estimates were generated from the following product families: (i) Genius
AutoCAD, (ii) Genius Desktop, (iii) Genius AutoCAD LT, (iv) Genius Vario, and
(v) Genius Modules. Aggregate revenue for Genius products was estimated to be
less than $20 million for the period from May 4, 1998 to January 31, 1999.
Thereafter, revenue was estimated to increase at rates ranging from 25 to 33
percent for fiscal years 2000 through 2004, stabilizing at 20 percent growth for
the remainder of the estimation period. Year-to-year revenue growth estimates
were developed based on an expanding market for CAD software products and the
ability of Autodesk to maintain its position in the market. The growth rates
contained in the first five years of the projections are greater than those
historically experienced by Autodesk and are largely a result of 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.
As stated previously, 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.
18
<PAGE>
Management's analysis also 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 to four years for the Genius Desktop and Genius Vario
and Modules products, and approximately five to six years for all other Genius
products and technologies purchased by Autodesk.
Operating expenses
- ------------------
Operating expenses used in the valuation analysis of Genius included (i) cost of
revenues, (ii) general and administrative expense, (iii) marketing and sales
expense, and (iv) research and development expense. In developing future
expense estimates, it was estimated that the Genius operations would be merged
into Autodesk's operating structure. Selected operating expense assumptions
were based on an evaluation of Autodesk's overall business model, specific
product results, including both historical and expected direct expense levels
(as appropriate), and an assessment of general industry metrics.
Cost of revenues. Cost of revenues, expressed as a percentage of revenue, for
the developed and in-process technologies identified in the valuation was
estimated to be 11% throughout the estimation period. The Company's cost of
revenues was 13% for fiscal 1996 and fiscal 1997, and 12% for fiscal 1998.
General and administrative. General and administrative expense, expressed as a
percentage of revenue, for the developed and in-process technologies identified
in the valuation ranged from 8.5 percent in fiscal year 1999 to 6.0 percent in
fiscal year 2002. Thereafter, general and administrative expenses, expressed as
a percentage of revenue for the developed and in-process technologies identified
in valuation were estimated to stabilize at 5.0 percent of revenue. For the
fiscal year ended January 31, 1998, Autodesk's general and administrative
expense, excluding depreciation and amortization, was approximately 9 percent.
Marketing and sales. Marketing and sales expense, expressed as a percentage of
revenue, for the developed and in-process technologies identified in the
valuation, was estimated to be 25 percent throughout the estimation period,
based on the Company's historical experience with similar products.
Research and development. Research and development ("R&D") expenses consist of
the costs associated with activities undertaken to correct errors or keep
products updated with current information (also referred to as "maintenance"
R&D). Maintenance R&D includes all activities undertaken after a product is
available for general release to customers to correct errors or keep the product
updated with current information. These activities include routine changes and
additions. The maintenance R&D expense was estimated to be 2.5 percent of
revenue for the developed and in-process technologies throughout the estimation
period.
Effective income tax rate
- -------------------------
The effective income tax rate utilized in the analysis of in-process technology
was 34 percent in fiscal year 1999 and in the mid 30-percent range thereafter,
which reflects Autodesk's current combined federal and state statutory income
tax rate, exclusive of nonrecurring charges and its estimated income tax rate in
future years.
Discount rate
- -------------
The discount rates selected for developed and in-process technology were 15.0
percent and 20.0 percent, respectively. In the selection of the appropriate
discount rates, consideration was given to (i) the Weighted Average Cost of
Capital ("WACC") (15.0 percent) and (ii) the Weighted Average Return on Assets
(15.7 percent). The discount rate utilized for the in-process technology was
determined to be higher than Autodesk's 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.
