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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
---------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- ---
Act of 1934
FOR THE PERIOD ENDED OCTOBER 31, 1997
OR
- --- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 0-14338
AUTODESK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2819853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 MCINNIS PARKWAY
SAN RAFAEL, CALIFORNIA 94903
(Address of principal executive offices)
TELEPHONE NUMBER (415) 507-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- ----
As of December 9, 1997, there were 46,637,000 shares of the Registrant's Common
Stock outstanding.
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AUTODESK, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Statement of Operations
Three and nine months ended October 31, 1997 and 1996..... 3
Condensed Consolidated Balance Sheet
October 31, 1997 and January 31, 1997..................... 4
Condensed Consolidated Statement of Cash Flows
Nine months ended October 31, 1997 and 1996............... 6
Notes to Condensed Consolidated Financial Statements....... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 17
SIGNATURES................................................. 17
2
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
October 31, October 31,
------------------ --------------------
1997 1996 1997 1996
-------- -------- ---------- --------
Revenues $166,324 $119,735 $446,391 $391,542
Direct commissions 4,129 3,088 11,116 9,869
-------- -------- -------- --------
Net revenues 162,195 116,647 435,275 381,673
Costs and expenses:
Cost of revenues 17,512 15,220 52,278 49,134
Marketing and sales 60,215 50,233 171,571 150,125
Research and development 33,050 23,662 91,085 69,471
General and administrative 21,292 18,521 60,455 55,455
Charges for acquired in-process
research and development - 1,509 58,087 4,738
-------- -------- -------- --------
132,069 109,145 433,476 328,923
-------- -------- -------- --------
Income from operations 30,126 7,502 1,799 52,750
Interest and other income, net 2,617 1,604 7,391 4,471
-------- -------- -------- --------
Income before income taxes 32,743 9,106 9,190 57,221
Provision for income taxes 11,787 3,233 23,144 21,643
-------- -------- -------- --------
Net income (loss) $ 20,956 $ 5,873 $(13,954) $ 35,578
======== ======== ======== ========
Net income (loss) per share $0.41 $0.13 $(0.30) $0.75
======== ======== ======== ========
Shares used in computing
net income (loss) per share 51,480 45,410 47,050 47,480
======== ======== ======== ========
See accompanying notes.
3
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(In thousands)
October 31, 1997 January 31, 1997
----------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 43,024 $ 64,814
Marketable securities 169,956 117,971
Accounts receivable, net 78,345 68,577
Inventories 6,397 7,340
Deferred income taxes 37,978 35,616
Prepaid expenses and other
current assets 15,967 16,210
-------- --------
Total current assets 351,667 310,528
-------- --------
Marketable securities, including
a restricted balance of $17,300
at October 31, 1997 and $28,000
at January 31, 1997 105,013 103,523
Computer equipment, furniture, and
leasehold improvements, at cost:
Computer equipment and furniture 115,368 103,903
Leasehold improvements 20,319 17,818
Less accumulated depreciation (94,040) (77,671)
-------- --------
Net computer equipment, furniture,
and leasehold improvements 41,647 44,050
Purchased technologies and capitalized
software 33,998 15,916
Other assets 36,641 18,216
-------- --------
$568,966 $492,233
======== ========
See accompanying notes.
4
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands)
October 31, 1997 January 31, 1997
----------------- -----------------
(Unaudited)
Current liabilities:
Accounts payable $ 27,984 $ 24,557
Accrued compensation 25,271 18,099
Accrued income taxes 76,363 75,061
Other accrued liabilities 68,133 32,454
-------- --------
Total current liabilities 197,751 150,171
-------- --------
Deferred income taxes 1,870 2,974
Litigation accrual 29,328 29,328
Other liabilities 1,796 1,646
Put warrants - 64,500
Stockholders' equity:
Common stock 304,153 147,091
Retained earnings 42,598 106,587
Foreign currency translation adjustment (8,530) (10,064)
-------- --------
Total stockholders' equity 338,221 243,614
-------- --------
$568,966 $492,233
======== ========
See accompanying notes.
