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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
____
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
____ 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) (Zip Code)
Registrant's telephone number, including area code: (415) 507-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting Common Stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on
April 22, 1999 as reported on the NASDAQ National Market, was approximately
$1,039,000,000. Shares of Common Stock held by each officer and director and
by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of April 22, 1999, Registrant had outstanding 58,880,000 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended January
31, 1999 are incorporated by reference in Parts II and IV. Portions of the
Proxy Statement for Registrant's 1999 Annual Meeting of Stockholders to be held
June 24, 1999 are incorporated by reference in Part III.
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PART I
FORWARD-LOOKING INFORMATION
The forward-looking statements included in this report, which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties. Actual results could differ materially from those anticipated in
the forward-looking statements included herein as a result of a number of
factors, including but not limited to those discussed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
incorporated by reference to pages 2 through 21 of the Company's 1999 Annual
Report to Stockholders.
ITEM 1. BUSINESS
GENERAL
Autodesk, Inc. ("Autodesk" or the "Company") was incorporated in California
in 1982 and was reincorporated in Delaware in May 1994. The Company's two-
dimensional ("2D") and three-dimensional ("3D") products are used across
industries and in the home for architectural design, mechanical design, spatial
data management and mapping, animation, and visualization applications. The
Company's flagship product, AutoCAD(R), is one of the world's leading computer-
aided design ("CAD") tools, with an installed base of more than 2.1 million
units worldwide. The Company's software products are sold worldwide, primarily
through a network of dealers and distributors.
In February 1995, the Company realigned its internal marketing and
development organizations around key market groups that most closely match
Autodesk's customer base. During fiscal year 1998, the Company defined a new
market group, the Personal Solutions Group ("PSG"), whose products are targeted
to individual users as well as professionals. Each market group incorporates
product development, quality assurance, technical publications, and product
industry marketing. The Company has aligned its market groups into three
segments: the Design Solutions segment (which includes the AEC, MCAD, and GIS
market groups, as well as AutoCAD products), the Personal Solutions segment, and
the Kinetix segment. The Company's market groups are discussed below.
In March 1999, Autodesk acquired Discreet Logic Inc. ("Discreet"), in a
business combination accounted for as a pooling of interests. In the
acquisition, Autodesk acquired all of the voting stock of Discreet, issuing 0.33
shares of Autodesk common stock or 0.33 exchangeable shares for each outstanding
share of Discreet. The transaction resulted in the issuance of an aggregate of
approximately 10 million shares of Autodesk common stock and exchangeable
shares.
Architecture, Engineering, and Construction ("AEC") AEC software from the
Company and third party developers is used to automate every phase of a
building's life cycle-from conceptual design through construction, maintenance,
and renovation. The architecture, engineering, construction, facilities
management, process & power, and land management industries use AEC products.
During fiscal year 1998, the Company expanded its product offerings for the AEC
Market Group by acquiring Softdesk, Inc. in March 1997. Principal AEC products
include AutoCAD Architectural Desktop(TM), AutoCAD(R) Land Development Desktop,
and Autodesk(R) CAD Overlay(R).
Mechanical Computer-Aided Design ("MCAD") The Company's Mechanical CAD
Market Group is dedicated to providing mechanical engineers, designers, and
drafters with advanced, value-based software solutions that are designed to
solve their professional design challenges. Autodesk's premier MCAD product is
Mechanical Desktop(R). Following the acquisition of Genius CAD Software GmbH
("Genius") in May 1998, Autodesk also offers the Genius(TM) AutoCAD product.
Geographic Information Systems ("GIS") The Company's GIS Market Group
strategy is to provide a family of easy-to-use mapping and GIS technology to
help large and small businesses and governments manage their assets and
infrastructure. The GIS Market Group assists automated mapping/facilities
managers, as well as GIS and CAD users, to share mapping, GIS, and associated
information in an enterprise environment. The Company's current GIS products
include AutoCAD Map(R), Autodesk MapGuide(R), and Autodesk World(R).
Personal Solutions Group ("PSG") The PSG Market Group develops easy-to-use,
affordable tools for professionals, occasional users, or consumers who draft,
diagram, and draw, thus expanding the Company's traditional customer base of
architects and engineers. PSG products also enable non-CAD users to visually
communicate with CAD users. PSG products include AutoCAD LT(R), Actrix(TM)
Technical, and AutoSketch(R).
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Kinetix(R) The Kinetix division of Autodesk is devoted to bringing powerful
3D content-creation software to computer-industry professionals focused on two
markets: entertainment (film, broadcast video, and interactive games) and design
conceptualization and visualization. Kinetix provides two core platform products
- -3D Studio MAX(R) and 3D Studio VIZ(R), that specifically focus on these
markets.
As noted above, Autodesk acquired Discreet in the first quarter of fiscal
year 2000. Discreet develops, assembles, markets and supports nonlinear digital
systems and software for creating, editing, and compositing imagery and special
effects for film, video and HDTV. Discreet products include flame* and inferno*.
PRODUCTS
The Company's Design Solutions segment includes the following products:
AutoCAD
AutoCAD software is a general-purpose CAD tool used independently and in
conjunction with specific applications designed to work with AutoCAD in fields
ranging from architecture and mechanical design to plant design and mapping.
Professionals utilize AutoCAD for design, modeling, drafting, mapping,
rendering, and management tasks. AutoCAD runs on Microsoft Windows 95, Windows
98, and Windows NT for Intel.
AutoCAD(R) Release 14 was introduced in May 1997. Built for speed and
efficiency, AutoCAD Release 14 includes enhancements in areas that most
influence productivity, including: precision drawing tools such as AutoSnap(TM),
data-sharing features like raster image and reference file clipping,
photorealistic rendering, solid fills, and TrueType fonts.
AutoCAD software's open-system architecture allows users to adapt AutoCAD
to unique professional requirements with any of more than 5,000 independently
developed add-on applications. Many of these applications are based on
ObjectARX(TM) technology, a new generation of C++-based application programming
interfaces ("APIs"). ObjectARX-based applications utilize AutoCAD software's
object-oriented capabilities.
Sales of AutoCAD and AutoCAD upgrades accounted for approximately 62
percent, 70 percent, and 70 percent of Autodesk's revenues in fiscal years 1999,
1998, and 1997, respectively. On a stand-alone basis, AutoCAD and AutoCAD
upgrades were 51 percent, 65 percent, and 68 percent of consolidated revenues in
fiscal years 1999, 1998, and 1997, respectively. During fiscal year 1999,
approximately 263,000 new AutoCAD licenses were added worldwide, compared to
244,000 and 207,000 licenses added during fiscal years 1998 and 1997,
respectively.
AutoCAD(R) OEM
AutoCAD OEM ("Original Equipment Manufacturer") for Windows-based operating
systems is a selectively licensed CAD engine offering a complete application-
development environment for creating and delivering targeted or niche solutions
with scaled feature sets. It is for developers, system integrators, and
commercial software developers who require an embeddable CAD system which gives
them the ability to scale and control the application feature set. AutoCAD OEM
provides developers with a complete toolkit of AutoCAD features and APIs
including ObjectARX capabilities, a full suite of drawing and editing functions
as well as AutoLISP(R) and a LISP API. These capabilities enable development of
new products for new markets untapped by traditional CAD products and solutions.
Mechanical Desktop
Mechanical Desktop software is an integrated software application that
unites advanced 2D and 3D mechanical design capabilities for PCs. Mechanical
Desktop contains integrated modules for fully parametric feature-based solid
modeling, surface modeling, and assembly modeling; 2D design/drafting and bi-
directional associative drafting; as well as a built-in Autodesk(R) IGES
Translator, which enables users to accurately exchange IGES (Initial Graphics
Exchange Specification) data with other systems. Mechanical Desktop Release 3.0,
which was released in August 1998, includes numerous performance enhancements.
Individual Face Drafting, Parting Line Definition, Part Splitting, Face
Splitting, 3D Helical Sweep, 3D Lofting, Feature Suppression, Global Design
Variables, Sketch Editing, new Balloon, Bill of Material, and Part List
Functionality and Drafting Standards Support, are among the advanced features
included in the latest release of Mechanical Desktop software.
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Genius(TM) AutoCAD
For mechanical designers who work primarily in 2D with AutoCAD, Genius(TM)
14 is a complete 2D solution that offers all the power of standard part
libraries and automation tools that reduce design cycle and drawing production
time. The functionality included in Genius 14 includes: Drawing borders & Title
blocks, PowerEdit, PowerSnaps, PowerRecall, PowerDimension, In line create &
edit, Dim break with associativity, Detail views, Standard parts, Nuts & Bolts.
AutoCAD Map
AutoCAD Map software is the first AutoCAD-based automated-mapping product
for professional planners, utility managers, and technicians who need to create
and maintain their own maps and use their data for engineering-based analysis
and planning. Built with AutoCAD software, AutoCAD Map focuses on five key GIS
business-related functions: digital map creation, analysis, maintenance of up-
to-date maps, data exchange, and publishing. The API in AutoCAD Map enables
developers to build vertical applications for industries such as
telecommunications, utilities, oil and gas, state and local government, and
natural resource and environmental engineering. AutoCAD Map also contains
ObjectARX capabilities.
Autodesk MapGuide
Autodesk MapGuide is a Web-based GIS technology that is designed to allow
corporate customers and developers to use the Internet and business Intranets to
rapidly deploy decision support systems having a geographic component. Suited
for a wide range of users--from GIS professionals to the casual computer user
across a scale from the small to the very large enterprise--Autodesk MapGuide
software enables users to access and query digital maps over a network, and
permits users to display and analyze geographic data for applications such as
tracking customers, providing digital map-based information to dispersed staff,
allocating resources, and managing facilities infrastructure.
Autodesk World
Autodesk World allows for the integration and analysis of geographic-based
data within a Windows environment. It provides users with data capture, edit,
analysis, integration, and presentation functionality for spatially based
information, including raster, vector (both CAD and GIS) data, and attributes
associated with those data. Autodesk World features Object Linking and
Embedding ("OLE"), which allows users to link drawings to other Windows
applications such as Microsoft Word or Excel. Autodesk World's application
programming interfaces and integrated Visual Basic for Applications 5.0
scripting environment enable easy customization and application development.
AutoCAD Architectural Desktop
AutoCAD Architectural Desktop software offers a new level of architectural
design tools built on the speed and power of AutoCAD. Supporting the
architectural design process from conceptual design to design development,
through construction documentation, AutoCAD Architectural Desktop features
industry-specific 2D production drafting functionality as well as integrated and
accessible 3D design options. Users benefit from simplified mass modeling,
intelligent building components, style definitions, and layer management
according to industry standards. AutoCAD Architectural Desktop software's data
continuity throughout the entire design process enables efficiency and
productivity by eliminating the need to recreate design and drafting data.
AutoCAD Land Development Desktop
AutoCAD Land Development Desktop software is built on the power and speed
of AutoCAD / AutoCAD Map and is specifically designed for civil engineering,
surveying, and land planning professionals worldwide. This innovative software
contains specialized features such as COGO and Map Creation, Terrain Modeling,
Alignments, Parcels and Project Data Management. Users will benefit from an easy
to use interface and overall integration of the product. With project data
stored in a central location, AutoCAD Land Development Desktop provides an
interoperable solution to help the entire project team intelligently share large
amounts of drawing and project data in an efficient and accurate way.
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Autodesk CAD Overlay
Autodesk CAD Overlay software enables users to display, edit, and
manipulate raster images in color, grayscale, and binary formats inside AutoCAD
Release 14, AutoCAD Map, Mechanical Desktop, AutoCAD(R) Mechanical, AutoCAD Land
Development Desktop, or AutoCAD Architectural Desktop drawings. Autodesk CAD
Overlay software allows users to integrate scanned drawings with AutoCAD line
types and then plot hybrid raster/vector drawings. It enables users to treat
raster entities as if they were vector entities for quick, efficient
manipulation. CAD Overlay also allows users to manipulate, and edit, aerial
photos and satellite imagery, for analysis and presentation purposes inside
AutoCAD.
The Company's Personal Solutions segment includes the following products:
AutoCAD LT
AutoCAD LT 98 is a low-cost 2D CAD application intended for CAD managers,
designers, and engineers who need a powerful, stand-alone CAD tool, but who do
not require the advanced feature set in AutoCAD. AutoCAD LT 98 software
contains an extensive 2D drafting toolset as well as 3D lines and polylines with
quick shading and hidden-line removal. Other features include a Start-Up dialog
box and Drawing Set-Up wizards to help the user create or open a drawing
quickly; real-time pan and zoom; a Drag-and-Drop Content Explorer(TM) featuring
thousands of industry-standard symbols; and Integrated Internet Tools to open or
save drawings directly to the Internet. AutoCAD LT operates in the Windows
environment with pull-down menus, customizable toolbar, toolbox, menus, and
scripts, as well as dialog boxes and icons. It supports the Windows Clipboard,
as well as ActiveX Automation. AutoCAD LT 98 is fully compatible with Windows
98 and Windows NT 4.X and has built-in Microsoft Office 97 compatibility.
AutoSketch
AutoSketch Release 6 is an affordable, easy-to-use precision drawing tool
for technical professionals who occasionally create conceptual drawings and
sketches. AutoSketch Release 6 reduces the complexity of professional CAD by
providing "drawing guides" that help users get started quickly and easily on any
type of technical drawing. Incorporating a variety of new productivity and ease-
of-use features such as 3D Effects, an AutoArray tool, and Dynamic Pan & Zoom,
AutoSketch Release 6 is a powerful, yet affordable tool that fulfills the
precision drawing needs of a broad range of users.
Actrix
Actrix is a family of easy-to-use diagramming solutions that allows
customers to quickly create a range of dynamic drawings, including engineering
schematics, facilities plans, network diagrams, and process flow charts. Actrix
is also a modern development platform for creating custom corporate solutions
and third party applications. Actrix Technical, the first entry in the Actrix
product family, shipped in November 1998. Actrix Technical is ideal for
engineers, architects, facilities planners, network managers, and project
managers who need to create diagrams, schematics, and content-based layouts.
With its AutoCAD interoperability and user friendliness, Actrix Technical can be
used as an adjacent-seat diagramming solution for organizations and design teams
who use AutoCAD and specifically for non-CAD users. Actrix delivers next-
generation ActiveShapes(TM) objects whose built-in intelligence makes them
automatically snap, orient, and align with accuracy. Actrix is a Windows
application, and it supports file formats like DXF, TIFF, BMP, HTML, JPEG, and
DWF.
The principal product offerings from the Kinetix segment are discussed below:
3D Studio MAX
3D Studio MAX R2 software, which began shipping in the third quarter of
fiscal year 1998, is a 3D modeling and animation software package specifically
written to take advantage of advanced features offered by the Windows NT
operating system. With a real-time interface, multiple-processor support, and 3D
graphics acceleration capabilities, 3D Studio MAX delivers workstation-class
performance and functionality to PCs.
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The intuitive interface eliminates many of the commonly accepted boundaries
between modeling, rendering, and animation, and offers instant feedback; users
can see the results of their actions in real time, as they are applied. Shaded
views with real-time feedback allow users to visualize natural, real-world
environments in which they can directly manipulate objects, regardless of scene
complexity. Because 3D Studio MAX software maintains a data history of geometry
creation and modification, users can return to and change any step, at any time,
without having to redo prior work. 3D Studio MAX is also the only environment
that can run Character Studio(R), a powerful character-animation and skinning
plug-in software product offered by Autodesk.
3D Studio VIZ
3D Studio VIZ, introduced in May 1997, is a design tool that enables users
to express ideas on-screen, in full 3D. Architectural models, engineering
samples, and construction-site previews all become a quick reality with this
software tool. Real-world feedback can be incorporated into the design, and
users can explore more options with their customers more cost-effectively. 3D
Studio VIZ and AutoCAD files are easily exchanged and allow for the development
of advanced engineering or architectural visualizations. 3D Studio VIZ animates,
so clients can take a simulated walkthrough of a site, understand a structure,
or view a part as it will operate in the final assembly. The 3D Studio VIZ user
interface employs CAD-like creation tools including fillets, trims, and
chamfers.
The principal product offerings from Autodesk's new Discreet business unit are
discussed below:
flame*
flame* is an on-line, resolution-independent, non-linear, uncompressed
digital system. The system is used by creative professionals to create, edit and
composite special visual effects in an on-line, real-time environment. Easily
integrated into a suite environment and possessing the power and features
necessary to serve as the core of a fully digital suite, flame* is designed to
allow the operator to create desired effects with near instantaneous feedback. A
complete flame* system includes the flame* software, and SGI Octane workstation,
a stone* disk array and various I/O devices.
inferno*
inferno* is an on-line, non-linear, resolution-independent, uncompressed
digital system providing all the features of flame* with film tools, and
increased image resolution and color control for digital film work. The system
also features tools for grain management, wire and scratch removal and colour
calibration. A compete inferno* system includes the inferno* software, an SGI
Onyx2 workstation, a stone* disk array and various I/O devices.
PRODUCT DEVELOPMENT AND ENHANCEMENT
The software industry is characterized by rapid technological change in
computer hardware, operating systems, and software. To keep pace with this
change, Autodesk maintains an aggressive program of new product development.
Autodesk dedicates considerable resources to research and development to further
enhance its existing products and to create new products and technologies.
During fiscal years 1999, 1998, and 1997, Autodesk incurred $142.8 million,
$122.4 million, and $93.7 million, respectively, for software design,
development, product localization, and project-management activities (excluding
capitalized software development costs of $1.3 million and $2.2 million during
fiscal year 1999 and 1998, respectively; no software development costs were
capitalized during fiscal year 1997).
The majority of Autodesk's basic research and product development has been
performed in the United States, while translation and localization of foreign-
market versions, as well as some product development, are performed by
development teams or contractors in the local markets. Autodesk's product-
related functions in Europe, including software development, localization,
quality assurance, and technical publications, are centralized in Neuchatel,
Switzerland. Production in Europe is centralized in Ireland, and production in
Asia Pacific is centralized in Singapore.
Autodesk intends to continue recruiting and hiring experienced software
developers and to consider the licensing and acquisition of complementary
software technologies and businesses. In addition, Autodesk will continue to
actively collaborate with and support independent software developers who offer
products that enhance and complement AutoCAD software and other products offered
by Autodesk.
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The software industry is characterized by rapid technological change as
well as changes in customer requirements and preferences. The software products
offered by Autodesk are internally complex and despite extensive testing and
quality control, may contain errors or defects ("bugs"). Defects or errors may
occur in future releases of AutoCAD or other software products offered by
Autodesk. Such defects or errors could result in corrective releases to
Autodesk's software products, damage to Autodesk's reputation, loss of revenues,
an increase in product returns, or lack of market acceptance of its products,
any of which could have a material and adverse effect on Autodesk's business and
consolidated results of operations.
Autodesk believes that its future results will depend largely upon its
ability to offer products that compete favorably with respect to product
reliability, performance, ease of use, range of useful features, continuing
product enhancements, reputation, price and training. Delays or difficulties may
result in the delay or cancellation of planned development projects, and could
have a material and adverse effect on Autodesk's business and consolidated
results of operations. Further, increased competition in the market for design,
drafting, mapping, or multimedia software products could also have a negative
impact on Autodesk's business and consolidated results of operations. More
specifically, gross margins may be adversely affected if sales of low-end CAD
products and AutoCAD upgrades, which historically have had lower margins, grow
at a faster rate than Autodesk's higher-margin products.
The success of Autodesk's Discreet business unit will depend in part upon
Autodesk's ability to enhance Discreet's existing systems and software and to
develop and introduce new products and features which meet changing customer
requirements and emerging industry standards on a timely basis. In addition, in
connection with Discreet's recent acquisitions, Autodesk must fully integrate
the edit* (formerly D-Vision OnLine), effect* (formerly Flint and Illuminaire
Composition), paint* (formerly Illuminaire Paint), and light* (formerly
Lightscape) products into its product line and operations. Discreet from time to
time experienced delays in introducing new products and product enhancements and
the Discreet business unit post acquisition may experience difficulties that
could delay or prevent the successful development, introduction and marketing of
new products or product enhancements. In addition, such new products or product
enhancements may not meet the requirements of the marketplace and achieve market
acceptance. Any such failure could have a material adverse effect on Autodesk's
business and consolidated results of operations. From time to time the Discreet
business unit or others may announce products, features or technologies which
have the potential to shorten the life cycle of or replace its then existing
products. Such announcements could cause customers to defer the decision to buy
or determine not to buy its products or cause its distributors to seek to return
products to the Discreet business unit, any of which could have a material
adverse effect on Autodesk's business and consolidated results of operations. In
addition, product announcements by Silicon Graphics, Inc. ("SGI") and others in
the past have caused customers to defer their decision to buy or determine not
to buy Discreet's products. In addition, products or technologies developed by
others may render the Discreet business unit's products or technology
noncompetitive or obsolete.
Certain of Autodesk's historical product development activities have
been performed by independent firms and contractors, while other technologies
are licensed from third parties. Autodesk generally either owns or licenses the
software developed by third parties. Because talented development personnel are
in high demand, independent developers, including those who have developed
products for Autodesk in the past, may not be able to provide development
support to Autodesk in the future. Similarly, Autodesk may not be able to obtain
and renew existing license agreements on favorable terms, if at all, which could
have a material and adverse effect on Autodesk'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 Autodesk's design software. Certain developers may elect to
support other products or otherwise experience disruption in product development
and delivery cycles. Such disruption in particular markets could negatively
impact these third-party developers and end users, which could have a material
adverse effect on Autodesk's business and consolidated results of operations.
Further, increased merger and acquisition activity currently experienced in the
technology industry could affect relationships with other third-party
developers, and thus adversely affect operating results.
Additionally, Autodesk's development efforts may not result in the timely
introduction of new products, and such new products may not be commercially
successful. Failure to successfully develop new products, delays in the
introduction of these new products, or lower-than-anticipated demand for these
products could have a material and adverse effect on the Company's business and
consolidated results of operations.
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MARKETING AND SALES
Autodesk's customer-related operations are divided into three geographic
regions: the Americas, Europe, and Asia Pacific. Autodesk's products are
marketed worldwide through a network of domestic and foreign offices. The
Company sells its software products primarily through distributors and resellers
(value-added resellers or "VARs") who distribute Autodesk's products to end
users in more than 150 countries. VARs, including both independent owners and
computer store franchisees, are supported by Autodesk and its subsidiaries
through technical training, periodic publications, and Autodesk's Home Page on
the Internet.
In addition, Autodesk works directly with dealer and distributor sales
organizations, computer manufacturers, other software developers, and
peripherals manufacturers through cooperative advertising, promotions, and
trade-show presentations. Autodesk also holds annual "Expos" throughout the
world. These dedicated trade shows, incorporated within major industry trade
shows, highlight Autodesk's products, as well as a number of third-party
products. Autodesk employs mass-marketing techniques such as direct mailings
and advertising in business and trade journals. Autodesk has a worldwide user
group organization dedicated to the exchange of information related to the use
of Autodesk's products.
Domestically, Autodesk distributes its products primarily through its
authorized dealer network. Other domestic sales are made principally to large
corporations, governmental agencies, educational institutions, and, for certain
low-end design products, to end users. The majority of all of Autodesk's
international sales are made to dealers and distributors, which are supported by
Autodesk's foreign subsidiaries and international sales organizations. Certain
international sales result from direct exports from the United States.
Fluctuations in foreign exchange rates, specifically the stronger value of the
dollar, relative to certain international currencies, negatively impacted
foreign revenues during fiscal year 1999. These foreign currency fluctuations,
as well as any slowdowns in any of Autodesk's geographical markets, including
the recent economic instability experienced in certain Asia Pacific countries,
could have a material adverse effect on Autodesk's business and future
consolidated results of operations.
Autodesk's ability to effectively distribute its products depends in part
upon the financial and business condition of its VAR network. Although Autodesk
has not currently experienced any material problems with its VAR network,
computer software dealers and distributors are typically not highly capitalized,
have tended to experience difficulties during times of economic contraction and
during periods of technology-market price pressure, and may do so in the future.
Computer 2000/Datech and Mensch und Maschine accounted for 11 percent ($84.2
million) and 11 percent ($81.2 million) of total consolidated revenues for
fiscal year 1999. Revenues from Computer 2000/Datech and Mensch und Maschine are
included in the Design Solutions segment. While no single customer accounted for
more than 10 percent of Autodesk's consolidated revenues in fiscal years 1998 or
1997, the loss of, or a significant reduction in, business with any one of
Autodesk's major international distributors or large U.S. resellers could have a
material adverse effect on Autodesk's business and consolidated results of
operations. Autodesk's largest international distributor is Computer 2000/Datech
AG in Germany. Autodesk's largest resellers in the United States are Avatech,
DLT Solutions, Inc. and Ingram Micro.
Autodesk intends to continue to make its products available in foreign
languages and expects that foreign sales will continue to contribute a
significant portion of its consolidated revenues. International revenues,
including exports from the United States, accounted for approximately 60
percent, 59 percent, and 67 percent of consolidated revenues in fiscal years
1999, 1998, and 1997, respectively.
CUSTOMER AND DEALER SUPPORT
During fiscal year 1998, Autodesk realigned its customer and dealer support
network around its market groups to better provide services related to specific
industry segments. Autodesk requires each authorized dealer and distributor to
provide a professional level of technical support to customers by employing
full-time, trained, technical-support personnel. Autodesk supports its dealers
and distributors through technical product training, sales training classes, and
direct telephone support. During fiscal year 1998, Autodesk began to offer more
end-user support in addition to services which had historically been offered
such as the online support available through the Autodesk Home Page on the
Internet. These new support services include the Web-Based Learning program, a
fee-based distance learning program that provides lessons and tutorials that
highlight critical components of its products, and various Learning Assistance
programs, which provide lessons related to design projects through an
interactive multimedia tool.
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Autodesk offers phone support through authorized Autodesk dealers under two
programs: the Autodesk Premier Support Program ("APSP") and the Autodesk Systems
Center Program ("ASCP"). Under the APSP, participating dealers act as dedicated
account managers to Autodesk customers that have technical questions related to
a specific vertical industry. The ASCP requires dealers to provide superior
industry-specific application training to end users of the Company's products.
In addition, Autodesk provides direct phone support to end users under the
Safety Net Program ("SNP"). Under the SNP, Autodesk support staff provide
technical support for customers with questions about AutoCAD and products
offered by Autodesk's market groups.
As of January 31, 1999, Autodesk had authorized more than 900 independent
Autodesk Training Centers (ATC(R)) throughout the world. These accredited
training centers offer in-depth education and training in computer-aided design
skills on AutoCAD and other Autodesk products, as well as on related,
independently developed software.
Customers have formed Autodesk user groups as forums for education and to
suggest product enhancements and development of new products. The Autodesk User
Group International (AUGI(R)), officially recognized by Autodesk, sponsors an
annual meeting held concurrently with the Autodesk University(R) user show;
publishes a quarterly newsletter; independently evaluates Autodesk products;
compiles user feature and functionality requirements; and offers telecourses
taught by its membership on CompuServe. In addition, there are local user
groups in Europe, Asia Pacific, and the Americas focused on expanding the use of
Autodesk products.
DEVELOPER PROGRAMS
One of Autodesk's key strategies is to maintain an open-architecture design
of its software products to facilitate third-party development of peripheral and
complementary products. This approach enables customers and third parties to
customize Autodesk's products for a wide variety of highly specific uses.
Autodesk offers several programs that provide marketing, sales, and technical
support and programming tools to Autodesk Registered Developers worldwide, who
develop commercially available add-on applications for Autodesk products.
Although Autodesk derives no direct revenue from these application developers,
Autodesk believes that the availability and use of their add-on products enhance
sales opportunities for Autodesk's core products.
Under the Autodesk Developer Channel, Autodesk offers three programs to
third-party developers that are interested in licensing Autodesk software and
technology. The Unique Application Reseller program ("UAR") allows software
developer partners the ability to sell and support Autodesk software when
bundled with specifically defined vertical applications. The OEM program
provides the technology for qualified developers to create and deliver suites of
scaleable products that focus on solving customer needs in specialized markets.
The Solution Integrator ("SI") allows solution provider partners the ability to
sell and support Autodesk software when bundled with specifically defined
vertical solutions.
To support the growth of third-party developers, whose applications extend
and enhance the functionality of Autodesk's products worldwide, Autodesk
established the Developer Network Program ("ADN"). The ADN is a business network
comprised of independent application developers and customers. This program
provides sales, marketing, technical, and product support to Autodesk Strategic
Developers.
BACKLOG
Autodesk typically ships products within one to two weeks after receipt of
an order, which is common in the computer software industry. Accordingly,
Autodesk does not maintain significant backlog, and backlog as of any particular
date gives no indication of actual sales for any succeeding period.
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
9
<PAGE>
software market in particular is characterized by vigorous competition in each
of the vertical markets in which Autodesk and its individual market groups
compete, both by entry of competitors with innovative technologies and by
consolidation of companies with complementary products and technologies.
The Architecture, Engineering, and Construction family of products competes
directly with software offered by companies such as Bentley Systems, Inc.
("Bentley"); Computervision Corporation (a subsidiary of Parametric Technology
Corporation) ("Computervision"); CADAM Systems Company, Inc.; Diehl Graphsoft,
Inc.; EaglePoint Software; International Microcomputer Software, Inc. ("IMSI");
Intergraph Corporation; Nemetschek Systems, Inc.; and Visio Corporation
("Visio"). Autodesk's MCAD products compete with products offered by Bentley;
Visionary Design Systems; Hewlett-Packard Corporation; Parametric Technology
Corporation; Structural Dynamics Research Corporation; Unigraphics;
Computervision; Dassault Systemes ("Dassault"); SolidWorks Corporation (a
subsidiary of Dassault); Baystate Technologies, Inc.; and think3. Autodesk's GIS
Market Group faces competition from Bentley; Intergraph Corporation; MapInfo
Corporation; Environmental Systems Research Institute ("ESRI"); and
Smallworldwide plc. Kinetix product offerings compete with products offered by
other multimedia companies such as Adobe Systems Inc.; Macromedia, Inc.; Silicon
Graphics, Inc.; and Avid Technology, Inc. The Personal Solutions Group family of
products competes with IMSI; The Learning Company; Visio; Micrografx Inc.; and
others. Certain of the competitors of Autodesk have greater financial,
technical, sales and marketing, and other resources than Autodesk.
The future financial performance of Autodesk's Discreet business unit will
depend in part on the successful development, introduction and customer
acceptance of existing and new or enhanced products. In addition, in order for
the unit to achieve sustained growth, the market for its systems and software
must continue to develop and Autodesk must expand this market to include
additional applications within the film and video industries and develop or
acquire new products for use in related markets. Autodesk may not be successful
in marketing its existing or new or enhanced products. In addition, as Autodesk
enters new markets, distribution channels, technical requirements and levels and
bases of competition may be different from those in Autodesk's current markets;
Autodesk may not be able to compete favorably.
Autodesk believes that the principal factors affecting competition in its
markets are product reliability, performance, ease of use, range of useful
features, continuing product enhancements, reputation, price, and training. In
addition, the availability of third-party application software is a competitive
factor within the CAD market. Autodesk believes that it competes favorably in
these areas and that its competitive position will depend, in part, upon its
continued ability to enhance existing products, and to develop and market new
products.
In April 1998, Autodesk received notice that the Federal Trade Commission
("FTC") has undertaken a nonpublic investigation to determine whether Autodesk
or others have engaged in or are engaging in unfair methods of competition. The
FTC has not made any claims or allegations regarding Autodesk's current business
practices or policies, nor have any charges been filed. Autodesk intends to
cooperate fully with the FTC in its inquiry. Autodesk does not believe that the
investigation will have a material impact on its business or results of
operations.
INTELLECTUAL PROPERTY AND LICENSES
Autodesk protects its intellectual property through copyright, trade
secret, patent, and trademark laws. For substantially all AutoCAD sales outside
of North America, Autodesk uses software protection locks to inhibit
unauthorized copying. Nonetheless, Autodesk's intellectual property rights may
not be successfully asserted in the future or may be invalidated, circumvented,
or challenged. In addition, the laws of certain foreign countries where
Autodesk's products are distributed do not protect Autodesk's intellectual
property rights to the same extent as U.S. laws. The inability of Autodesk to
protect its proprietary information could have a material adverse effect on
Autodesk's business and consolidated results of operations.
From time to time, Autodesk receives claims alleging infringement of a
third party's intellectual property rights, including patents. Any disputes
involving Autodesk's intellectual property rights or those of another party
could lead to costly litigation which could have a material adverse effect on
Autodesk's business and consolidated results of operations.
Autodesk retains ownership of software it develops. All software is
licensed to users and provided in object code pursuant to either shrink-wrap,
embedded or on-line licenses, or executed license agreements. These agreements
contain restrictions on duplication, disclosure, and transfer.
10
<PAGE>
Autodesk believes that because of the limitations of laws protecting its
intellectual property and the rapid, ongoing technological changes in both the
computer hardware and software industries, it must rely principally upon
software engineering and marketing skills to maintain and enhance its
competitive market position.
Autodesk has an in-house antipiracy program focused on pursuing companies and
individuals who illegally duplicate, sell, or install Autodesk's software
products. Software piracy is in some cases a felony under U.S. federal law,
which allows copyright and patent holders to protect and enforce their rights as
owners of intellectual property. Additionally, Autodesk is a member and co-
founder of the Business Software Alliance ("BSA"), an organization comprised of
member software companies whose purpose is to advance favorable public policy
for the technology industry and promote the importance of honoring software
copyrights.
Until fiscal 1996, substantially all of Discreet's systems were sold without
written license agreements. Autodesk may be involved in litigation relating to
these sales, and the outcome of any such litigation may be more unfavorable to
Autodesk as a result of such omissions. The Discreet business unit uses both
software and hardware keys with respect to its systems and software but
otherwise does not copy-protect its systems and software. It may be possible for
unauthorized third parties to copy the Discreet business unit's products or to
reverse-engineer or obtain and use information that the Discreet business unit
regards as proprietary. Competitors may independently develop technologies that
are substantially equivalent or superior to the Discreet business unit's
technologies.
PRODUCTION AND SUPPLIERS
Production of Autodesk's software products involves duplication of the
software media and the printing of user manuals. The purchase of media and the
transfer of the software programs onto media for distribution to customers are
performed by Autodesk and by licensed subcontractors. Media for Autodesk's
products include CD-ROMs and disks which are available from multiple sources.
User manuals for Autodesk's products and packaging materials are produced to
Autodesk specifications by outside sources. Domestic production is performed in
leased facilities operated by Autodesk. Certain product assembly is also
performed by independent third-party contractors. International production is
performed by independent third-party contractors in Ireland and Singapore. To
date, Autodesk has not experienced any material difficulties or delays in the
production of its software and documentation.
Autodesk's Discreet business unit has historically relied on third-party
vendors to manufacture and supply all of the hardware components used in its
systems. Manufacturing at the Discreet unit consists of assembly (including disk
array assembly), testing, and value added systems integration.
The Discreet unit's flame*, effect*, inferno*, fire*, smoke* and frost*
software currently run on workstations manufactured by SGI. There are
significant risks associated with this reliance on SGI and the Discreet unit may
be impacted by the timing of the development and release of products by SGI, as
was the case during fiscal year 1996. In addition, there may be unforeseen
difficulties associated with adapting the Discreet unit's products to future SGI
products. Moreover, although Autodesk has no reason to believe that the Discreet
unit will be unable to obtain sufficient quantities of SGI workstations on a
timely basis, the Discreet unit may not continue to be able to procure such
workstations in sufficient quantities on a timely basis.
The Discreet unit is also dependent on SGI as the unit's sole source for video
I/O cards used in the unit's systems. The Discreet unit generally purchases sole
source or other components pursuant to purchase orders placed from time to time
in the ordinary course of business and has no written agreements or guaranteed
supply arrangements with its sole source suppliers.
EMPLOYEES
As of January 31, 1999, Autodesk had 2,712 full-time employees, of which 2,071
were based in the Americas, 439 in Europe, and 202 in Asia Pacific. The
continued growth and success of Autodesk depends significantly on the continued
service of highly skilled employees. Competition for these employees in today's
marketplace, especially in the technology industries, is intense. Autodesk's
ability to attract and retain employees is dependent on a number of factors,
including its continued ability to grant stock incentive awards. Autodesk may
not be successful in continuing to recruit new personnel and to retain existing
personnel. The loss of one or more key employees or Autodesk's inability to
maintain existing employees or recruit new employees could have a material
adverse impact
11
<PAGE>
on Autodesk. In addition, Autodesk may experience increased compensation costs
to attract and retain skilled personnel.
ITEM 2. PROPERTIES
Autodesk's executive offices and those related to product development,
domestic marketing and sales, and production are located in leased office space
in northern California. The Company also leases office space in various
locations throughout the United States for local sales, development, and
technical support personnel. Autodesk's foreign subsidiaries lease office space
for their operations.
Autodesk believes that its existing facilities and offices are adequate to
meet its requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On August 28, 1998, a complaint was filed against Discreet and certain of its
directors in the Marin County, California, Superior Court relating to Autodesk's
acquisition of the Company. The complaint alleges that the defendants breached
their fiduciary duties to shareholders in connection with the acquisition. The
complaint seeks unspecified damages from the defendants. Autodesk believes the
claims asserted in the complaint are without merit and intends to vigorously
contest them.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1999.
Executive Officers of the Registrant
- ------------------------------------
The following sets forth certain information regarding the executive officers of
the Company as of April 22, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Carol A. Bartz.............. 50 Chairman of the Board and Chief Executive Officer
Eric B. Herr................ 51 President and Chief Operating Officer
Joseph H. Astroth, Ph.D..... 43 Vice President, GIS Market Group
Carl Bass................... 41 Vice President, AECAD and Chief Technical Officer
Steve Cakebread............. 47 Vice President and Chief Financial Officer
Linda Clarke................ 43 Vice President, Corporate Marketing
Dominic J. Gallello......... 44 Vice President, Mechanical CAD Market Group
Stephen McMahon............. 57 Vice President, Human Resources and Facilities
Marcia K. Sterling.......... 55 Vice President, Business Development, General Counsel, and
Secretary
Godfrey R. Sullivan......... 45 Vice President, Personal Solutions Group
Michael E. Sutton........... 54 Vice President, Worldwide Field Organization
</TABLE>
CAROL A. BARTZ joined the Company in April 1992 and has served as Chief
Executive Officer and Chairman of the Board since May 1992. Ms. Bartz served as
President from May 1992 through September 1996. Ms. Bartz is a director of
AirTouch Communications, Inc., Network Appliance, Inc., BEA Systems, Inc.,
Cadence Design Systems, Inc., and Cisco Systems, Inc.