19
<PAGE>
ALLOCATION OF VALUE
The fair values of the assets acquired from Genius were allocated between Europe
and the rest of the world ("ROW"), which consisted of the U.S. and Asia. The
allocation of assets among Europe and ROW was based on revenue expected to be
generated on Genius products. Based on the management's revenue forecast for
fiscal years 1998 through 2003, it was determined that 60 percent of Genius'
products total sales are expected to be generated in Europe, while the remaining
40 percent of sales are expected to be generated in ROW. Accordingly, the
identified intangible assets were allocated 60 percent to Europe and 40 percent
to ROW. The results of the allocation of values between Europe and ROW based
assets are as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC ALLOCATION
--------------------------------------------
IDENTIFIED INTANGIBLE ASSET EUROPE ROW
- ---------------------------------------------- ----------- -----------
<S> <C> <C>
Developed Technology $7,620,000 $5,080,000
In-Process Technology 7,860,000 5,240,000
Trademark, trade name and other intangible assets 660,000 440,000
</TABLE>
COMPARISON TO ACTUAL RESULTS
To date, revenues and operating expenses attributable to in-process technologies
associated with the Genius acquisition are consistent with management's
projections. Based upon factors currently known, management believes the
revenues and operating expenses associated with these in-process technologies
will favorably impact Autodesk's consolidated results of operations and
financial position. 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.
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 $19.2 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
$19.2 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 $21.1 million ($0.46 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.
20
<PAGE>
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.
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. Interest income was $7.8 million for the first
nine months of the current fiscal year as compared with $5.0 million in the
prior fiscal year. The fiscal year 1999 amount included $2.7 million
representing the interest portion of the VMI settlement (see Note 3 to the
unaudited Condensed Consolidated Financial Statements). Also contributing to the
year-over-year increase was a $1.3 million gain realized upon the sale of
technical programs and related documentation, certain tangible fixed assets,
copyrights, tradenames, and other intangible assets associated with Autodesk's
Picture This Home!(R) software programs and series of consumer titles. Autodesk
did not transfer any liabilities as part of this sale.
Provision for income taxes. The Company's effective income tax rate, excluding
the impact of nonrecurring charges, was 36 percent for the first nine months
of fiscal year 1999 as compared to 38.5 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 $.7 million benefit from the $13.1 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.
21
<PAGE>
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 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.
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 updates, 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.
22
<PAGE>
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.
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 internally
complex and, despite extensive testing and quality control, may contain errors
or defects ("bugs"), especially when first introduced. In fiscal year 1996,
Autodesk experienced quality and performance issues associated with AutoCAD
Release 13, including issues related to compatibility with certain hardware
platforms and peripheral equipment, interoperability problems with products
designed to work in conjunction with AutoCAD Release 13, and other issues
associated with the software's object-oriented design. These factors resulted
in a high rate of product returns in fiscal year 1996. 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.
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.
23
<PAGE>
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 negatively impacted revenues, principally due to changes in the rate of
exchange between the U.S. dollar and the Japanese yen and the Australian dollar.
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.
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. While no single customer accounted for more than 10 percent of
Autodesk's consolidated revenues in fiscal years 1998, 1997, or 1996, 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.
24
<PAGE>
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.
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 January 18, 1999, the Company
announced an amended agreement to acquire Discreet by the issuance of 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 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.
25
<PAGE>
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.
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
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. 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.
26
<PAGE>
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 no assurance,
however, that the Company will be able to complete such modifications to comply
with Euro requirements, which could 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 bills, 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.
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.
27
<PAGE>
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/A 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/A 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 restated 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.
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: February 3, 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)
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> OCT-31-1998 <F1>
<CASH> 76,640
<SECURITIES> 261,032
<RECEIVABLES> 96,693
<ALLOWANCES> 7,090
<INVENTORY> 6,667
<CURRENT-ASSETS> 479,080
<PP&E> 147,991
<DEPRECIATION> 108,831
<TOTAL-ASSETS> 662,545
<CURRENT-LIABILITIES> 227,527
<BONDS> 0
0
0
<COMMON> 345,735
<OTHER-SE> 86,664
<TOTAL-LIABILITY-AND-EQUITY> 662,545
<SALES> 551,022
<TOTAL-REVENUES> 551,022
<CGS> 56,648
<TOTAL-COSTS> 395,392
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,488
<INTEREST-EXPENSE> 603
<INCOME-PRETAX> 108,480
<INCOME-TAX> 42,974
<INCOME-CONTINUING> 65,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,506
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.34
<FN>
<F1> Certain information for the 9 months ended October 31, 1998 has been
restated to reflect the adjustment described at Note 1 to the Company's
consolidated Financial Statements.
</FN>
</TABLE>