5
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
October 31,
------------
1997 1996
------------ ---------
Operating activities
Net income (loss) $ (13,954) $ 35,578
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Charges for acquired in-process
research and development 58,087 4,738
Depreciation and amortization 31,540 24,998
Changes in operating assets and
liabilities, net of business
combinations 26,344 6,960
--------- --------
Net cash provided by operating activities 102,017 72,274
--------- --------
Investing activities
Net purchases of marketable securities (45,580) (23,010)
Business combinations, net of cash acquired (5,766) (9,653)
Purchases of computer equipment, furniture,
and leasehold improvements (10,520) (15,304)
Purchases of software technologies,
capitalization of software costs and other (11,579) (8,338)
--------- --------
Net cash used in investing activities (73,445) (56,305)
--------- --------
Financing activities
Proceeds from issuance of common stock 74,327 17,643
Repurchase of common stock (116,132) (67,045)
Dividends paid (8,557) (8,113)
--------- --------
Net cash used in financing activities (50,362) (57,515)
--------- --------
Net decrease in cash and cash equivalents (21,790) (41,546)
Cash and cash equivalents at beginning of year 64,814 129,305
--------- --------
Cash and cash equivalents at end of quarter $ 43,024 $ 87,759
========= ========
Supplemental disclosure of noncash investing
and financing activities:
Common stock issued in connection with the
acquisition of Softdesk, Inc. $ 89,600 $ -
========= ========
See accompanying notes.
6
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
- -- ---------------------
The condensed consolidated financial statements at October 31, 1997 and for the
three- and nine-month periods then ended are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements at October 31, 1997 should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Annual Report to Stockholders
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997. The results of operations for the three and
nine months ended October 31, 1997 are not necessarily indicative of the results
for the entire fiscal year ending January 31, 1998.
2. Recently Issued Accounting Standards
- -- ------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. This statement is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application of this statement is not permitted.
Under the new requirements, the Company will be required to present both basic
net income per share and diluted net income per share. Basic net income per
share will exclude dilutive common stock equivalents. Diluted net income per
share will include common stock equivalents. If SFAS 128 had been applied for
the three month period ended October 31, 1997, basic net income per share would
have been approximately $0.03 higher than net income per share as currently
reported. The application of this pronouncement is not expected to impact the
calculation of basic net loss per share for the nine months ended October 31,
1997 but would have increased basic net income per share for the nine months
ended October 31, 1996 by $0.03. Due to the insignificant number of common stock
equivalents outstanding for the quarter ended October 31, 1996, the calculation
of basic net income per share for the three-month period ended October 31, 1996
is not expected to have a material impact on currently reported net income per
share. The impact of SFAS 128 on the calculation of diluted net income (loss)
per share is not expected to be material for all periods reported.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements and is required
to be adopted by the Company beginning in its fiscal year 1999. Additionally,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," ("SFAS 131") which establishes standards for the way
public business enterprises report information in annual statements and interim
financial reports regarding operating segments, products and services,
geographic areas and major customers. SFAS 131 will first be reflected in the
Company's fiscal year 1999 Annual Report and will apply to both annual and
interim financial reporting subsequent to this date.
The Accounting Standards Executive Committee has issued Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"), which supersedes SOP 91-1,
the former literature on software revenue recognition. This Statement will be
effective beginning in fiscal year 1999. The Company believes it is in
compliance with the provisions of SOP 97-2, and its adoption is not expected
to have a material impact on the consolidated financial position or results of
operations of the Company.
7
3. Derivatives
- -- -----------
In January 1997, the Securities and Exchange Commission issued new rules
requiring expanded disclosure for "market risk-sensitive" financial instruments.
These rules will be fully effective for the Company's annual financial
statements for the year ending January 31, 1999. As required for this interim
filing, specific information on the Company's accounting policies with regard to
activities in derivative financial instruments is provided below.
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.
In conjunction with one of the Company's stock repurchase programs, the Company
may, from time to time, enter into additional put warrant and call option
arrangements. As with the current put warrant contracts further discussed in
Note 5 below, the Company's maximum potential repurchase obligation under the
put warrants will be reclassified from stockholders' equity to put warrants on
the consolidated balance sheet. Under these arrangements, the Company can
typically settle with a stock or a cash settlement equal to the difference
between the exercise price and market value at the date of exercise.