ERIC B. HERR has been Autodesk's President and Chief Operating Officer since
September 1996, having also served as the Acting Vice President, AEC Market
Group, from September 1996 through March 1997. Mr. Herr served as the Chief
Financial Officer from the time he joined the Company in May 1992 until
September 1996. From December 1992 through January 1995, Mr. Herr served as Vice
President, Emerging Businesses. From January 1995 to May 1995, Mr. Herr served
as Vice President, Finance and Administration.
DR. JOSEPH H. ASTROTH has served as Vice President, GIS Market Group, since
joining the Company in January 1996. From September 1989 through December 1995,
Dr. Astroth held various positions with Graphic Data Systems Corporation
including Director, Environmental Market Group, from January 1993 to June 1994,
and Vice President of Product Management, Engineering, from June 1994 to
December 1995.
CARL BASS was named Vice President of Engineering in October 1997. He was
named Chief Technical Officer in December 1996. From November 1995 to December
1996, Mr. Bass served as a Senior Technical Fellow for the AutoCAD family of
products. Mr. Bass served as Chief Architect for AutoCAD from September 1993 to
October 1995. Before joining Autodesk, Mr. Bass was cofounder and Chief
Technical Officer of Ithaca Software from May 1986 to August 1993.
STEVE CAKEBREAD joined the Company in April 1997 as Vice President and Chief
Financial Officer. From April 1993 through March 1997 he served as Vice
President, Finance World Trade Corporation at Silicon Graphics. Mr. Cakebread
held various finance and general management positions at Hewlett-Packard from
January 1972 through March 1993.
LINDA CLARKE joined the Company in February 1999 as Vice President of
Corporate Marketing. From December 1996 through December 1998, she served as
Vice President of Global Marketing for Baan Company. From January 1990 through
December 1996, Ms. Clarke was the Vice President of Marketing, Application
Products Division of Adobe Systems.
DOMINIC J. GALLELLO has served as Vice President, MCAD Market Group since
January 1995. Mr. Gallello served as Vice President, Asia Pacific, from the
time he joined Autodesk in October 1992 until July 1996. From February 1995 to
August 1995, Mr. Gallello served as Acting Vice President, MCAD Market Group.
13
<PAGE>
STEPHEN MCMAHON has served as Vice President, Human Resources, since joining
Autodesk in July 1992. From July 1987 to July 1992, Mr. McMahon served as Senior
Director, Human Resources, for Apple Computer, Inc.
MARCIA K. STERLING joined Autodesk in October 1995 as Vice President, Business
Development, General Counsel, and Secretary. From September 1982 to October
1995, she practiced corporate and securities law at Wilson Sonsini Goodrich &
Rosati, where she was a member.
GODFREY R. SULLIVAN was named Vice President, Personal Solutions Group, in
September 1997. Mr. Sullivan served as Vice President, the Americas, since
joining Autodesk in October 1992 and as Acting Vice President, AEC/FM Market
Group, from February 1995 to September 1995.
MICHAEL E. SUTTON was named Vice President, Worldwide Field Organization in
September 1998. From June 1993 through September 1998, Mr. Sutton served as Vice
President, Europe/Middle East/Africa.
There is no family relationship among any of the directors or executive
officers of Autodesk.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated by reference to the
Company's 1999 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to page 1 of
the Company's 1999 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to pages 2
through 21 of the Company's 1999 Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this Item is incorporated by reference to page 18 of
the Company's 1999 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages 22
through 42 of the Company's 1999 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
14
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in that the
Registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement that
specifically address the items set forth herein are incorporated by reference.
Such incorporation does not include the Compensation Committee Report or the
Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement.
The information concerning the Company's executive officers required by this
Item is incorporated by reference herein to the section of this Report in Part
I, Item 4, entitled "Executive Officers of the Registrant."
The information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934 is to be set forth in the Proxy Statement and is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements: The following Consolidated Financial Statements of
--------------------
Autodesk, Inc., and Report of Ernst & Young LLP, Independent Auditors, are
incorporated by reference to pages 22 through 42 of the Registrant's 1999
Annual Report to Stockholders:
Consolidated Statement of Income-Fiscal Years Ended January 31, 1999, 1998,
and 1997
Consolidated Balance Sheet-January 31, 1999 and 1998
Consolidated Statement of Cash Flows-Fiscal Years Ended January 31, 1999,
1998, and 1997
Consolidated Statement of Stockholders' Equity-Three-Year Period Ended
January 31, 1999
Notes to Consolidated Financial Statements
15
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
2. Financial Statement Schedule: The following financial statement schedule of
----------------------------
Autodesk, Inc., for the fiscal years ended January 31, 1999, 1998, and 1997,
is filed as part of this Report and should be read in conjunction with the
Consolidated Financial Statements of Autodesk, Inc.
Schedule II Valuation and Qualifying Accounts..................... S-1
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
--------
immediately following the financial statement schedules are filed as part of,
or incorporated by reference into, this Report.
<TABLE>
<CAPTION>
Exhibit
No. Description
-- -----------
<S> <C>
2.1 (1) Second Amended and Restated Agreement and Plan of Acquisition and Amalgamation by and among Autodesk, Inc.,
Autodesk Development B.V., 9066-9771 Quebec Inc., Autodesk Canada Inc., 9066-9854 Quebec Inc. and Discreet
Logic Inc., dated as of November 18, 1998, as amended on December 18, 1998 and January 18, 1999
2.2 (1) Second Amended and Restated Amalgamation Agreement by and among Discreet Logic Inc., 9066-9854 Quebec Inc.
and Autodesk, Inc. dated as of January 18, 1999
2.3 (2) Agreement and Plan of Reorganization By and Among Autodesk, Inc., Autodesk Acquisition Corporation, and
Softdesk, Inc., dated December 10, 1996, as amended December 19, 1996
3.1 Certificate of Incorporation of Registrant
3.2 (3) Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of
Autodesk, Inc.
3.3 Certificate of the Powers, Designations, Preferences and Rights of Series B Preferred Stock of Autodesk,
Inc.
3.4 (4) Bylaws of Registrant, as amended
4.1 (5) Preferred Shares Right Agreement dated December 14, 1995
4.2 (5) Amendment No. 1 to Preferred Shares Rights Agreement
9.1 Voting and Exchange Trust Agreement dated March 16, 1999 among Autodesk, Inc., Discreet Logic Inc., Autodesk
Development B.V., and Montreal Trust Company of Canada
10.1 (6)* Registrant's 1987 Stock Option Plan, as amended
10.2 (6)* Registrant's Employee Qualified Stock Purchase Plan and form of Subscription Agreement, as amended
10.3 (4)* Registrant's 1990 Directors' Option Plan, as amended
10.4 (4)* Registrant's 1996 Stock Plan, as amended
10.5 (7)* Form of Indemnification Agreement executed by the Company
and each of its officers and directors
10.6(8)* Agreement between Registrant and Carol A. Bartz dated
April 7, 1992
10.7(9)* Teleos Research 1996 Stock Plan
10.8(10)* Softdesk, Inc. 1992 Stock Option Plan
10.9(10)* Softdesk, Inc. 1993 Director Stock Option Plan
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
10.10(10)* Softdesk, Inc. 1993 Equity Incentive Plan
10.11(4)* Registrant's 1998 Employee Qualified Stock Purchase Plan
10.12 Support Agreement dated March 16, 1999 among Autodesk, Inc., Autodesk Development B.V. and Discreet Logic
Inc.
10.13(11)* Discreet Logic Inc. Amended and Restated 1994 Restricted Stock and Stock Option Plan
10.14(11)* Discreet Logic Inc. 1995 Employee Stock Purchase Plan
10.15(11)* Discreet Logic Inc. 1995 Non-Employee Director Stock Option Plan
10.16(11)* Discreet Logic Inc. 1997 Special Limited Non-Employee Director Stock Plan
13.1 Pages 1 through 42 of the Registrant's Annual Report to Stockholders for the year ended January 31, 1999 (to
be deemed filed only to the extent required by the instructions to exhibits for reports on Form 10-K)
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors (included on page 20 of this Report)
24.1 Power of Attorney (included on page 19 of this Report)
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with the Registrant's Report on Form 8-K filed on March 16, 1999.
(2) Incorporated by reference to the exhibit filed with the Registration Statement on Form S-4 filed on March 3,
1997.
(3) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 31, 1997.
(4) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 31, 1998.
(5) Incorporated by reference to the Registrant's Report on Form 8-A filed on January 5, 1996, as amended on January
8, 1996 and January 15, 1998.
(6) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 31, 1996.
(7) Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 31, 1995.
(8) Incorporated by reference to the exhibit filed with the Registrant's Report on Form 10-Q for the fiscal quarter
ended April 30, 1992.
(9) Incorporated by reference to the exhibit filed with the Registrant's Report on Form S-8 filed on July 23, 1996.
(10) Incorporated by reference to the exhibit filed with the Registrant's Report on Form S-8 filed on April 3, 1997.
(11) Incorporated by reference to the exhibits filed with the Registrant's Report on Form S-8 filed on March 18, 1999.
</TABLE>
* Denotes a management contract or compensatory plan or arrangement.
17
<PAGE>
(b) Reports on Form 8-K
-------------------
On November 19, 1998 the Company filed a report on Form 8-K describing the
Second Amended and Restated Agreement and Plan of Acquisition and
Amalgamation entered into among Autodesk, Inc., Autodesk Development B.V.,
9066-9771 Quebec Inc., Autodesk Canada Inc., 9066-9854 Quebec Inc., and
Discreet Logic Inc.
On January 20, 1999 the Company filed a report on Form 8-K describing the
Amendment No. 2 to the Second Amended and Restated Agreement and Plan of
Acquisition and Amalgamation entered into among Autodesk, Inc., Autodesk
Development B.V., 9066-9771 Quebec Inc., Autodesk Canada Inc., 9066-9854
Quebec Inc., and Discreet Logic Inc.
With the exception of the information incorporated by reference to the
Annual Report to Stockholders in Items 5, 6, 7, and 8 of Part II and Item
14 of Part IV of this Form 10-K, the Company's 1999 Annual Report to
Stockholders is not to be deemed filed as a part of this Report.
Autodesk, the Autodesk logo, AutoCAD, AutoCAD LT, AutoCAD Map, AutoSketch,
Kinetix, Mechanical Desktop, 3D Studio MAX, AutoLISP, Softdesk, Autodesk
University, CAD Overlay, Autodesk MapGuide, Autodesk World, 3D Studio VIZ,
AUGI, ATC, and Character Studio are registered trademarks, and ObjectARX,
AutoSnap, Actrix, Content Explorer, ActiveShapes, and AutoCAD Architectural
Desktop are trademarks of Autodesk, Inc. in the USA and/or other countries.
Genius is a trademark of Genius CAD Software GmbH and CoKG licensed to
Autodesk, Inc., for limited use in connection with specified products. All
other brand names, product names, or trademarks belong to their respective
holders.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AUTODESK, INC.
By: /s/ CAROL A. BARTZ
------------------------
Carol A. Bartz
Chairman of the Board
Dated: April 28, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carol A. Bartz as his or her attorney-in-fact,
each with the power of substitution, for him or her in any and all capacities,
to sign any amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------- ------------------------------------------ -------------------------------
<S> <C> <C>
/s/ CAROL A. BARTZ Chief Executive Officer and April 28, 1999
- -----------------------------
Carol A. Bartz Director (Principal Executive
Officer)
/s/ STEVE CAKEBREAD Vice President and Chief Financial Officer April 28, 1999
- -----------------------------
Steve Cakebread (Principal Financial Officer)
/s/ DAVID S. OPPENHEIMER Vice President, Finance April 28, 1999
- -----------------------------
David S. Oppenheimer (Principal Accounting Officer)
/s/ MARK A. BERTELSEN Director April 28, 1999
- -----------------------------
Mark A. Bertelsen
/s/ CRAWFORD W. BEVERIDGE Director April 28, 1999
- -----------------------------
Crawford W. Beveridge
/s/ J. HALLAM DAWSON Director April 28, 1999
- -----------------------------
J. Hallam Dawson
/s/ PAUL OTELLINI Director April 28, 1999
- -----------------------------
Paul Otellini
/s/ MORTON L. TOPFER Director April 28, 1999
- -----------------------------
Morton L. Topfer
/s/ MARY ALICE TAYLOR Director April 28, 1999
- -----------------------------
Mary Alice Taylor
</TABLE>
19
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Autodesk, Inc. of our report dated February 22, 1999, except for Note 12 as
to which the date is March 16, 1999, included in the 1999 Annual Report to
Stockholders of Autodesk, Inc.
Our audits also included the financial statement schedule of Autodesk, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-15675, No. 33-22656, No. 33-39458, No. 33-41265, No. 33-51110,
No. 33-54683, No. 33-61015, No. 333-08693, No. 333-15037, No. 333-24469, and
No. 333-62655) pertaining to the 1987 Stock Option Plan, 1990 Directors'
Option Plan, 1996 Stock Plan, Employee Qualified Stock Purchase Plan and the
1998 Employee Qualified Stock Purchase Plan of Autodesk, Inc., the Teleos
Research 1996 Stock Plan and the Softdesk, Inc. 1992 Stock Option Plan,
Softdesk, Inc. 1993 Director Stock Option Plan and Softdesk, Inc. 1993 Equity
Incentive Plan of our report dated February 22, 1999, except for Note 12 as to
which the date is March 16, 1999, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule in this
Annual Report (Form 10-K) of Autodesk, Inc.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Jose, California
April 28, 1999
20
<PAGE>
Schedule II
AUTODESK, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and Deductions at End
Description of Year Expenses Write-Offs of Year
- ---------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fiscal year ended January 31, 1999
Allowance for doubtful accounts $ 7,136,000 $ 1,737,000 $ 2,068,000 $ 6,805,000
Allowance for stock balancing and
product rotation $20,219,000 $25,484,000 $30,926,000 $14,777,000
Fiscal year ended January 31, 1998
Allowance for doubtful accounts $ 6,635,000 $ 3,701,000 $ 3,200,000 $ 7,136,000
Allowance for stock balancing and
product rotation $17,175,000 $38,419,000 $35,375,000 $20,219,000
Fiscal year ended January 31, 1997
Allowance for doubtful accounts $ 6,731,000 $ 1,735,000 $ 1,831,000 $ 6,635,000
Allowance for stock balancing and
product rotation $14,607,000 $46,884,000 $44,316,000 $17,175,000
</TABLE>
S-1
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
AUTODESK, INC.
FIRST: The name of the Corporation is Autodesk, Inc. (the "Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle, zip code 19801. The name of its
registered agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The Corporation is authorized to issue two classes of stock to be
designated respectively Common Stock and Preferred Stock. The total
number of shares of all classes of stock which the Corporation has
authority to issue is Fifty-Two Million (52,000,000), consisting of
Fifty Million (50,000,000) shares of Common Stock, $0.01 par value
(the "Common Stock"), and Two Million (2,000,000) shares of Preferred
Stock, $0.01 par value (the "Preferred Stock").
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized subject to
limitations prescribed by law, to fix by resolution or resolutions the
designations, powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series of Preferred
Stock, including without limitation authority to fix by resolution or
resolutions, the dividend rights, dividend rate, conversion rights,
voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, and liquidation preferences
of any wholly unissued series of Preferred Stock, and the number of
shares constituting any such series and the designation thereof, or
any of the foregoing.
The Board of Directors is further authorized to increase (but not
above the total number of authorized shares of the class) or decrease
(but not below the number of shares of any such series then
outstanding) the number of shares of any series, the number of which
was fixed by it, subsequent to the issue of shares of such series then
outstanding, subject to the powers, preferences and rights, and the
qualifications, limitations and restrictions thereof stated in the
resolution of the Board of Directors originally fixing the number of
shares of such series. If the number of shares of any series is so
decreased, then the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
<PAGE>
FIFTH: The name and mailing address of the incorporator are as follows:
Martin W. Korman
Wilson Sonsini Goodrich & Rosati
Two Palo Alto Square
Palo Alto, CA 94306
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: The election of directors need not be by written ballot unless a
stockholder demands election by written ballot at a meeting of
stockholders and before voting begins or unless the Bylaws of the
Corporation shall so provide.
EIGHTH: The number of directors which constitute the whole Board of
Directors of the Corporation shall be designated in the Bylaws of
the Corporation.
NINTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is
expressly authorized to adopt, alter, amend or repeal the Bylaws
of the Corporation.
TENTH: To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or may hereafter be amended,
no director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the
adoption of any provision of this Certificate of Incorporation
inconsistent with this Article, shall eliminate or reduce the
effect of this Article in respect of any matter occurring, or any
cause of action, suit or claim that, but for this Article, would
accrue or arise, prior to such amendment, repeal or adoption of
an inconsistent provision.
ELEVENTH: At the election of directors of the Corporation, each holder of
stock of any class or series shall be entitled to one vote for
each share held. No stockholder will be permitted to cumulate
votes at any election of directors.
TWELFTH: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the
Corporation may be kept (subject to any provision contained in
the laws of the State of Delaware) outside of the State of
Delaware at such place or places as may be designated from time
to time by the Board of Directors or in the Bylaws of the
Corporation.
THIRTEENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by the
laws of the State of Delaware, and all rights conferred herein
are granted subject to this reservation.
<PAGE>
The undersigned incorporator hereby acknowledges that the foregoing
Certificate of Incorporation is his act and deed and that the facts stated
herein are true.
Dated: May 5, 1994
/s/ Martin W. Korman
----------------------------------------
Martin W. Korman
Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
AUTODESK, INC.
Autodesk, Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), pursuant to the provisions of the
General Corporation Law of the State of Delaware (the "GCL"), does hereby
certify as follows:
FIRST: The Certificate of Incorporation of the Corporation is hereby
amended by deleting the second sentence of the first paragraph of ARTICLE FOURTH
of the Certificate of Incorporation in its present form and substituting
therefor a new second sentence of the first paragraph of ARTICLE FOURTH in the
following form:
The total number of shares of all classes of stock which the
Corporation has authority to issue is One Hundred Two Million
(102,000,000), consisting of One Hundred Million (100,000,000)
shares of Common Stock, $0.01 par value (the "Common Stock"), and
Two Million (2,000,000) shares of Preferred Stock, $0.01 par value
(the "Preferred Stock").
SECOND: The amendment to the Amended and Restated Certificate of
Incorporation of the Corporation set forth in this Certificate of Amendment has
been duly adopted in accordance with the provisions of Section 242 of the GCL
(a) the Board of Directors of the Corporation having duly adopted a resolution
setting forth such amendment and declaring its advisability and submitting it to
the stockholders of the Corporation for their approval, and (b) the stockholders
of the Corporation having duly adopted such amendment by vote of the holders of
a majority of the outstanding stock entitled to vote thereon at a special
meeting of the stockholders called and held upon notice in accordance with
Section 222 of the GCL.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by Carol A. Bartz, its Chairman of the Board, President
and Chief Executive Officer, this 13th day of October, 1994.
AUTODESK, INC.
By: /s/ Carol A. Bartz
--------------------------------
Carol A. Bartz
Chairman of the Board, President
And Chief Executive Officer
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
AUTODESK, INC.
(Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware)
Carol A. Bartz and Marcia K. Sterling each hereby certifies:
(1) They are the Chief Executive Officer and Secretary, respectively, of
Autodesk, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "General Corporation Law");
(2) The original Certificate of Incorporation of this corporation,
originally filed on May 10, 1994, is hereby amended and restated in its entirety
to read as follows:
FIRST: The name of this corporation is Autodesk, Inc. (the
"Corporation").
SECOND: The address of the Corporation's registered office in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, in
the City of Wilmington, County of New Castle, zip code 19801. The
name of its registered agent at such address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the
General Corporation Law of Delaware.
FOURTH: The Corporation is authorized to issue two classes of stock to be
designated respectively Common Stock and Preferred Stock. The
total number of shares of all classes of stock which the
Corporation has authority to issue is Two Hundred Fifty-Two
Million (252,000,000), consisting of Two Hundred Fifty Million
(250,000,000) shares of Common Stock, $0.01 par value (the
"Common Stock"), and Two Million (2,000,000) shares of Preferred
Stock, $0.01 par value (the "Preferred Stock").
The Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized subject
to limitations prescribed by law, to fix by resolution or
resolutions the designations, powers, preferences and rights, and
the qualifications, limitations or restrictions thereof, of each
such series of Preferred Stock, including without limitation
authority to fix by resolution or resolutions, the dividend
rights, dividend rate, conversion rights, voting rights, rights
and terms of redemption (including sinking fund provisions),
redemption price or prices, and liquidation preferences of any
wholly unissued series of Preferred Stock, and the number of
shares constituting any such series and the designation thereof,
or any of the foregoing.
The Board of Directors is further authorized to increase (but not
above the total number of authorized shares of the class) or
decrease (but not below the number of shares of any such series
then outstanding) the number of shares of any series, the number
of which was fixed by it, subsequent to the issue of shares of
such series then outstanding, subject to the powers, preferences
and rights, and the qualifications, limitations and restrictions
thereof stated in the resolution of the Board of Directors
originally fixing the number of shares of such series. If the
number of shares of any series is so decreased, then the shares
constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the
number of shares of such series.
<PAGE>
FIFTH: The Corporation is to have perpetual existence.
SIXTH: The election of directors need not be by written ballot unless a
stockholder demands election by written ballot at a meeting of
stockholders and before voting begins or unless the Bylaws of the
Corporation shall so provide.
SEVENTH: The number of directors which constitute the whole Board of
Directors of the Corporation shall be designated in the Bylaws of
the Corporation.
EIGHTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is
expressly authorized to adopt, alter, amend or repeal the Bylaws
of the Corporation.
NINTH: To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or may hereafter be amended,
no director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the
adoption of any provision of this Amended and Restated
Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article in respect
of any matter occurring, or any cause of action, suit or claim
that, but for this Article, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
TENTH: At the election of directors of the Corporation, each holder of
stock of any class or series shall be entitled to one vote for
each share held. No stockholder will be permitted to cumulate
votes at any election of directors.
ELEVENTH: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the
Corporation may be kept (subject to any provision contained in
the laws of the State of Delaware) outside of the State of
Delaware at such place or places as may be designated from time
to time by the Board of Directors or in the Bylaws of the
Corporation.
TWELFTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated
Certificate of Incorporation, in the manner now or hereafter
prescribed by the laws of the State of Delaware, and all rights
conferred herein are granted subject to this reservation.
(3) This Amended and Restated Certificate of Incorporation has been duly
adopted by the Board of Directors of this Corporation in accordance with
Sections 242 and 245 of the General Corporation Law.
(4) This Amended and Restated Certificate of Incorporation has been duly
approved, in accordance with Section 242 of the General Corporation Law, by vote
of the holders of a majority of the outstanding stock entitled to vote thereon.
IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Certificate of Incorporation on this 16/th/ day of April, 1998.
-----
/s/ Carol A. Bartz
----------------------------------
Carol A. Bartz
Chief Executive Officer
/s/ Marcia K. Sterling
------------------------------
Marcia K. Sterling
Secretary
<PAGE>
CORRECTED CERTIFICATE
OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
AUTODESK, INC.
A Delaware corporation
I, Marcia K. Sterling, hereby certify:
1. That I am the duly elected Secretary of Autodesk, Inc. ("Autodesk"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "General Corporation Law"), the original Certificate of
Incorporation of which was filed with the Secretary of State of Delaware on May
10, 1994 (the "Certificate of Incorporation");
2. That the instrument being corrected is entitled "Amended and Restated
Certificate of Incorporation of Autodesk, Inc." (the "Prior Instrument") and was
filed with the Secretary of State of Delaware on April 16, 1998, and that the
Prior Instrument as so filed is an inaccurate record of the corporate action
therein referred to inasmuch as it failed to contemplate and preserve a
previously filed Certificate of Designation, and therefore requires correction
as permitted by Section 103(f) of the General Corporation Law;
3. That the document in its corrected form shall be entitled "Certificate
of Amendment of Certificate of Incorporation of Autodesk, Inc." and shall be in
the form attached hereto as Exhibit A (the "Corrected Instrument"), and the
Prior Instrument is hereby superseded in its entirety by the Corrected
Instrument, effective as of April 16, 1998, the original filing date of the
Prior Instrument.
IN WITNESS WHEREOF, Autodesk has caused this Corrected Certificate to be
signed and acknowledged by Marcia K. Sterling, its Secretary, this 7th day of
April, 1999.
/s/ Marcia K. Sterling
-----------------------------
Marcia K. Sterling, Secretary
I hereby acknowledge on behalf of Autodesk that this instrument is the act
and deed of Autodesk and that the facts stated herein are true.
/s/ Marcia K. Sterling
-----------------------------
Marcia K. Sterling, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
AUTODESK, INC.
I, Marcia K. Sterling, hereby certify:
1. That I am the duly elected Secretary of Autodesk, Inc. ("Autodesk"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "General Corporation Law"), the original Certificate of
Incorporation of which was filed with the Secretary of State of Delaware on May
10, 1994;
2. The Certificate of Incorporation of Autodesk is hereby amended by
deleting the first paragraph of Article FOURTH of the Certificate of
Incorporation in its present form and substituting therefor a new first
paragraph of Article FOURTH in the following form:
"The Corporation is authorized to issue two classes of stock to be
designated respectively Common Stock and Preferred Stock. The total number of
shares of all classes of stock which the Corporation has authority to issue is
Two Hundred Fifty-Two Million (252,000,000) shares of Common Stock, $0.01 par
value (the "Common Stock"), and Two Million (2,000,000) shares of Preferred
Stock, $0.01 par value (the "Preferred Stock")."
3. This Certificate of Amendment of Certificate of Incorporation has been
duly adopted by the Board of Directors of this Corporation in accordance with
Section 242 of the General Corporation Law of the State of Delaware.
4. This Certificate of Amendment of Certificate of Incorporation has been
duly approved, in accordance with Sections 242 and 228 of the General
Corporation Law of the State of Delaware, by affirmative vote of the holders of
a majority of the outstanding stock entitled to vote thereon.
IN WITNESS WHEREOF, Autodesk has caused this Certificate of Amendment of
Certificate of Incorporation to be signed and acknowledged by Marcia K.
Sterling, its Secretary, this 7th day of April, 1999.
/s/ Marcia K. Sterling
-----------------------------
Marcia K. Sterling, Secretary
I hereby acknowledge on behalf of Autodesk that this instrument is the act
and deed of Autodesk and that the facts stated herein are true.
/s/ Marcia K. Sterling
-----------------------------
Marcia K. Sterling, Secretary
<PAGE>
EXHIBIT 3.3
-----------
CERTIFICATE OF THE POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF
SERIES B PREFERRED STOCK
OF AUTODESK, INC.
Pursuant to Section 151(g) of the General Corporation Law
of the State of Delaware
We, Carol A. Bartz and Marcia K. Sterling, the President and the Secretary,
respectively, of Autodesk, Inc., a Delaware corporation (the "Company"), in
accordance with the provisions of Section 103 of the General Corporation Law of
the State of Delaware (the "DGCL"), DO HEREBY CERTIFY that, pursuant to the
provisions of Section 151(g) of the DGCL, the following resolutions were duly
adopted by the Board of Directors of the Company and pursuant to authority
conferred upon the Board of Directors by the provisions of the Amended and
Restated Certificate of Incorporation of the Company (the "Certificate of
Incorporation"), the Board of Directors of the Company, in an Action by Written
Consent dated January 18, 1999, adopted resolutions providing for the issuance
of a series of Preferred Stock of the Company and fixing the relative powers,
designations, preferences, rights, qualifications, limitations and restrictions
of such stock. These resolutions are as follows:
"RESOLVED, that pursuant to authority expressly granted to and vested in
the Board of Directors of the Company by the provisions of the Certificate of
Incorporation, the issuance of a series of Preferred Stock of the Company to be
designated "Series B Preferred Stock," par value $0.01 per share, which shall
consist of one of the 1,900,000 shares of Preferred Stock which the Company now
has authority to issue, be, and the same hereby is, authorized, and the Board
hereby fixes the powers, designations, preferences and relative, participating,
optional and other rights, and the qualifications, limitations and restrictions
thereof, of the sole share of such series (in addition to the powers,
designations, preferences and relative, participating, optional or other rights,
and the qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock of
this series) as follows:
I. Authorized Number and Designation. One share of the Preferred Stock,
$0.01 par value per share, of the Company is hereby constituted as a series of
the Preferred Stock designated Series B Preferred Stock, $0.01 par value (the
"Series B Preferred").
II. Dividends and Distributions. The holder of Series B Preferred shall
not be entitled to receive any dividends declared and paid by the Company.
III. Voting Rights. Except as otherwise required by law or by the
Certificate of Incorporation: (i) the holder of record of the sole share of
Series B Preferred shall have a number of
<PAGE>
votes equal to the number of votes that the holders (the "Holders") of the
outstanding Exchangeable Non-Voting Shares ("Exchangeable Shares") of Discreet
Logic Inc., a Quebec company ("New Discreet"), from time to time, would be
entitled to if all such Exchangeable Shares were exchanged by the Holders for
shares of the Common Stock of the Company ("Common Stock") pursuant to the
terms of the Exchangeable Shares, in each case for the election of directors
and on all matters submitted to a vote of the stockholders of the Company
("Voting Rights"); (ii) the holder of record of the sole share of Series B
Preferred shall not have the Voting Rights with respect to the Exchangeable
Shares owned by the Company, the Company's subsidiaries or any person or
entity directly or indirectly controlled by or under common control with the
Company (unless such person or entity, if any, was a director, executive
officer, or principal shareholder of Discreet Logic Inc., a Quebec company ("Old
Discreet"), prior to the date of filing hereof); and (iii) in respect of all
matters concerning the voting of shares, the Series B Preferred and the Common
Stock shall vote as a single class.
IV. Liquidation Preference. Upon any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, and subject to
any prior rights of holders of shares of Preferred Stock ranking senior to the
Series B Preferred, the holder of the share of Series B Preferred shall be
paid an amount equal to $1.00, together with payment to any class of stock
ranking equally with the Series B Preferred, and before payment shall be made
to the holders of any stock ranking on liquidation junior to the Series B
Preferred (such amount payable with respect to the Series B Preferred being
referred to as the "Series B Preferred Liquidation Preference Payment").
V. Ranking. The Series B Preferred shall rank junior to the Series A
Preferred Stock of the Company in all respects.
VI. Other Provisions. (a) Pursuant to the terms of that certain Second
Amended and Restated Agreement and Plan of Acquisition and Amalgamation dated as
of November 18, 1998, as amended, by and among the Company, Autodesk Development
B.V. ("Dutchco"), 9066-9771 Quebec Inc., Autodesk Canada Inc., 9066-9854 Quebec
Inc. and Old Discreet, one share of Series B Preferred is being issued to the
trustee (the "Trustee") under the Voting and Exchange Trust Agreement, dated as
of March 16, 1999 by and among the Company, Dutchco, New Discreet and the
Trustee.
(b) The holder of the sole share of Series B Preferred is entitled
to exercise the voting rights attendant thereto in such manner as such holder
desires.
(c) At such time as the Series B Preferred has no votes attached to
it because there are no Exchangeable Shares outstanding which are not owned by
the Company, any of its subsidiaries or any person directly or indirectly
controlled by or under common control of the Company, excluding such shares of
Series B Preferred owned by any person or entity, if any, that was a director,
executive officer or principal stockholder of Old Discreet prior to the date
of filing hereof, the Series B Preferred shall be cancelled.
-2-
<PAGE>
RESOLVED FURTHER, that the Chief Executive Officer, President or any Vice
President and the Secretary or any Assistant Secretary of the Company be, and
they hereby are, authorized and directed to prepare and file (or cause to be
prepared and filed) a Certificate of the Powers, Designations, Preferences and
Rights in accordance with the foregoing resolution and the provisions of
Delaware law and to take such actions as they may deem necessary or appropriate
to carry out the intent of the foregoing resolutions."
IN WITNESS WHEREOF, we have executed and subscribed to this Certificate and
do hereby affirm the foregoing as true under the penalties of perjury this 9th
day of March, 1999.
Autodesk, Inc.
/s/ Carol A Bartz
-------------------------------------------
Carol A. Bartz
Chairman and Chief Executive Officer
/s/ Marcia K. Sterling
-------------------------------------------
Marcia K. Sterling
Vice President, Business Development,
General Counsel and Secretary
-3-
<PAGE>
EXHIBIT 9.1
VOTING AND EXCHANGE TRUST AGREEMENT
AGREEMENT made as of the 16th day of March, 1999
BETWEEN:
AUTODESK, INC.,
a corporation subsisting under the laws
of the State of Delaware,
(hereinafter referred to as the "Parent")
--and--
DISCREET LOGIC INC.,
a company subsisting under the laws
of the Province of Quebec,
(hereinafter referred to as the "Corporation")
--and--
AUTODESK DEVELOPMENT B.V.,
a corporation subsisting under the laws
of The Netherlands,
(hereinafter referred to as "Dutchco")
--and--
MONTREAL TRUST COMPANY OF CANADA,
a trust company incorporated under the
laws of Canada,
(hereinafter referred to as the "Trustee").
WHEREAS pursuant to the Second Amended and Restated Agreement and Plan of
Acquisition and Amalgamation dated as of November 18, 1998, as amended, by and
among Parent, Dutchco, 9066-9771 Quebec Inc. ("Amalgamation Sub"), 9066-9854
Quebec Inc. ("Autodesk Quebec"), Autodesk Canada Inc. and Discreet Logic Inc.
(the "Company") (such agreement being hereinafter referred to as the
"Combination Agreement"), the parties agreed that immediately after the
Effective Time (as such term is defined in the Combination Agreement), Parent,
Dutchco, the Corporation and a Canadian trust company would execute and
deliver a Voting and Exchange Trust Agreement containing the terms and
conditions set forth in Exhibit D to the Combination Agreement together with
such other terms and conditions as may be agreed to by the parties to the
Combination Agreement acting reasonably;
AND WHEREAS to give effect to the amalgamation contemplated in the
Combination Agreement and the Second Amended and Restated Amalgamation
Agreement dated as of January 18, 1999 among the Company, Autodesk Quebec and
Amalgamation Sub, articles of amalgamation (the "Articles of Amalgamation")
were filed pursuant to the Companies Act (Quebec) whereby the Company,
Autodesk Quebec and Amalgamation Sub were amalgamated to continue as the
Corporation (the "Amalgamation");
AND WHEREAS pursuant to the Amalgamation (i) the shareholders of the Company
("Discreet Shareholders") received one Class B non-voting common share of the
Corporation ("Class B Shares") for each common share of the Company held by
each such shareholder immediately prior to the Amalgamation, (ii) Dutchco, a
wholly-owned subsidiary of Parent, became the registered and beneficial owner
of all of the issued and outstanding Class A Shares of the Corporation, and
(iii) Autodesk Canada Inc., an indirect wholly-owned
1
<PAGE>
subsidiary of Parent, became the registered and beneficial owner of all of the
issued and outstanding Class C Shares of the Corporation;
AND WHEREAS subsequent to the Amalgamation, the holders of Class B Shares
had the right to elect to retract the Class B Shares received by them upon the
Amalgamation in exchange for exchangeable non-voting shares of the Corporation
(the "Exchangeable Shares") on the basis of 0.33 of one Exchangeable Share for
each Class B Share so retracted;
AND WHEREAS, immediately following the retraction of the Class B Shares by
the holders thereof, the remaining Class B Shares not so retracted were
automatically converted into units each consisting of one Class E Share and
one Class F Share;
AND WHEREAS the Articles of Amalgamation set forth the rights, privileges,
restrictions and conditions (collectively the "Exchangeable Share Provisions")
attaching to the Exchangeable Shares;
AND WHEREAS pursuant to the Combination Agreement and the terms and
conditions of the Exchangeable Shares, the Parent is to provide voting rights
in the Parent to each holder (other than the Parent, its subsidiaries and
Affiliates) from time to time of Exchangeable Shares, such voting rights per
Exchangeable Share to be equivalent to the voting rights per Parent Common
Share;
AND WHEREAS pursuant to the Combination Agreement and the terms and
conditions of the Exchangeable Shares, Dutchco is to grant to and in favour of
the holders (other than the Parent, its subsidiaries and Affiliates) from time
to time of Exchangeable Shares the right, in the circumstances set forth
herein, to require Dutchco to purchase from each such holder all or any part
of the Exchangeable Shares held by the holder;
AND WHEREAS the parties desire to make appropriate provision and to
establish a procedure whereby voting rights in the Parent shall be exercisable
by holders (other than the Parent, its subsidiaries and Affiliates) from time
to time of Exchangeable Shares by and through the Trustee, which will hold
legal title to one share of Series B Preferred Stock of the Parent to which
voting rights attach for the benefit of such holders, and whereby the right to
require Dutchco to purchase Exchangeable Shares from the holders thereof
(other than the Parent, its subsidiaries and Affiliates) shall be exercisable
by such holders from time to time of Exchangeable Shares by and through the
Trustee, which will hold legal title to such right for the benefit of such
holders;
AND WHEREAS pursuant to the provisions attaching to the Class E Shares and
the Class F Shares of the Corporation, the Corporation has the right to redeem
all of the issued and outstanding Class E Shares and Class F Shares;
AND WHEREAS pursuant to the provisions attaching to the Class E Shares and
the Class F Shares of the Corporation, Dutchco has, upon notice by the
Corporation of its intent to redeem the Class E Shares and the Class F Shares,
the right to purchase all of the issued and outstanding Class E Shares and
Class F Shares;
AND WHEREAS the parties desire to make appropriate provision whereby Dutchco
covenants to exercise the Class E Redemption Call Right and the Class F
Redemption Call Right and the Trustee shall be entitled to enforce such
covenant on behalf of the Class E and Class F Shareholders;
AND WHEREAS these recitals and any statements of fact in this trust
agreement are made by the Parent, Dutchco and the Corporation and not by the
Trustee;
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this trust agreement and for other good and valuable consideration
(the receipt and sufficiency of which are hereby acknowledged), the parties
agree as follows:
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ARTICLE 1
Definitions and Interpretation
1.1 Definitions. In this trust agreement, the following terms shall have the
following meanings:
"Affiliate" of any person means any other person directly or indirectly
controlled by, or under common control of, that person. For the purposes of
this definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control of"), as applied to any person,
means the possession by another person, directly or indirectly, of the power
to direct or cause the direction of the management and policies of that first
mentioned person, whether through the ownership of voting securities, by
contract or otherwise; provided, however, that any former directors, executive
officers or principal shareholders of Discreet Logic Inc. who may be deemed to
be an affiliate of Parent, after the Effective Date, shall not be considered
an "Affiliate" for purposes of this Agreement.