4. Business Combinations
- -- ---------------------
On March 31, 1997, the Company issued approximately 2.9 million shares of its
common stock for all outstanding shares of Softdesk, Inc. ("Softdesk"), a
leading supplier of AutoCAD-based application software for the architecture,
engineering, and construction market, and exchanged Autodesk options for
outstanding Softdesk options. Based upon the value of Autodesk stock and
options exchanged, the transaction was valued at approximately $94 million for
the Softdesk stockholders. This transaction has been accounted for using the
purchase method. The operating results of Softdesk, which have not been
material in relation to those of the Company, have been included in the
accompanying condensed consolidated financial statements from the acquisition
date.
To assist in the allocation of the purchase price, an independent valuation of
Softdesk was completed. Approximately $55.1 million of the Softdesk purchase
price represented the value of in-process research and development that had not
yet reached technological feasibility and had no alternative future use. This
amount was charged to operations in the first quarter of fiscal year 1998.
8
5. Common Stock Repurchase Programs
- -- --------------------------------
As further discussed in the Company's fiscal year 1997 Annual Report on Form
10-K, the Company sold put warrants to an independent third party in September
1996 that entitled the holder of the warrants to sell 3 million shares of the
Company's common stock to the Company at $21.50 per share. Additionally, the
Company purchased call options from the same independent third party that
entitled the Company to buy 2 million shares of its common stock at $25.50 per
share. The premiums received with respect to the equity options totaled $8.1
million and equaled the premiums paid. Consequently, there was no exchange of
cash. The Company exercised the call options, repurchasing two million shares
of its common stock during the third quarter for $51 million. The put warrants,
expired in September 1997 and were reclassified from put warrants to
stockholders' equity during the third quarter of fiscal year 1998. During the
quarter ended October 31, 1997, the Company repurchased an additional 610,000
shares of its common stock for $26.9 million pursuant to an ongoing and
systematic repurchase program approved by the Company's Board of Directors.
In December 1997, the Company sold put warrants to an independent third party
that entitle 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 that entitle the Company to buy 1 million shares at $39.88 per
share. The put warrants and call options expire in March 1998. 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 amount related
to the Company's maximum potential repurchase obligation under the put warrants
will be reclassified from stockholders' equity to put warrants. The Company has
the right to settle the put warrants with stock or cash equal to the difference
between the exercise price and market value at the date of exercise.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE DISCUSSION IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" CONTAINS TREND ANALYSES AND OTHER FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. ALL STATEMENTS, TREND
ANALYSES AND OTHER INFORMATION CONTAINED HEREIN RELATIVE TO MARKETS FOR
AUTODESK'S PRODUCTS AND TRENDS IN REVENUE, AS WELL AS OTHER STATEMENTS INCLUDING
SUCH WORDS AS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE," "EXPECT," "GOAL," AND
"INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING STATEMENTS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND ECONOMIC RISKS, AND
AUTODESK'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FACTORS SET FORTH ELSEWHERE
HEREIN, INCLUDING "CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING
RESULTS," PAGE 13, AS WELL AS FACTORS SET FORTH IN AUTODESK'S ANNUAL REPORT ON
FORM 10-K.
RESULTS OF OPERATIONS
Three Months Ended October 31, 1997 and 1996
- --------------------------------------------
Net revenues. The Company's third quarter net revenues of $162.2 million
increased 39 percent from the third quarter of the prior fiscal year. The
Company achieved significant net revenue growth in all geographic sectors
compared to the corresponding period in the prior fiscal year. The Company
recorded net revenues in the Americas of $78.1 million, a 69 percent increase
from the same period in the prior fiscal year, while revenues in Europe and
Asia/Pacific of $52.4 million and $31.7 million increased 20 percent and 19
percent, respectively. This revenue growth resulted principally from higher
sales of AutoCAD and AutoCAD updates. The most current version of AutoCAD,
Release 14, was introduced in the second quarter of the current fiscal year.
Also contributing to the higher revenues were new and enhanced products such as
AutoCAD Map, Autodesk World, 3D Studio VIZ, as well as incremental revenues
associated with the March 1997 acquisition of Softdesk, Inc. ("Softdesk"), a
leading supplier of AutoCAD-based software for the architecture, engineering,
and construction ("AEC") market. Sales of AutoCAD and AutoCAD updates accounted
for approximately 72 percent and 68 percent of the Company's consolidated net
revenues in the third quarter of fiscal years 1998 and 1997, respectively. The
stronger value of the US dollar, relative to certain international currencies,
primarily the Japanese yen, the German mark and the French franc, negatively
impacted net revenues in the third quarter of the current fiscal year by $7.6
million when compared to the same period in the prior fiscal year. International
sales, including exports from the U.S., accounted for approximately 52 percent
of the Company's revenues in the third quarter of fiscal year 1998 as compared
to 63 percent in the same period of the prior fiscal year.