"Automatic Exchange Rights" means the benefit of the obligation of Dutchco
to effect the automatic exchange of Parent Common Shares for Exchangeable
Shares pursuant to section 5.12 hereof.
"Beneficiaries" means, for the purposes of matters relating to the Voting
Share, the Exchangeable Shares Shareholders and, for the purposes of matters
relating herein to the Covenants, the Class E and F Shareholders.
"Beneficiary Votes" has the meaning ascribed thereto in section 4.2 hereof.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means a day other than a Saturday, Sunday or a day when banks
are not open for business in either or both of San Francisco, California or
Montreal, Quebec.
"Canadian Dollar Equivalent" means in respect of an amount expressed in a
foreign currency (the "Foreign Currency Amount") at any date the product
obtained by multiplying (a) the Foreign Currency Amount by (b) the noon spot
exchange rate on such date for such foreign currency expressed in Canadian
dollars as reported by the Bank of Canada or, in the event such spot exchange
rate is not available, such exchange rate on such date for such foreign
currency expressed in Canadian dollars as may be deemed by the Board of
Directors to be appropriate for such purpose.
"Class B Conversion Time" means the time at which each outstanding Class B
Share shall automatically be converted into a unit consisting of one Class E
Share and one Class F Share as contemplated in section 5.1 of the provisions
attaching to the Class B Shares.
"Class E and F Shareholders" means the registered holders from time to time
of the Class E Shares and the Class F Shares.
"Class E Shares" means the Class E voting common shares in the share capital
of the Corporation.
"Class F Shares" means the Class F non-voting common shares in the share
capital of the Corporation.
"Class E Redemption Right" means the right of the Corporation to redeem the
Class E Shares as contemplated in section 4.1 of the provisions attaching to
the Class E Shares.
"Class F Redemption Right" means the right of the Corporation to redeem the
Class F Shares as contemplated in section 4.1 of the provisions attaching to
the Class F Shares.
"Class E Redemption Call Right" means the overriding right of Dutchco
contemplated in section 4.3 of the provisions attached to the Class E Shares
pursuant to which Dutchco is entitled, upon and notwithstanding the proposed
exercise by the Corporation of the Class E Redemption Right, to purchase all
but not less than all of
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the issued and outstanding Class E Shares from all but not less than all of
the holders of the issued and outstanding Class E Shares.
"Class F Redemption Call Right" means the overriding right of Dutchco
contemplated in section 4.3 of the provisions attached to the Class F Shares
pursuant to which Dutchco is entitled, upon and notwithstanding the proposed
exercise by the Corporation of the Class F Redemption Right, to purchase all
but not less than all of the issued and outstanding Class F Shares from all
but not less than all of the holders of the issued and outstanding Class F
Shares.
"Covenants" means the covenants of the Corporation contained in section 7.1
hereof and the covenant of Dutchco contained in section 7.2 hereof.
"Current Market Price" means, in respect of a Parent Common Share on any
date, the Canadian Dollar Equivalent of the average of the closing prices of a
Parent Common Shares on Nasdaq on each of the thirty (30) consecutive trading
days ending not more than three trading days before such date, or, if the
Parent Common Shares are not then quoted on Nasdaq, on such other stock
exchange or automated quotation system on which the Parent Common Shares are
listed or quoted, as the case may be, as may be selected by the Board of
Directors for such purpose; provided, however, that if there is no public
distribution or trading activity of Parent Common Shares during such period
then the Current Market Price of a Parent Common Share shall be determined by
the Board of Directors based upon the advice of such qualified independent
financial advisors as the Board of Directors may deem to be appropriate, and
provided further that any such selection, opinion or determination by the
Board of Directors shall be conclusive and binding.
"Exchange Right" has the meaning ascribed thereto in section 5.1 hereof.
"Exchangeable Shares Shareholders" means the registered holders from time to
time of the Exchangeable Shares other than the Parent, its subsidiaries and
Affiliates.
"Insolvency Event" means the institution by the Corporation of any
proceeding to be adjudicated bankrupt or insolvent or to be dissolved or wound
up, or the consent of the Corporation to the institution of bankruptcy,
insolvency, dissolution or winding up proceedings against it, or the filing of
a petition, answer or consent seeking dissolution or winding up under any
bankruptcy, insolvency or analogous laws, including without limitation the
Companies Creditors' Arrangement Act (Canada) and the Bankruptcy and
Insolvency Act (Canada), and the failure by the Corporation to contest in good
faith any such proceedings commenced in respect of the Corporation within 15
days of becoming aware thereof, or the consent by the Corporation to the
filing of any such petition or to the appointment of a receiver, or the making
by the Corporation of a general assignment for the benefit of creditors, or
the admission in writing by the Corporation of its inability to pay its debts
generally as they become due, or the Corporation not being permitted, pursuant
to solvency requirements of applicable law, to redeem any Retracted Shares
pursuant to section 6.6 of the Exchangeable Share Provisions.
"Liquidation Call Right" has the meaning ascribed thereto in the
Exchangeable Share Provisions.
"Liquidation Event" has the meaning ascribed thereto in section 5.12(b)
hereof.
"Liquidation Event Effective Date" has the meaning ascribed thereto in
section 5.12(c) hereof.
"List" has the meaning ascribed thereto in section 4.6 hereof.
"Nasdaq" means the Nasdaq National Market.
"Officer's Certificate" means, with respect to the Parent, Dutchco or the
Corporation, as the case may be, a certificate signed by any one of the
Chairman of the Board, a Vice-Chairman of the Board, the President, any Vice-
President or any other senior officer of the Parent, Dutchco or the
Corporation, as the case may be.
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"Parent Consent" has the meaning ascribed thereto in section 4.2 hereof.
"Parent Meeting" has the meaning ascribed thereto in section 4.2 hereof.
"Parent Successor" has the meaning ascribed thereto in section 12.1(a)
hereof.
"person" includes an individual, partnership, corporation, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator and other legal representative.
"Redemption Call Right" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"Retracted Shares" has the meaning ascribed thereto in section 5.7 hereof.
"Retraction Call Right" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"Support Agreement" means that certain support agreement made as of even
date hereof between the Corporation, Dutchco and the Parent.
"Trust" means the trust created by this Agreement.
"Trust Estate" means the Voting Share, any other securities, the Exchange
Right, the Automatic Exchange Rights, the Covenants and any money or other
property which may be held by the Trustee from time to time pursuant to this
trust agreement.
"Trustee" means Montreal Trust Company of Canada and, subject to the
provisions of Article 11 hereof, includes any successor trustee.
"Voting Rights" means the voting rights attached to the Voting Share.
"Voting Share" means the one share of Series B Preferred Stock of the
Parent, issued by the Parent to and deposited with the Trustee, which entitles
the holder of record to a number of votes at meetings of holders of Parent
Common Shares equal to that number of votes that holders of the Exchangeable
Shares outstanding from time to time other than Exchangeable Shares held by
the Parent, its subsidiaries and Affiliates would be entitled to if such
Exchangeable Shares were exchanged for Parent Common Shares.
1.2 Interpretation Not Affected by Headings, etc. The division of this
Agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this Agreement.
1.3 Number, Gender, etc. Words importing the singular number only shall
include the plural and vice versa. Words importing the use of any gender shall
include all genders.
1.4 Date for any Action. If any date on which any action is required to be
taken under this trust agreement is not a Business Day, such action shall be
required to be taken on the next succeeding Business Day.
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ARTICLE 2
Purpose of Agreement
2.1 Establishment of Trust. The purpose of this Agreement is to create the
Trust for the benefit of the Beneficiaries, as herein provided. The Trustee
will hold the Voting Share in order to enable the Trustee to exercise the
Voting Rights and will hold the Exchange Right and the Automatic Exchange
Rights and the other rights with respect to matters relating to the Voting
Share granted in or resulting from the Trustee being a party to this Agreement
in order to enable the Trustee to exercise or enforce such rights, in each
case as trustee for and on behalf of the Exchangeable Shares Shareholders as
provided in this Agreement. The Trustee will hold the Covenants and will hold
the other rights with respect to matters relating to the Covenants granted in
or resulting from the Trustee being a party to this Agreement in order to
enable the Trustee to exercise or enforce such rights, in each case as trustee
for and on behalf of the Class E and F Shareholders as provided in this
Agreement.
ARTICLE 3
Voting Share
3.1 Issue and Ownership of the Voting Share. The Parent hereby issues to and
deposits with the Trustee the Voting Share to be hereafter held of record by
the Trustee as trustee for and on behalf of, and for the use and benefit of,
the Beneficiaries and in accordance with the provisions of this Agreement.
Parent hereby acknowledges receipt from the Trustee as trustee for and on
behalf of the beneficiaries of good and valuable consideration (and the
sufficiency thereof) for the issuance of the Voting Share by the Parent to the
Trustee. During the term of the Trust and subject to the terms and conditions
of this Agreement, the Trustee shall possess and be vested with full legal
ownership of the Voting Share and shall be entitled to exercise all of the
rights and powers of an owner with respect to the Voting Share, provided that
the Trustee shall:
(a) hold the Voting Share and the legal title thereto as trustee solely
for the use and benefit of the Beneficiaries in accordance with the
provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, have no power or
authority to sell, transfer, vote or otherwise deal in or with the Voting
Share and the Voting Share shall not be used or disposed of by the Trustee
for any purpose other than the purposes for which this Trust is created
pursuant to this Agreement.
3.2 Legended Share Certificates. The Corporation will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Beneficiaries of their right to instruct the Trustee with respect to the
exercise of the Beneficiary Votes.
3.3 Safe Keeping of Certificate. The certificate representing the Voting
Share shall at all times be held in safekeeping by the Trustee.
ARTICLE 4
Exercise of Voting Share
4.1 Voting Share. The Trustee, as the holder of record of the Voting Share,
shall be entitled to all of the Voting Rights, including the right to consent
to or to vote the Voting Share in person or by proxy, on any matter, question
or proposition whatsoever that may properly come before the shareholders of
the Parent at a Parent Meeting or in connection with a Parent Consent (in each
case, as hereinafter defined). The Voting Rights shall be and remain vested in
and exercised by the Trustee. Subject to section 8.15 hereof, the Trustee
shall exercise the Voting Rights only:
(a) on the basis of instructions received pursuant to this Article 4 from
Beneficiaries entitled to instruct the Trustee as to the voting thereof at
the time at which the Parent Consent is sought or the Parent Meeting is
held; or
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(b) to the extent that no instructions are received from a Beneficiary
with respect to the Voting Rights to which such Beneficiary is entitled,
the Trustee shall not exercise or permit the exercise of such Voting
Rights.
4.2 Number of Votes. With respect to all meetings of shareholders of the
Parent at which holders of Parent Common Shares are entitled to vote (a
"Parent Meeting") and with respect to all written consents sought by the
Parent from its shareholders including the holders of Parent Common Shares (a
"Parent Consent"), each Beneficiary shall be entitled to instruct the Trustee
to cast and exercise, in the manner instructed, one of the votes comprised in
the Voting Rights for each Exchangeable Share owned of record by such
Beneficiary on the record date established by the Parent or by applicable law
for such Parent Meeting or Parent Consent, as the case may be (the
"Beneficiary Votes") in respect of each matter, question or proposition to be
voted on at such Parent Meeting or to be consented to in connection with such
Parent Consent.
4.3 Mailings to Shareholders. With respect to each Parent Meeting and Parent
Consent, the Trustee will mail or cause to be mailed (or otherwise communicate
in the same manner as the Parent utilizes in communications to holders of
Parent Common Shares, subject to the Trustee being advised in writing of such
method and its ability to provide this method of communication) to each of the
Beneficiaries named in the List (as hereinafter defined) on the same day as
the initial mailing or notice (or other communication) with respect thereto is
given by the Parent to its shareholders:
(a) a copy of such notice, together with any related materials to be
provided to shareholders of the Parent;
(b) a statement that such Beneficiary is entitled, subject to the
provisions of section 4.7, to instruct the Trustee as to the exercise of
the Beneficiary Votes with respect to such Parent Meeting or Parent
Consent, as the case may be, or, pursuant and subject to section 4.7, to
attend such Parent Meeting and to exercise personally the Beneficiary Votes
thereat;
(c) a statement as to the manner in which such instructions may be given
to the Trustee, including an express indication that instructions may be
given to the Trustee to give:
(i) a proxy to such Beneficiary or his designee to exercise
personally such Beneficiary's Beneficiary Votes; or
(ii) a proxy to a designated agent or other representative of the
management of the Parent to exercise such Beneficiary's Beneficiary
Votes;
(d) a statement that if no such instructions are received from the
Beneficiary, the Beneficiary Votes to which such Beneficiary is entitled
will not be exercised;
(e) a form of direction whereby the Beneficiary may so direct and
instruct the Trustee as contemplated herein; and
(f) a statement of the time and date by which such instructions must be
received by the Trustee in order to be binding upon it, which in the case
of a Parent Meeting shall not be earlier than the close of business on the
second Business Day prior to such meeting, and of the method for revoking
or amending such instructions.
The materials referred to above are to be provided by Parent to the Trustee,
but shall be subject to review and comment by the Trustee. For the purpose of
determining the Beneficiary Votes to which a Beneficiary is entitled in
respect of any such Parent Meeting or Parent Consent, the number of
Exchangeable Shares owned of record by the Beneficiary shall be determined at
the close of business on the record date established by the Parent or by
applicable law for purposes of determining shareholders entitled to vote at
such Parent Meeting or to give written consent in connection with such Parent
Consent. The Parent will notify the Trustee in writing of any decision of the
Board of Directors of the Parent with respect to the calling of any such
Parent Meeting or the seeking of any such Parent Consent and shall provide all
necessary information and materials to the Trustee in each case promptly and
in any event in sufficient time to enable the Trustee to perform its
obligations contemplated by this section 4.3.
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4.4 Copies of Shareholder Information. The Parent will deliver to the
Trustee copies of all proxy materials (including notices of Parent Meetings
but excluding proxies to vote Parent Common Shares), information statements,
reports (including without limitation all interim and annual financial
statements) and other written communications that are to be distributed from
time to time to holders of Parent Common Shares in sufficient quantities and
in sufficient time so as to enable the Trustee to send or cause to be sent
those materials to each Beneficiary at the same time as such materials are
first sent to holders of Parent Common Shares. The Trustee will mail or
otherwise send to each Beneficiary, at the expense of the Parent, copies of
all such materials (and all materials specifically directed to the
Beneficiaries or to the Trustee for the benefit of the Beneficiaries by the
Parent) received by the Trustee from the Parent at the same time as such
materials are first sent to holders of Parent Common Shares. The Trustee will
also make available for inspection by any Beneficiary at the Trustee's
principal corporate trust office in the cities of Toronto, Ontario and
Montreal, Quebec all proxy materials, information statements, reports and
other written communications that are:
(a) received by the Trustee as the registered holder of the Voting Share
and made available by the Parent to the holders of Parent Common Shares; or
(b) specifically directed to the Beneficiaries or to the Trustee for the
benefit of the Beneficiaries by the Parent.
4.5 Other Materials. Immediately after receipt by the Parent or any
shareholder of the Parent of any material sent or given generally to the
holders of Parent Common Shares by or on behalf of a third party, including
without limitation dissident proxy and information circulars (and related
information and material) and tender and exchange offer circulars (and related
information and material), the Parent shall use its best efforts to obtain and
deliver to the Trustee copies thereof in sufficient quantities so as to enable
the Trustee to forward such material (unless the same has been provided
directly to Beneficiaries by such third party) to each Beneficiary as soon as
possible thereafter. As soon as possible after receipt thereof, the Trustee
will mail or otherwise send to each Beneficiary, at the expense of the Parent,
copies of all such materials received by the Trustee from the Parent. The
Trustee will also make available for inspection by any Beneficiary at the
Trustee's principal corporate trust office in the cities of Toronto, Ontario
and Montreal, Quebec copies of all such materials.
4.6 List of Persons Entitled to Vote. The Corporation shall, (a) prior to
each annual, general and special Parent Meeting or the seeking of any Parent
Consent and (b) forthwith upon each request made at any time by the Trustee in
writing, prepare or cause to be prepared a list (a "List") of the names and
addresses of the Beneficiaries arranged in alphabetical order and showing the
number of Exchangeable Shares held of record by each such Beneficiary, in each
case at the close of business on the date specified by the Trustee in such
request or, in the case of a List prepared in connection with a Parent Meeting
or a Parent Consent, at the close of business on the record date established
by the Parent or pursuant to applicable law for determining the holders of
Parent Common Shares entitled to receive notice of and/or to vote at such
Parent Meeting or to give consent in connection with such Parent Consent. Each
such List shall be delivered to the Trustee promptly after receipt by the
Corporation of such request or the record date for such meeting or seeking of
consent, as the case may be, and in any event within sufficient time as to
enable the Trustee to perform its obligations under this Agreement. The Parent
agrees to give the Corporation notice (with a copy to the Trustee) of the
calling of any Parent Meeting or the seeking of any Parent Consent, together
with the record dates therefor, sufficiently prior to the date of the calling
of such meeting or seeking of such consent so as to enable the Corporation to
perform its obligations under this section 4.6.
4.7 Entitlement to Direct Votes. Any Beneficiary named in a List prepared in
connection with any Parent Meeting or any Parent Consent will be entitled (a)
to instruct the Trustee in the manner described in section 4.3 with respect to
the exercise of the Beneficiary Votes to which such Beneficiary is entitled or
(b) to attend such meeting and personally to exercise thereat (or to exercise
with respect to any written consent), as the proxy of the Trustee, the
Beneficiary Votes to which such Beneficiary is entitled.
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4.8 Voting by Trustee, and Attendance of Trustee Representative, at Parent
Meetings.
(a) In connection with each Parent Meeting and Parent Consent, the
Trustee shall exercise, either in person or by proxy, in accordance with
the instructions received from a Beneficiary pursuant to section 4.3, the
Beneficiary Votes as to which such Beneficiary is entitled to direct the
vote (or any lesser number thereof as may be set forth in the
instructions); provided, however, that such written instructions are
received by the Trustee from the Beneficiary prior to the time and date
fixed by it for receipt of such instructions in the notice given by the
Trustee to the Beneficiary pursuant to section 4.3.
(b) The Trustee shall cause such representatives as are empowered by it
to sign and deliver, on behalf of the Trustee, proxies for Voting Rights to
attend each Parent Meeting. Upon submission by a Beneficiary (or its
designee) of identification satisfactory to the Trustee's representatives,
and at the Beneficiary's request, such representatives shall sign and
deliver to such Beneficiary (or its designee) a proxy to exercise
personally the Beneficiary Votes as to which such Beneficiary is otherwise
entitled hereunder to direct the vote, if such Beneficiary either (i) has
not previously given the Trustee instructions pursuant to section 4.3 in
respect of such meeting, or (ii) submits to the Trustee's representatives
written revocation of any such previous instructions. At such meeting, the
Beneficiary exercising such Beneficiary Votes shall have the same rights as
the Trustee to speak at the meeting in respect of any matter, question or
proposition, to vote by way of ballot at the meeting in respect of any
matter, question or proposition and to vote at such meeting by way of a
show of hands in respect of any matter, question or proposition.
4.9 Distribution of Written Materials. Any written materials to be
distributed by the Trustee to Beneficiaries pursuant to this Agreement shall
be delivered or sent by mail (or otherwise communicated in the same manner as
the Parent utilizes in communications to holders of Parent Common Shares,
subject to the Trustee being advised in writing of such method and its ability
to provide this method of communication) to each Beneficiary at its address as
shown on the books of the Corporation. The Corporation shall provide or cause
to be provided to the Trustee for this purpose, on a timely basis and without
charge or other expense:
(a) current lists of the Beneficiaries and the registered holders of
Exchangeable Shares; and
(b) upon the request of the Trustee, mailing labels to enable the Trustee
to carry out its duties under this Agreement.
4.10 Termination of Voting Rights. All of the rights of a Beneficiary with
respect to the Beneficiary Votes exercisable in respect of the Exchangeable
Shares held by such Beneficiary, including the right to instruct the Trustee
as to the voting of or to vote personally such Beneficiary Votes, shall be
deemed to be surrendered by the Beneficiary to the Parent and such Beneficiary
Votes and the Voting Rights represented thereby shall cease immediately upon
the delivery by such holder to the Trustee of the certificates representing
such Exchangeable Shares in connection with the exercise by the Beneficiary of
the Exchange Right or the occurrence of the automatic exchange of Exchangeable
Shares for Parent Common Shares, as specified in Article 5 hereof (unless in
either case (a) Dutchco shall not have delivered the requisite Parent Common
Shares issuable in exchange therefor to the Trustee for delivery to the
Beneficiaries or (b) such exchange of Exchangeable Shares for Parent Common
Shares occurs after the close of business on the record date for a Parent
Meeting or the seeking of a Parent Consent but prior to such Parent Meeting or
the effective date of such Parent Consent), or upon the retraction or
redemption of Exchangeable Shares pursuant to Article 6 or Article 7 of the
Exchangeable Share Provisions, respectively, or upon the effective date of the
liquidation, dissolution or winding-up of the Corporation pursuant to Article
5 of the Exchangeable Share Provisions, or upon the purchase of Exchangeable
Shares from the holder thereof by Dutchco pursuant to the exercise by Dutchco
of the Retraction Call Right, the Redemption Call Right or the Liquidation
Call Right (unless Dutchco shall not have delivered the requisite Parent
Common Shares and cheque, if any, deliverable in exchange thereof to the
Trustee for delivery to the Beneficiaries and such redemption, retraction or
purchase occurs after the close of business on the record date for a Parent
Meeting or the seeking of a Parent Consent but prior to such Parent Meeting or
the effective date of such Parent Consent).
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ARTICLE 5
Exchange Right and Automatic Exchange
5.1 Grant and Ownership of the Exchange Right. Dutchco hereby grants to the
Trustee as trustee for and on behalf of, and for the use and benefit of, the
Beneficiaries the right (the "Exchange Right"), upon the occurrence and during
the continuance of an Insolvency Event, to require Dutchco to purchase from
each or any Beneficiary all or any part of the Exchangeable Shares held by the
Beneficiary and the Automatic Exchange Rights, all in accordance with the
provisions of this Agreement. Dutchco hereby acknowledges receipt from the
Trustee as trustee for and on behalf of the Beneficiaries of good and valuable
consideration (and the sufficiency thereof) for the grant of the Exchange
Right and the Automatic Exchange Right by Dutchco to the Trustee. During the
term of the Trust and subject to the terms and conditions of this Agreement,
the Trustee shall possess and be vested with full legal ownership of the
Exchange Right and the Automatic Exchange Rights and shall be entitled to
exercise all of the rights and powers of an owner with respect to the Exchange
Right and the Automatic Exchange Rights, provided that the Trustee shall:
(a) hold the Exchange Right and the Automatic Exchange Rights and the
legal title thereto as trustee solely for the use and benefit of the
Beneficiaries in accordance with the provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, have no power or
authority to exercise or otherwise deal in or with the Exchange Right or
the Automatic Exchange Rights, and the Trustee shall not exercise any such
rights for any purpose other than the purposes for which this Trust is
created pursuant to this Agreement.
5.2 Legended Share Certificates. The Corporation will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Beneficiaries of:
(a) their right to instruct the Trustee with respect to the exercise of
the Exchange Right in respect of the Exchangeable Shares held by a
Beneficiary; and
(b) the Automatic Exchange Rights.
5.3 General Exercise of Exchange Right. The Exchange Right shall be and
remain vested in and exercised by the Trustee. Subject to section 8.15, the
Trustee shall exercise the Exchange Right only:
(a) on the basis of instructions received pursuant to this Article 5 from
Beneficiaries entitled to instruct the Trustee as to the exercise thereof;
or
(b) to the extent that no instructions are received from a Beneficiary
with respect to the Exchange Right, the Trustee shall not exercise or
permit the exercise of the Exchange Right.
5.4 Purchase Price. The purchase price payable by Dutchco for each
Exchangeable Share to be purchased by Dutchco under the Exchange Right shall
be an amount per share equal to (a) the Current Market Price of a Parent
Common Share on the last Business Day prior to the day of closing of the
purchase and sale of such Exchangeable Share under the Exchange Right plus (b)
an additional amount equivalent to the full amount of all dividends declared
and unpaid on each such Exchangeable Share and all dividends declared on
Parent Common Shares which have not been declared on such Exchangeable Shares
in accordance with section 3.1 of the Exchangeable Share Provisions (provided
that if the record date for any such declared and unpaid dividends occurs on
or after the day of closing of such purchase and sale the purchase price shall
not include such additional amount equivalent to such declared and unpaid
dividends). In connection with each exercise of the Exchange Right, Dutchco
will provide to the Trustee an Officer's Certificate setting forth the
calculation of the purchase price for each Exchangeable Share. The purchase
price for each such Exchangeable Share so purchased may be satisfied only by
Dutchco delivering or causing to be delivered to the Trustee, on behalf of the
relevant Beneficiary, one Parent Common Share and a cheque for the balance, if
any, of the purchase price.
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5.5 Exercise Instructions. Subject to the terms and conditions herein set
forth, a Beneficiary shall be entitled, upon the occurrence and during the
continuance of an Insolvency Event, to instruct the Trustee to exercise the
Exchange Right with respect to all or any part of the Exchangeable Shares
registered in the name of such Beneficiary on the books of the Corporation. To
cause the exercise of the Exchange Right by the Trustee, the Beneficiary shall
deliver to the Trustee, in person or by certified or registered mail, at its
principal corporate trust office in Toronto, Ontario or Montreal, Quebec or at
such other places in Canada as the Trustee may from time to time designate by
written notice to the Beneficiaries, the certificates representing the
Exchangeable Shares which such Beneficiary desires Dutchco to purchase, duly
endorsed in blank, and accompanied by such other documents and instruments as
may be required to effect a transfer of Exchangeable Shares under the
Companies Act (Quebec) and the by-laws of the Corporation and such additional
documents and instruments as the Trustee or Dutchco may reasonably require
together with (a) a duly completed form of notice of exercise of the Exchange
Right, contained on the reverse of or attached to the Exchangeable Share
certificates, stating (i) that the Beneficiary thereby instructs the Trustee
to exercise the Exchange Right so as to require Dutchco to purchase from the
Beneficiary the number of Exchangeable Shares specified therein, (ii) that
such Beneficiary has good title to and owns all such Exchangeable Shares to be
acquired by Dutchco free and clear of all liens, claims and encumbrances,
(iii) the names in which the certificates representing the Parent Common
Shares deliverable in connection with the exercise of the Exchange Right are
to be issued and (iv) the names and addresses of the persons to whom such new
certificates should be delivered and (b) payment (or evidence satisfactory to
the Trustee, the Corporation and Dutchco of payment) of the taxes (if any)
payable as contemplated by section 5.8 of this Agreement. If only a part of
the Exchangeable Shares represented by any certificate or certificates
delivered to the Trustee are to be purchased by Dutchco under the Exchange
Right, a new certificate for the balance of such Exchangeable Shares shall be
issued to the holder at the expense of the Corporation.
5.6 Delivery of Parent Common Shares; Effect of Exercise. Promptly after
receipt of the certificates representing the Exchangeable Shares which the
Beneficiary desires Dutchco to purchase under the Exchange Right together with
such documents and instruments of transfer and a duly completed form of notice
of exercise of the Exchange Right (and payment of taxes, if any, or evidence
thereof), duly endorsed for transfer to Dutchco, the Trustee shall notify the
Parent, Dutchco and the Corporation of its receipt of the same, which notice
to the Parent, Dutchco and the Corporation shall constitute exercise of the
Exchange Right by the Trustee on behalf of the holder of such Exchangeable
Shares, and Dutchco shall immediately thereafter deliver or cause to be
delivered to the Trustee, for delivery to the Beneficiary of such Exchangeable
Shares (or to such other persons, if any, properly designated by such
Beneficiary), the certificates for the number of Parent Common Shares
deliverable in connection with the exercise of the Exchange Right, which
shares shall be duly issued as fully paid and non-assessable and shall be free
and clear of any lien, claim or encumbrance, and cheques for the balance, if
any, of the total purchase price therefor. Immediately upon the giving of
notice by the Trustee to the Parent, Dutchco and the Corporation of the
exercise of the Exchange Right, as provided in this section 5.6, the closing
of the transaction of purchase and sale contemplated by the Exchange Right
shall be deemed to have occurred, and the Beneficiary of such Exchangeable
Shares shall be deemed to have transferred to Dutchco all of its right, title
and interest in and to such Exchangeable Shares and in the related interest in
the Trust Estate and shall cease to be a holder of such Exchangeable Shares
and shall not be entitled to exercise any of the rights of a holder in respect
thereof, other than the right to receive such Beneficiary's proportionate part
of the total purchase price therefor, unless the requisite number of Parent
Common Shares (together with a cheque for the balance, if any, of the total
purchase price therefor) is not allotted, issued and delivered by Dutchco to
the Trustee, for delivery to such Beneficiary (or to such other persons, if
any, properly designated by such Beneficiary), within five Business Days of
the date of the giving of such notice by the Trustee, in which case the rights
of the Beneficiary shall remain unaffected until such Parent Common Shares are
so allotted, issued and delivered by Dutchco and any such cheque is so
delivered and paid. Concurrently with such Beneficiary ceasing to be a holder
of Exchangeable Shares, the Beneficiary shall be considered and deemed for all
purposes to be the holder of the Parent Common Shares to be delivered to it
pursuant to the Exchange Right.
5.7 Exercise of Exchange Right Subsequent to Retraction. In the event that a
Beneficiary has exercised its right under Article 6 of the Exchangeable Share
Provisions to require the Corporation to redeem any or all of
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the Exchangeable Shares held by the Beneficiary (the "Retracted Shares") and
is notified by the Corporation pursuant to section 6.6 of the Exchangeable
Share Provisions that the Corporation will not be permitted as a result of
solvency requirements of applicable law to redeem all such Retracted Shares,
and provided that Dutchco shall not have exercised the Retraction Call Right
with respect to the Retracted Shares and that the Beneficiary has not revoked
the retraction request delivered by the Beneficiary to the Corporation
pursuant to section 6.7 of the Exchangeable Share Provisions, the retraction
request will constitute and will be deemed to constitute notice from the
Beneficiary to the Trustee instructing the Trustee to exercise the Exchange
Right with respect to those Retracted Shares which the Corporation is unable
to redeem. In any such event, the Corporation hereby agrees with the Trustee
and in favour of the Beneficiary immediately to notify the Trustee of such
prohibition against the Corporation redeeming all of the Retracted Shares and
immediately to forward or cause to be forwarded to the Trustee all relevant
materials delivered by the Beneficiary to the Corporation or to the transfer
agent of the Exchangeable Shares (including without limitation a copy of the
retraction request delivered pursuant to section 6.1 of the Exchangeable Share
Provisions) in connection with such proposed redemption of the Retracted
Shares and the Trustee will thereupon exercise the Exchange Right with respect
to the Retracted Shares that the Corporation is not permitted to redeem and
will require the Parent to purchase such shares in accordance with the
provisions of this Article 5.
5.8 Stamp or Other Transfer Taxes. Upon any sale of Exchangeable Shares to
Dutchco pursuant to the Exchange Right or the Automatic Exchange Rights, the
share certificate or certificates representing the Parent Common Shares to be
delivered in connection with the payment of the total purchase price therefor
shall be issued in the name of the Beneficiary of the Exchangeable Shares so
sold or in such names as such Beneficiary may otherwise direct in writing
without charge to the holder of the Exchangeable Shares so sold; provided,
however, that such Beneficiary (a) shall pay (and neither the Parent, Dutchco,
the Corporation nor the Trustee shall be required to pay) any documentary,
stamp, transfer or other taxes that may be payable in respect of any transfer
involved in the issuance or delivery of such shares to a person other than
such Beneficiary or (b) shall have established to the satisfaction of the
Trustee, the Parent, Dutchco and the Corporation that such taxes, if any, have
been paid.
5.9 Notice of Insolvency Event. Immediately upon the occurrence of an
Insolvency Event or any event which with the giving of notice or the passage
of time or both would be an Insolvency Event, the Corporation, Dutchco and/or
the Parent, as the case may be, shall give written notice thereof to the
Trustee. As soon as practicable after receiving notice from the Corporation,
Dutchco and/or the Parent, as the case may be, or from any other person of the
occurrence of an Insolvency Event, the Trustee will mail to each Beneficiary,
at the expense of Dutchco and/or the Parent, a notice of such Insolvency
Event, which notice shall contain a brief statement of the right of the
Beneficiaries with respect to the Exchange Right.
5.10 Qualification of Parent Common Shares in the United States. The Parent
represents and warrants that it has taken all actions and done all things as
are necessary or desirable to cause the Parent Common Shares (and that it will
take all actions and do all things as are necessary or desirable to cause such
shares or securities into which Parent Common Shares may be reclassified or
changed) to be issued and delivered pursuant to the Exchangeable Share
Provisions, Exchange Right or the Automatic Exchange Rights to be freely
tradeable thereafter in the United States (other than any restrictions on
transfers by reason of a holder being an "affiliate" of the Parent or, prior
to the Effective Date, for purposes of United States federal or state
securities law). The Parent will in good faith expeditiously take all such
actions and do all such things as are necessary or desirable to cause all
Parent Common Shares to be delivered pursuant to the Exchangeable Share
Provisions, Exchange Right or the Automatic Exchange Rights to be listed,
quoted or posted for trading on all stock exchanges and quotation systems on
which outstanding Parent Common Shares are listed, quoted or posted for
trading at such time.
5.11 Reservation of Parent Common Shares. The Parent hereby represents,
warrants and covenants that it has irrevocably reserved for issuance and will
at all times keep available, free from pre-emptive and other rights, out of
its authorized and unissued capital stock such number of Parent Common Shares
(a) as is equal to
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the sum of (i) the number of Exchangeable Shares issued and outstanding from
time to time and (ii) the number of Exchangeable Shares issuable upon the
exercise of all rights to acquire Exchangeable Shares outstanding from time to
time and (b) as are now and may hereafter be required to enable and permit the
Corporation and Dutchco to meet their respective obligations hereunder, under
the Support Agreement, under the Exchangeable Share Provisions and under any
other security or commitment pursuant to which the Parent may now or hereafter
be required to issue Parent Common Shares.
5.12 Automatic Exchange on Liquidation of the Parent.
(a) The Parent will give the Trustee notice of each of the following events
at the time set forth below:
(i) in the event of any determination by the Board of Directors of the
Parent to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to the Parent or to effect any other distribution
of assets of the Parent among its shareholders for the purpose of winding
up its affairs, at least 60 days prior to the proposed effective date of
such liquidation, dissolution, winding-up or other distribution; and
(ii) immediately, upon the earlier of (A) receipt by the Parent of notice
of and (B) the Parent otherwise becoming aware of any threatened or
instituted claim, suit, petition or other proceedings with respect to the
involuntary liquidation, dissolution or winding-up of the Parent or to
effect any other distribution of assets of the Parent among its
shareholders for the purpose of winding up its affairs.
(b) Immediately following receipt by the Trustee from the Parent of notice
of any event (a "Liquidation Event") contemplated by section 5.12(a)(i) or
5.12(a)(ii) above, the Trustee will give notice thereof to the Beneficiaries.
Such notice shall include a brief description of the automatic exchange of
Exchangeable Shares for Parent Common Shares provided for in section 5.12(c).
(c) In order that the Beneficiaries will be able to participate on a pro
rata basis with the holders of Parent Common Shares in the distribution of
assets of the Parent in connection with a Liquidation Event, on the fifth
Business Day prior to the effective date (the "Liquidation Event Effective
Date") of a Liquidation Event all of the then outstanding Exchangeable Shares
held by Beneficiaries shall be automatically exchanged for Parent Common
Shares. To effect such automatic exchange, Dutchco shall purchase each
Exchangeable Share outstanding on the fifth Business Day prior to the
Liquidation Event Effective Date and held by Beneficiaries, and each
Beneficiary shall sell the Exchangeable Shares held by it at such time, for a
purchase price per share equal to (a) the Current Market Price of a Parent
Common Share on the fifth Business Day prior to the Liquidation Event
Effective Date, which shall be satisfied in full by Dutchco delivering or
causing to be delivered to the Beneficiary one Parent Common Share, plus (b)
an additional amount equivalent to the full amount of all dividends declared
and unpaid on each such Exchangeable Share and all dividends declared on
Parent Common Shares which have not been declared on such Exchangeable Shares
in accordance with section 3.1 of the Exchangeable Share Provisions (provided
that if the record date for any such declared and unpaid dividends occurs on
or after the day of closing of such purchase and sale the purchase price shall
not include such additional amount equivalent to such declared and unpaid
dividends). In connection with such automatic exchange, the Parent will
provide to the Trustee an Officer's Certificate setting forth the calculation
of the purchase price for each Exchangeable Share.
(d) On the fifth Business Day prior to the Liquidation Event Effective Date,
the closing of the transaction of purchase and sale contemplated by the
automatic exchange of Exchangeable Shares for Parent Common Shares shall be
deemed to have occurred, and each Beneficiary shall be deemed to have
transferred to Dutchco all of the Beneficiary's right, title and interest in
and to its Exchangeable Shares and the related interest in the Trust Estate
and shall cease to be a holder of such Exchangeable Shares and Dutchco shall
deliver or cause to be delivered to the Beneficiary the Parent Common Shares
deliverable upon the automatic exchange of Exchangeable Shares for Parent
Common Shares and shall deliver to the Trustee for delivery to the Beneficiary
a cheque for the balance, if any, of the total purchase price for such
Exchangeable Shares. Concurrently with such Beneficiary ceasing to be a holder
of Exchangeable Shares, the Beneficiary shall be considered and deemed
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for all purposes to be the holder of the Parent Common Shares issued to it
pursuant to the automatic exchange of Exchangeable Shares for Parent Common
Shares and the certificates held by the Beneficiary previously representing
the Exchangeable Shares exchanged by the Beneficiary with Dutchco pursuant to
such automatic exchange shall thereafter be deemed to represent the Parent
Common Shares delivered to the Beneficiary by Dutchco pursuant to such
automatic exchange. Upon the request of a Beneficiary and the surrender by the
Beneficiary of Exchangeable Share certificates deemed to represent Parent
Common Shares, duly endorsed in blank and accompanied by such instruments of
transfer as Dutchco may reasonably require, Dutchco shall deliver or cause to
be delivered to the Beneficiary certificates representing the Parent Common
Shares of which the Beneficiary is the holder.
5.13 Withholding Rights. Parent, Dutchco and the Trustee shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to
this Agreement to any holder of Exchangeable Shares such amounts as Parent,
Dutchco or the Trustee is required to deduct and withhold with respect to the
making of such payment under the United States Internal Revenue Code of 1986,
as amended, the Income Tax Act (Canada) or any provision of state, local,
provincial or foreign tax law. To the extent that amounts are so withheld,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the shares in respect of which such
deduction and withholding was made, provided that such withheld amounts are
actually remitted to the appropriate taxing authority. To the extent that the
amount so required to be deducted or withheld from any payment to a holder
exceeds the cash portion of the consideration otherwise payable to the holder,
the Parent, Dutchco and the Trustee are hereby authorized to sell or otherwise
dispose of at fair market value such portion of such consideration as is
necessary to provide sufficient funds to the Parent, Dutchco or the Trustee,
as the case may be, in order to enable it to comply with such deduction or
withholding requirement and the Parent or the Trustee shall give an accounting
to the holder with respect thereto and any balance of such sale proceeds.
ARTICLE 6
Restrictions on Issue of Parent Special Voting Stock
6.1 Issue of Additional Shares. During the term of this Agreement, the
Parent will not create, issue or allot (or make any agreement to so do) any
other shares of Series B Preferred Stock of the Parent in addition to the
Voting Share.
ARTICLE 7
Covenants
7.1 Corporation Covenant. Immediately following the Class B Conversion Time,
the Corporation will give notice to Dutchco of its intention to exercise the
Class E Redemption Right and the Class F Redemption Right as provided in the
share provisions for the Class E Shares and the Class F Shares and this
Agreement shall constitute good and valid notice by the Corporation to Dutchco
of its intention to exercise such redemptions.
7.2 Dutchco Covenant. Immediately upon the Corporation providing notice to
Dutchco of its intention to exercise the Class E Redemption Right and the
Class F Redemption Right as contemplated in section 7.1 hereof, Dutchco will
exercise the Class E Redemption Call Right and the Class F Redemption Call
Right and this Agreement shall constitute good and valid notice by Dutchco to
the Corporation of its exercise of both the Class E Redemption Call Right and
the Class F Redemption Call Right.
7.3 Trust. The Corporation makes the covenant contained in section 7.1
hereof, and Dutchco makes the covenant contained in section 7.2 hereof, to and
in favour of the Trustee for the benefit of the Class E and F Shareholders and
acknowledges that the Trustee shall hold the Covenants as trustee for and on
behalf of the Class E and F Shareholders and in accordance with the provisions
of this Agreement. Each of the Corporation
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and Dutchco hereby acknowledges receipt from the Trustee as trustee for and on
behalf of such Class E and F Shareholders of good and valuable consideration
(and the sufficiency thereof) for the making of such covenants to the Trustee.
Until such time as all Class E Shares and Class F Shares held by holders other
than Parent, its subsidiaries and the Affiliates have been redeemed and
subject to the terms and conditions of this Agreement, the Trustee shall
possess and be entitled to exercise all of the rights and powers of an owner
of the Class E Shares and Class F Shares, provided that the Trustee shall:
(a) hold the rights associated with the Covenants as trustee solely for
the use and benefit of the Class E and F Shareholders in accordance with
the provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, have no power or
authority to deal in or with the Covenants or the Class E Shares and the
Class F Shares for any purpose other than the purposes for which this Trust
is created pursuant to this Agreement.
ARTICLE 8
Concerning the Trustee
8.1 Powers and Duties of the Trustee. The rights, powers and authorities of
the Trustee under this Agreement, in its capacity as trustee of the Trust,
shall include:
(a) purchasing the Voting Share from the Parent as trustee for and on
behalf of the Beneficiaries in accordance with the provisions of this
Agreement;
(b) granting proxies and distributing materials to Beneficiaries as
provided in this Agreement;
(c) voting the Beneficiary Votes in accordance with the provisions of
this Agreement;
(d) receiving the grant of the Exchange Right and the Automatic Exchange
Rights from Dutchco as trustee for and on behalf of the Beneficiaries in
accordance with the provisions of this Agreement;
(e) receiving the Covenants from Dutchco and the Corporation for and on
behalf of the Beneficiaries in accordance with the provisions of this
Agreement;
(f) exercising the Exchange Right and enforcing the benefit of the
Automatic Exchange Rights, in each case in accordance with the provisions
of this Agreement, and in connection therewith receiving from Beneficiaries
Exchangeable Shares and other requisite documents and distributing to such
Beneficiaries the Parent Common Shares and cheques, if any, to which such
Beneficiaries are entitled upon the exercise of the Exchange Right or
pursuant to the Automatic Exchange Rights, as the case may be;
(g) holding title to the Trust Estate;
(h) investing any monies forming, from time to time, a part of the Trust
Estate as provided in this Agreement;
(i) taking action on its own initiative or at the direction of a
Beneficiary or Beneficiaries to enforce the obligations of the Parent,
Dutchco and/or the Corporation under this Agreement; and
(j) taking such other actions and doing such other things as are
specifically provided in this Agreement.
In the exercise of such rights, powers and authorities, the Trustee shall
have (and is granted) such incidental and additional rights, powers and
authority not in conflict with any of the provisions of this Agreement as the
Trustee, acting in good faith and in the reasonable exercise of its
discretion, may deem necessary, appropriate or desirable to effect the purpose
of the Trust. Any exercise of such discretionary rights, powers and
authorities by the Trustee shall be final, conclusive and binding upon all
persons affected thereunder, including the Parties hereto and the
Beneficiaries. For greater certainty, the Trustee shall have only those duties
as are set out specifically in this Agreement.
The Trustee in exercising its rights, powers, duties and authorities
hereunder shall act honestly and in good faith with a view to the best
interests of the Beneficiaries and shall exercise the care, diligence and
skill that a reasonably prudent trustee would exercise in comparable
circumstances.
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8.2 No Conflict of Interest. The Trustee represents to the Corporation,
Dutchco and the Parent that at the date of execution and delivery of this
Agreement there exists no material conflict of interest in the role of the
Trustee as a fiduciary hereunder and the role of the Trustee in any other
capacity. The Trustee shall, within 90 days after it becomes aware that such a
material conflict of interest exists, either eliminate such material conflict
of interest or resign in the manner and with the effect specified in Article
11. If, notwithstanding the foregoing provisions of this section 8.2, the
Trustee has such a material conflict of interest, the validity and
enforceability of this Agreement shall not be affected in any manner
whatsoever by reason only of the existence of such material conflict of
interest. If the Trustee contravenes the foregoing provisions of this section
8.2, any Party hereto or Beneficiary may apply to the Ontario Court General
Division for an order that the Trustee be replaced as trustee hereunder.
8.3 Dealings with Transfer Agents, Registrars, etc. The Corporation, Dutchco
and the Parent irrevocably authorize the Trustee, from time to time, to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent registrar or
transfer agent, of the Exchangeable Shares and the Parent Common Shares;
and
(b) requisition, from time to time, (i) from any such registrar or
transfer agent any information readily available from the records
maintained by it which the Trustee may reasonably require for the discharge
of its duties and responsibilities under this Agreement and (ii) from the
registrar or transfer agent of the Parent Common Shares, and any subsequent
registrar or transfer agent of such shares, the share certificates issuable
upon the exercise from time to time of the Exchange Right and pursuant to
the automatic exchange of Exchangeable Shares for Parent Common Shares in
the manner specified in Article 5 hereof.
The Corporation, Dutchco and the Parent irrevocably authorize their
respective registrars and transfer agents to comply with all such requests.
The Parent and Dutchco covenant that they will supply the Parent's registrar
or transfer agent with duly executed share certificates for the purpose of
completing the exercise from time to time of the Exchange Right and the
automatic exchange of Exchangeable Shares for Parent Common Shares, in each
case pursuant to Article 5 hereof.
8.4 Books and Records. The Trustee shall keep available for inspection by
the Parent, Dutchco and the Corporation, at the Trustee's principal corporate
trust office in Toronto, Ontario and Montreal, Quebec correct and complete
books and records of account relating to the Trustee's actions under this
Agreement, including without limitation all information relating to mailings
and instructions to and from Beneficiaries and all transactions pursuant to
the Exchange Right and the Automatic Exchange Rights. On or before March 31,
1999, and on or before March 31 in every year thereafter, so long as the
Voting Share is on deposit with the Trustee, the Trustee shall transmit to the
Parent, Dutchco and the Corporation a brief report, dated as of the preceding
December 31, with respect to:
(a) the property and funds comprising the Trust Estate as of that date;
(b) the number of exercises of the Exchange Right, if any, and the
aggregate number of Exchangeable Shares received by the Trustee on behalf
of Beneficiaries in consideration of delivery by Dutchco of Parent Common
Shares and any other consideration in connection with the Exchange Right,
during the calendar year ended on such date; and
(c) all other actions taken by the Trustee in the performance of its
duties under this Agreement which it had not previously reported.
8.5 Income Tax Returns and Reports. The Trustee shall, to the extent
necessary, prepare and file on behalf of the Trust appropriate United States
and Canadian income tax returns and any other returns or reports as may be
required by applicable law or pursuant to the rules and regulations of any
securities exchange or other trading system, if any, through which the
Exchangeable Shares are traded and, in connection therewith and without
limiting the generality of section 8.10 hereof, may obtain the advice and
assistance of such experts as the Trustee may consider necessary or advisable.
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8.6 Indemnification Prior to Certain Actions by Trustee. The Trustee shall
exercise any or all of the rights, duties, powers or authorities vested in it
by this Agreement at the request, order or direction of any Beneficiary upon
such Beneficiary furnishing to the Trustee reasonable funding, security and
indemnity against the costs, expenses and liabilities which may be incurred by
the Trustee therein or thereby, provided that no Beneficiary shall be
obligated to furnish to the Trustee any such funding, security or indemnity in
connection with the exercise by the Trustee of any of its rights, duties,
powers and authorities with respect to the Voting Share pursuant to Article 4
hereof, subject to section 8.15, and with respect to the Exchange Right
pursuant to Article 5 hereof, subject to section 8.15, and with respect to the
Automatic Exchange Rights pursuant to Article 5 hereof.
None of the provisions contained in this Agreement shall require the Trustee
to expend or risk its own funds or otherwise incur financial liability in the
exercise of any of its rights, powers, duties or authorities unless funded,
given security and indemnified as aforesaid.
8.7 Actions by Beneficiaries. No Beneficiary shall have the right to
institute any action, suit or proceeding or to exercise any other remedy
authorized by this Agreement for the purpose of enforcing any of its rights or
for the execution of any trust or power hereunder unless the Beneficiary has
requested the Trustee to take or institute such action, suit or proceeding and
furnished the Trustee with the funding, security and indemnity referred to in
section 8.6 and the Trustee shall have failed to act within a reasonable time
thereafter. In such case, but not otherwise, the Beneficiary shall be entitled
to take proceedings in any court of competent jurisdiction such as the Trustee
might have taken; it being understood and intended that no one or more
Beneficiaries shall have any right in any manner whatsoever to affect, disturb
or prejudice the rights hereby created by any such action, or to enforce any
right hereunder or under the Voting Rights, the Exchange Rights or the
Automatic Exchange Rights except subject to the conditions and in the manner
herein provided, and that all powers and trusts hereunder shall be exercised
and all proceedings at law shall be instituted, had and maintained by the
Trustee, except only as herein provided, and in any event for the equal
benefit of all Beneficiaries.
8.8 Reliance upon Declarations. The Trustee shall not be considered to be in
contravention of any of its rights, powers, duties and authorities hereunder
if, when required, it acts and relies in good faith upon lists, mailing
labels, notices, statutory declarations, certificates, opinions, reports or
other papers or documents furnished pursuant to the provisions hereof or
required by the Trustee to be furnished to it in the exercise of its rights,
powers, duties and authorities hereunder if such lists, mailing labels,
notices, statutory declarations, certificates, opinions, reports or other
papers or documents comply with the provisions of section 8.9 hereof, if
applicable, and with any other applicable provisions of this Agreement.
8.9 Evidence and Authority to Trustee. The Corporation, Dutchco and/or the
Parent shall furnish to the Trustee evidence of compliance with the conditions
provided for in this Agreement relating to any action or step required or
permitted to be taken by the Corporation, Dutchco and/or the Parent or the
Trustee under this agreement or as a result of any obligation imposed under
this Agreement, including, without limitation, in respect of the Voting Rights
or the Exchange Right or the Automatic Exchange Rights and the taking of any
other action to be taken by the Trustee at the request of or on the
application of the Corporation, Dutchco and/or the Parent forthwith if and
when:
(a) such evidence is required by any other section of this Agreement to
be furnished to the Trustee in accordance with the terms of this section
8.9; or
(b) the Trustee, in the exercise of its rights, powers, duties and
authorities under this Agreement, gives the Corporation, Dutchco and/or the
Parent written notice requiring it to furnish such evidence in relation to
any particular action or obligation specified in such notice.
Such evidence shall consist of an Officer's Certificate of the Corporation,
Dutchco and/or the Parent or a statutory declaration or a certificate made by
persons entitled to sign an Officer's Certificate stating that any such
condition has been complied with in accordance with the terms of this
Agreement.
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Whenever such evidence relates to a matter other than the Voting Rights or
the Exchange Right or the automatic exchange of Exchangeable Shares for Parent
Common Shares pursuant to section 5.12, and except as otherwise specifically
provided herein, such evidence may consist of a report or opinion of any
solicitor, auditor, accountant, appraiser, valuer, engineer or other expert or
any other person whose qualifications give authority to a statement made by
him, provided that if such report or opinion is furnished by a director,
officer or employee of the Corporation, Dutchco and/or the Parent it shall be
in the form of an Officer's Certificate or a statutory declaration.
Each statutory declaration, certificate, opinion or report furnished to the
Trustee as evidence of compliance with a condition provided for in this
Agreement shall include a statement by the person giving the evidence:
(a) declaring that he has read and understands the provisions of this
Agreement relating to the condition in question;
(b) describing the nature and scope of the examination or investigation
upon which he based the statutory declaration, certificate, statement or
opinion; and
(c) declaring that he has made such examination or investigation as he
believes is necessary to enable him to make the statements or give the
opinions contained or expressed therein.
8.10 Experts, Advisers and Agents. The Trustee may:
(a) in relation to these presents act and rely on the opinion or advice
of or information obtained from any solicitor, auditor, accountant,
appraiser, valuer, engineer or other expert, whether retained by the
Trustee or by the Corporation, Dutchco and/or the Parent or otherwise, and
may employ such assistants as may be necessary to the proper discharge of
its powers and duties and determination of its rights hereunder and may pay
proper and reasonable compensation for all such legal and other advice or
assistance as aforesaid; and
(b) employ such agents and other assistants as it may reasonably require
for the proper discharge of its powers and duties hereunder, and may pay
reasonable remuneration for all services performed for it (and shall be
entitled to receive reasonable remuneration for all services performed by
it) in the discharge of the trusts hereof and compensation for all
disbursements, costs and expenses made or incurred by it in the discharge
of its duties hereunder and in the management of the Trust.
8.11 Investment of Moneys Held By Trustee. Unless otherwise provided in this
Agreement, any moneys held by or on behalf of the Trustee which under the
terms of this Agreement may or ought to be invested or which may be on deposit
with the Trustee or which may be in the hands of the Trustee may be invested
and reinvested in the name or under the control of the Trustee in securities
in which, under the laws of the Province of Ontario or the Province of Quebec,
trustees are authorized to invest trust moneys, provided that such securities
are stated to mature within two years after their purchase by the Trustee, and
the Trustee shall so invest such moneys on the written direction of the
Corporation. Pending the investment of any moneys as hereinbefore provided,
such moneys may be deposited in the name of the Trustee at a chartered bank in
Canada or, with the consent of the Corporation, in the deposit department of
the Trustee or any other loan or trust the Corporation authorized to accept
deposits under the laws of Canada or any province thereof at the rate of
interest then current on similar deposits.
8.12 Trustee Not Required to Give Security. The Trustee shall not be
required to give any bond or security in respect of the execution of the
trusts, rights, duties, powers and authorities of this Agreement or otherwise
in respect of the premises.
8.13 Trustee Not Bound to Act on the Corporation's Request. Except as in
this Agreement otherwise specifically provided, the Trustee shall not be bound
to act in accordance with any direction or request of the Corporation and/or
the Parent or of their respective Boards of Directors until a duly
authenticated copy of the instrument or resolution containing such direction
or request shall have been delivered to the Trustee, and the Trustee shall be
empowered to act and rely upon any such copy purporting to be authenticated
and believed by the Trustee to be genuine.
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8.14 Authority to Carry on Business. The Trustee represents to the
Corporation, Dutchco and the Parent that at the date of execution and delivery
by it of this Agreement it is authorized to carry on the business of a trust
company in the Province of Quebec and the Province of Ontario but if,
notwithstanding the provisions of this section 8.14, it ceases to be so
authorized to carry on business, the validity and enforceability of this
Agreement, the Covenants, the Voting Rights, the Exchange Right and the
Automatic Exchange Rights shall not be affected in any manner whatsoever by
reason only of such event but the Trustee shall, within 90 days after ceasing
to be authorized to carry on the business of a trust company in the Province
of Quebec and in the Province of Ontario, either become so authorized or
resign in the manner and with the effect specified in Article 11.
8.15 Conflicting Claims. If conflicting claims or demands are made or
asserted with respect to any interest of any Beneficiary in any Exchangeable
Shares, including any disagreement between the heirs, representatives,
successors or assigns succeeding to all or any part of the interest of any
Beneficiary in any Exchangeable Shares resulting in conflicting claims or
demands being made in connection with such interest, then the Trustee shall be
entitled, at its sole discretion, to refuse to recognize or to comply with any
such claim or demand. In so refusing, the Trustee may elect not to exercise
any Voting Rights, Exchange Right or Automatic Exchange Rights, the Covenants
subject to such conflicting claims or demands and, in so doing, the Trustee
shall not be or become liable to any person on account of such election or its
failure or refusal to comply with any such conflicting claims or demands. The
Trustee shall be entitled to continue to refrain from acting and to refuse to
act until:
(a) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Right Automatic Exchange Rights or the Covenants subject
to such conflicting claims or demands have been adjudicated by a final
judgment of a court of competent jurisdiction; or
(b) all differences with respect to the Voting Rights, Exchange Right or
Automatic Exchange Rights subject to such conflicting claims or demands
have been conclusively settled by a valid written agreement binding on all
such adverse claimants, and the Trustee shall have been furnished with an
executed copy of such agreement.
If the Trustee elects to recognize any claim or comply with any demand made by
any such adverse claimant, it may in its discretion require such claimant to
furnish such surety bond or other security satisfactory to the Trustee as it
shall deem appropriate fully to indemnify it as between all conflicting claims
or demands.
8.16 Acceptance of Trust. The Trustee hereby accepts the Trust created and
provided for by and in this Agreement and agrees to perform the same upon the
terms and conditions herein set forth and to hold all rights, privileges and
benefits conferred hereby and by law in trust for the various persons who
shall from time to time be Beneficiaries, subject to all the terms and
conditions herein set forth.
ARTICLE 9
Compensation
9.1 Fees and Expenses of the Trustee. The Parent, Dutchco and the
Corporation jointly and severally agree to pay to the Trustee reasonable
compensation for all of the services rendered by it under this Agreement and
will reimburse the Trustee for all reasonable expenses (including taxes) and
disbursements, including the cost and expense of any suit or litigation of any
character and any proceedings before any governmental agency reasonably
incurred by the Trustee in connection with its rights and duties under this
Agreement; provided that the Parent, Dutchco and the Corporation shall have no
obligation to reimburse the Trustee for any expenses or disbursements paid,
incurred or suffered by the Trustee in any suit or litigation in which the
Trustee is determined to have acted in bad faith or with negligence or wilful
misconduct.
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ARTICLE 10
Indemnification and Limitation of Liability
10.1 Indemnification of the Trustee. The Parent, Dutchco and the Corporation
jointly and severally agree to indemnify and hold harmless the Trustee and
each of its directors, officers, employees and agents appointed and acting in
accordance with this Agreement (collectively, the "Indemnified Parties")
against all claims, losses, damages, costs, penalties, fines and reasonable
expenses (including reasonable expenses of the Trustee's legal counsel) which,
without fraud, negligence, wilful misconduct or bad faith on the part of such
Indemnified Party, may be paid, incurred or suffered by the Indemnified Party
by reason of or as a result of the Trustee's acceptance or administration of
the Trust, its compliance with its duties set forth in this Agreement, or any
written or oral instructions delivered to the Trustee by the Parent, Dutchco
or the Corporation pursuant hereto. In no case shall the Parent, Dutchco or
the Corporation be liable under this indemnity for any claim against any of
the Indemnified Parties unless the Parent, Dutchco and the Corporation shall
be notified by the Trustee of the written assertion of a claim or of any
action commenced against the Indemnified Parties, promptly after any of the
Indemnified Parties shall have received any such written assertion of a claim
or shall have been served with a summons or other first legal process giving
information as to the nature and basis of the claim. Subject to clause (ii)
below, the Parent, Dutchco and the Corporation shall be entitled to
participate at their own expense in the defence and, if the Parent, Dutchco or
the Corporation so elect at any time after receipt of such notice, either of
them may assume the defence of any suit brought to enforce any such claim. The
Trustee shall have the right to employ separate counsel in any such suit and
participate in the defence thereof but the fees and expenses of such counsel
shall be at the expense of the Trustee unless: (i) the employment of such
counsel has been authorized by the Parent, Dutchco or the Corporation; or (ii)
the named parties to any such suit include both the Trustee and the Parent,
Dutchco or the Corporation and the Trustee shall have been advised by counsel
acceptable to the Parent or the Corporation that there may be one or more
legal defenses available to the Trustee which are different from or in
addition to those available to the Parent or the Corporation (in which case
the Parent, Dutchco and the Corporation shall not have the right to assume the
defence of such suit on behalf of the Trustee but shall be liable to pay the
reasonable fees and expenses of counsel for the Trustee).
10.2 Limitation of Liability. The Trustee shall not be held liable for any
loss which may occur by reason of depreciation of the value of any part of the
Trust Estate or any loss incurred on any investment of funds pursuant to this
Agreement, except to the extent that such loss is attributable to the fraud,
negligence, wilful misconduct or bad faith on the part of the Trustee.
ARTICLE 11
Change of Trustee
11.1 Resignation. The Trustee, or any trustee hereafter appointed, may at
any time resign by giving written notice of such resignation to the Parent,
Dutchco and the Corporation specifying the date on which it desires to resign,
provided that such notice shall never be given less than 60 days before such
desired resignation date unless the Parent, Dutchco and the Corporation
otherwise agree and provided further that such resignation shall not take
effect until the date of the appointment of a successor trustee and the
acceptance of such appointment by the successor trustee. Upon receiving such
notice of resignation, the Parent, Dutchco and the Corporation shall promptly
appoint a successor trustee by written instrument in duplicate, one copy of
which shall be delivered to the resigning trustee and one copy to the
successor trustee.
11.2 Removal. The Trustee, or any trustee hereafter appointed, may be
removed at any time on 60 days' prior notice by written instrument executed by
the Parent, Dutchco and the Corporation, in duplicate, one copy of which shall
be delivered to the trustee so removed and one copy to the successor trustee
provided that such removal shall not take effect until the date of the
appointment of a successor trustee and the acceptance of such appointment by
the successor trustee.
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11.3 Successor Trustee. Any successor trustee appointed as provided under
this Agreement shall execute, acknowledge and deliver to the Parent, Dutchco
and the Corporation and to its predecessor trustee an instrument accepting
such appointment. Thereupon, the resignation or removal of the predecessor
trustee shall become effective and such successor trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers,
duties and obligations of its predecessor under this Agreement, with like
effect as if originally named as trustee in this Agreement. However, on the
written request of the Parent, Dutchco and the Corporation or of the successor
trustee, the trustee ceasing to act shall, upon payment of any amounts then
due it pursuant to the provisions of this Agreement, execute and deliver an
instrument transferring to such successor trustee all the rights and powers of
the trustee so ceasing to act. Upon the request of any such successor trustee,
the Parent, Dutchco, the Corporation and such predecessor trustee shall
execute any and all instruments in writing for more fully and certainly
vesting in and confirming to such successor trustee all such rights and
powers.
11.4 Notice of Successor Trustee. Upon acceptance of appointment by a
successor trustee as provided herein, the Parent, Dutchco and the Corporation
shall cause to be mailed notice of the succession of such trustee hereunder to
each Beneficiary specified in a List. If the Parent, Dutchco or the
Corporation shall fail to cause such notice to be mailed within 10 days after
acceptance of appointment by the successor trustee, the successor trustee
shall cause such notice to be mailed at the expense of the Parent, Dutchco and
the Corporation.
ARTICLE 12
Parent Successors
12.1 Certain Requirements in Respect of Combination, etc. The Parent shall
not enter into any transaction (whether by way of reconstruction,
reorganization, consolidation, merger, transfer, sale, lease or otherwise)
whereby all or substantially all of its undertaking, property and assets would
become the property of any other person or, in the case of a merger, of the
continuing corporation resulting therefrom unless:
(a) such other person or continuing corporation is a corporation (herein
called the "Parent Successor") incorporated under the laws of any state of
the United States or the laws of Canada or any province thereof;
(b) the Parent Successor, by operation of law, becomes, without more,
bound by the terms and provisions of this Agreement or, if not so bound,
executes, prior to or contemporaneously with the consummation of such
transaction a agreement supplemental hereto and such other instruments (if
any) as are satisfactory to the Trustee and in the opinion of legal counsel
to the Trustee are necessary or advisable to evidence the assumption by the
Parent Successor of liability for all moneys payable and property
deliverable hereunder and the covenant of such Parent Successor to pay and
deliver or cause to be delivered the same and its agreement to observe and
perform all the covenants and obligations of the Parent under this
Agreement; and
(c) such transaction shall, to the satisfaction of the Trustee and in the
opinion of legal counsel to the Trustee, be upon such terms as
substantially to preserve and not to impair in any material respect any of
the rights, duties, powers and authorities of the Trustee or of the
Beneficiaries hereunder.
12.2 Vesting of Powers in Successor. Whenever the conditions of section 12.1
hereof have been duly observed and performed, the Trustee, if required, by
section 12.1 hereof, the Parent Successor and the Corporation shall execute
and deliver the supplemental agreement provided for in Article 13 and
thereupon the Parent Successor shall possess and from time to time may
exercise each and every right and power of the Parent under this Agreement in
the name of the Parent or otherwise and any act or proceeding by any provision
of this Agreement required to be done or performed by the Board of Directors
of the Parent or any officers of the Parent may be done and performed with
like force and effect by the Board of Directors or officers of such Parent
Successor.
12.3 Wholly-Owned Subsidiaries. Nothing herein shall be construed as
preventing the amalgamation or merger of any wholly-owned subsidiary of the
Parent with or into the Parent or the winding-up, liquidation or dissolution
of any wholly-owned subsidiary of the Parent provided that all of the assets
of such subsidiary are transferred to the Parent or another wholly-owned
subsidiary of the Parent and any such transactions are expressly permitted by
this Article 12.
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ARTICLE 13
Amendments and Supplemental Trust Agreements
13.1 Amendments, Modifications, etc. Except as contemplated by section 13.2
below, this Agreement may not be amended or modified except by an agreement in
writing executed by the Corporation, the Parent, Dutchco and the Trustee and
approved by the holders of Exchangeable Shares in accordance with section 10.2
of the Exchangeable Share Provisions provided that the Trustee shall not agree
to any amendment to the provisions of Article 7 or waive any right thereunder
without the consent of the Class E and F Shareholders at a meeting of those
holders held in accordance with the provisions attaching to the Class E Shares
and the Class F Shares.
13.2 Ministerial Amendments. Notwithstanding the provisions of section 13.1
hereof, the parties to this Agreement may in writing, at any time and from
time to time, without the approval of the Beneficiaries, amend or modify this
Agreement for the purposes of:
(a) adding to the covenants of any party hereto for the protection of the
Corporation or the Beneficiaries hereunder;
(b) making such provisions or modifications not inconsistent with this
Agreement as may be necessary or desirable with respect to matters or
questions arising hereunder which, in the opinion of the Board of Directors
of each of the Parent, Dutchco and the Corporation and in the opinion of
the Trustee and its counsel, having in mind the best interests of the
Beneficiaries as a whole, it may be expedient to make, provided that such
Boards of Directors and the Trustee and its counsel shall be of the opinion
that such provisions and modifications will not be prejudicial to the
interests of the Beneficiaries; or
(c) making such changes or corrections hereto which, on the advice of
counsel to the Corporation, the Parent, Dutchco and the Trustee, are
required for the purpose of curing or correcting any ambiguity or defect or
inconsistent provision or clerical omission or mistake or manifest error
contained herein, provided that the Trustee and its counsel and the Board
of Directors of each of the Corporation, Dutchco and the Parent shall be of
the opinion that such changes or corrections will not be prejudicial to the
interests of the Beneficiaries.
13.3 Meeting to Consider Amendments. The Corporation, at the request of the
Parent, shall call a meeting or meetings of the Beneficiaries for the purpose
of considering any proposed amendment or modification requiring approval
pursuant hereto. Any such meeting or meetings shall be called and held in
accordance with the by-laws of the Corporation, the Exchangeable Share
Provisions, the articles of the Corporation and all applicable laws.
13.4 Changes in Capital of Parent and the Corporation. At all times after
the occurrence of any event effected pursuant to section 2.7 or section 2.8 of
the Support Agreement, as a result of which either the Parent Common Shares or
the Exchangeable Shares or both are in any way changed, this Agreement shall
forthwith be amended and modified as necessary in order that it shall apply
with full force and effect, mutatis mutandis, to all new securities into which
the Parent Common Shares or the Exchangeable Shares or both are so changed and
the parties hereto shall execute and deliver a supplemental agreement giving
effect to and evidencing such necessary amendments and modifications.
13.5 Execution of Supplemental Agreements. No amendment to or modification
or waiver of any of the provisions of this Agreement otherwise permitted
hereunder shall be effective unless made in writing and signed by all of the
parties hereto. From time to time the Corporation (when authorized by a
resolution of the Board of Directors), Dutchco (when authorized by a
resolution of its Board of Directors), the Parent (when authorized by a
resolution of its Board of Directors) and the Trustee may, subject to the
provisions of these presents, and they shall, when so directed by these
presents, execute and deliver by their proper officers, agreements or other
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instruments supplemental hereto, which thereafter shall form part hereof, for
any one or more of the following purposes:
(a) evidencing the succession of Parent Successors to the Parent and the
covenants of and obligations assumed by each such Parent Successor in
accordance with the provisions of Article 12 and the successor of any
successor trustee in accordance with the provisions of Article 11;
(b) making any additions to, deletions from or alterations of the
provisions of this Agreement or the Voting Rights, the Exchange Right, the
Automatic Exchange Rights or the Covenants which, in the opinion of the
Trustee and its counsel, will not be prejudicial to the interests of the
Beneficiaries as a whole or are in the opinion of counsel to the Trustee
necessary or advisable in order to incorporate, reflect or comply with any
legislation the provisions of which apply to the Parent, Dutchco, the
Corporation, the Trustee or this Agreement; and
(c) for any other purposes not inconsistent with the provisions of this
Agreement, including without limitation to make or evidence any amendment
or modification to this Agreement as contemplated hereby, provided that, in
the opinion of the Trustee and its counsel, the rights of the Trustee and
the Beneficiaries as a whole will not be prejudiced thereby.
ARTICLE 14
Termination
14.1 Term. The Trust created by this Agreement shall be effective upon the
issuance by the Corporation of Class E Shares, Class F Shares and/or
Exchangeable Shares and shall continue until the earliest to occur of the
following events:
(a) no outstanding Exchangeable Shares are held by a Beneficiary;
(b) each of the Corporation, Dutchco and the Parent elects in writing to
terminate the Trust and such termination is approved by the Beneficiaries
of the Exchangeable Shares in accordance with section 10.2 of the
Exchangeable Share Provisions; and
(c) 21 years after the death of the last survivor of the descendants of
His Majesty King George VI of the United Kingdom of Great Britain and
Northern Ireland living on the date of the creation of the Trust.
14.2 Survival of Agreement. This Agreement shall be effective upon the
issuance by the Corporation of Class E Shares, Class F Shares and/or
Exchangeable Shares and shall survive any termination of the Trust and shall
continue until there are no Exchangeable Shares outstanding held by a
Beneficiary; provided, however, that the provisions of Articles 9 and 10 shall
survive any such termination of this Agreement.
ARTICLE 15
General
15.1 Severability. If any provision of this Agreement is held invalid,
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this Agreement shall not in any way be affected or improved
thereby and this Agreement shall be carried and as near as possible in
accordance with its original terms and conditions; and to this end the
provisions of this Agreement are intended to be and shall be deemed severable;
provided, however, that if the provision or provisions so held to be invalid,
in the reasonable judgment of the parties hereto, is or are so fundamental to
the intent of the parties hereto and the operation of this Agreement that the
enforcement of the other provisions hereof, in the absence of such invalid
provision or provisions, would damage irreparably the intent of the parties in
entering into this Agreement, the parties hereto shall agree to amend or
otherwise modify this Agreement so as to carry out the intent and purposes
hereof and the transactions contemplated hereby.
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15.2 Enurement. This Agreement shall be binding upon and enure to the
benefit of the parties hereto and their respective successors and permitted
assigns and to the benefit of the Beneficiaries.
15.3 Notices to Parties. All notices and other communications between the
parties hereunder shall be in writing and shall be deemed to have been given
if delivered personally or by confirmed telecopy to the parties at the
following addresses (or at such other address for such party as shall be
specified in like notice):
a) if to the Parent or Dutchco at:
Autodesk, Inc.
20400 Stevens Creek Boulevard
Cupertino, CA 95401-2217
Attention: Marcia K. Sterling
Vice President Business Development, General Counsel and
Secretary
Telecopy: (408) 517-1886
(b) if to the Corporation at:
Discreet Logic Inc.
10 Duke Street
Montreal, Quebec
Canada H3C 2L7
Attention: Francois Plamondon
Executive Vice President, Chief Financial Officer, Treasurer
and Secretary
Telecopy: (514) 393-3996
(c) if to the Trustee at:
Montreal Trust Company of Canada
6th Floor
1800 McGill College Avenue
Montreal, Quebec
H3A 3K9
Attention: .
Telecopy: (514) .
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy shall
be deemed to have been given and received on the date of confirmed receipt
thereof, provided such notice or other communication is received prior to 5:00
p.m. (local time) on a Business Day, and otherwise it shall be deemed to have
been given and received upon the immediately following Business Day.
15.4 Notice of Beneficiaries. Any and all notices to be given and any
documents to be sent to any Beneficiaries may be given or sent to the address
of such Beneficiary shown on the register of holders of Exchangeable Shares,
Class E Shares or Class F Shares as the case may be, in any manner permitted
by the by-laws of the Corporation from time to time in force in respect of
notices to shareholders and the provisions of the then prevailing law and
shall be deemed to be received (if given or sent in such manner) at the time
specified in such by-laws and the provisions of the then prevailing law, the
provisions of which by-laws shall apply mutatis mutandis to notices or
documents as aforesaid sent to such holders.
15.5 Risk of Payments by Post. Whenever payments are to be made or documents
are to be sent to any Beneficiary by the Trustee or by the Corporation, or by
such Beneficiary to the Trustee or to the Parent, Dutchco or the Corporation,
the making of such payment or sending of such document sent through the post
shall be at the risk of the Corporation, in the case of payments made or
documents sent by the Trustee or the Corporation, and the Beneficiary, in the
case of payments made or documents sent by the Beneficiary.
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15.6 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
15.7 Jurisdiction. This Agreement shall be construed and enforced in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
15.8 Attornment. Each of the Parent, Dutchco and the Corporation agree that
any action or proceeding arising out of or relating to this Agreement may be
instituted in the courts of Ontario waive any objection which it may have now
or hereafter to the venue of any such action or proceeding, irrevocably
submits to the non-exclusive jurisdiction of the said courts in any such
action or proceeding, agrees to be bound by any judgment of the said courts
and not to seek, and hereby waives, any review of the merits of any such
judgment by the courts of any other jurisdiction and each of Parent, Dutchco
and the Corporation hereby appoint Aird & Berlis at its office in Toronto as
Parent's, Dutchco's and the Corporation's attorney for service of process.