The Company derives a substantial portion of its revenues from sales of AutoCAD
and AutoCAD updates. As such, any factors adversely affecting sales of AutoCAD
and AutoCAD updates, including customer acceptance, product performance,
compatibility with hardware equipment, and interoperability problems with
products designed to run in conjunction with AutoCAD Release 14, could result in
damage to the Autodesk and AutoCAD brand names, and could have a material
adverse effect on the Company's business and consolidated results of operations.
In addition, recent economic events in Asia, including depreciation of certain
Asian currencies, failures at financial institutions, stock market declines, and
reduction in planned capital investment at key enterprises, may adversely impact
the Company's revenues in Asian markets.
10
Product returns, consisting principally of stock rotation, are recorded as a
reduction of revenues and represented approximately 6 percent and 8 percent of
consolidated revenues in the third quarter of fiscal years 1998 and 1997,
respectively. Fiscal year 1997 product returns were impacted by product rotation
resulting from performance issues with AutoCAD Release 13 and transition and
update cycles related to the Company's various software products. Although
product returns, comparing the third quarter of fiscal 1998 to the same period
in the prior year, decreased as a percentage of consolidated revenues,
management anticipates that product returns in future periods will continue to
be impacted by product update cycles, new product releases, and software
quality.
Cost of revenues. When expressed as a percentage of net revenues, cost of
revenues decreased approximately 2 percent in the third quarter of fiscal year
1998 as compared to the same period of the prior fiscal year. This improvement
resulted from efficiencies in production and distribution activities,
management's continued focus on managing the costs of materials, and the mix of
product sales. Cost of revenues as a percentage of net revenues has been and
may continue to 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 were 37 percent and 43
percent of net revenues in the third quarter of fiscal years 1998 and 1997,
respectively. Actual spending increased approximately 20 percent as a result of
higher employee costs, including increased variable compensation associated with
higher revenues, and higher costs to support the launch of new and enhanced
products from the Company's market groups, including 3D Studio MAX Release 2.0
and AutoCAD LT 97. The Company expects to continue its emphasis on marketing
and sales activities in the future to promote Autodesk's competitive position
and to support marketing and sales of its products. Accordingly, the Company
expects marketing and sales expenses to continue to be significant, both in
absolute dollars and as a percentage of net revenues.
Research and development. Research and development expenses represented 20
percent of net revenues in the third quarter of both fiscal years 1998 and 1997.
Actual research and development spending increased by 40 percent from the same
period in the prior fiscal year due to the addition of software engineers,
expenses associated with the development and translation of new products, and
incremental expenses associated with acquisitions in the last half of fiscal
year 1997 and the March 1997 acquisition of Softdesk. The Company anticipates
that research and development expenses will increase in future periods as a
result of product development efforts by the Company's market groups and
incremental growth in the number of technical personnel resulting from recent
acquisitions. 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 decreased to
13 percent of net revenues in the third quarter of fiscal year 1998 from 16
percent of net revenues in the third quarter of the prior fiscal year. In
absolute dollar terms, general and administrative expenses increased 15 percent
from the same period of the prior fiscal year, resulting primarily from
increased employee-related expenses and amortization expense associated with
intangible assets recorded in connection with the acquisition of Softdesk. The
Company currently expects that general and administrative expenses will increase
in future periods to support spending on infrastructure, including continued
investment in Autodesk's worldwide information systems.
Interest and other income. Interest and other income increased $1.0 million or
63 percent comparing the third quarter of fiscal year 1997 to the third quarter
of fiscal year 1998. The increase in interest income was due primarily to
higher average balances of cash, cash equivalents, and marketable securities.
11
Provision for income taxes. The Company's effective income tax rate was 36.0
percent in the third quarter of fiscal year 1998 compared to 35.5 percent in the
same quarter of the prior fiscal year. The increase in the effective income tax
rate in fiscal year 1998 was due to the acquisition of certain intangible assets
during the year, the amortization of such assets not being deductible for tax
purposes, and a change in the geographic mix of operations resulting from the
acquisition of Softdesk.