15.9 Guaranty/Assignment. The Parent hereby unconditionally and irrevocably
guarantees the prompt and full performance by Dutchco of, and shall cause
Dutchco to comply with, its obligations hereunder. Dutchco, upon prior notice
to the Trustee, may assign all or a portion of its rights and obligations
hereunder to the Parent or any Affiliate thereof, which shall thereupon assume
such assigned rights and obligations, without the consent of the Trustee, the
Beneficiary, or the Corporation subject to the Trustee, the Corporation and
the Parent or Affiliate, as the case may be, entering into a supplemental
agreement pursuant to section 13.5(c) reflecting such assignment and
assumption. This Agreement may not be assigned by the Parent without the prior
written consent of Dutchco, the Trustee and the Corporation and the approval
of the holders of the Exchangeable Shares in accordance with section 10.2 of
the Exchangeable Share Provisions and the Class E and F Shareholders other
than the Parent, its subsidiaries and Affiliates.
15.10 Language. The parties have agreed that this Agreement be drafted in
English. Les parties ont convenu que cette convention soit redigee en langue
anglaise.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
Autodesk, Inc.
By /s/ Carol A. Bartz
----------------------------------
Carol A. Bartz
Chief Executive Officer
Autodesk Development B.V.
By /s/ Michael E. Sutton
----------------------------------
Michael E. Sutton
Directeur
Discreet Logic Inc.
By /s/ Marcia K. Sterling
----------------------------------
Marcia K. Sterling
Secretary
Montreal Trust Company of Canada
By /s/ Daniel E. Marz
----------------------------------
Daniel E. Marz
Senior Corporate Trust Officer
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EXHIBIT 10.12
SUPPORT AGREEMENT
MEMORANDUM OF AGREEMENT made as of the 16 day of March, 1999
BETWEEN:
AUTODESK, INC.,
a corporation subsisting under the laws
of the State of Delaware,
(hereinafter referred to as the "Parent"),
--and--
AUTODESK DEVELOPMENT B.V.,
a corporation subsisting under the laws
of The Netherlands,
(hereinafter referred to as "Dutchco"),
--and--
DISCREET LOGIC INC.,
a corporation subsisting under the laws
of the Province of Quebec,
(hereinafter referred to as the "Corporation").
WHEREAS pursuant to the Second Amended and Restated Agreement and Plan of
Acquisition and Amalgamation dated as of November 18, 1998, as amended, by and
among the Parent, Dutchco, 9066-9771 Quebec Inc. ("Amalgamation Sub"),
Autodesk Canada Inc. ("ACI") 9066-9854 Quebec Inc. ("Autodesk Quebec") and
Discreet Logic Inc. (a predecessor to the Corporation) (such agreement being
hereinafter referred to as the "Combination Agreement"), the parties agreed
that immediately after the Effective Time (as such term is defined in the
Combination Agreement), the Parent, Dutchco and the Corporation would execute
and deliver a Support Agreement containing the terms and conditions set forth
in Exhibit C to the Combination Agreement, together with such other terms and
conditions as may be agreed to by the parties to the Combination Agreement
acting reasonably;
AND WHEREAS pursuant to the Combination Agreement, articles of amalgamation
dated March 16, 1999 (the "Articles of Amalgamation") were filed pursuant to the
Companies Act (Quebec) whereby Discreet Logic Inc., Autodesk Quebec and
Amalgamation Sub amalgamated to continue as the Corporation;
AND WHEREAS immediately following to the Amalgamation, holders of certain
issued and outstanding Class B non-voting common share of the Corporation (the
"Class B Shares") elected to retract such shares in exchange for Exchangeable
Non-Voting Shares of the Corporation (the "Exchangeable Shares") on the basis
of 0.33 of an Exchangeable Share for each Class B Share so retracted;
AND WHEREAS the Articles of Amalgamation set forth the rights, privileges,
restrictions and conditions (collectively, the "Exchangeable Share
Provisions") attaching to the Exchangeable Shares;
AND WHEREAS pursuant to the Transactions (as defined in the Combination
Agreement), Dutchco, an indirect wholly owned subsidiary of the Parent, is the
registered and beneficial owner of all of the issued and outstanding Class A
Shares of the Corporation and all of the issued and outstanding Class E Shares
and Class F Shares of the Corporation, and ACI, a wholly owned subsidiary of
the Parent, is the registered and beneficial owner of all of the issued and
outstanding Class C Shares of the Corporation, and is the registered
owner of all of the issued and outstanding Class D Shares of the Corporation;
<PAGE>
AND WHEREAS the parties hereto desire to make appropriate provision and to
establish a procedure whereby the Parent and Dutchco will take certain actions
and make certain payments and deliveries necessary to ensure that the
Corporation will be able to make certain payments and to deliver or cause to
be delivered, Parent Common Shares in satisfaction of the obligations of the
Corporation under the Exchangeable Share Provisions with respect to the
payment and satisfaction of Liquidation Amounts, Retraction Prices and
Redemption Prices, all in accordance with the Exchangeable Share Provisions;
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree
as follows:
ARTICLE 1
Definitions and Interpretation
1.1 Defined Terms. Each term denoted herein by initial capital letters and
not otherwise defined herein shall have the meaning ascribed thereto in the
Exchangeable Share Provisions, unless the context requires otherwise.
1.2 Interpretation not Affected by Headings, etc. The division of this
agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this agreement.
1.3 Number, Gender, etc. Words importing the singular number only shall
include the plural and vice versa. Words importing the use of any gender shall
include all genders.
1.4 Date for any Action. In the event that any date on or by which any
action is required or permitted to be taken under this agreement is not a
Business Day, such action shall be required or permitted to be taken on or by
the next succeeding Business Day. For the purposes of this agreement, a
"Business Day" means any day other than a Saturday, Sunday or a day when banks
are not open for business in either or both of San Francisco, California or
Montreal, Quebec.
ARTICLE 2
Covenants of the Parent, Dutchco and the Corporation
2.1 Funding of the Corporation. So long as any Exchangeable Shares are
outstanding, the Parent (and Dutchco in the case of subclauses (b), (e) and
(f)) will:
(a) not declare or pay any dividend on the Parent Common Shares unless (i)
the Corporation will have sufficient assets, funds and other property
available to enable the due declaration and the due and punctual payment in
accordance with applicable law, of an equivalent dividend on the Exchangeable
Shares and (ii) the Corporation shall simultaneously declare or pay, as the
case may be, an equivalent dividend on the Exchangeable Shares, in each case
in accordance with the Exchangeable Share Provisions;
(b) cause the Corporation to declare simultaneously with the declaration of
any dividend on the Parent Common Shares an equivalent dividend on the
Exchangeable Shares and, when such dividend is paid on
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<PAGE>
the Parent Common Shares, cause the Corporation to pay simultaneously
therewith such equivalent dividend on the Exchangeable Shares, in each case in
accordance with the Exchangeable Share Provisions;
(c) advise the Corporation sufficiently in advance of the declaration by the
Parent of any dividend on the Parent Common Shares and take all such other
actions as are necessary, in cooperation with the Corporation, to ensure that
the respective declaration date, record date and payment date for a dividend
on the Exchangeable Shares shall be the same as the record date, declaration
date and payment date for the corresponding dividend on the Parent Common
Shares and shall correspond with any required dating for any stock exchange
purpose on which the Exchangeable Shares are listed;
(d) ensure that the record date for any dividend declared on the Parent
Common Shares is not less than 10 Business Days after the declaration date for
such dividend;
(e) take all such actions and do all such things as are necessary or
desirable to enable and permit the Corporation, in accordance with applicable
law, to pay and otherwise perform its obligations with respect to the
satisfaction of the Liquidation Amount in respect of each issued and
outstanding Exchangeable Share upon the liquidation, dissolution or winding-up
of the Corporation, including without limitation all such actions and all such
things as are necessary or desirable to enable and permit the Corporation to
cause to be delivered Parent Common Shares to the holders of Exchangeable
Shares in accordance with the provisions of Article 5 of the Exchangeable
Share Provisions; and
(f) take all such actions and do all such things as are necessary or
desirable to enable and permit the Corporation, in accordance with applicable
law, to pay and otherwise perform its obligations with respect to the
satisfaction of the Retraction Price and the Redemption Price, including
without limitation all such actions and all such things as are necessary or
desirable to enable and permit the Corporation to cause to be delivered Parent
Common Shares to the holders of Exchangeable Shares, upon the redemption of
the Exchangeable Shares in accordance with the provisions of Article 6 or
Article 7 of the Exchangeable Share Provisions, as the case may be.
2.2 Segregation of Funds. The Parent will and if applicable will cause the
Corporation to deposit a sufficient amount of funds in a separate account and
segregate a sufficient amount of such assets and other property as is
necessary to enable the Corporation to pay or otherwise satisfy the applicable
Liquidation Amount, Retraction Price or Redemption Price, in each case for the
benefit of holders from time to time of the Exchangeable Shares, and will use
such funds, assets and other property so segregated exclusively for the
payment or other satisfaction of the Liquidation Amount, the Retraction Price
or the Redemption Price, as applicable.
2.3 Reservation of Parent Common Shares. The Parent hereby represents,
warrants and covenants that it has irrevocably reserved for issuance and will
at all times keep available, free from pre-emptive and other rights, out of
its authorized and unissued capital stock such number of Parent Common Shares
(or other shares or securities into which the Parent Common Shares may be
reclassified or changed as contemplated by section 2.7 hereof) (a) as is equal
to the sum of (i) the number of Exchangeable Shares issued and outstanding
from time to time and (ii) the number of Exchangeable Shares issuable upon the
exercise of all rights to acquire Exchangeable Shares outstanding from time to
time and (b) as are now and may hereafter be required to enable and permit the
Corporation to meet its obligations hereunder, under the Voting and Exchange
Trust Agreement, under the Exchangeable Share Provisions and under any other
security or commitment pursuant to which the Parent may now or hereafter be
required to issue Parent Common Shares.
2.4 Notification of Certain Events. In order to assist the Parent and
Dutchco to comply with their obligations hereunder, the Corporation will give
the Parent and Dutchco notice of each of the following events at the time set
forth below:
(a) in the event of any determination by the Board of Directors of the
Corporation to institute voluntary liquidation, dissolution or winding up
proceedings with respect to the Corporation or to effect any other
distribution of the assets of the Corporation among its shareholders for the
purpose of winding up its affairs, at least 60 days prior to the proposed
effective date of such liquidation, dissolution, winding up or other
distribution;
3
<PAGE>
(b) immediately, upon the earlier of receipt by the Corporation of notice of
and the Corporation otherwise becoming aware of any threatened or instituted
claim, suit, petition or other proceeding with respect to the involuntary
liquidation, dissolution or winding up of the Corporation or to effect any
other distribution of the assets of the Corporation among its shareholders for
the purpose of winding up its affairs;
(c) immediately, upon receipt by the Corporation of a Retraction Request (as
defined in the Exchangeable Share Provisions);
(d) at least 130 days prior to any accelerated Automatic Redemption Date
determined by the Board of Directors of the Corporation in accordance with the
Exchangeable Share Provisions; and
(e) as soon as practicable upon the issuance by the Corporation of any
Exchangeable Shares or rights to acquire Exchangeable Shares (other than the
issuance of Exchangeable Shares upon the redemption of outstanding Class B
Shares pursuant to the Transactions).
2.5 Delivery of Parent Common Shares. In furtherance of its obligations
under sections 2.1(e) and 2.1(f) hereof, upon notice from the Corporation of
any event which requires the Corporation to cause to be delivered Parent
Common Shares to any holder of Exchangeable Shares, Dutchco shall forthwith
deliver the requisite Parent Common Shares to or to the order of the former
holder of the surrendered Exchangeable Shares, as the Corporation shall
direct. All such Parent Common Shares shall be duly issued as fully paid and
non-assessable and shall be free and clear of any lien, claim, encumbrance,
security interest or adverse claim. In consideration of the delivery of each
such Parent Common Share by Dutchco, the Corporation shall issue to Dutchco,
or as Dutchco shall direct, such number of Class A Shares of the Corporation
as is equal to the fair value of such Parent Common Share.
2.6 Qualification of Parent Common Shares in the United States. The Parent
represents and warrants that it has taken all actions and done all things as
are necessary or desirable to cause the Parent Common Shares to be issued and
delivered pursuant to the Exchangeable Share Provisions, the Exchange Right or
the Automatic Exchange Rights (as defined in the Voting and Exchange Trust
Agreement) to be freely tradeable thereafter in the United States (other than
any restrictions on transfers by reason of a holder being an "affiliate" of
the Parent or, prior to the Effective Date, for purposes of United States
federal or state securities law). The Parent will in good faith expeditiously
take all such actions and do all such things as are necessary or desirable to
cause all Parent Common Shares to be delivered pursuant to the Exchangeable
Share Provisions, Exchange Right or the Automatic Exchange Rights to be
listed, quoted or posted for trading on all stock exchanges and quotation
systems on which outstanding Parent Common Shares are listed, quoted or posted
for trading at such time.
2.7 Economic Equivalence.
(a) The Parent will not without the prior approval of the Corporation and
the prior approval of the holders of the Exchangeable Shares given in
accordance with Section 10.2 of the Exchangeable Share Provisions:
(i) issue or distribute Parent Common Shares (or securities exchangeable
for or convertible into or carrying rights to acquire Parent Common Shares)
to the holders of all or substantially all of the then outstanding Parent
Common Shares by way of stock dividend or other distribution, other than an
issue of Parent Common Shares (or securities exchangeable for or
convertible into or carrying rights to acquire Parent Common Shares) to
holders of Parent Common Shares who exercise an option to receive dividends
in Parent Common Shares (or securities exchangeable for or convertible into
or carrying rights to acquire Parent Common Shares) in lieu of receiving
cash dividends; or
(ii) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding Parent Common Shares
entitling them to subscribe for or to purchase Parent Common Shares (or
securities exchangeable for or convertible into or carrying rights to
acquire Parent Common Shares); or
(iii) issue or distribute to the holders of all or substantially all of
the then outstanding Parent Common Shares (A) shares or securities of the
Parent of any class other than Parent Common Shares (other than shares
convertible into or exchangeable for or carrying rights to acquire Parent
Common Shares), (B) rights,
4
<PAGE>
options or warrants other than those referred to in section 2.7(a)(ii)
above, (C) evidences of indebtedness of the Parent or (D) assets of the
Parent;
unless (i) the Corporation is able under applicable law to issue or distribute
the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets simultaneously
to holders of the Exchangeable Shares, and (ii) the Corporation shall issue or
distribute such rights, options, securities, shares, evidences of indebtedness
or other assets simultaneously to holders of the Exchangeable Shares.
(b) The Parent will not without the prior approval of the Corporation and
the prior approval of the holders of the Exchangeable Shares given in
accordance with Section 10.2 of the Exchangeable Share Provisions:
(i) subdivide, redivide or change the then outstanding Parent Common
Shares into a greater number of Parent Common Shares; or
(ii) reduce, combine or consolidate or change the then outstanding Parent
Common Shares into a lesser number of Parent Common Shares; or
(iii) reclassify or otherwise change the Parent Common Shares or effect
an amalgamation, merger, reorganization or other transaction affecting the
Parent Common Shares;
unless (i) the Corporation is able under applicable law to simultaneously make
the same or an economically equivalent change to, or in the rights of the
holders of, the Exchangeable Shares, and (ii) the Corporation simultaneously
does make the same or an economically equivalent change to, or in the rights
of the holders of, the Exchangeable Shares.
(c) The Parent will ensure that the record date for any event referred to in
section 2.7(a) or 2.7(b) above, or (if no record date is applicable for such
event) the effective date for any such event, is not less than 20 Business
Days (or such shorter period as the Parent and the Corporation may agree upon)
after the date on which such event is declared or announced by the Parent
(with simultaneous notice thereof to be given by the Parent to the
Corporation).
(d) The Board of Directors of the Corporation shall determine, in good faith
and in its sole discretion (with the assistance of such reputable and
qualified independent financial advisors and/or other experts as the board may
require), economic equivalence for the purposes of any event referred to in
Section 2.7(a) or 2.7(b) above and each such determination shall be conclusive
and binding on Dutchco and the Parent. In making each such determination, the
following factors shall, without excluding other factors determined by the
Board of Directors of the Corporation to be relevant, be considered by the
Board of Directors of the Corporation:
(i) in the case of any stock dividend or other distribution payable in
Parent Common Shares, the number of such shares issued in proportion to the
number of Parent Common Shares previously outstanding;
(ii) in the case of the issuance or distribution of any rights, options
or warrants to subscribe for or purchase Parent Common Shares (or
securities exchangeable for or convertible into or carrying rights to
acquire Parent Common Shares), the relationship between the exercise price
of each such right, option or warrant and the current market value (as
determined by the Board of Directors of the Corporation in the manner above
contemplated) of a Parent Common Share;
(iii) in the case of the issuance or distribution of any other form of
property (including without limitation any shares or securities of the
Parent of any class other than Parent Common Shares, any rights, options or
warrants other than those referred to in Section 2.7(d)(ii) above, any
evidences of indebtedness of the Parent or any assets of the Parent), the
relationship between the fair market value (as determined by the Board of
Directors of the Corporation in the manner above contemplated) of such
property to be issued or distributed with respect to each outstanding
Parent Common Share and the current market value (as determined by the
Board of Directors of the Corporation in the manner above contemplated) of
a Parent Common Share;
5
<PAGE>
(iv) in the case of any subdivision, redivision or change of the then
outstanding Parent Common Shares into a greater number of Parent Common
Shares or the reduction, combination or consolidation or change of the then
outstanding Parent Common Shares into a lesser number of Parent Common
Shares or any amalgamation, merger, reorganization or other transaction
affecting the Parent Common Shares, the effect thereof upon the then
outstanding Parent Common Shares; and
(v) in all such cases, the general taxation consequences of the relevant
event to holders of Exchangeable Shares to the extent that such
consequences may differ from the taxation consequences to holders of Parent
Common Shares as a result of differences between taxation laws of Canada
and the United States (except for any differing consequences arising as a
result of differing marginal taxation rates and without regard to the
individual circumstances of holders of Exchangeable Shares).
For purposes of the foregoing determinations, the current market value of
any security listed and traded or quoted on a securities exchange or automated
quotation system shall be the average of the closing prices of such security
during the three consecutive trading days ending not more than five trading
days before the date of determination on the principal securities exchange on
which such securities are listed and traded or quoted; provided, however, that
if there is no active public distribution or trading activity of such
securities during such period, then the current market value thereof shall be
determined by the Board of Directors of the Corporation, in good faith and in
its sole discretion (with the assistance of such reputable and qualified
independent financial advisors and/or other experts as the board may require),
and provided further that any such determination by the Board of Directors of
the Corporation shall be conclusive and binding on the Parent.
2.8 Tender Offers, Etc. In the event that a tender offer, share exchange
offer, issuer bid, take-over bid or similar transaction with respect to Parent
Common Shares (an "Offer") is proposed by the Parent or is proposed to the
Parent or its shareholders and is recommended by the Board of Directors of the
Parent, or is otherwise effected or to be effected with the consent or
approval of the Board of Directors of the Parent, the Parent will use its best
efforts expeditiously and in good faith to take all such actions and do all
such things as are necessary or desirable to enable and permit holders of
Exchangeable Shares to participate in such Offer to the same extent and on an
economically equivalent basis as the holders of Parent Common Shares, without
discrimination. Without limiting the generality of the foregoing, the Parent
will use its best efforts expeditiously and in good faith to ensure that
holders of Exchangeable Shares may participate in all such Offers without
being required to retract Exchangeable Shares as against the Corporation (or,
if so required, to ensure that any such retraction shall be effective only
upon, and shall be conditional upon, the closing of the Offer and only to the
extent necessary to tender or deposit to the Offer).
2.9 Ownership of Outstanding Shares. Without the prior approval of the
Corporation and the prior approval of the holders of the Exchangeable Shares
given in accordance with Section 10.2 of the Exchangeable Share Provisions,
the Parent covenants and agrees in favour of the Corporation that, as long as
any outstanding Exchangeable Shares are owned by any person or entity other
than the Parent or any of its Affiliates, Parent will be and remain the direct
or indirect beneficial owner of all issued and outstanding shares in the
capital of the Corporation other than the Class D Shares and all outstanding
securities of the Corporation, in each case carrying or otherwise entitled to
voting rights in any circumstances, and in each case other than the
Exchangeable Shares or the Class D Shares.
2.10 Parent Not To Vote Exchangeable Shares. The Parent covenants and agrees
that it will appoint and cause to be appointed proxyholders with respect to
all Exchangeable Shares held by the Parent and its subsidiaries and Affiliates
for the sole purpose of attending each meeting of holders of Exchangeable
Shares in order to be counted as part of the quorum for each such meeting. The
Parent further covenants and agrees that it will not, and will cause its
subsidiaries and Affiliates not to, exercise any voting rights which may be
exercisable by holders of Exchangeable Shares from time to time pursuant to
the Exchangeable Share Provisions or pursuant to the provisions of the
Companies Act (Quebec) (or any successor or other corporate statute by which
the Corporation in the future shall be governed) with respect to any
Exchangeable Shares held by it or by its subsidiaries or Affiliates in respect
of any matter considered at any meeting of holders of Exchangeable Shares.
6
<PAGE>
2.11 Due Performance. On and after the Effective Time, Parent and Dutchco
shall duly and timely perform all of their respective obligations expressed in
the Combination Agreement.
2.12 Preservation of Existence of Corporation. Without the prior approval of
the holders of Exchangeable Shares given in accordance with Section 10.2 of
the Exchangeable Shares Provisions, the Parent, Dutchco and Corporation
covenant and agree that, so long as any Exchangeable Shares are owned by any
person or entity other than the Parent or its Affiliates, the separate
existence of Corporation shall be preserved and Corporation shall not be
liquidated, wound up or dissolved or merged with or into another entity.
2.13 Certain Requirements in Respect of Combination, etc. The Parent shall
not enter into any transaction (whether by way of reconstruction,
reorganization, consolidation, merger, transfer, sale, lease or otherwise)
whereby all or substantially all of its undertaking, property and assets would
become the property of any other person or, in the case of a merger, of the
continuing corporation resulting therefrom unless:
(a) such other person or continuing corporation is a corporation (herein
called the "Parent Successor") incorporated under the laws of any state of the
United States or the laws of Canada or any province thereof;
(b) the Parent Successor, by operation of law, becomes, without more, bound
by the terms and provisions of this trust agreement or, if not so bound,
executes, prior to or contemporaneously with the consummation of such
transaction a trust agreement supplemental hereto and such other instruments
(if any) as are satisfactory to the Trustee and in the opinion of legal
counsel to the Trustee are necessary or advisable to evidence the assumption
by the Parent Successor of liability for all moneys payable and property
deliverable hereunder and the covenant of such Parent Successor to pay and
deliver or cause to be delivered the same and its agreement to observe and
perform all the covenants and obligations of the Parent under this trust
agreement; and
(c) such transaction shall, to the satisfaction of the Trustee and in the
opinion of legal counsel to the Trustee, be upon such terms as substantially
to preserve and not to impair in any material respect any of the rights,
duties, powers and authorities of the Trustee or of the Beneficiaries
hereunder.
ARTICLE 3
General
3.1 Term. This agreement shall come into force and be effective upon the
issue by the Corporation of Exchangeable Shares and shall terminate and be of
no further force and effect at such time as no Exchangeable Shares (or
securities or rights convertible into or exchangeable for or carrying rights
to acquire Exchangeable Shares) are held by any party other than the Parent
and any of its Affiliates.
3.2 Changes in Capital of Parent and the Corporation. Notwithstanding the
provisions of Section 3.4, at all times after the occurrence of any event
effected pursuant to Section 2.7 or 2.8 hereof, as a result of which either
the Parent Common Shares or the Exchangeable Shares or both are in any way
changed, this agreement shall forthwith be amended and modified as necessary
in order that it shall apply with full force and effect, mutatis mutandis, to
all new securities into which the Parent Common Shares or the Exchangeable
Shares or both are so changed and the parties hereto shall execute and deliver
an agreement in writing giving effect to and evidencing such necessary
amendments and modifications.
3.3 Severability. If any provision of this agreement is held invalid,
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this agreement shall not in any way be affected or improved
thereby and this agreement shall be carried and as near as possible in
accordance with its original terms and conditions; and to this end the
provisions of this agreement are intended to be and shall be deemed severable;
provided, however, that if the provision or provisions so held to be invalid,
in the reasonable judgment of the parties hereto, is or are so fundamental to
the intent of the parties hereto and the operation of this agreement that the
enforcement of the other provisions hereof, in the absence of such invalid
provision or provisions, would damage irreparably the intent of the parties in
entering into this agreement, the parties hereto shall agree to amend or
7
<PAGE>
otherwise modify this agreement so as to carry out the intent and purposes
hereof and the transactions contemplated hereby.
3.4 Amendments, Modifications, etc. Except as contemplated by Section 3.5,
this agreement may not be amended or modified except by an agreement in
writing executed by the Corporation, Dutchco and the Parent and approved by
the holders of the Exchangeable Shares in accordance with Section 10.2 of the
Exchangeable Share Provisions.
3.5 Ministerial Amendments. Notwithstanding the provisions of Section 3.4,
the parties to this agreement may in writing, at any time and from time to
time, without the approval of the holders of the Exchangeable Shares, amend or
modify this agreement for the purposes of:
(a) adding to the covenants of any of the parties for the protection of the
holders of the Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with this
agreement as may be necessary or desirable with respect to matters or
questions which, in the opinion of the Boards of Directors of each of the
Corporation, Dutchco and the Parent, it may be expedient to make, provided
that each such Board of Directors shall be of the opinion that such amendments
or modifications will not be prejudicial to the interests of the holders of
the Exchangeable Shares; or
(c) making such changes or corrections which, on the advice of counsel to
the Corporation, Dutchco and the Parent, are required for the purpose of
curing or correcting any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error, provided that the Boards of
Directors of each of the Corporation, Dutchco and the Parent shall be of the
opinion that such changes or corrections will not be prejudicial to the
interests of the holders of the Exchangeable Shares.
3.6 Meeting to Consider Amendments. The Corporation, at the request of the
Parent or Dutchco, shall call a meeting or meetings of the holders of the
Exchangeable Shares for the purpose of considering any proposed amendment or
modification requiring approval pursuant to Section 3.4 hereof. Any such
meeting or meetings shall be called and held in accordance with the by-laws of
the Corporation, the Exchangeable Share Provisions and all applicable laws.
3.7 Amendments Only in Writing. No amendment to or modification or waiver of
any of the provisions of this agreement otherwise permitted hereunder shall be
effective unless made in writing and signed by all of the parties hereto.
3.8 Enurement. This agreement shall be binding upon and enure to the benefit
of the parties hereto and their respective successors and assigns.
3.9 Notices to Parties. All notices and other communications between the
parties shall be in writing and shall be deemed to have been given if
delivered personally or by confirmed telecopy to the parties at the following
addresses (or at such other address for either such party as shall be
specified in like notice):
(a) if to the Parent or Dutchco at:
Autodesk, Inc.
20400 Stevens Creek Boulevard
Cupertino, CA 95401-2217
Attention: Marcia K. Sterling
Vice President Business Development, General Counsel and Secretary
Telecopy:
(408) 517-1886
8
<PAGE>
(b) if to the Corporation at:
Discreet Logic Inc.
10 Duke Street
Montreal, Quebec
Canada H3C 2L7
Attention: Francois Plamondon
Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Telecopy:
(514) 393-3996
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy shall
be deemed to have been given and received on the date of confirmed receipt
thereof, provided such notice or other communication is received prior to 5:00
p.m. (local time) on a Business Day, and otherwise it shall be deemed to have
been given and received upon the immediately following Business Day.
3.10 Counterparts. This agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
3.11 Jurisdiction. This agreement shall be construed and enforced in
accordance with the laws of the Province of Quebec and the laws of Canada
applicable therein.
3.12 Attornment. The Parent, Dutchco and the Corporation agree that any
action or proceeding arising out of or relating to this agreement may be
instituted in the courts of Quebec, waive any objection which they may have
now or hereafter to the venue of any such action or proceeding, irrevocably
submits to the non-exclusive jurisdiction of the said courts in any such
action or proceeding, agree to be bound by any judgment of the said courts and
not to seek, and hereby waive, any review of the merits of any such judgment
by the courts of any other jurisdiction and the Parent and Dutchco hereby
appoint the Corporation at its registered office in the Province of Quebec as
the Parent's and Dutchco's attorney for service of process.
3.13 Guaranty/Assignment. Parent hereby unconditionally and irrevocably
guarantees the prompt and full performance by Dutchco of, and shall cause
Dutchco to comply with, its obligations hereunder and pursuant to the
Transactions. Dutchco may assign all or a portion of its rights and
obligations hereunder to Parent or any Affiliate of Parent, which shall
thereupon assume such assigned rights and/or obligations without the consent
of the Corporation subject to the Corporation and Parent or such Affiliate, as
the case may be, entering into a supplemental agreement reflecting such
assignment and assumption. This agreement may not be assigned by the Parent
without the prior written consent of Dutchco and the Corporation approved by
the holders of the Exchangeable Shares in accordance with Section 10.2 of the
Exchangeable Share Provisions.
3.14 Language. The parties have agreed that this agreement be drafted in
English. Les parties ont convenu que cette convention soit redigee en langue
anglaise.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be duly
executed as of the date first above written.
Autodesk, Inc.
By: /s/ Carol A. Bartz
---------------------------------
Carol A. Bartz
Chief Executive Officer
Autodesk Development B.V.
By: /s/ Michael E. Sutton
---------------------------------
Michael E. Sutton
Directeur
Discreet Logic Inc.
By: /s/ Marcia K. Sterling
---------------------------------
Marcia K. Sterling
Secretary
10
<PAGE>
1999 ANNUAL REPORT FOR AUTODESK, INC.
FINANCIAL
REVIEW
<PAGE>
1 Selected Five-Year Financial Data
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
22 Consolidated Statement of Income
23 Consolidated Balance Sheet
24 Consolidated Statement of Cash Flows
25 Consolidated Statement of Stockholders' Equity
26 Notes to Consolidated Financial Statements
42 Report of Ernst & Young LLP, Independent Auditors
<PAGE>
SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data, percentages, Fiscal year ended January 31,
and employees)
For the Fiscal Year/1/ 1999 1998 (restated) 1997 1996 1995
----------- ---------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 740,167 $ 617,126 $ 496,693 $ 534,167 $ 454,612
----------- ---------------- ---------- ----------- ----------
Cost of revenues 76,364 71,338 64,217 66,812 61,725
----------- ---------------- ---------- ----------- ----------
Marketing and sales 260,553 237,107 199,939 183,550 154,562
----------- ---------------- ---------- ----------- ----------
Research and development 142,806 122,432 93,702 78,678 65,176
----------- ---------------- ---------- ----------- ----------
General and administrative 123,622 88,900 74,280 76,100 65,738
----------- ---------------- ---------- ----------- ----------
Nonrecurring charges/2/ 21,985 22,187 4,738 -- 25,500
----------- ---------------- ---------- ----------- ----------
Litigation accrual reversal (18,200) -- -- -- --
----------- ---------------- ---------- ----------- ----------
Income from operations/2/ 133,037 75,162 59,817 129,027 81,911
----------- ---------------- ---------- ----------- ----------
Interest and other income, net 13,523 9,644 6,695 9,253 7,233
----------- ---------------- ---------- ----------- ----------
Income before income taxes 146,560 84,806 66,512 138,280 89,144
----------- ---------------- ---------- ----------- ----------
Net income/2/ 90,639 45,171 41,571 87,788 56,606
----------- ---------------- ---------- ----------- ----------
Net cash provided by operating activities 146,735 158,612 114,183 106,632 104,412
----------- ---------------- ---------- ----------- ----------
At Year End/1/
Cash, cash equivalents, and marketable securities $ 378,195 $ 301,319 $ 286,308 $ 272,402 $ 255,373
----------- ---------------- ---------- ----------- ----------
Current assets 450,489 307,702 297,671 335,013 360,725
----------- ---------------- ---------- ----------- ----------
Total assets 693,877 563,490 492,233 517,929 482,076
----------- ---------------- ---------- ----------- ----------
Current liabilities 231,599 199,487 150,171 144,295 154,990
----------- ---------------- ---------- ----------- ----------
Long-term liabilities 2,036 31,064 33,948 31,306 3,602
----------- ---------------- ---------- ----------- ----------
Total liabilities 233,635 230,551 184,119 175,601 158,592
----------- ---------------- ---------- ----------- ----------
Stockholders' equity 460,242 332,939 243,614 342,328 323,484
----------- ---------------- ---------- ----------- ----------
Working capital 218,890 108,215 147,500 190,718 205,735
----------- ---------------- ---------- ----------- ----------
Number of employees 2,712 2,470 2,044 1,894 1,788
----------- ---------------- ---------- ----------- ----------
Common Stock Data/1/
Basic net income per share/2/ $ 1.94 $ 0.97 $ 0.91 $ 1.86 $ 1.20
----------- ---- -------- ---------- ----------- ----------
Diluted net income per share/2/ $ 1.85 $ 0.91 $ 0.88 $ 1.76 $ 1.14
----------- ---- -------- ---------- ----------- ----------
Book value per share $ 9.72 $ 7.32 $ 5.40 $ 7.39 $ 6.85
----------- ---- -------- ---------- ----------- ----------
Dividends paid per share $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.24
----------- ---- -------- ---------- ----------- ----------
Shares used in computing basic net income per
share 46,640 46,760 45,540 47,090 47,320
----------- ---- -------- ---------- ----------- ----------
Shares used in computing diluted net income per
share 48,910 49,860 47,190 49,800 49,840
----------- ---- -------- ---------- ----------- ----------
Shares outstanding at year end 47,342 45,465 45,108 46,351 47,241
----------- ---- -------- ---------- ----------- ----------
Financial Ratios/1/
Current ratio 1.9 1.5 2.0 2.3 2.3
----------- ---------------- ---------- ----------- ----------
Return on net revenues/2/ 12% 7% 8% 16% 12%
----------- ---------------- ---------- ----------- ----------
Return on average assets/2/ 14% 9% 8% 18% 13%
----------- ---------------- ---------- ----------- ----------
Return on average stockholders' equity/2/ 23% 16% 14% 26% 18%
----------- ---------------- ---------- ----------- ----------
</TABLE>
/1/ Amounts do not include the operating results or financial position of
Discreet Logic Inc., which was acquired by Autodesk on March 16, 1999. (See Note
12 to the consolidated financial statements.)
/2/ Amounts include the effects of nonrecurring charges of $22.0 million, $22.2
million, $4.7 million, and $25.5 million recorded in fiscal years 1999, 1998,
1997, and 1995, respectively. Nonrecurring charges consist of charges for
purchased in-process research and development from business acquisitions in
fiscal years 1999, 1998, and 1997. The fiscal year 1995 amount represents a
legal judgment against the Company.
1
<PAGE>
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 revenues, 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."
RECENT EVENTS
In March 1999, Autodesk acquired Discreet Logic Inc., a company that develops,
assembles, markets, and supports nonlinear, online digital systems and software
for creating, editing, and compositing imagery and special effects for film,
video, HDTV, broadcast, and the Web, in a transaction accounted for as a pooling
of interests. In the acquisition, Autodesk acquired all of Discreet's voting
stock, issuing 0.33 shares of Autodesk common stock or 0.33 exchangeable shares
for each outstanding share of Discreet. Autodesk issued approximately 10 million
shares of its stock, or exchangeable shares, in the acquisition. Each
exchangeable share can be exchanged, at its holder's election, for Autodesk
common stock.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues, consolidated
statement of income data for the periods indicated. These operating results are
not necessarily indicative of results for any future periods.
Fiscal year ended January 31,
1999 1998 (restated) 1997
----------- --------------- ----------
Net revenues 100% 100% 100%
----------- --------------- ----------
Costs and expenses:
----------- --------------- ----------
Cost of revenues 10 12 13
----------- --------------- ----------
Marketing and sales 35 38 40
----------- --------------- ----------
Research and development 19 20 19
----------- --------------- ----------
General and administrative 17 14 15
----------- --------------- ----------
Nonrecurring charges 3 4 1
----------- --------------- ----------
Litigation accrual reversal (2) -- --
----------- --------------- ----------
Total costs and expenses 82 88 88
Income from operations 18 12 12
----------- --------------- ----------
Interest and other income, net 2 1 1
----------- --------------- ----------
Income before income taxes 20 13 13
----------- --------------- ----------
Provision for income taxes 8 6 5
----------- --------------- ----------
Net income 12% 7% 8%
----------- --------------- ----------
Net revenues
Autodesk's consolidated net revenues in fiscal year 1999 were $740.2 million,
which represented a 20 percent increase from fiscal year 1998 net revenues of
$617.1 million. Revenues in the Americas and Europe increased $58.7 million or
20 percent and $78.9 million or 38 percent, respectively, from the prior fiscal
year, while net revenues in Asia Pacific decreased slightly for the same period.
The increased revenues resulted primarily from increased
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license revenues from new and upgrade product offerings from the Company's
market groups and to a lesser extent from recent acquisitions. Net revenues in
fiscal year 1998 increased 24 percent from the $496.7 million posted in fiscal
year 1997, primarily due to higher sales of AutoCAD(R) software, the Company's
flagship product, and significant growth in the Company's market group revenues.
Also contributing to the increased revenues in fiscal year 1998 were revenues
contributed by Softdesk, Inc. ("Softdesk"), which was acquired by the Company in
March 1997.
AutoCAD and AutoCAD upgrades represented approximately 62 percent, 70 percent,
and 70 percent of consolidated revenues in fiscal years 1999, 1998, and 1997,
respectively. On a stand-alone basis, AutoCAD and AutoCAD upgrades were 51
percent, 65 percent, and 68 percent of consolidated revenues in fiscal years
1999, 1998, and 1997, respectively. During fiscal year 1999, approximately
263,000 new AutoCAD licenses were added worldwide, compared to 244,000 and
207,000 licenses added during fiscal years 1998 and 1997, respectively. AutoCAD
upgrade revenues were $112 million, $108 million, and $45 million in fiscal
years 1999, 1998, and 1997, respectively. On a stand-alone basis, AutoCAD
upgrade revenues were $99 million, $101 million, and $44 million, respectively.
International revenues, including exports from the United States, accounted for
approximately 60 percent, 59 percent, and 67 percent of consolidated revenues in
fiscal years 1999, 1998, and 1997, respectively. The stronger value of the U.S.
dollar, relative to international currencies, primarily the Japanese yen and the
Australian dollar, negatively affected international revenues by approximately
$4 million in fiscal year 1999 as compared to fiscal year 1998 and by $30
million in fiscal year 1998 as compared to fiscal year 1997. Fluctuations in
foreign exchange rates positively impacted international operating expenses by
$3 million in fiscal year 1999, positively impacted international operating
expenses by $11 million in fiscal year 1998, and did not materially impact
operating expenses in fiscal year 1997. A summary of revenues by geographic area
is presented in Note 8 to the consolidated financial statements.
The Company records product returns as a reduction of revenues. In fiscal years
1999, 1998, and 1997, product returns, consisting principally of stock rotation,
totaled $30.9 million, $35.4 million, and $44.3 million (or 4 percent, 6
percent, and 9 percent of total consolidated revenues, respectively). Total
product returns decreased $4.5 million in fiscal year 1999 due largely to
continued management focus on the level of inventories with the Company's
resellers, sell-through sales activities and programs in Autodesk's distribution
channel, and fewer returns associated with AutoCAD Release 14 compared to the
prior version. Returns of AutoCAD and AutoCAD upgrades accounted for 23 percent,
40 percent, and 61 percent of total product returns in fiscal years 1999, 1998,
and 1997, respectively. The lower level of product returns in fiscal year 1999
compared to fiscal years 1998 and 1997 reflected a lower level of product
rotation that had previously been associated with performance issues relating to
AutoCAD Release 13 and customers' perception issues associated with this
product.
The nature and technical complexity of Autodesk's software is such that defect
corrections have occurred in the past and may occur in future releases of
AutoCAD and other software products offered by the Company. As is the case with
most complex software, the Company has experienced performance issues with
previous releases of its AutoCAD software, and performance issues could occur in
future releases of AutoCAD and other products offered by the Company.
Delays in the introduction of planned future product releases, or failure to
achieve significant customer acceptance for these new products, may have a
material adverse effect on the Company's revenues and consolidated results of
operations in future periods. Additionally, slowdowns in any of the Company's
geographical markets, including the recent economic instability in certain
countries of the Asia Pacific region, could also have a material adverse effect
on Autodesk's business and consolidated results of operations.
Cost of revenues
Cost of revenues includes the purchase of disks and compact disks (CDs), costs
associated with transferring the Company's software to electronic media,
printing of user manuals and packaging materials, freight, royalties,
amortization of purchased technology and capitalized software, facility costs,
and in certain foreign markets, software protection locks. When expressed as a
percentage of net revenues, cost of revenues decreased approximately 2 percent
in fiscal year 1999 as compared to fiscal year 1998 and 1 percent in fiscal year
1998 as compared to fiscal year 1997. Gross margins in fiscal year 1999 were
positively impacted by continued operating efficiencies, lower royalties for
licensed technology embedded in Autodesk's products, and
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the geographic distribution of sales, partially offset by an increase in the
amortization of purchased technologies and capitalized software. In the future,
cost of revenues as a percentage of net revenues may be impacted by the mix of
product sales, royalty rates for licensed technology embedded in Autodesk's
products, and the geographic distribution of sales.
Marketing and sales
Marketing and sales expenses include salaries, sales commissions, travel, and
facility costs for the Company's marketing, sales, dealer training, and support
personnel. These expenses also include programs aimed at increasing revenues,
such as advertising, trade shows, and expositions, as well as various sales and
promotional programs designed for specific sales channels and end users. When
expressed as a percentage of net revenues, marketing and sales expenses
decreased from 38 percent in fiscal year 1998 to 35 percent in fiscal year 1999.
Actual fiscal year 1999 marketing and sales expenses of $260.6 million increased
by 10 percent from the $237.1 million of expense incurred in the prior fiscal
year. The increase in spending was largely due to higher employee costs and
increases in advertising and promotional costs associated with the launch of
certain new and enhanced products introduced by the Company's market groups
during fiscal year 1999. Fiscal year 1998 marketing and sales expenses increased
19 percent over fiscal year 1997 expenses of $199.9 million due to higher
employee costs as well as marketing and sales costs associated with the launch
of AutoCAD Release 14 and other new and enhanced products released throughout
the year. 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 consist primarily of salaries and benefits for
software engineers, contract development fees, expenses associated with product
translations, costs of computer equipment used in software development, and
facilities expenses. During fiscal years 1999, 1998, and 1997, Autodesk incurred
$142.8 million, $122.4 million, and $93.7 million, respectively, of research and
development expenses (excluding capitalized software development costs of $1.3
million and $2.2 million during fiscal years 1999 and 1998, respectively; no
software development costs were capitalized during fiscal year 1997). Research
and development expenses increased in fiscal year 1999 primarily due to higher
employee-related costs ($15.1 million increase) and incremental research and
development expenses associated with the May 1998 acquisition of Genius CAD
Software GmbH ("Genius") ($4.7 million increase). The increase in research and
development expenses between fiscal years 1998 and 1997 was due to the addition
of software engineers and incremental research and development personnel
expenses associated with the March 1997 business combination with Softdesk. The
Company anticipates that research and development expenses will increase in
fiscal year 2000 as a result of product development efforts by the Com-pany'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 include the Company's information systems,
finance, human resources, legal, and other administrative operations. Fiscal
year 1999 general and administrative expenses of $123.6 million increased 39
percent from the $88.9 million recorded in the prior fiscal year, primarily due
to higher employee-related costs ($12 million increase), amortization expense
associated with intangible assets recorded in connection with the acquisitions
of Genius and Softdesk ($6.7 million increase), costs incurred to ensure that
the Company's infrastructure is year 2000 compliant ($3.5 million increase), and
consulting fees related to enhancing the information systems infrastructure
($5.0 million increase). Fiscal year 1998 general and administrative expenses
increased 20 percent from fiscal year 1997 spending of $74.3 million, primarily
due to higher employee-related costs and amortization expense associated with
the intangible assets recorded in connection with the acquisition of Softdesk.
The Company currently expects that general and administrative expenses in the
coming year will increase to support spending on infrastructure, including
continued investment in Autodesk's worldwide information systems.
Nonrecurring charges
Genius CAD Software GmbH
On May 4, 1998, Autodesk entered into an agreement with Genius, a German limited
liability company, to purchase various mechanical com-
4
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puter-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 nonrecurring 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
relates 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.
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 and AutoCAD LT, (ii) Genius(TM) Desktop,
(iii) Genius(TM) 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. At the time of the acquisition, the following were 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 September 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.
For 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.
Modernization of the code for Genius AutoCAD and Genius Desktop included a
complete replacement of the existing LISP-based code with modern object-oriented
code based on Autodesk's ObjectARX(TM) technology. The Company determined
through technical due diligence that a substantial portion of the source code in
both Genius AutoCAD and Genius Desktop was based on LISP, with remaining code
based on ADS. Replacing the LISP and ADS code was anticipated to significantly
improve the flexibility (for example, 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 code and what impact this conversion would have on any
new features currently being developed. Autodesk estimates that this conversion
may take several releases 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.
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 that 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 APIs 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). As is
the case with 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
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<PAGE>
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. The costs incurred to reach technological feasibility for
Genius Desktop, which first shipped in September 1998, were approximately
$500,000.
For the Genius AutoCAD LT product offering, the most significant technological
challenge was the fact that APIs to AutoCAD LT(R) software (the Autodesk product
on which Genius(TM) LT runs) did not exist. To develop features for Genius
AutoCAD LT, work-arounds 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 that 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's limited access to the
platform product, AutoCAD LT, was expected, before the acquisition, to result in
a substantial development effort. In addition, improving the interoperability of
the Genius LT product and AutoCAD LT after the acquisition also posed a
significant technological challenge to Autodesk. The Company estimated that the
next release of Genius AutoCAD LT, 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, which runs on top of AutoCAD, was shipping at the date of
acquisition in a two-dimensional ("2D") version. At the date of acquisition, a
three-dimensional ("3D") version was under development. The 3D version is a
significant shift in technology, from handling 2D drawings to 3D models, and the
resulting complexity increases are significant. Developing 3D Vario involved
developing parametric modeling in three dimensions--an area that has significant
new development challenges and is far more speculative than 2D parametric
modeling. In addition, the 3D Genius 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. The 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.
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<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, Genius Vario, and
Genius Modules products, and approximately five to six years for all other
Genius products and technologies purchased by Autodesk.
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, expressed as a percentage of revenue, for the developed and
in-process technologies identified in the valuation was estimated to be 11
percent throughout the estimation period. The Company's cost of goods sold was
13 percent for fiscal 1996 and fiscal 1997, and 12 percent for fiscal 1998.
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 for fiscal year 1999 to 6 percent for 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 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 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 ("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.
The effective income tax rate utilized in the analysis of in-process technology
was 34 percent for fiscal year 1999 and in the mid-30 percentage 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.
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 Company's Weighted Average
Cost of Capital ("WACC") (15.0 percent) and (ii) the Company's Weighted Average
Return on Assets (15.7 percent) at the date of acquisition. 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.
The fair values of the assets acquired from Genius were allocated between Europe
and the rest of the world ("ROW"), which consisted of the United States and
Asia Pacific. The allocation of assets among Europe and ROW was based on revenue
expected to be generated on Genius products. Based on 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:
7
<PAGE>
<TABLE>
<CAPTION>
(In thousands) Geographic allocation
Identified intangible asset Europe ROW
<S> <C> <C>
Developed technology $ 7,620 $ 5,080
----- -----
In-process technology 7,860 5,240
----- -----
Trademarks, trade names, and other intangible assets 660 440
----- -----
</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.
Softdesk
On March 31, 1997, Autodesk issued approximately 2.9 million shares of its
common stock for all outstanding shares of Softdesk. Based upon the value of
Autodesk stock and options exchanged, the transaction, including transaction
costs, was valued at approximately $94 million. In connection with the
acquisition, the Company recorded a charge for in-process research and
development of $19.2 million, all of which was recorded as a nonrecurring charge
in the fiscal quarter ended April 30, 1997.
In-process technologies overview. The nature of the efforts required to develop
the acquired in-process technology into commercially viable products principally
relates 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. As of the acquisition date, Softdesk had spent a
significant amount of research and development effort related to the
reprogramming of all its existing products to a new ARX technology (AutoCAD
Runtime Extension) code base. The new ARX technology was expected to provide
significant improvement in the orientation of objects in CAD products. As of the
acquisition date, Softdesk had completed improvements of ARX technology in
various development projects associated within the following technology
categories: (i) AutoCAD Architectural/Structural, (ii) AutoCAD Civil, (iii)
AutoCAD Imaging, (iv) AutoCAD Maintenance, (v) AutoCAD Productivity, and (vi)
AutoCAD Retail.
In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed"), "the cost of software
purchased to be integrated with another product or process will be capitalized
only if technological feasibility was established for the software component and
if all research and development activities for the other components of the
product or process were completed at the time of the purchase." Although
Autodesk purchased a set of professional products from Softdesk, as described
above, these products were built on top of AutoCAD Release 13 and AutoCAD
Release 12 software; they did not utilize Autodesk's ObjectARX programming
system in any significant way. With this new technology, AutoCAD developers and
users could transform ordinary drawing geometry such as lines, arcs, circles,
and other entities into "intelligent" custom drawing objects. Com-mercially
shipped Softdesk(R) products, as of the valuation date, were limited to working
with the native AutoCAD drafting entities and command set--an environment in
which real-world objects were represented by geometric entities that could
seldom respond directly to user commands. Higher-level entities that represented
building elements could be built as groups or collections of geometric entities,
but these collections were very rigid and did not exhibit intelligent behavior.
With the relational database and the ObjectARX API in AutoCAD Release 13
software, objects could "know" their form and function. For example, an
ObjectARX-based custom door positioned in a wall will not let itself be placed
where it cannot open. In other applications, clicking on a fastener or flange,
or a land parcel or topo-graphical feature, can access additional design data in
that custom object and trigger operations ranging from a simple on-screen notice
to the preparation of a com-prehensive spreadsheet. ObjectARX was a significant
departure from previous AutoCAD development environments. Programming ObjectARX
required a high level of skill in object-oriented programming. Furthermore,
development was being done on a new
8
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object-oriented development platform which did not have significant prior
development built on top.
The first two AEC applications acquired from Softdesk were developed in this new
environment. AutoCAD Architectural Desktop(TM) and AutoCAD(R) Land Development
Desktop software, both released in the last half of fiscal year 1999, were
developed in the ObjectARX environment. The ObjectARX environment provided
general mechanisms, but the Softdesk development teams had to adapt these
mechanisms specifically for architectural and civil use. A significant amount of
effort was undertaken to develop these products in this new environment. The
development teams had to draw upon their experience to arrive at object
definitions which would function appropriately in their specific markets. In
addition, these object definitions had to be general enough that they could be
localized to meet the unique needs of the design and construction practices in a
variety of international markets. These two products both attempted to move
functionality from a "drafting-based" to "model-based" approach. Although some
model-based design systems have been attempted in the past, none had been
developed on top of a leading design and drafting platform such as AutoCAD.
Finally, none had been developed with a tight linkage to the design and drafting
functions inherent in a broad platform such as AutoCAD.
Although the functionality of these products is somewhat similar to previous
Softdesk products, there was significant technological risk in developing
products in a new, unproven development environment. While such development had
been conducted within Autodesk--in the mechanical CAD division (for Mechanical
Desktop(R) soft-ware)--it had not been successfully done by other companies.
With respect to the acquired in-process technologies, as previously discussed,
the calculations of value were adjusted to reflect the value creation efforts of
Softdesk prior to the close of the acquisition. Following are the estimated
completion percentages, estimated technology lives, and projected introduction
dates as of the date of the acquisition of Softdesk:
<TABLE>
<CAPTION>
Percent Technology Introduction
Softdesk in-process technologies completed life dates
<S> <C> <C> <C>
AutoCAD Architectural/Structural modules 65% 7 years Sept 1998/June 1997
AutoCAD Civil modules 90% 7 years May/June 1997
AutoCAD Imaging modules 75% 5 years May/June 1997
AutoCAD Maintenance modules 65% 7 years May/June 1997
AutoCAD Productivity modules 65% 7 years May/June 1997
AutoCAD Retail modules 70% 7 years July 1997
</TABLE>
Estimated costs to be incurred to reach technological feasibility as of the date
of acquisition for all of the Softdesk in-process technologies totaled
approximately $1.8 million, with the AutoCAD Architectural/Structural modules
comprising approximately $1.2 million of the total. The remaining in-process
projects each had estimated costs to complete of less than $200,000. These in-
process projects have been completed.
Valuation analysis. Future revenue estimates were generated from the following
product families: (i) AutoCAD Architectural/Structural, (ii) AutoCAD Civil,
(iii) AutoCAD Imaging, (iv) AutoCAD Maintenance, (v) AutoCAD Productivity, and
(vi) AutoCAD Retail. Aggregate revenue for Softdesk products was estimated to be
less than $30 million for the 10 months ended January 31, 1998. Revenues,
including revenues associated with yet-to-be-developed products utilizing the
acquired technologies, as well as most of the in-process projects identified in
the valuation analysis, were estimated to increase on an annualized basis by
more than 250 percent for fiscal year 1999. Thereafter, revenue was estimated to
increase at rates ranging from 11 to 17 percent for fiscal years 2000 through
2002 and to stabilize at 10 percent for the remainder of the estimation period.
Revenue estimates were based on (i) aggregate revenue growth rates for the
business as a whole, (ii) individual product revenues, (iii) growth rates for
the CAD software market, (iv) the aggregate size of the CAD software market, (v)
anticipated product development and introduction schedules, (vi) product sales
cycles, and (vii) the estimated life of a product's underlying technology. The
estimated product development cycle for the new modules ranged from 6 to 24
months (averaging 12 months).
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Operating expenses used in the valuation analysis of Softdesk included (i) cost
of goods sold, (ii) general and administrative expense, (iii) marketing and
sales expense, and (iv) research and development expense. In developing future
expense estimates, it was assumed that the Softdesk 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, expressed as a percentage of revenue, for the developed
technology identified in the valuation analysis ranged from approximately 19
percent for fiscal year 1998 to approximately 14 percent for fiscal year 2002.
Cost of revenues, expressed as a percentage of revenue, for the in-process
technology ranged from approximately 17 percent for fiscal year 1998 to
approximately 15 percent for fiscal year 2004. Autodesk's cost of revenues was
13 percent for fiscal year 1996, 13 percent for fiscal year 1997, and 12
percent for fiscal year 1998.
General and administrative expense, expressed as a percentage of revenue, for
the developed technology identified in the valuation analysis ranged from
approximately 6 percent for fiscal year 1998 to approximately 7 percent
for fiscal year 2002. General and administrative expense, expressed as a
percentage of revenue, for the in-process technology ranged from approximately
8 percent for fiscal year 1998 to approximately 7 percent for fiscal year
2002.
Marketing and sales expense, expressed as a percentage of revenue, for the
developed technology identified in the valuation ranged from approximately 31
percent for fiscal year 1998 to approximately 28 percent for fiscal year 2002.
Marketing and sales expense, expressed as a percentage of revenue, for the in-
process technology ranged from approximately 32 percent for fiscal year 1998
to approximately 29 percent for fiscal year 2002.
Research and development expenses consist of the costs associated with
activities undertaken to correct errors or keep products updated with current
information. 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.
The effective income tax rate utilized in the analysis of in-process technology
was 36 percent for fiscal year 1998, 34 percent for fiscal year 1999, and in
the mid-30 percentage range thereafter, which reflects Autodesk's combined
federal and state statutory income tax rate, exclusive of nonrecurring charges
at the time of the acquisition and estimated for future years.
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 Company's WACC (14.0 percent)
and (ii) the Company's Weighted Average Return on Assets (20.0 percent) at the
date of acquisition. 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.
Comparison to actual results. To date, the assumptions used in the projections
of revenues from in-process technologies and the estimated costs and completion
dates for those technologies were reasonable based on factors known at the
acquisition date. Actual revenues from in-process technologies have been less
than amounts projected in connection with the analysis of the Softdesk
acquisition. This shortfall reflects competitive factors related to price,
difficulties in developing robust commercial applications in the new ObjectARX
environment, functionality, and performance in the architecture, engineering,
and construction software industry, particularly in regard to localized building
services applications. Partially offsetting the variance from management's
original revenue projections is a favorable variance in spending. Additionally,
the value of other intangible assets acquired from Softdesk may become impaired.
Other nonrecurring charges--fiscal year 1999
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). These charges reduced income after tax by approximately $5.9 million
($0.12 per share on a diluted basis).
Other nonrecurring charges--fiscal year 1998
In the first quarter of fiscal year 1998, the Company acquired
certain assets of and licensed technology from 3D/Eye for $5.8 million. Of the
total cost, $3.0 million represented the value of in-process research and
development that had not yet reached technological feasibility and had no
alternative future use and was charged to operations.
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Other nonrecurring charges--fiscal year 1997
During fiscal year 1997, the Company acquired certain businesses for an
aggregate of $9.9 million. Included in these acquisitions were the purchases of
assets from Creative Imaging Technologies, Inc. ("CIT"), CadZooks, Inc., and
Argus Technologies, Inc. ("Argus"), as well as the outstanding stock of Teleos
Research ("Teleos"). Approximately $3.2 million of the Teleos purchase price and
$1.5 million of the Argus purchase price represented the value of in-process
research and development and were charged to operations during fiscal year 1997.
Interest and other income
Interest income was $14.2 million, $9.8 million, and $8.8 million in fiscal
years 1999, 1998, and 1997, respectively. The increase in fiscal year 1999
interest income over fiscal year 1998 and 1997 interest income was largely due
to an increase in average cash, cash equivalents, and marketable securities
balances. Interest and other income in fiscal years 1999, 1998, and 1997 was
net of interest expense of $0.4 million, $0.2 million, and $1.8 million,
respectively.
The Company has a hedging program to minimize foreign exchange gains or losses,
where possible, from recorded foreign-denominated assets and liabilities. This
program involves the use of forward foreign exchange contracts in the primary
European and Asian currencies. The Company does not hedge anticipated foreign-
denominated revenues and expenses not yet incurred. Losses resulting from
foreign currency transactions primarily in Europe and Asia Pacific, which are
included in interest and other income, were $0.4 million, $0.1 million, and $0.2
million in fiscal years 1999, 1998, and 1997, respectively.
Provision for income taxes
Autodesk's effective income tax rate, excluding the impact of nonrecurring
charges, was 35.4 percent in fiscal year 1999 compared to 38.0 percent and 35.5
percent in fiscal years 1998 and 1997, respectively. The decrease in the
effective income tax rate in fiscal year 1999 compared to fiscal year 1998 was
due to incremental tax benefits associated with the Company's foreign sales
corporation and foreign earnings, which are taxed at rates different from the
U.S. statutory rate. The increase in the tax rate between fiscal years 1998 and
1997 was due to the amortization of certain intangible assets not deductible for
tax purposes and foreign earnings, which are taxed at rates different from the
U.S. statutory rate. See Note 3 to the consolidated financial statements for an
analysis of the differences between the U.S. statutory and effective income tax
rates.
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. On
August 27, 1997, the Internal Revenue Service issued a Notice of Deficiency
proposing increases to the amount of the Company's United States 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.
Recently issued accounting standards
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9 ("SOP 98-9"), which amends certain
provisions of SOP 97-2 "Software Revenue Recognition" and extends the deferral
of the application of certain passages of SOP 97-2 provided by SOP 98-4 until
the beginning of Autodesk's fiscal year 2001. Autodesk does not expect the
adoption of this standard to have a material effect on its consolidated
operating results or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The
statement requires companies 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
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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 Autodesk's fiscal year 2001. Autodesk is
currently evaluating the impact of SFAS 133 on its financial statements and
related disclosures.
In the first quarter of fiscal year 1999, the Company adopted the provisions of
the AICPA's SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." This standard requires companies to capitalize
qualifying computer software costs which are incurred during the application
development stage and amortize them over the software's estimated useful life.
The adoption of this standard did not have a material effect on the Company's
consolidated operating results or financial position in fiscal year 1999.
RESTATEMENT
As described in Note 10, the acquisition of Softdesk, Inc. ("Softdesk"), was
accounted for as a business combination using the purchase method of accounting.
In accordance with Accounting Principles Board Opinion No. 16, "Accounting for
Business Combinations," the cost of the Softdesk acquisition was 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 amount allocated to in-process
research and development of $55.1 million was expensed in the first quarter of
fiscal year 1998 (the period in which the acquisition was 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 reevaluated its IPR&D charges on the Softdesk acquisition, revised
the purchase price allocation, and restated its financial statements. As a
result, Autodesk made adjustments to decrease the amounts previously expensed as
IPR&D and increase the amounts capitalized as goodwill and other intangibles
relating to the Softdesk acquisition by $35.9 million.
The effect of this adjustment on previously reported consolidated financial
statements as of and for the year ended January 31, 1998, is as follows:
<TABLE>
<CAPTION>
(In thousands, except for per share data)
As reported As restated
<S> <C> <C>
Nonrecurring charges $ 58,087 $ 22,187
------ ------
General and administrative 83,287 88,900
------ ------
Cost of revenues 70,858 71,338
------ ------
Income from operations 45,355 75,162
------ ------
Net income 15,364 45,171
------ ------
Basic net income per share $ 0.33 $ 0.97
------ ------
Diluted net income per share 0.31 0.91
------ ------
Purchased technologies and capitalized software, net 31,553 33,373
------ ------
Goodwill, net 16,995 44,982
------ ------
Retained earnings 19,895 49,702
------ ------
</TABLE>
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 $378.2 million at January 31, 1999, compared to $301.3
million at January 31, 1998. The $76.9 million increase in cash, cash
equivalents, and marketable securities was due primarily to cash generated from
operations ($146.7 million) and cash proceeds from the issuance of shares
through employee stock option and stock purchase programs ($90.6 million). This
increase was partially offset by cash used to acquire complementary technologies
and businesses ($69.3 million), to repurchase shares of the Company's common
stock ($48.9 million), to purchase computer equipment, furniture, and leasehold
improvements ($30.4 million), and to pay dividends on the Company's common stock
($11.7 million).
During fiscal years 1999, 1998, and 1997, the Company repurchased and retired a
total of 600,000, 2,332,500, and 1,659,500 shares of its common stock at average
repurchase prices of $42.56, $38.39, and $32.44, respectively, pursuant to an
ongoing and systematic repurchase plan ("Systematic Plan") approved by the
Company's Board of Directors to reduce the dilutive effect of common shares to
be issued under the Company's employee stock plans. In December 1997, the Board
of Directors author-
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ized the purchase of an additional 4 million shares under the Systematic Plan.
In August 1996, Autodesk announced another stock repurchase program for the
purchase of up to 5 million shares of common stock in open market transactions
as market and business conditions warranted--the "Supplemental Plan." In
December 1997, the Board of Directors authorized the purchase of an additional
5 million shares under the Supplemental Plan. The Company could utilize equity
options as part of the Supplemental Plan.
In connection with the Supplemental Plan, the Company sold put warrants to an
independent third party in September 1996 and purchased call options from the
same independent third party. The premiums received with respect to the equity
options equaled the premiums paid. Consequently, there was no exchange of cash.
The Company exercised the call options, repurchasing 2,000,000 shares of its
common stock during the third quarter of fiscal year 1998 for $51 million. The
put warrants expired unexercised in September 1997 and were reclassified from
put warrants to stockholders' equity during the third quarter of fiscal year
1998. For additional information, see Note 7 to the consolidated financial
statements. During fiscal years 1999, 1998, and 1997, the Company repurchased
and retired a total of 545,000, 1,000,000, and 557,500 shares of its common
stock at average repurchase prices of $42.81, $34.37, and $24.09, respectively,
subject to the Supplemental Plan.
In December 1997, the Company sold put warrants to an independent third party
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. The outstanding put warrants at
January 31, 1998, 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 acquisition of Discreet Logic Inc. (see Note 12 to the
consolidated financial statements), in August 1998, the Autodesk Board of
Directors rescinded its authorization of the Systematic Plan and the
Supplemental Plan, both of which have been terminated.
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 January 31, 1999, there were no borrowings outstanding under
this credit agreement, which expires in January 2000.
The Company's principal commitments at January 31, 1999, consisted of
obligations under operating leases for facilities. For additional information,
see Note 5 to the consolidated financial statements. The Company anticipates
making tax payments in connection with its federal tax audits in fiscal year
2000, none of which are expected to have a material adverse impact on the
Company's consolidated results of operations or financial position. Autodesk
believes that its existing cash, cash equivalents, marketable securities,
available line of credit, and cash generated from operations will be sufficient
to satisfy its currently anticipated cash requirements for fiscal year 2000.
Longer-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products 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.
CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
Autodesk operates in a rapidly changing environment that involves a number of
risks, some of which are beyond its control. The following discussion highlights
some of these risks and the possible impact of these factors on future results
of operations.
Competition
The software industry has limited barriers to entry, and the availability of
desktop computers with continually expanding capabilities at progressively lower
prices contributes to the ease of market entry. Because of these and other
factors, competitive conditions in the industry are likely to intensify in the
future. Increased competition could result in price reductions, reduced revenues
and profit margins, and loss of market share, any of which could ad-
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versely affect Autodesk's business, consolidated results of operations, and
financial condition. The design software market in particular is characterized
by vigorous competition in each of the vertical markets in which Autodesk and
its individual market groups compete, both by entry of competitors with
innovative technologies and by consolidation of companies with complementary
products and technologies.
The Architecture, Engineering, and Construction family of products competes
directly with software offered by companies such as Bentley Systems, Inc.
("Bentley"); Computervision Corporation (a subsidiary of Parametric
Technology Corporation) ("Computervision"); CADAM Systems Company, Inc.; Diehl
Graphsoft, Inc.; Eagle Point Software; International Microcomputer Software,
Inc. ("IMSI"); Intergraph Corporation; Nemetschek Systems, Inc.; and Visio
Corporation ("Visio"). Autodesk's MCAD products compete with products offered by
Bentley; Visionary Design Systems; Hewlett-Packard Corporation; Parametric
Technology Corporation; Structural Dynamics Research Corporation; Unigraphics;
Computervision; Dassault Systemes ("Dassault"); Solidworks Corporation (a
subsidiary of Dassault); Baystate Technologies, Inc.; and think3. Autodesk's
GIS Market Group faces competition from Bentley; Intergraph; MapInfo
Corporation; Environmental Systems Research Institute ("ESRI"); and
Smallworldwide plc. Kinetix(R) product offerings compete with products offered
by other multimedia companies such as Adobe Systems Inc.; Macromedia, Inc.;
Silicon Graphics, Inc.; and Avid Technology, Inc. The Personal Solutions Group
family of products competes with IMSI; The Learning Company; Visio; Micrografx
Inc.; and others. Certain of the competitors of Autodesk have greater financial,
technical, sales and marketing, and other resources than Autodesk.
The future financial performance of Autodesk's Discreet business unit will
depend in part on the successful development, introduction, and customer
acceptance of existing and new or enhanced products. In addition, in order for
the unit to achieve sustained growth, the market for its systems and software
must continue to develop, and Autodesk must expand this market to include
additional applications within the film and video industries and develop or
acquire new products for use in related markets. Autodesk may not be successful
in marketing its existing or new or enhanced products. In addition, as Autodesk
enters new markets, distribution channels, technical requirements, and levels
and bases of competition may be different from those in Autodesk's current
markets; Autodesk may not be able to compete favorably.
Autodesk believes that the principal factors affecting competition in its
markets are product relia-bility, 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 com-petitive
factor within the CAD market. Autodesk believes that it competes favorably in
these areas and that its competitive position depends, in part, upon its
continued ability to enhance existing products and to develop and market new
products.
In April 1998, Autodesk received notice that the Federal Trade Commission
("FTC") has undertaken a nonpublic investigation to determine whether Autodesk
or others have engaged in or are engaging in unfair methods of competition. The
FTC has not made any claims or allegations regarding Autodesk's current business
practices or policies, nor have any charges been filed. Autodesk intends to
cooperate fully with the FTC in its inquiry. Autodesk does not believe that the
investigation will have a material impact on its business or consolidated
results of operations.
Fluctuations in quarterly operating results
Autodesk has experienced fluctuations in operating results in interim periods in
certain geographic regions due to seasonality. Autodesk's operating results in
Europe during the third fiscal quarter are usually impacted by a slow summer
period, and the Asia Pacific operations typically experience seasonal slowing in
the third and fourth fiscal quarters.
The technology industry is particularly susceptible to fluctuations in operating
results within a quarter. While Autodesk experienced less fluctuation of
operating results within fiscal years 1999 and 1998 as compared to prior years,
historically the majority of Autodesk's 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 timing of the
introduction of new products by Autodesk or its competitors and other economic
factors experienced by Autodesk's customers in the geographic regions in which
Autodesk does business.
The operating results of Autodesk's recently acquired Discreet business unit
could vary significantly from quarter to quarter. A limited number of system
sales may account for a substantial percentage of Discreet's quarterly revenue
because of the
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high average sales price of Discreet's products and the timing of purchase
orders. Historically, Discreet has generally experienced greater revenues during
the period following the completion of the NAB trade show, which typically is
held in April. In addition, the timing of revenue is influenced by a number of
other factors, including the timing of individual orders and shipments, other
industry trade shows, competition, seasonal customer buying patterns, changes in
customer buying patterns in response to platform changes and changes in product
development, and sales and marketing expenditures.
Additionally, Autodesk's operating expenses are based in part on its
expectations for future revenues and are relatively fixed in the short term.
Accordingly, any revenue shortfall below expectations could have an immediate
and significant adverse effect on Autodesk's consolidated results of operations
and financial condition.
Similarly, shortfalls in Autodesk's revenues or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of Autodesk's common stock. Moreover, Autodesk's stock price
is subject to the volatility generally associated with technology stocks and may
also be affected by broader market trends unrelated to performance.
Product concentration
Autodesk derives a substantial portion of its revenues from sales of AutoCAD
software, AutoCAD upgrades, and adjacent products which are interoperable with
AutoCAD. As such, any factor adversely affecting sales of AutoCAD and AutoCAD
upgrades, including such factors as product life cycle, market acceptance,
product performance and reliability, reputation, price competition, and the
availability of third-party applications, could have a material adverse effect
on the Company's business and consolidated results of operations.
Product development and introduction
The software industry is characterized by rapid technological change as well as
changes in customer requirements and preferences. The software products offered
by Autodesk are internally complex and, despite extensive testing and quality
control, may contain errors or defects ("bugs"). Defects or errors may occur in
future releases of AutoCAD or other software products offered by Autodesk. Such
defects or errors could result in corrective releases to Autodesk's software
products, damage to Autodesk's reputation, loss of revenues, an increase in
product returns, or lack of market acceptance of its products, any of which
could have a material and adverse effect on Autodesk's business and consolidated
results of operations.
Autodesk believes that its future results will depend largely upon its ability
to offer products that compete favorably with respect to reliability,
performance, ease of use, range of useful features, continuing product
enhancements, reputation, price, and training. Delays or difficulties may result
in the delay or cancellation of planned development projects and could have a
material and adverse effect on Autodesk's business and consolidated results of
operations. Further, increased competition in the market for design, drafting,
mapping, or multimedia software products could also have a negative impact on
Autodesk's business and consolidated results of operations. More specifically,
gross margins may be adversely affected if sales of low-end CAD products and
AutoCAD upgrades, which historically have had lower margins, grow at a faster
rate than Autodesk's higher-margin products.
In particular, the success of Autodesk's Discreet business unit will depend in
part upon Autodesk's ability to enhance Discreet's existing systems and software
and to develop and introduce new products and features which meet changing
customer requirements and emerging industry standards on a timely basis. In
addition, in connection with Discreet's recent acquisitions, Autodesk must fully
integrate the edit* (formerly D-Vision OnLine), effect* (formerly Flint and
Illuminaire Composition), paint* (formerly Illuminaire Paint), and light*
(formerly Lightscape) products into its product line and operations. Discreet
from time to time experienced delays in introducing new products and product
enhancements, and the Discreet business unit postacquisition may experience
difficulties that could delay or prevent the successful development,
introduction, and marketing of new products or product enhancements. In
addition, such new products or product enhancements may not meet the
requirements of the marketplace and achieve market acceptance. Any such failure
could have a material adverse effect on Autodesk's business and consolidated
results of operations. From time to time the Discreet business unit or others
may announce products, features or technologies which have the potential to
shorten the life cycle of or replace its then existing products. Such
announcements could cause customers to defer the decision to buy or determine
not to buy its products or cause its distributors to seek to return products to
the Discreet business unit, any of which could have
15
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material adverse effect on Autodesk's business and consolidated results of
operations. In addition, product announcements by Silicon Graphics, Inc. ("SGI")
and others in the past have caused customers to defer their decision to buy or
determine not to buy Discreet's products. In addition, products or technologies
developed by others may render the Discreet business unit's products or
technology noncompetitive or obsolete.
Certain of Autodesk's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. Autodesk generally either owns or licenses the
software developed by third parties. Because talented development personnel are
in high demand, independent developers, including those who have developed
products for Autodesk in the past, may not be able to provide development
support to Autodesk in the future. Similarly, Autodesk may not be able to obtain
and renew license agreements on favorable terms, if at all, and any failure to
do so could have a material adverse effect on Autodesk's business and
consolidated results of operations.
Autodesk's business strategy has historically depended in large part on its
relationships with third-party developers, who provide products that expand the
functionality of Autodesk's design software. Certain developers may elect to
support other products or otherwise experience disruption in product development
and delivery cycles. Such disruption in particular markets could negatively
impact these third-party developers and end users, which could have a material
adverse effect on Autodesk's business and consolidated results of operations.
Further, increased merger and acquisition activity currently experienced in the
technology industry could affect relationships with other third-party developers
and thus adversely affect operating results.
International operations
Autodesk anticipates that international operations will continue to account for
a significant portion of its consolidated revenues. Risks inherent in Autodesk's
international operations include the following: unexpected changes in regulatory
practices and tariffs; difficulties in staffing and managing foreign operations;
longer collection cycles for accounts receivable; potential changes in tax laws;
greater difficulty in protecting intellectual property; and the impact of
fluctuating exchange rates between the U.S. dollar and foreign currencies in
markets where Autodesk does business. During fiscal year 1999, changes in
exchange rates from the same period of the prior fiscal year adversely impacted
revenues, principally due to changes in the Japanese yen and the Australian
dollar. As more fully described in Note 2 to the consolidated financial
statements, 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. The
Company 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,
including the ongoing economic volatility currently experienced in certain Asia
Pacific countries. These and other factors may 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
Autodesk sells its software products primarily to distributors and resellers
(value-added resellers, or "VARs"). Autodesk's ability to effectively distribute
products depends in part upon the financial and business condition of its VAR
network. Although Autodesk has not currently experienced any material problems
with its VAR network, computer software dealers and distributors are typically
not highly capitalized and have experienced difficulties during times of
economic contraction and may do so in the future. Computer 2000/Datech and
Mensch und Maschine accounted for 11 percent ($84.2 million) and 11 percent
($81.2 million) of total consolidated revenues for fiscal year 1999,
respectively. Revenues from Computer 2000/Datech and Mensch und Maschine are
included in the Design Solutions segment. While no single customer accounted for
more than 10 percent of Autodesk's consolidated revenues in fiscal years 1998 or
1997, the loss of or a significant reduction in business with any one of
Autodesk's major international distributors or large U.S. resellers could have a
material adverse effect on Autodesk's business and consolidated results of
operations in future periods. Autodesk's largest international distributor is
Computer 2000/Datech AG in Germany. Autodesk's largest resellers in the United
States are Avatech, DLT Solutions, Inc., and Ingram Micro.