On August 27, 1997, the Internal Revenue Service ("IRS") issued a Notice of
Deficiency proposing increases to the amount of the Company's federal income
taxes for fiscal years 1992 and 1993. On November 25, 1997, the Company filed a
petition with the United States Tax Court to contest these alleged tax
deficiencies. Resolution of these alleged tax deficiencies is not expected to
have a material adverse impact on the Company's consolidated results of
operations or its financial position.
Nine Months Ended October 31, 1997 and 1996
- -------------------------------------------
Net revenues. Autodesk's net revenues for the nine months ended October 31,
1997 were $435.3 million, which represented a 14 percent increase from the
same period of the prior fiscal year. The increase resulted principally from
strong initial demand for new and update versions of AutoCAD Release 14
software and increased revenues from the Company's geographic information
system ("GIS") and AEC product offerings.
Cost of revenues. Cost of revenues as a percentage of net revenues for the
nine months ended October 31, 1997 was 12 percent of net revenues, a one percent
decrease from the same period in the prior fiscal year. Cost of revenues as a
percentage of net revenues has been and may continue to 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 for the nine months ended
October 31, 1997 were 39 percent of net revenues, consistent with the same
period of the prior year. Actual spending for the period increased 14 percent
as a result of higher employee costs as well as increased marketing and sales
costs associated with the launch of AutoCAD Release 14 and other new and
enhanced product offerings.
Research and development. Research and development expenses as a percentage of
net revenues for the nine months ended October 31, 1997 increased to 21 percent
from 18 percent for the same period in the prior fiscal year. Actual spending,
including capitalized software costs of $2.2 million recorded during the first
half of fiscal year 1998, increased 34 percent as compared to the same period in
the prior fiscal year. The increase is due primarily to the addition of
software engineers, expenses associated with the development and translation of
new products, and incremental research and development personnel expenses
associated with fiscal year 1997 acquisitions and the March 1997 business
combination with Softdesk.
General and administrative. General and administrative expenses decreased 1
percent to 14 percent of net revenues for the nine months ended October 31,
1997, when compared to the same period of the prior fiscal year. In absolute
dollar terms, actual spending increased 9 percent from the same period of the
prior fiscal year, primarily due to increased employee-related expenses as
well as amortization expense associated with intangible assets recorded in
connection with the Softdesk merger.
12
Charge for acquired in-process research and development. On March 31, 1997,
the Company exchanged 2.9 million shares of its common stock for all of the
outstanding stock of Softdesk. This transaction was accounted for using the
purchase method of accounting with the purchase price being principally
allocated to capitalized software, purchased technologies, and intangible
assets. Approximately $55.1 million of the total purchase price represented the
value of in-process research and development that had not yet reached
technological feasibility and had no alternative future use and, as such, was
recorded as a charge for acquired in-process research and development. The
Company also recorded an additional $3.0 million charge for acquired in-process
research and development during the nine months ended October 31, 1997 which
represented technology acquired from another third party. During the nine
months ended October 31, 1996, the Company recorded a charge of $3.2 million for
acquired in-process research and development associated with the acquisition of
Teleos Research and a $1.5 million charge related to in-process research and
development associated with the purchase of certain assets of Argus
Technologies, Inc.
Interest and other income. Interest and other income for the nine months ended
October 31, 1997 was $7.4 million compared to $4.5 million for the same period
in the prior fiscal year. The increase was due to higher interest income
related to higher average cash, cash equivalents, and marketable securities
balances in the current fiscal year.
Provision for income taxes. The Company's effective income tax rate, excluding
the one-time charges for acquired in-process research and development associated
with the Softdesk merger, was 36.0 percent for the nine months ended October 31,
1997. The Company's effective income tax rate, excluding the one-time charges
for acquired in-process research and development associated with the Teleos
acquisition, was 35.5 percent for the nine months ended October 31, 1996. The
increase in the effective income tax rate in fiscal year 1998 was due to the
acquisition of certain intangible assets during the year, the amortization of
such assets not being deductible for tax purposes, and a change in the
geographic mix of operations resulting from the acquisition of Softdesk.
CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
Autodesk operates in a rapidly changing global environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks and the possible impact of these
factors on future results of operations.