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Product returns
With the exception of certain European distributors, agreements with Autodesk's
VARs do not contain specific product-return privileges. However, Autodesk
permits its VARs to return product in certain instances, generally during
periods of product transition and during update cycles. While Autodesk
experienced a decrease in the overall level of product returns in fiscal year
1999 compared to fiscal years 1998 and 1997, management anticipates that product
returns in future periods will continue to be impacted by product update cycles,
new product releases, and software quality.
Autodesk establishes reserves, including reserves for stock balancing and
product rotation, based on estimated future returns of product and after taking
into account channel inventory levels, the timing of new product introductions,
and other factors. While Autodesk maintains strict measures to monitor channel
inventories and to provide appropriate reserves, actual product returns may
differ from its reserve estimates, and such differences could have a material
effect on Autodesk's business and consolidated results of operations.
Intellectual property
Autodesk relies on a combination of patents, copyright and trademark laws, trade
secrets, confidentiality procedures, and contractual provisions to protect its
proprietary rights. Despite such efforts to protect its proprietary rights,
unauthorized parties from time to time have copied aspects of Autodesk's
software products or have obtained and used information that Autodesk regards as
proprietary. Policing unauthorized use of Autodesk's software products is
time-consuming and costly. While Autodesk has received some revenues resulting
from the unauthorized use of its software products, it is unable to measure the
extent to which piracy of its software products exists, and software piracy can
be expected to be a persistent problem. Autodesk's means of protecting its
proprietary rights may not be adequate, and its competitors may independently
develop similar technology. Autodesk expects that software product developers
will be increasingly subject to infringement claims as the number of products
and competitors in its industry segments grows and as the functionality of
products in different industry segments overlaps. Infringement or invalidity
claims (or claims for indemnification resulting from infringement claims) may be
asserted against Autodesk, and any such assertions could have a material adverse
effect on its business. Any such claims, whether with or without merit, could be
time-consuming, result in costly litigation and diversion of resources, cause
product shipment delays, or require Autodesk to enter into royalty or licensing
agreements. In addition, such royalty or license agreements, if required, may
not be available on acceptable terms, if at all, which could have a material
adverse effect on Autodesk's business and consolidated results of operations.
Autodesk also relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in its products to perform key functions. These third-party software
licenses may not continue to be available on commercially reasonable terms, and
the software may not be appropriately supported, maintained, or enhanced by the
licensors. The loss of licenses to, or inability to support, maintain, and
enhance any such software could result in increased costs, or in delays or
reductions in product shipments until equivalent software could be developed,
identified, licensed, and integrated, which could have a material adverse effect
on Autodesk's business and consolidated results of operations.
Until fiscal year 1996, substantially all of Discreet's systems were sold
without written license agreements. Autodesk may be involved in litigation
relating to these sales, and the outcome of any such litigation may be more
unfavorable to Autodesk as a result of such omissions. The Discreet business
unit uses both software and hardware keys with respect to its systems and
software but otherwise does not copy-protect its systems and software. It may
be possible for unauthorized third parties to copy the Discreet business
unit's products or to reverse-engineer or obtain and use information that the
Discreet business unit regards as proprietary. Competitors may independently
develop technologies that are substantially equivalent or superior to the
Discreet business unit's technologies.
Attraction and retention of employees
Autodesk's continued growth and success depends significantly on the continued
service of highly skilled employees. Competition for these employees in today's
marketplace, especially in the technology industries, is intense. Autodesk's
ability to attract and retain employees is dependent on a number of factors
including its continued ability to grant stock incentive awards, which are
described in more detail in Note 6 to the consolidated financial statements.
Autodesk may not be successful in continuing to recruit new personnel and to
retain existing personnel. The loss of one or more key employees or Autodesk's
inability to maintain existing em-
17
<PAGE>
ployees or recruit new employees could have a material adverse impact on
Autodesk. In addition, Autodesk may experience increased compensation costs to
attract and retain skilled personnel.
Disclosures about market risk
Foreign currency exchange risk
The Company's earnings and cash flows are subject to fluctuations due to changes
in foreign currency exchange rates. The Company's risk management strategy
utilizes forward foreign exchange contracts to manage its exposures of
underlying assets, liabilities, and other obligations which exist as part of its
ongoing business operations. Contracts are primarily denominated in Swiss francs
and Japanese yen. The Company does not enter into any foreign exchange
derivative instruments for speculative purposes.
A sensitivity analysis was performed on the Company's hedging portfolio as of
January 31, 1999. This analysis indicated that a hypothetical 10 percent
appreciation of the U.S. dollar from January 31, 1999, market rates would
increase the fair value of the Company's forward contracts by $3.0 million.
Conversely, a hypothetical 10 percent depreciation of the dollar from January
31, 1999, market rates would decrease the fair value of the Company's forward
contracts by $3.3 million. The Company does not anticipate any material adverse
effect on its consolidated financial position, results of operations, or cash
flows as a result of these forward foreign exchange contracts.
Interest rate sensitivity
The Company had an investment portfolio of fixed income securities, including
those classified as cash equivalents and security deposits, of $179.8 million at
January 31, 1999. These securities are subject to interest rate fluctuations and
will decrease in market value if interest rates increase.
A sensitivity analysis was performed on the Company's investment portfolio as of
January 31, 1999. This sensitivity analysis is based on a modeling technique
that measures the hypothetical market value changes that would result from a
parallel shift in the yield curve of plus 50, plus 100, or plus 150 basis points
over 6-month and 12-month time horizons. The market value changes for a
50, 100, or 150 basis point increase were not material due to the limited
duration of the Company's portfolio.
The Company does not use derivative financial instruments in its investment
portfolio to manage interest rate risk. The Company places its investments in
instruments that meet high credit quality standards, as specified in its
investment policy guidelines, which limits the amount of credit exposure to any
one issue, issuer, or type of instrument.
Impact of year 2000
Some of the computer programs used by Autodesk in its internal operations rely
on time-sensitive software that was written using two digits rather than four to
identify the applicable year. These programs may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Autodesk is currently in the final stages
of the project related to information technology ("IT") systems and will
continue testing applications throughout its fiscal year 2000, which began on
February 1, 1999. Autodesk also continues to complete the remediation of its
internal infrastructure and expects to complete the majority of this work by the
end of the first quarter of fiscal year 2000. The remaining efforts of this
infrastructure remediation in some international offices are partially dependent
on third-party products. These third-party products may not be converted in a
timely manner or at all, and any failure in this regard may cause Autodesk
infrastructure not to function properly.
During fiscal year 1999, Autodesk spent approximately $4 million on the IT year
2000 project. These costs were expensed as incurred in accordance with EITF
96-14, "Accounting for the Costs Associated with Modifying Computer Software for
the Year 2000." Autodesk 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. Autodesk believes that the key components of
the IT year 2000 project have been either replaced or remediated. Throughout the
remainder of fiscal year 2000, Autodesk will continue to work on business
continuity plans which include the documentation and testing of manual processes
to address any potential future issues related to the year 2000. Further,
Autodesk estimates that if any component of the current systems fail due to
year-2000-related issues, Autodesk would be able to divert people and systems
traffic, causing delays between one and three days in service interruptions and
processing Autodesk information. Autodesk has a contingency plan in place to
prevent the loss of critical data, which includes the backup of all critical
data-proc
18
<PAGE>
essing 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 it uses in the
ordinary course of business as described above, Autodesk has also reviewed its
non-IT systems to determine year 2000 compliance of these systems. Autodesk is
in a monitoring program that continually checks the status of all non-IT systems
and does not anticipate an adverse impact on service and business capabilities
with regard to these non-IT systems. Expenditures related to these monitoring
procedures have been minimal and are not expected to be significant in future
periods.
Autodesk has also tested and continues to test all products it currently
produces internally for sale to third parties to determine year 2000 compliance.
During fiscal year 1999, Autodesk spent approximately $600,000 on a year 2000
compliance testing program related to its products and expects to spend an
additional $300,000 to $800,000 to complete this project. Products currently
sold 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. Autodesk will continue to evaluate each product in the
currently supported inventory. Any future costs associated with ensuring that
Autodesk's products are compliant with the year 2000 are not expected to have a
material impact on Autodesk's results of operations or financial position.
Furthermore, commentators have stated that a significant amount of litigation
may arise out of year 2000 compliance issues, and Autodesk is aware of a growing
number of lawsuits against other software vendors. Because of the unprecedented
nature of such litigation, it is uncertain whether and to what extent Autodesk
may be affected by it.
Single European currency
Effective January 1, 1999, 11 of the 15 member countries of the European Union
have adopted the euro as their legal currency. On that date, the participating
countries established fixed euro conversion rates between their existing
sovereign currencies and the euro. The euro now trades on currency exchanges and
is available for noncash transactions. As of February 1, 1999, Autodesk's
internal systems have the ability to price and invoice customers in the euro.
Autodesk is also engaging in foreign exchange and hedging activities in the
euro. Autodesk will continue to modify the internal systems that will be
affected by this conversion during fiscal year 2000, and it does not expect the
costs of further system modifications to be material. There can be no assurance,
however, that Autodesk will be able to complete such modifications to comply
with euro requirements, which could have a material adverse effect on Autodesk's
operating results. Autodesk will continue to evaluate the impact of the
introduction of the euro on its foreign exchange and hedging activities,
functional currency designations, and pricing strategies in the new economic
environment. In addition, Autodesk faces risks to the extent that banks and
vendors upon whom Autodesk relies and their suppliers are unable to make
appropriate modifications to support Autodesk's operations with respect to euro
transactions. While Autodesk will continue to evaluate the impact of the euro,
management does not believe its introduction will have a material adverse effect
upon Autodesk's results of operations or financial condition.
Risks associated with acquisitions and investments
Autodesk periodically acquires or invests in businesses, software products, and
technologies which are complementary to Autodesk's business through strategic
alliances, debt and equity investments, joint ventures, and the like. The risks
associated with such acquisitions or investments include, among others, the
difficulty of assimilating the operations and personnel of the companies, the
failure to realize anticipated synergies, and the diversion of management's time
and attention. In addition, such investments and acquisitions may involve
significant transaction-related costs. 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 on 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
19
<PAGE>
linearity quarter to quarter in the Company's operating results and financial
condition.
As further described in Note 10 to the 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 12, on March 16, 1999, the Company acquired Discreet Logic
Inc. ("Discreet"), in a business combination accounted for as a pooling of
interests. There can be no assurance that the anticipated benefits of the Genius
acquisition, the Discreet acquisition, or any future acquisitions will be
realized.
Failure to achieve beneficial synergies from Discreet acquisition
Autodesk has acquired Discreet with the expectation that the acquisition will
result in beneficial synergies. These include mutual benefits from complementary
strengths in the 3D modeling and animation tools markets, the competitive
advantages resulting from offering a comprehensive suite of integrated product
offerings, combined industry experience and market knowledge, and shared
distribution channels. Achieving these anticipated synergies will depend on a
number of factors including, without limitation, the successful integration of
Autodesk's and Discreet's operations and general and industry-specific economic
factors. Even if Autodesk and Discreet are able to integrate their operations
and economic conditions remain unchanged, the anticipated synergies may not be
achieved. The failure to achieve such synergies could have a material adverse
effect on Autodesk's business, results of operations, and financial condition.
Integration of Discreet's operations and technologies
Achieving the anticipated benefits of the Discreet acquisition will depend in
part upon whether the integration of the two companies' businesses is
accomplished in an efficient and effective manner, and there can be no assurance
as to the extent to which this will occur, if at all. The combination of the two
companies will require, among other things, integration of the companies'
respective operations, products, technologies, management information systems,
distribution channels, and key personnel and the coordination of their sales,
marketing, and research and development efforts. In particular, Autodesk will be
required to integrate its existing sales channel, which consists principally of
independent resellers, with Discreet's sales force, which typically sells
product directly to customers. As a result of these and other factors, the
integration may not be accomplished smoothly or successfully, if at all. If
significant difficulties are encountered in the integration of the existing
operations, products, or technologies or the development of new products and
technologies, resources could be diverted from new product development, and
delays in new product introductions could occur. Compared to Autodesk's
products, Discreet's products have traditionally experienced longer, more
complex sales cycles. Autodesk may not be able to take full advantage of the
combined sales efforts. In addition, the difficulties of integrating Autodesk
and Discreet may be increased by the necessity of coordinating organizations
with distinct corporate cultures and widely dispersed operations in two
different countries. The integration of operations and technologies of these
entities is a significant challenge to Autodesk management and will require
substantial effort and dedication of management and other personnel, which may
distract their attention from the day-to-day business of these entities, the
development or acquisition of new technologies, and the pursuit of other
business opportunities. In addition, certain Discreet(TM) product offerings
currently include computer hardware, which may present business issues as to
which Autodesk management has limited experience. Failure to successfully
accomplish the integration of the two companies' operations, technologies, and
personnel would likely have a material adverse effect on Autodesk's business,
financial condition and results of operations. In addition, during the period of
integration, aggressive competitors may undertake initiatives to attract
customers or employees through various incentives, which could have a material
adverse effect on the business, results of operations, and financial conditions
of Autodesk.
Discreet's customers
Discreet's customers may not continue their current buying patterns in light of
the acquisition. Certain customers may defer purchasing decisions as they
evaluate the acquisition, other recent acquisitions and product announcements in
the multimedia and design software industries, Autodesk's postacquisition
product strategy, current and anticipated product offerings of competitors, and
any other outside forces which may affect customer buying patterns. Customers
may ultimately decide to purchase competitors' products in lieu of Discreet
products. Historically, Discreet and Autodesk have had significantly different
types of customers. These different customer types may evaluate postacquisition
Autodesk differently. The decision of customers to defer their purchasing
decisions or to purchase
20
<PAGE>
products elsewhere could have a material adverse effect on Autodesk's business,
results of operations, and financial condition.
Integration of operations of a non-U.S. company Cross-border acquisitions entail
certain special risks beyond those normally encountered in a domestic
acquisition. These include the difficulty of integrating employees from a
different corporate culture into the acquiring organization; the need to
understand different incentives that motivate employees in a non-U.S. company;
the greater difficulty of transplanting the acquiring company's corporate
culture to an organization that is physically distant; and the difficulty and
expense of relocating employees from one country to another in the event of an
internal group restructuring following an acquisition. These factors can reduce
the likelihood of the long-term success of a cross-border acquisition. Although
Autodesk derives the majority of its revenues from non-U.S. sales and has
significant operations outside the United States, it has limited experience
integrating the management, sales, product development, and marketing
organizations of a significant non-U.S. business with its existing operations.
Although Discreet has sales and marketing operations in the United States and
derives a significant portion of its revenue from U.S. sales, its management and
product development personnel are predominantly based in Canada. Autodesk may
not be able to successfully integrate the personnel and operations of Discreet
into the existing Autodesk organization.
Single market for Discreet's product offerings; risks associated with expansion
into new markets To date, Discreet's products have been purchased primarily by
creative professionals for use in production and postproduction in the film and
video industries. In order for Autodesk's Discreet business unit to achieve
sustained growth, the market for Discreet's product offerings must continue to
develop, and Autodesk must expand this market to include additional applications
within the film and video industries and develop new products for use in related
markets. Discreet recently announced its multiplatform software initiative to
develop and market software across Apple Macintosh, Microsoft Windows NT, and
Unix operating systems, in addition to its existing real-time turnkey systems
solutions, targeted at two new market segments: institutional customers and
prosumers (professional consumers). While Autodesk believes that the market
recognition which Discreet achieved through sales of Flame/R/, Smoke/R/,
effect*, Inferno/R/, and Fire/R/ systems to creative professionals will
facilitate Autodesk's marketing efforts in new markets, Autodesk's Discreet
business unit may not be able to successfully develop and market systems and
software for other markets, and, even if it does so, such systems and software
may not be accepted at a rate, and in levels, sufficient to maintain growth.
Further, the distribution channels, technical requirements, and levels and bases
of competition in other markets are different than those in the Discreet
business unit's current market, so the Discreet business unit may not be able to
compete favorably in those markets.
21
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(In thousands, except per share data) Fiscal year ended January 31,
1999 1998 (restated) 1997
---------- --------------- ---------
<S> <C> <C> <C>
Net revenues $ 740,167 $ 617,126 $ 496,693
---------- --------------- ---------
Costs and expenses:
---------- --------------- ---------
Cost of revenues 76,364 71,338 64,217
---------- --------------- ---------
Marketing and sales 260,553 237,107 199,939
---------- --------------- ---------
Research and development 142,806 122,432 93,702
---------- --------------- ---------
General and administrative 123,622 88,900 74,280
---------- --------------- ---------
Nonrecurring charges 21,985 22,187 4,738
---------- --------------- ---------
Litigation accrual reversal (18,200) -- --
Total costs and expenses 607,130 541,964 436,876
---------- --------------- ---------
Income from operations 133,037 75,162 59,817
---------- --------------- ---------
Interest and other income, net 13,523 9,644 6,695
---------- --------------- ---------
Income before income taxes 146,560 84,806 66,512
---------- --------------- ---------
Provision for income taxes 55,921 39,635 24,941
---------- --------------- ---------
Net income $ 90,639 $ 45,171 $ 41,571
---------- --------------- ---------
Basic net income per share $ 1.94 $ 0.97 $ 0.91
---------- --------------- ---------
Diluted net income per share $ 1.85 $ 0.91 $ 0.88
---------- --------------- ---------
Shares used in computing basic net income per share 46,640 46,760 45,540
---------- --------------- ---------
Shares used in computing diluted net income per share 48,910 49,860 47,190
---------- --------------- ---------
</TABLE>
See accompanying notes.
22
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(In thousands) January 31,
1999 1998 (restated)
-------------- -----------------
<S> <C> <C>
Assets
-------------- -----------------
Current assets:
-------------- -----------------
Cash and cash equivalents $ 209,174 $ 96,089
-------------- -----------------
Marketable securities 102,756 100,399
-------------- -----------------
Accounts receivable, net of allowance for doubtful accounts of $6,805 ($7,136 in 1998) 91,847 60,856
-------------- -----------------
Inventories 7,594 7,351
-------------- -----------------
Deferred income taxes 20,323 27,577
-------------- -----------------
Prepaid expenses and other current assets 18,795 15,430
-------------- -----------------
Total current assets 450,489 307,702
-------------- -----------------
Marketable securities, including a restricted balance of $18,000 in 1998 66,265 104,831
-------------- -----------------
Computer equipment, furniture, and leasehold improvements:
-------------- -----------------
Computer equipment and furniture 116,467 117,434
-------------- -----------------
Leasehold improvements 22,947 20,505
-------------- -----------------
Accumulated depreciation (99,747) (98,800)
-------------- -----------------
Net computer equipment, furniture, and leasehold improvements 39,667 39,139
-------------- -----------------
Purchased technologies and capitalized software, net of accumulated amortization of $46,344
($29,471 in 1998) 30,559 33,373
-------------- -----------------
Goodwill 70,348 44,982
-------------- -----------------
Deferred income taxes 11,417 13,782
-------------- -----------------
Other assets 25,132 19,681
-------------- -----------------
$ 693,877 $ 563,490
-------------- -----------------
Liabilities and stockholders' equity
-------------- -----------------
Current liabilities:
-------------- -----------------
Accounts payable $ 27,431 $ 26,417
-------------- -----------------
Accrued compensation 45,253 34,962
-------------- -----------------
Accrued income taxes 91,085 76,465
-------------- -----------------
Deferred revenues 17,349 18,934
-------------- -----------------
Other accrued liabilities 50,481 42,709
-------------- -----------------
Total current liabilities 231,599 199,487
-------------- -----------------
Deferred income taxes 378 481
-------------- -----------------
Litigation accrual -- 29,328
-------------- -----------------
Other liabilities 1,658 1,255
-------------- -----------------
Commitments and contingencies
-------------- -----------------
Stockholders' equity:
-------------- -----------------
Common stock, $0.01 par value; 250,000 shares authorized, 47,342 issued and
outstanding (45,465 in 1998) 361,611 299,315
-------------- -----------------
Accumulated other comprehensive income (9,379) (16,078)
-------------- -----------------
Retained earnings 108,010 49,702
-------------- -----------------
Total stockholders' equity 460,242 332,939
-------------- -----------------
$ 693,877 $ 563,490
-------------- -----------------
</TABLE>
See accompanying notes.
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Fiscal year ended January 31,
1999 1998(restated) 1997
------------- ------------ ----------
<S> <C> <C> <C>
Operating activities
------------- ------------ ----------
Net income $ 90,639 $ 45,171 $ 41,571
------------- ------------ ----------
Adjustments to reconcile net income to net cash provided by
operating activities:
------------- ------------ ----------
Depreciation and amortization 63,177 49,947 34,833
------------- ------------ ----------
Charge for acquired in-process research and development 13,100 22,187 4,738
------------- ------------ ----------
Litigation and related interest accrual reversal (20,900) -- --
------------- ------------ ----------
Net gain on disposition of business unit (1,307) -- --
------------- ------------ ----------
Loss on disposal of long-lived assets 3,531 -- --
------------- ------------ ----------
Changes in operating assets and liabilities, net of
business combinations:
------------- ------------ ----------
Accounts receivable (30,991) 8,829 25,365
------------- ------------ ----------
Inventories (93) 534 2,345
------------- ------------ ----------
Deferred income taxes 9,516 (10,947) (785)
------------- ------------ ----------
Prepaid expenses and other current assets (3,365) 1,501 890
------------- ------------ ----------
Accounts payable and accrued assets 8,808 40,125 (4,318)
------------- ------------ ----------
Accrued income taxes 14,620 1,265 9,544
------------- ------------ ----------
Net cash provided by operating acivities 146,735 158,612 114,183
------------- ------------ ----------
Investing activities
------------- ------------ ----------
Purchases of available-for-sale marketable securities (838,591) (1,102,015) (683,550)
------------- ------------ ----------
Maturities of available-for-sale marketable securities 874,800 1,126,174 604,727
------------- ------------ ----------
Purchase of computer equipment, furniture, and leasehold improvement (30,396) (15,000) (17,409)
------------- ------------ ----------
Business combinations, net of cash acquired (69,279) (5,766) (9,908)
------------- ------------ ----------
Proceeds from disposition of business unit 5,137 -- --
------------- ------------ ----------
Proceeds from disposition of fixed assets 2,719 -- --
------------- ------------ ----------
Purchases of software technologies and
capitalization of software development costs (5,979) (19,833) (995)
------------- ------------ ----------
Acquisition of other assets (6,190) -- --
------------- ------------ ----------
Other (4,771) (36) (3,407)
------------- ------------ ----------
Net cash used by investing activities (72,550) (16,476) (110,542)
------------- ------------ ----------
Financing activities
------------- ------------ ----------
Proceeds from issuance of common stock 90,553 80,059 23,307
------------- ------------ ----------
Repurchase of common stock (48,866) (174,907) (67,269)
------------- ------------ ----------
Dividends paid (11,722) (11,290) (10,879)
------------- ------------ ----------
Net cash provided by (used in) financing activities 29,965 (106,138) (54,841)
------------- ------------ ----------
Effect of exchange rate changes on cash 8,935 (4,723) (13,291)
------------- ------------ ----------
Net increase (decrease) in cash and cash equivalents 113,085 31,275 (64,491)
------------- ------------ ----------
Cash and cash equivalents at beginning of year 96,089 64,814 129,305
------------- ------------ ----------
Cash and cash equivalents at end of year $ 209,174 $ 96,089 $ 64,109
============== ============= ==========
Supplemental disclosure of noncash investing and financing activities:
Common stock received in relation to the equity collar $ 4,265 $ -- $ --
------------- ------------ ----------
Common stock issued in connection with the acquisition of
Software $ -- $ 92,021 $ --
------------- ------------ ----------
</TABLE>
See accompanying notes.
24
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands) Three-year period ended January 31, 1999
Accumulated
Common stock other Total
--------------------
Comprehensive comprehensive Retained stockholders'
Shares Amount income Income earnings equity
-------- ----------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 31, 1996 46,351 $ 140,765 $11,095 $ 190,468 $ 342,328
-------- ----------- ----------- ------------- ----------- -----------
Common shares issued under stock option
and stock purchase plans 974 20,729 20,729
-------- ----------- ----------- ------------- ----------- -----------
Tax effect of stock options 2,578 2,578
-------- ----------- ----------- ------------- ----------- -----------
Reclassification of put warrants (9,870) (54,630) (64,500)
-------- ----------- ----------- ------------- ----------- -----------
Comprehensive income:
-------- ----------- ----------- ------------- ----------- -----------
Net income $ 41,571 41,571 41,571
-------- ----------- ----------- ------------- ----------- -----------
Other comprehensive loss, net of tax
-------- ----------- ----------- ------------- ----------- -----------
Unrealized losses on available-for
-sale securities, net of
reclassification adjustments (426) (426)
-------- ----------- ----------- ------------- ----------- -----------
Foreign currency translation
adjustment (20,518) (20,518)
-------- ----------- ----------- ------------- ----------- -----------
Other comprehensive loss (20,944) (20,944)
-------- ----------- ----------- ------------- ----------- -----------
Comprehensive income $ 20,627
-------- ----------- ----------- ------------- ----------- -----------
Dividends paid (10,879) (10,879)
-------- ----------- ----------- ------------- ----------- -----------
Repurchase of common shares (2,217) (7,111) (60,158) (67,269)
-------- ----------- ----------- ------------- ----------- -----------
Balances, January 31, 1997 45,108 147,091 (9,849) 106,372 243,614
-------- ----------- ----------- ------------- ----------- -----------
Common shares issued under stock
option and stock purchase plans 2,790 63,829 63,829
-------- ----------- ----------- ------------- ----------- -----------
Tax effect of stock options 16,230 16,230
-------- ----------- ----------- ------------- ----------- -----------
Reclassification of put warrants 9,870 54,630 64,500
-------- ----------- ----------- ------------- ----------- -----------
Shares issued in connection with
business combination 2,900 92,021 92,021
-------- ----------- ----------- ------------- ----------- -----------
Comprehensive income:
-------- ----------- ----------- ------------- ----------- -----------
Net income (restated) 45,171 45,171 45,171
-------- ----------- ----------- ------------- ----------- -----------
Other comprehensive income (loss),
net of tax:
-------- ----------- ----------- ------------- ----------- -----------
Unrealized gains on available-
for-sale securities, net of
reclassification adjustments 362 362
-------- ----------- ----------- ------------- ----------- -----------
Foreign currency translation
adjustment (6,591) (6,591)
-------- ----------- ----------- ------------- ----------- -----------
Other comprehensive loss (6,229) (6,229)
-------- ----------- ----------- ------------- ----------- -----------
Comprehensive income (restated) $ 38,942
-------- ----------- ----------- ------------- ----------- -----------
Dividends paid (11,290) (11,290)
-------- ----------- ----------- ------------- ----------- -----------
Repurchase of common shares (5,333) (29,726) (145,181) (174,907)
-------- ----------- ----------- ------------- ----------- -----------
Balances, January 31, 1998(restated) 45,465 299,315 (16,078) 49,702 332,939
-------- ----------- ----------- ------------- ----------- -----------
Common shares issued under stock option
and stock purchase plans 3,119 75,084 75,084
-------- ----------- ----------- ------------- ----------- -----------
Tax effect of stock options 15,469 15,469
-------- ----------- ----------- ------------- ----------- -----------
Comprehensive income:
-------- ----------- ----------- ------------- ----------- -----------
Net income 90,639 90,639 90,639
-------- ----------- ----------- ------------- ----------- -----------
Other comprehensive income, net
of tax:
-------- ----------- ----------- ------------- ----------- -----------
Unrealized gains on available-for-
sale securities, net of
reclassification adjustments 198 198
-------- ----------- ----------- ------------- ----------- -----------
Foreign currency translation
adjustment 6,501 6,501
-------- ----------- ----------- ------------- ----------- -----------
Other comprehensive income 6,699 6,699
-------- ----------- ----------- ------------- ----------- -----------
Comprehensive income $ 97,338
-------- ----------- ----------- ------------- ----------- -----------
Dividends paid (11,722) (11,722)
-------- ----------- ----------- ------------- ----------- -----------
Repurchase of common shares (1,242) (28,257) (20,609) (48,866)
-------- ----------- ----------- ------------- ----------- -----------
Balances, January 31, 1999 47,342 $361,611 $ (9,379) $108,010 $460,242
======== =========== =========== ============= =========== ===========
</TABLE>
See accompanying notes.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Operations
Autodesk, Inc. ("Autodesk" or the "Company") is a leader in the development and
marketing of design and drafting software and multimedia tools, primarily for
the business and professional environment. Autodesk's flagship product, AutoCAD,
is one of the world's leading computer-aided design ("CAD") tools, with an
installed base of 2.1 million seats worldwide.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated. Certain reclassifications have been made to the 1997 and 1998
consolidated financial statements to conform to the 1999 presentation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Foreign currency translation
The asset and liability accounts of foreign subsidiaries are translated from
their respective functional currencies at the rates in effect at the balance
sheet date, and revenue and expense accounts are translated at weighted average
rates during the period. Foreign currency translation adjustments are reflected
as a separate component of stockholders' equity. Losses resulting from foreign
currency transactions, which are included in interest and other income, were
($405,000), ($68,000), and ($197,000) in fiscal years 1999, 1998, and 1997,
respectively.
The Company hedges a portion of its exposure on certain receivables and payables
denominated in foreign currencies using forward foreign exchange contracts in
European and Asian currencies. Gains and losses associated with exchange rate
fluctuations on forward foreign exchange contracts are recorded currently in
interest and other income and offset corresponding gains and losses on the
foreign currency assets being hedged. The costs of forward foreign exchange
contracts are amortized on a straight-line basis over the life of the contract
as interest and other income.
Cash and cash equivalents
The Company considers all highly liquid investments with insignificant interest
rate risk and original maturities of three months or less to be cash
equivalents. Cash equivalents are recorded at cost, which approximates fair
value.
Marketable securities
Marketable securities, consisting principally of high-quality municipal bonds,
tax-advantaged money market instruments, and U.S. Treasury notes, are stated at
fair value. Marketable securities maturing within one year that are not
restricted are classified as current assets.
The Company determines the appropriate classification of its marketable
securities at the time of purchase and reevaluates such classification as of
each balance sheet date. The Company has classified all of its marketable
securities as available-for-sale and carries such securities at fair value, with
unrealized gains and losses, net of tax, reported in stockholders' equity until
disposition.
Concentration of credit risk
The Company places its cash, cash equivalents, and marketable securities with
financial institutions with high credit standing and, by policy, limits the
amounts invested with any one institution, type of security, and issuer.
Autodesk's accounts receivable are derived from software sales to a large number
of resellers and distributors in the Americas, Europe, and the Asia Pacific
region. The Company performs ongoing evaluations of its customers' financial
condition and limits the amount of credit extended when deemed necessary, but
generally requires no collateral. Two customers accounted for approximately 11
percent each of consolidated net revenues in fiscal year 1999. No single
customer accounted for more than 10 percent of consolidated net revenues in
fiscal years 1998 or 1997.
Inventories
Inventories, consisting principally of disks, compact disks (CDs), and user
manuals, are stated at the
26
<PAGE>
lower of cost (determined on the first-in, first-out method) or market.
Computer equipment, furniture, and leasehold
improvements
Computer equipment, furniture, and leasehold improvements are stated at cost.
Computer equipment and furniture are depreciated using the straight-line method
over the estimated useful lives of the assets, which range from two to five
years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the estimated useful life or the lease term. Depreciation expense was
$27,078,000, $22,876,000, and $21,252,000 in fiscal years 1999, 1998, and 1997,
respectively.
Purchased technologies and capitalized software
Costs incurred in the initial design phase of software development are expensed
as incurred. Once the point of technological feasibility is reached, production
costs (programming and testing) are capitalized. Certain acquired
software-technology rights are also capitalized. Capitalized software costs are
amortized ratably as revenues are recognized, but not less than on a
straight-line basis over two- to seven-year periods. Amortization expense, which
is included as a component of cost of revenues, was $17,609,000, $13,148,000,
and $9,563,000 in fiscal years 1999, 1998, and 1997, respectively. The actual
lives of the Company's purchased technologies or capitalized software may differ
from management's estimates, and such differences could cause carrying amounts
of these assets to be reduced materially.
Other assets and goodwill
Amortization of purchased intangibles and goodwill is provided on a
straight-line basis over the respective useful lives of the assets, which range
from three to ten years. Accumulated amortization was $44,646,000, $28,169,000,
and $14,293,000 in fiscal years 1999, 1998, and 1997, respectively. The Company
evaluates the realizability and the related periods of amortization of these
assets on a regular basis. Amortization expense, which is included as a
component of general and administrative expenses, was $18,490,000, $13,923,000,
and $4,018,000 in fiscal years 1999, 1998, and 1997, respectively.
Employee stock compensation
The Company accounts for its employee stock plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Revenue recognition
Autodesk's revenue recognition policy is in compliance with the provisions of
the American Institute of Certified Public Accountants' Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of
Position 98-4 ("SOP 98-4"). Revenue is recognized at the time of shipment,
provided that no significant vendor obligations exist and collection of the
resulting receivable is deemed probable. A portion of revenues related to
certain customer consulting and training obligations is deferred.
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.
Autodesk establishes allowances for product returns, including allowances for
stock balancing and product rotation, based on estimated future returns of
product and after taking into consideration channel inventory levels at its
resellers, the timing of new product introductions, and other factors. These
allowances are recorded as direct reductions of revenue and accounts receivable.
While the Company maintains strict measures to monitor channel inventories and
to provide appropriate allowances, actual product returns may differ from the
Company's estimates, and such differences could be material to the consolidated
financial statements.
Advertising
Advertising costs are expensed the first time the
advertising takes place. Total advertising expenses incurred were $10,469,000,
$12,194,000, and $10,830,000 during fiscal years 1999, 1998, and 1997,
respectively.
Royalties
The Company licenses software used to develop components of certain software
products. Royalties are payable to developers of the software at various rates
and amounts generally based on unit sales or revenues. Royalty expense was
$6,375,000, $7,640,000, and $8,000,000 in fiscal years 1999, 1998, and 1997,
respectively. Such costs are included as a component of cost of revenues.
Net income per share
The Company computes net income per share in accordance with Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share"
27
<PAGE>
("SFAS 128"). SFAS 128 requires companies to pre-sent both basic net income per
share and diluted net income per share. Basic net income per share excludes
dilutive common stock equivalents and is calculated as net income divided by the
weighted average common shares outstanding. Diluted net income per share is
computed using the weighted average number of outstanding common shares 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:
(In thousands) Fiscal year ended January 31,
<TABLE>
<CAPTION>
1999 1998 (restated) 1997
--------- ---------------- ----------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income per
share--net income $ 90,639 $ 45,171 $ 41,571
--------- ----------- ---------
Denominator:
Denominator for basic net income per share--weighted
average shares 46,640 46,760 45,540
--------- ----------- ---------
Effect of dilutive common stock options 2,270 3,100 1,650
--------- ----------- ---------
Denominator for diluted net income per share 48,910 49,860 47,190
--------- ----------- ---------
</TABLE>
See Note 13 for related quarterly financial data amounts.
Stock options to purchase 3.2 million, 1.9 million, and 4.8 million shares of
common stock in fiscal years 1999, 1998, and 1997, respectively, were
outstanding but not included in the computation of diluted net income per share
because the option exercise price was greater than the average market price of
the common shares.
Recently issued accounting standards
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9 ("SOP 98-9"), which amends certain
provisions of SOP 97-2 and extends the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 until the beginning of Autodesk's
fiscal year 2001. Autodesk does not expect the adoption of this standard to have
a material effect on its consolidated operating results or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The
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 Autodesk's fiscal year 2001. Autodesk is currently evaluating
the impact of SFAS 133 on its financial statements and related disclosures.
In the first quarter of fiscal year 1999, the Company adopted the provisions of
the AICPA's SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." This standard requires companies to capitalize
qualifying computer software costs which are incurred during the application
development stage and amortize them over the software's estimated useful life.
The adoption of this standard did not have a material effect on the Company's
consolidated operating results or financial position in fiscal year 1999.
Restatement
As described in Note 10, the acquisition of Softdesk, Inc. ("Softdesk"), was
accounted for as a business combination using the purchase method of accounting.
In accordance with Accounting Principles Board Opinion No. 16, "Accounting for
Business Combinations," the cost of the Softdesk acquisition was 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 million was expensed in the first quarter of
fiscal year 1998 (the period in which the acquisition was consummated) in
accordance with FASB Interpretation No. 4, "Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Meth-od." Subsequent to
the Securities and Exchange Commission's letter to the AICPA dated September 9,
1998, regarding its views on in-process research
28
<PAGE>
and development ("IPR&D"), the Company has reevaluated its IPR&D charges on the
Softdesk acquisition, revised the purchase price allocation, and restated its
financial statements. As a result, Autodesk made adjustments to decrease the
amounts previously expensed as IPR&D and increase the amounts capitalized as
goodwill and other intangibles relating to the Softdesk acquisition by $35.9
million.
The effect of this adjustment on previously reported consolidated financial
statements as of and for the year ended January 31, 1998, is as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data)
As reported As restated
----------- -----------
<S> <C> <C>
Nonrecurring charges $ 58,087 $ 22,187
----------- -----------
General and administrative 83,287 88,900
----------- -----------
Cost of revenues 70,858 71,338
----------- -----------
Income from operations 45,355 75,162
----------- -----------
Net income 15,364 45,171
----------- -----------
Basic net income per share $ 0.33 $ 0.97
----------- -----------
Diluted net income per share 0.31 0.91
----------- -----------
Purchased technologies and capitalized software, net 31,553 33,373
----------- -----------
Goodwill, net 16,995 44,982
----------- -----------
Retained earnings 19,895 49,702
----------- -----------
</TABLE>
NOTE 2. FINANCIAL INSTRUMENTS
Fair values of financial instruments
Estimated fair values of financial instruments are based on quoted market
prices. The carrying amounts and fair value of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
(In thousands) January 31, 1999 January 31, 1998
Carrying Carrying
amount Fair value amount Fair value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 209,174 $ 209,174 96,089 96,089
---------- ---------- --------- ----------
Marketable securities 169,021 169,021 205,230 205,230
---------- ---------- --------- ----------
Forward foreign
currency contracts (80) (80) (124) (124)
---------- ---------- --------- ----------
</TABLE>
Foreign currency contracts
The Company utilizes derivative financial instruments in the form of forward
foreign exchange contracts only 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. The Company, as a matter of
policy, does not engage in trading or speculative transactions. In general,
instruments used as hedges must be effective at reducing the foreign currency
risk associated with the underlying transaction being hedged and must be
designated as a hedge at the inception of the contract. Substantially all
forward foreign currency contracts entered into by the Company have maturities
of 60 days or less. The Company uses the forward contracts only as hedges of
existing transactions. Amounts receivable and payable on forward foreign
exchange contracts are recorded as other current assets and other accrued
liabilities, respectively. For these contracts, mark-to-market gains and losses
are recognized as other income or expense in the current period, generally
consistent with the period in which the gain or loss of the underlying
transaction is recognized. Cash flows associated with derivative transactions
are classified in the statement of cash flows in a manner consistent with those
of the transactions being hedged. The notional amounts of foreign currency
contracts were $31.2 million and $38.8 million at January 31, 1999 and 1998,
respectively, and were predominantly to buy Swiss francs. While the contract or
notional amount is often used to express the volume of foreign exchange
contracts, the amounts potentially subject to credit risk are generally limited
to the amounts, if any, by which the counterparties' obligations under the
agreements exceed the obligations of the Company to the counterparties.
29
<PAGE>
Marketable securities
Marketable securities include the following available-for-sale securities at
January 31, 1999 and 1998:
<TABLE>
<CAPTION>
(In thousands) January 31, 1999
Gross Gross
unrealized unrealized Estimated
Cost gains losses fair value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Short-term:
------------ ----------- ----------- ------------
Municipal bonds $ 90,655 $ 157 $ -- $ 90,812
------------ ----------- ----------- ------------
Preferred stock 10,000 -- -- 10,000
------------ ----------- ----------- ------------
Treasury bills 1,944 -- -- 1,944
------------ ----------- ----------- ------------
102,599 157 -- 102,756
------------ ----------- ----------- ------------
Long-term:
------------ ----------- ----------- ------------
Municipal bonds 65,247 1,018 -- 66,265
------------ ----------- ----------- ------------
65,247 1,018 -- 66,265
------------ ----------- ----------- ------------
$ 167,846 $ 1,175 $ -- $ 169,021
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
January 31, 1998
Gross Gross
unrealized unrealized Estimated
Cost gains losses fair value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Short-term:
------------ ----------- ----------- ------------
Municipal bonds $ 24,383 $ -- $ (22) $ 24,361
------------ ----------- ----------- ------------
Treasury bills 9,994 2 -- 9,996
------------ ----------- ----------- ------------
Preferred stock 2,000 -- -- 2,000
------------ ----------- ----------- ------------
Money market deposits 64,042 -- -- 64,042
------------ ----------- ----------- ------------
100,419 2 (22) 100,399
------------ ----------- ----------- ------------
Long-term:
------------ ----------- ----------- ------------
Municipal bonds 85,911 935 -- 86,846
------------ ----------- ----------- ------------
U.S. Treasury bills 17,987 -- (2) 17,985
------------ ----------- ----------- ------------
103,898 935 (2) 104,831
------------ ----------- ----------- ------------
$ 204,317 $ 937 $ (24) $ 205,230
------------ ----------- ----------- ------------
</TABLE>
Long-term U.S. Treasury bills included a restricted balance of $18.0 million at
January 31, 1998 (see Note 4). The contractual maturities of Autodesk's
short-term marketable securities at January 31, 1999, were one year or less
while the Company's long-term marketable securities had contractual maturities
as follows: $10.5 million between one and two years; $24.1 million maturing in
three years; $15.7 million maturing in four to five years; and $15.9 million
beyond five years. Expected maturities may differ from contractual maturities
because the issuers of the securities may have the right to prepay or call
obligations without prepayment penalties. Realized gains and losses on sales of
available-for-sale securities were immaterial in fiscal years 1999, 1998, and
1997. The cost of securities sold is based on the specific identification
method.
30
<PAGE>
NOTE 3. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(In thousands) Fiscal year ended January 31,
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Federal:
------------ ----------- -----------
Current $ 30,522 $ 31,749 $ 5,546
------------ ----------- -----------
Deferred 7,216 (7,978) 1,133
------------ ----------- -----------
State:
------------ ----------- -----------
Current 3,600 5,594 4,796
------------ ----------- -----------
Deferred 1,078 (1,398) (1,148)
------------ ----------- -----------
Foreign:
------------ ----------- -----------
Current 12,480 14,083 15,503
------------ ----------- -----------
Deferred 1,025 (2,415) (889)
------------ ----------- -----------
$ 55,921 $ 39,635 $ 24,941
------------ ----------- -----------
</TABLE>
The principal reasons that the aggregate income tax provisions differ from the
U.S. statutory rate of 35 percent are as follows:
<TABLE>
<CAPTION>
(In thousands) Fiscal year ended January 31,
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Income tax provision at statutory rate $ 51,296 $ 29,682 $ 23,279
------------ ----------- -----------
Foreign income taxed at rates different from the
U.S. statutory rate (4,197) (1,005) (1,644)
------------ ----------- -----------
State income taxes, net of federal benefit 3,041 2,727 2,371
------------ ----------- -----------
Tax-exempt interest (2,087) (2,031) (1,348)
------------ ----------- -----------
Acquired in-process research and development 3,973 6,720 1,130
------------ ----------- -----------
Goodwill amortization 4,005 3,597 695
------------ ----------- -----------
Other (110) (55) 458
------------ ----------- -----------
$ 55,921 $ 39,635 $ 24,941
------------ ----------- -----------
</TABLE>
Significant sources of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
(In thousands) January 31,
1999 1998
----------- -----------
<S> <C> <C>
Accrued state income taxes $ 410 $ 5,667
----------- -----------
Accrued legal judgment, including accrued interest 1,598 13,863
----------- -----------
Reserves for product returns and bad debts 6,902 9,728
----------- -----------
Accrued compensation and benefits 4,705 3,809
----------- -----------
Purchased technology and capitalized software 13,580 11,079
----------- -----------
Unremitted earnings of certain subsidiaries (6,018) (6,018)
----------- -----------
Fixed assets 4,389 (693)
----------- -----------
Other, net 5,796 3,443
----------- -----------
Net deferred tax assets $ 31,362 $ 40,878
----------- -----------
</TABLE>
31
<PAGE>
The tax benefit associated with dispositions from employee stock plans reduced
taxes currently payable for fiscal years 1999, 1998, and 1997 by $15,469,000,
$16,230,000, and $2,578,000, respectively. No provision has been made for
federal income taxes on unremitted earnings of certain of the Company's foreign
subsidiaries (cumulative $251 million at January 31, 1999) because the Company
plans to reinvest all such earnings for the foreseeable future. At January 31,
1999, the unrecognized deferred tax liability for these earnings was
approximately $72.0 million. Foreign pretax income was $97.1 million, $55.1
million, and $45.0 million in fiscal years 1999, 1998, and 1997, respectively.
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. On
August 27, 1997, the Internal Revenue Service issued a Notice of Deficiency
proposing increases to the amount of the Company's United States 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. Management believes that adequate amounts have been provided for
any adjustments that may ultimately result from these examinations.
Cash payments for income taxes were approximately $17,236,000, $33,272,000, and
$13,605,000 for fiscal years 1999, 1998, and 1997, respectively.
NOTE 4. 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 was required by statute to post collateral
approximating the amount of the initial judgment plus accrued interest. In May
1997, the escrow account was reduced to $17.3 million, with interest to accrue.
At January 31, 1998, the Company's long-term marketable securities included a
balance of $18.0 million, which was restricted as to its use until final
adjudication of the matter.
The Company appealed the 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 and $2.7 million as operating income and
interest income, respectively, to reflect the remaining unutilized litigation
and related interest accruals.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable lease
agreements. The leases generally provide that the Company pay taxes, insurance,
and maintenance expenses related to the leased assets. Future minimum lease
payments for fiscal years ended January 31 are as follows: $21.7 million in
2000; $17.1 million in 2001; $11.4 million in 2002; $9.2 million in 2003; $5.9
million in 2004; and $19.2 million thereafter.
Rent expense was $23,238,000, $17,729,000, and $17,358,000 in fiscal years 1999,
1998, and 1997, respectively.
The Company has a line of credit permitting short-term, unsecured borrowings of
up to $40 million, which may be used from time to time to facilitate short-term
cash flow. There were no borrowings under this agreement at January 31, 1999,
which expires in January 2000.
The Company is a party to various legal proceedings arising from the normal
course of business activities. 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.
NOTE 6. EMPLOYEE BENEFIT PLANS
Stock option plans
Under the Company's stock option plans, incentive and nonqualified stock options
may be granted to officers, employees, directors, and consultants to purchase
shares of the Company's common stock. Options vest over periods of one to five
years and generally have terms of up to ten years. The exercise price of the
stock options is determined by the Company's Board of Directors on the date of
grant and is at least equal to the fair market value of the stock on the grant
date.
32
<PAGE>
<TABLE>
<CAPTION>
(Shares in thousands)
Weighted
average
Number of price per
shares Price per share share
----------- ------------------ -----------
<S> <C> <C> <C>
Options outstanding at January 31, 1996 $ 8,691 $ 13.38 - $ 49.25 $ 28.75
---------- ----------------- ------------
Granted 5,271 0.01 - 42.00 29.99
----------- ------------------ -----------
Exercised (651) 0.01 - 38.25 19.66
----------- ------------------ -----------
Canceled (598) 16.25 - 49.25 36.98
----------- ------------------ -----------
Options outstanding at January 31, 1997 12,713 $ 0.01 - $ 49.25 $ 28.11
----------- ------------------ -----------
Granted 3,411 0.01 - 48.38 34.62
----------- ------------------ -----------
Assumed via acquisitions 306 0.34 - 36.40 23.72
----------- ------------------ -----------
Exercised (2,304) 0.01 - 49.25 23.15
----------- ------------------ -----------
Canceled (908) 13.38 - 49.25 33.22
----------- ------------------ -----------
Options outstanding at January 31, 1998 13,218 $ 0.01 - $ 49.25 $ 30.20
----------- ------------------ -----------
Granted 3,061 0.01 - 47.94 36.76
----------- ------------------ -----------
Exercised (2,499) 0.01 - 49.25 25.22
----------- ------------------ -----------
Canceled (909) 13.38 - 49.25 35.66
----------- ------------------ -----------
Options outstanding at 12,871 $ 0.01 - $ 49.25 $ 32.34
----------- ------------------ -----------
Options exercisable at January 31, 1999 6,498 $ 0.01 - $ 49.25 $ 30.34
----------- ------------------ -----------
Options available for grant at January 31, 1999 2,772
----------- ------------------ -----------
</TABLE>
The following table summarizes information about options outstanding at January
31, 1999.
<TABLE>
<CAPTION>
Outstanding
options
weighted
Number of average Weighted
shares contractual average
(in life (in exercise
thousands) years) price
----------- ------------ -----------
<S> <C> <C> <C>
Range of per share exercise prices:
----------- ------------ -----------
$ 0.01 - $ 24.75 3,665 4.87 $ 21.29
----------- ------------ -----------
$ 25.38 - $ 36.50 4,838 7.46 $ 31.73
----------- ------------ -----------
$ 36.75 - $ 49.25 4,368 8.30 $ 42.29
----------- ------------ -----------
12,871 7.01 $ 32.34
----------- ------------ -----------
</TABLE>
The following table summarizes information about options outstanding and
exercisable at January 31, 1999.
<TABLE>
<CAPTION>
Number of Weighted
shares average
(in exercise
thousands) price
------------ -----------
<S> <C> <C>
Range of per share exercise prices:
------------ -----------
$ 0.01-$ 24.75 2,600 $ 20.19
------------ -----------
$ 25.38-$ 36.50 2,131 $ 30.68
------------ -----------
$ 36.75-$ 49.25 1,767 $ 44.88
------------ -----------
6,498 $ 30.34
------------ -----------
</TABLE>
33
<PAGE>
These options will expire if not exercised at specific dates ranging from
February 1999 to January 2009. Prices for options exercised during the
three-year period ended January 31, 1999, range from $0.01 to $49.25.
A total of 17.3 million shares of the Company's common stock have been reserved
for future issuance under existing stock option programs.
Employee stock purchase plan
The Company has an employee stock purchase plan ("plan") for all employees
meeting certain eligibility criteria. Under the plan, eligible employees may
purchase shares of the Company's common stock, at their discretion up to 15
percent of their compensation subject to certain limitations, at not less than
85 percent of fair market value as defined in the plan. A total of 2,000,000
shares have been reserved for issuance under the plan plus an annual increase as
defined in the plan document. In fiscal years 1999, 1998, and 1997, shares
totaling 620,000, 490,000, and 323,000, respectively, were issued under the plan
at average prices of $22.77, $21.99, and $24.56 per share. At January 31, 1999,
a total of 2,653,000 shares were available for future issuance under the plan.
Pro forma information
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for its employees' stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation," requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB No. 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized in the Company's financial
statements.
Pro forma information regarding net income and net income per share is required
by SFAS No. 123. This information is required to be determined as if the Company
had accounted for its employee stock options (including shares issued under the
employee stock purchase plan, collectively called "options") granted subsequent
to January 31, 1995, under the fair value method of that statement. The fair
value of options granted in 1999, 1998, and 1997 reported below has been
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
Employee stock options Employee stock purchase plan
1999 1998 1997 1999 1998 1997
----------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years) 2.8 2.6 2.7 0.5 0.5 0.5
----------- -------- -------- -------- --------- --------
Risk-free interest rate 5.2% 6.1% 6.1% 5.1% 5.4% 5.5%
----------- -------- -------- -------- --------- --------
Volatility 0.56 0.52 0.42 0.63 0.50 0.45
----------- -------- -------- -------- --------- --------
Dividend yield 0.7% 0.6% 0.8% 0.7% 0.6% 0.8%
----------- -------- -------- -------- --------- --------
</TABLE>
The weighted average estimated fair value of employee stock options granted
during fiscal years 1999, 1998, and 1997 was $15.10, $13.50, and $8.34 per
share, respectively. The weighted average estimated fair value of shares granted
under the employee stock purchase plan during fiscal years 1999, 1998, and 1997
was $9.11, $7.17, and $8.01, respectively.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
net income for 1999, 1998, and 1997 was $50,541,000, $7,868,000, and
$15,343,000, respectively. Pro forma basic net income per share was $1.08,
$0.17, and $0.34 in fiscal years 1999, 1998, and 1997, respectively. Pro forma
diluted net income per share were $1.03, $0.16, and $0.30, respectively.
These pro forma amounts include amortized fair values attributed to options
granted after January 31, 1995 only, and therefore are not likely to be
representative of future pro forma amounts.
Pretax savings plan
The Company has a pretax savings plan covering nearly all U.S. employees that
qualify under Section 401(k) of the Internal Revenue Code. Eligible employees
may contribute up to 20 percent of their pretax salary, subject to certain
limitations. The Company makes voluntary contributions and matches a portion of
employee contributions. Company contributions, which may be terminated at the
Company's discretion, were $4,623,000, $4,103,000, and $3,068,000 in fiscal
years 1999, 1998, and 1997, respectively.
34
<PAGE>
The Company provides defined-contribution plans in certain foreign countries
where required by statute. The Company's funding policy for foreign
defined-contribution plans is consistent with the local requirements in each
country. Company contributions to these plans during fiscal years 1999 and 1998
were $1,654,000 and $1,376,000, respectively. Company contributions to these
plans in fiscal year 1997 were not significant.
NOTE 7. STOCKHOLDERS' EQUITY
Preferred stock
The Company's Certificate of Incorporation authorizes 2 million shares of
preferred stock, and as of January 31, 1999, none was issued or outstanding. The
Board of Directors has the authority to issue the preferred stock in one or more
series and to fix rights, preferences, privileges and restrictions, including
dividends, and the number of shares constituting any series or the designation
of such series, without any further vote or action by the stockholders.
Common stock repurchase program
During fiscal years 1999, 1998, and 1997, the Company repurchased and retired a
total of 600,000, 2,332,500, and 1,659,500 shares of its common stock at average
repurchase prices of $42.56, $38.39, and $32.44, respectively, pursuant to an
ongoing and systematic repurchase plan ("Systematic Plan") approved by the
Company's Board of Directors to reduce the dilutive effect of common shares to
be issued under the Company's employee stock plans. In December 1997, the Board
of Directors authorized the purchase of an additional 4 million shares under the
Systematic Plan.
In August 1996, Autodesk announced another stock repurchase program for the
purchase of up to 5 million shares of common stock in open market transactions
as market and business conditions warranted -- the "Supplemental Plan." In
December 1997, the Board of Directors authorized the purchase of an additional
5 million shares under the Supplemental Plan. The Company could utilize equity
options as part of the Supplemental Plan.
In connection with the Supplemental Plan, the Company sold put warrants to an
independent third party in September 1996 and purchased call options from the
same independent third party. The premiums received with respect to the equity
options equaled the premiums paid. Consequently, there was no exchange of cash.
The Company exercised the call options, repurchasing 2,000,000 shares of its
common stock during the third quarter of fiscal year 1998 for $51 million. The
put warrants expired unexercised in September 1997 and were reclassified from
put warrants to stockholders' equity during the third quarter of fiscal year
1998. During fiscal years 1999, 1998, and 1997, the Company repurchased and
retired a total of 545,000, 1,000,000, and 557,500 shares of its common stock at
average repurchase prices of $42.81, $34.37, and $24.09, respectively, subject
to the Supplemental Plan.
In December 1997, the Company sold put warrants to an independent third party
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. The outstanding put warrants at
January 31, 1998, 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 acquisition of Discreet Logic Inc. (see Note 12), in
August 1998, the Autodesk Board of Directors rescinded its authorization and
terminated the Company's repurchase plans.
NOTE 8. SEGMENTS
During the fiscal year ended January 31, 1999, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for reporting information about a company's operating segments. Prior year
amounts have been restated to conform to the current year's presentation.
Management identified the Company's reportable segments based on differences in
customer type and distribution method. The Company operates in three
segments -- the Design Solutions segment (consisting of the MCAD, AECAD, and GIS
market groups), the Personal Solutions Group ("PSG"), and Kinetix. The Design
Solutions segment derives revenues from the sales of design software products
whose end users include architects, engineers, construction firms, designers,
and drafters. The Personal Solutions Group develops and sells design software
products for professionals, occasional us-
35
<PAGE>
ers, or consumers who design, draft, and diagram. Finally, Kinetix derives
revenues from the sale of multimedia products to animation professionals. All
segments primarily distribute their respective products through authorized
dealers and distributors. The PSG segment also sells its products directly
through telemarketing and the Internet.
Autodesk evaluates each segment's performance on the basis of income from
operations before income taxes. The Company currently does not separately
accumulate and report asset information by market group. Information concerning
the operations of the Company's reportable segments is as follows:
<TABLE>
<CAPTION>
(In millions) Fiscal year ended
January 31,
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Net revenues:
----------- ------------ -----------
Design Solutions $ 575.2 $ 494.3 $ 388.0
----------- ------------ -----------
Personal Solutions Group 122.9 89.7 79.2
----------- ------------ -----------
Kinetix 42.1 33.1 29.5
----------- ------------ -----------
$ 740.2 $ 617.1 $ 496.7
----------- ------------ -----------
<CAPTION>
(In millions) Fiscal year ended January 31,
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Income (loss) from
operations:
----------- ------------ -----------
Design Solutions $ 310.3 $ 267.6 $ 241.0
----------- ------------ -----------
Personal Solutions Group 84.1 53.3 50.5
----------- ------------ -----------
Kinetix 10.4 (2.4) (0.6)
----------- ------------ -----------
Unallocated amount /1/ (271.8) (243.3) (231.1)
----------- ------------ -----------
$ 133.0 $ 75.2 $ 59.8
----------- ------------ -----------
Depreciation and
amortization:
Design Solutions $ 37.2 $ 22.6 $ 19.2
----------- ------------ -----------
Personal Solutions Group 2.2 0.3 --
----------- ------------ -----------
Kinetix 4.5 7.3 1.2
----------- ------------ -----------
Unallocated amounts 19.3 19.7 14.4
----------- ------------ -----------
$ 63.2 $ 49.9 $ 34.8
----------- ------------ -----------
</TABLE>
/1/Unallocated amounts in fiscal year 1999 are attributed primarily to corporate
expenses of $110.3 million, other geographic costs and expenses which are
managed outside the reportable segments of $174.2 million, and nonrecurring
income of $12.7 million. Fiscal year 1998 unallocated amounts are primarily
related to corporate expenses of $76.6 million and other geographic costs and
expenses not allocated to specific segments of $166.7 million. Fiscal year 1997
amounts pertain to corporate expenses of $78.7 million and other geographic
costs and expenses of $152.4 million.
36
<PAGE>
Information regarding the Company's operations by geographic area is as follows:
<TABLE>
<CAPTION>
(In millions) Fiscal year ended
January 31,
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Net revenues:
----------- ------------ -----------
United States customers $ 298.8 $ 251.7 $ 163.3
----------- ------------ -----------
Other Americas 48.3 36.7 24.1
----------- ------------ -----------
Total Americas 347.1 288.4 187.4
----------- ------------ -----------
Europe 287.2 208.3 189.1
----------- ------------ -----------
Asia Pacific 105.9 120.4 120.2
----------- ------------ -----------
Total net revenues $ 740.2 $ 617.1 $ 496.7
=========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
(In millions) January 31,
1999 1998
------------ -----------
<S> <C> <C>
Long-lived assets:1
------------ -----------
United States operations $ 127.9 $ 162.0
------------ -----------
Other Americas 0.2 0.2
------------ -----------
Total Americas 128.1 162.2
------------ -----------
Neuchatel, Switzerland 37.7 3.4
------------ -----------
Other Europe 5.9 4.2
------------ -----------
Total Europe 43.6 7.6
------------ -----------
Asia Pacific 6.0 6.7
------------ -----------
Consolidating eliminations (12.0) (39.3)
------------ -----------
Total long-lived assets $ 165.7 $ 137.2
============ ===========
</TABLE>
/1/Per SFAS 131, long-lived assets exclude financial instruments and deferred
tax assets. As such, marketable securities and deferred taxes have been excluded
above.
NOTE 9. COMPREHENSIVE INCOME
As of February 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no impact on the
Company's net income or stockholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities and the 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.
The components of total accumulated other comprehensive income in the balance
sheet are as follows:
<TABLE>
<CAPTION>
(In thousands) January 31,
1999 1998
------------ -----------
<S> <C> <C>
Unrealized gains on available-for-sale
securities, net of tax $ 775 $ 577
------------ -----------
Foreign currency translation adjustment (10,154) (16,655)
------------ -----------
Total accumulated other comprehensive
income $ (9,379) $ (16,078)
------------ -----------
</TABLE>
37
<PAGE>
The related income tax effects allocated to each component of other
comprehensive income are as follows:
<TABLE>
<CAPTION>
(In thousands)
Amount Income tax Amount
before (expense) net of
taxes benefit taxes
----------- ------------ -----------
<S> <C> <C> <C>
Fiscal year 1999
----------- ------------ -----------
Unrealized gains on
securities
----------- ------------ -----------
Unrealized gains on
available-for-sale
securities $ 18 $ (6) $ 12
----------- ------------ -----------
Less: reclassification
adjustment for losses
realized in net income (269) 83 (186)
----------- ------------ -----------
Net unrealized gains $ 287 $ (89) $ 198
----------- ------------ -----------
Foreign currency
translation adjustments 6,501 -- 6,501
----------- ------------ -----------
Total other
comprehensive income $ 6,788 $ (89) $ 6,699
----------- ------------ -----------
Fiscal year 1998
----------- ------------ -----------
Net unrealized gains on
available-for-sale
securities $ 565 $ (203) $ 362
----------- ------------ -----------
Foreign currency
translation adjustments (6,591) -- (6,591)
----------- ------------ -----------
Total other
comprehensive loss $ (6,026) $ (203) $ (6,229)
----------- ------------ -----------
Fiscal year 1997
----------- ------------ -----------
Net unrealized losses on
available-for-sale
securities $ (660) $ 234 $ (426)
----------- ------------ -----------
Foreign currency
translation adjustments (20,518) -- (20,518)
----------- ------------ -----------
Total other
comprehensive loss $ (21,178) $ 234 $ (20,944)
----------- ------------ -----------
</TABLE>
NOTE 10. 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 CAD software applications and technologies (the "acquisition"). In
consideration for this acquisition, the Company paid Genius approximately $69
million in cash. The acquisition has been accounted for using the purchase
method of accounting with the purchase price being allocated as follows:
<TABLE>
<S> <C>
(In thousands)
Inventory $ 200
---------
Net fixed assets 200
---------
Purchased in-process research and development charged to operations 13,100
in the quarter ended July 31, 1998
---------
Purchased technology 12,700
---------
Assembled work force 1,100
---------
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 fiscal year 1999
following consummation of the acquisition. The value assigned to purchased in-
process technology was determined by identify-
38
<PAGE>
ing research projects in areas for which technological feasibility had not been
achieved. The calcula-tions 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.
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. ("Softdesk"). Softdesk is a
leading supplier of AutoCAD-based applications software for the architecture,
engineering, and construction market. Based on the value of Autodesk stock and
options exchanged, the transaction, including transactions costs, was valued at
approximately $94.1 million.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:
<TABLE>
<S> <C>
(In thousands)
Accounts receivables and other current assets $ 15,600
---------
Net fixed assets 3,200
---------
Other long-term assets 4,000
---------
Purchased in-process research and development charged to operations 19,200
in the quarter ended April 30, 1997
---------
Purchased technologies and other intangible assets 15,900
---------
Goodwill 48,000
---------
Liabilities assumed (7,800)
---------
Deferred tax liability (4,000)
---------
Total purchase consideration $ 94,100
=========
</TABLE>
Purchased in-process research and development Management estimated that $19.2
million of the purchase price represented purchased in-process technology that
had not yet reached technological feasibility and had no alternative future use.
Accordingly, this amount was expensed in the first quarter of fiscal year 1998
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 value was determined
by estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from such
projects, and discounting the net cash flows back to their present value. The
discount rate included a factor that took into account the uncertainty
surrounding the successful development of the purchased in-process technology
projects.
39
<PAGE>
Purchased technology
To determine the value of the purchased technology ($9.2 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.
In the first quarter of fiscal year 1998, the Company also acquired certain
assets of and licensed technology from 3D/Eye for $5.8 million. Of the total
cost, $3.0 million represented the value of in-process research and development
that had not yet reached technological feasibility and had no alternative future
use and was charged to operations.
FISCAL YEAR 1997 TRANSACTIONS
During fiscal year 1997, the Company acquired certain businesses for an
aggregate of $9.9 million. Included in these acquisitions were the purchases of
assets from Creative Imaging Technologies, Inc. ("CIT"), CadZooks, Inc., Argus
Technologies, Inc. ("Argus"), as well as the outstanding stock of Teleos
Research ("Teleos"). The purchase consideration was allocated to the acquired
assets and liabilities based on fair values as follows:
<TABLE>
<S> <C>
(In thousands)
Accounts receivables and other current assets $ 225
--------
Net fixed assets 243
--------
Other long-term assets 37
--------
Purchased in-process research and development charged to operations 4,738
in fiscal year 1997
--------
Purchased technologies and other intangible assets 3,213
--------
Goodwill 2,528
--------
Liabilities assumed (1,077)
--------
Total purchase consideration $ 9,907
========
</TABLE>
Amortization of these purchased technologies and other intangibles is provided
on a straight-line basis over the respective useful lives of the assets ranging
from three to seven years. The operating results of these acquisitions, which
have not been material in relation to those of Autodesk, have been included in
the consolidated financial statements from the respective acquisition dates.
Approximately $3.2 million of the Teleos purchase price and $1.5 million of the
Argus purchase price represented the value of in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. These amounts were charged to operations during fiscal
year 1997 and classified as nonrecurring charges in the accompanying statement
of income.
NOTE 11. 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 is
included in nonrecurring charges in the fiscal year 1999 Consolidated Statement
of Income (see Note 10). This 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 January
31, 1999, the number of employee separations due to restructuring actions was 80
and actual employee termination benefit payments of approximately $1.8 million
have been made. During the fourth quarter, Autodesk reduced the restructuring
accrual by approximately $0.3 million to reflect higher than expected attrition
rates. Most of the restructuring actions were completed as of January 31, 1999.
NOTE 12. SUBSEQUENT EVENTS
Acquisition
On March 16, 1999, the Company acquired Discreet Logic Inc. ("Discreet"), in a
business combination accounted for as a pooling of interests. In the
acquisition, Autodesk acquired all of the voting stock of Discreet, a company
that develops, assembles, markets, and supports nonlinear digital systems and
40
<PAGE>
software for creating, editing, and compositing imagery and special effects for
film, video, and HDTV, and issued 0.33 shares of the Company'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), for each outstanding share of
Discreet. The transaction resulted in the issuance of an aggregate of
approximately 10 million shares of Autodesk common stock and exchangeable
shares.
For Autodesk and Discreet pro forma purposes, Autodesk's historical condensed
consolidated statements of income for the fiscal years ended January 31, 1999,
1998, and 1997, have been combined with the condensed consolidated statements of
operations of Discreet for the 12 months ended December 31, 1998, the fiscal
year ended June 30, 1998, and the 11 months ended June 30, 1997. Operating
results for the period from January 1, 1998, to June 30, 1998, for Discreet are
duplicated in the pro forma consolidated statement of income of the combined
operating results for the years ended January 31, 1999 and 1998.
The following unaudited pro forma data summarizes the combined operating results
of the Company and Discreet as if the acquisition had occurred at the beginning
of the periods presented.
<TABLE>
<CAPTION>
(In thousands, except per Fiscal year ended January 31,
share amounts)
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Net revenues $ 871,879 $ 768,684 $ 598,617
----------- ------------ -----------
Net income 97,132 56,215 42,247
----------- ------------ -----------
Basic net income per share 1.72 1.00 0.77
----------- ------------ -----------
Diluted net income per share 1.64 0.94 0.74
----------- ------------ -----------
</TABLE>
Follow-on offering
In order to qualify for pooling of interests treatment in the Discreet
acquisition, prior to the closing of the acquisition, Autodesk completed a
follow-on offering of 3,000,000 shares of common stock at $41 per share.
NOTE 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly
financial information for fiscal years 1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
(In thousands, except
per share data)
1st 2nd 3rd 4th Fiscal
quarter quarter quarter quarter year
---------- ---------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Fiscal year 1999
---------- ---------- -------- ------- ----------
Net revenues $ 187,206 $ 186,638 $ 177,178 $ 189,145 $ 740,167
---------- ---------- --------- --------- ----------
Gross margin 167,375 168,071 158,928 169,429 663,803
---------- ---------- --------- --------- ----------
Income from operations 37,827 33,040 26,627 35,543 133,037
---------- ---------- --------- --------- ----------
Net income 25,815 21,317 18,374 25,133 90,639
---------- ---------- --------- --------- ----------
Basic net income
per share 0.56 0.46 0.40 0.53 1.94
---------- ---------- --------- --------- ----------
Diluted net
income per share 0.51 0.43 0.39 0.50 1.85
---------- ---------- --------- --------- ----------
Fiscal year 1998
---------- ---------- --------- --------- ----------
Net revenues $ 118,984 $ 154,096 $ 162,195 $ 181,851 $ 617,126
---------- ---------- --------- --------- ----------
(restated) 102,895 135,227 144,539 163,127 545,788
---------- ---------- --------- --------- ----------
Income (loss)
from operations
(restated) (18,488) 23,624 28,298 41,728 75,162
---------- ---------- --------- --------- ----------
Net income
(loss) (restated) (17,437) 15,990 19,128 27,490 45,171
---------- ---------- --------- --------- ----------
Basic net income
(loss) per share
(restated) (0.38) 0.33 0.41 0.60 0.97
---------- ---------- --------- --------- ----------
Diluted net
income (loss)
per share (0.38) 0.31 0.37 0.56 0.91
(restated)
---------- ---------- --------- --------- ----------
Fiscal year 1997
---------- ---------- --------- --------- ----------
Net revenues $ 136,281 $ 128,745 $ 116,647 $ 115,020 $ 496,693
---------- ---------- --------- --------- ----------
Gross margin 118,989 112,123 101,427 99,937 432,476
---------- ---------- --------- --------- ----------
Income from
operations 28,125 17,123 7,502 7,067 59,817
---------- ---------- --------- --------- ----------
Net income 19,060 10,645 5,873 5,993 41,571
---------- ---------- --------- --------- ----------
Basic net income
per share 0.41 0.23 0.13 0.13 0.91
---------- ---------- --------- --------- ----------
Diluted net
income per share 0.39 0.22 0.13 0.13 0.88
---------- ---------- --------- --------- ----------
</TABLE>
41
<PAGE>
Results for the second quarter of fiscal year 1999 included nonrecurring charges
of approximately $22.0 million representing the value of in-process research and
development that had not yet reached technological feasibility and had no
alternative future use ("IPR&D") acquired in the Genius acquisition and other
nonrecurring charges. (See Note 10 for further information.) These charges
resulted in a reduction in diluted net income per share of $0.36 in the second
quarter. Results for the first quarter of fiscal year 1998 included nonrecurring
charges of approximately $19.2 million and $3.0 million, respectively,
representing the value of IPR&D acquired in the Softdesk and 3D/Eye
transactions. These charges resulted in a reduction in diluted net income per
share of $0.46 in the first quarter of fiscal year 1998. Results for the second
and third fiscal quarters of fiscal year 1997 included nonrecurring charges of
$3.2 million and $1.5 million, respectively, related to IPR&D acquired in the
Teleos and Argus acquisitions that had not yet reached technological feasibility
and had no alternative future use. These charges resulted in an $0.08 and $0.02
reduction in diluted net income per share in the second and third quarters of
fiscal year 1997, respectively.
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Autodesk, Inc.
We have audited the accompanying consolidated balance sheets of Autodesk, Inc.,
as of January 31, 1999 and 1998, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended January 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Autodesk, Inc., at January 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended January 31, 1999, in conformity with generally accepted accounting
principles.
As discussed more fully in Note 1, the Company has modified the methods used to
value acquired in-process research and development recorded and written off in
connection with the Company's March 1997 acquisition of Softdesk, Inc., and,
accordingly, has restated the consolidated financial statements for the fiscal
year ended January 31, 1998, to reflect this change.
/s/ Ernst & Young LLP
San Jose, California
February 22, 1999,
except for Note 12, as to which the date is
March 16, 1999
42
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF AUTODESK, INC.
------------------------------
The Registrant owns 100% of the outstanding voting securities of the following
corporations, as of April 22, 1999, all of which are included in the
Registrant's consolidated financial statements:
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- ------ ---------------
<S> <C>
Autodesk (Europe) S.A. Switzerland
Autodesk AB Sweden
Autodesk AG Switzerland
Autodesk de Argentina S.A. Argentina
Autodesk Asia Pte. Ltd. Singapore
Autodesk Australia Pty. Ltd. Australia
Autodesk do Brazil Ltda Brazil
Autodesk B.V. Netherlands
Autodesk Canada, Inc. Canada
Autodesk Development Africa (Pty) Ltd. Republic of South Africa
Autodesk Development B.V. Netherlands
Autodesk Development Canada Ltd. Canada
Autodesk Development S.a r.l. Switzerland
Autodesk (EMEA) S.A. Switzerland
Autodesk Far East Ltd. Hong Kong
Autodesk GesmbH Austria
Autodesk GmbH Germany
Autodesk India Pte. Ltd. India
Autodesk International Holding Co. Delaware
Autodesk International Ltd. Barbados
Autodesk Ireland Ltd. Ireland
Autodesk Korea Ltd. Korea
Autodesk Ltd. United Kingdom
Autodesk Ltd. Japan Japan
Autodesk de Mexico S.A. de C.V. Mexico
Autodesk CIS (ZAO) Russia-C.I.S.
Autodesk S.A. (Spain) Spain
Autodesk S.A. France
Autodesk S.p.A. Italy
Autodesk Software Lda Portugal
Autodesk Spol. s.r.o Czech Republic
Autodesk, Taiwan Ltd. Taiwan
Autodesk de Venezuela, C.A. Venezuela
Foresight Resources Corporation Missouri
Teleos Research California
Discreet Logic, Inc. Canada
Discreet Logic - USA, Inc. Delaware
Bandit Communications, Inc. Delaware
D-Vision Systems, Inc. Illinois
Lightscape Technologies, Inc. Delaware
Discreet Logic (Desktop), Inc. Barbados
Discreet Logic Asia-Pacific Pte, Ltd. Singapore
Discreet Logic KK Japan
Discreet Logic (Brazil) Industria e Comercio Ltda Brazil
Discreet Logic Europe S.A. Luxembourg
Discreet Logic France SARL France
Discreet Logic (UK) Ltd. United Kingdom
Discreet Logic GmbH Germany
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 209,174
<SECURITIES> 102,756
<RECEIVABLES> 98,652
<ALLOWANCES> 6,805
<INVENTORY> 7,594
<CURRENT-ASSETS> 450,489
<PP&E> 139,414
<DEPRECIATION> 99,747
<TOTAL-ASSETS> 693,877
<CURRENT-LIABILITIES> 231,599
<BONDS> 0
0
0
<COMMON> 361,611
<OTHER-SE> 98,631
<TOTAL-LIABILITY-AND-EQUITY> 693,877
<SALES> 740,167
<TOTAL-REVENUES> 740,167
<CGS> 76,364
<TOTAL-COSTS> 528,975
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,791
<INTEREST-EXPENSE> 351
<INCOME-PRETAX> 146,560
<INCOME-TAX> 55,921
<INCOME-CONTINUING> 90,639
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,639
<EPS-PRIMARY> 1.94<F1>
<EPS-DILUTED> 1.85
<FN>
<F1>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