Fluctuations in quarterly operating results. From time to time, the Company
experiences fluctuations in its quarterly operations as a result of periodic
release cycles, competitive factors and general economic conditions among other
things. In addition, the Company has experienced fluctuations in operating
results in interim periods in certain geographic regions due to seasonality. In
particular, the Company's operating results in Europe during the third fiscal
quarter are usually impacted by a slow summer period while the Asia/Pacific
operations typically experience seasonal slowing in the third and fourth fiscal
quarters.
The Company typically receives and fulfills a majority of its orders within a
particular quarter, with these orders frequently concentrated in the last weeks
or days of a fiscal quarter. As a result, the Company may not learn of revenue
shortfalls until late in a fiscal quarter. Additionally, the Company's operating
expenses are based in part on its expectations of future revenues and are
relatively fixed in the short term. Accordingly, any revenue shortfall below
expectations could have an immediate and significant adverse effect on the
Company's consolidated results of operations and financial condition.
Similarly, shortfalls in Autodesk's revenues or earnings from levels expected
by securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock. Moreover, the Company's stock
price is subject to the volatility generally associated with technology stocks
and may also be affected by broader market trends unrelated to performance.
13
Product concentration. Autodesk derives a substantial portion of its revenues
from sales of AutoCAD software, AutoCAD updates, and adjacent products which are
interoperable with AutoCAD. As such, any factor adversely affecting sales of
AutoCAD and AutoCAD updates, including such factors as product life cycle,
market acceptance, product performance and reliability, reputation, price
competition, and the availability of third-party applications, could have a
material adverse effect on the Company's business and consolidated results of
operations.
Product development and introduction. The software industry is characterized
by rapid technological change as well as changes in customer requirements and
preferences. The software products offered by the Company are complex and,
despite extensive testing and quality control, may contain errors or defects
("bugs"), especially when first introduced. There can be no assurance that
defects or errors will not be discovered in software products offered by the
Company. Such defects or errors could result in corrective releases to the
Company's software products, damage to Autodesk's reputation, loss of revenues,
an increase in product returns, or lack of market acceptance of its products,
any of which could have a material and adverse effect on the Company's business
and consolidated results of operations.
The Company believes that its future results will depend largely upon its
ability to offer products that compete favorably with respect to price,
reliability, performance, range of useful features, continuing product
enhancements, reputation, and training. The discovery of product defects could
result in the delay or cancellation of planned development projects, and could
have a material and adverse effect on the Company's business and consolidated
results of operations. Further, increased competition in design software
products could also have a negative impact on the Company's business and
consolidated results of operations.
Certain of the Company's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. Autodesk generally either owns or has an exclusive
license for use of the software developed by third parties. Because talented
development personnel are in high demand, there can be no assurance that
independent developers, including those who have developed products for the
Company in the past, will be able to provide development support to the Company
in the future. Similarly, there can be no assurance that the Company will be
able to obtain and renew license agreements on favorable terms, if at all, and
any failure to do so could have a material adverse effect on the Company's
business and consolidated results of operations.
International revenues. The Company anticipates that international revenues
will continue to account for a significant portion of its consolidated
revenues. Risks inherent in the Company's international sales include the
following: the impact of fluctuating exchange rates between the US dollar and
foreign currencies in markets where Autodesk does business; unexpected changes
in regulatory practices and tariffs; difficulties in staffing and managing
foreign operations; longer collection cycles; potential changes in tax laws;
and greater difficulty in protecting intellectual property. During the first
nine months of fiscal year 1998, changes in exchange rates from the same
period of the prior fiscal year adversely impacted revenues, principally due
to changes in the Japanese yen, the German mark and the French franc. The
Company's international results may also be impacted by changes in the general
economic and political conditions in these foreign markets. Specifically, the
Company's international revenues may be directly impacted by the economic
volatility currently experienced in certain Asia/Pacific countries. There can
be no assurance that these and other factors will not have a material adverse
effect on the Company's future international sales and consequently, on the
Company's business and consolidated results of operations.
14
Dependence on distribution channels. The Company sells its software products
primarily to distributors and dealers (value-added resellers, or "VARs").
Autodesk's ability to effectively distribute products depends in part upon the
financial and business condition of its VAR network. Although the Company has
not, to date, experienced any material problems with its VAR network, computer
software dealers and distributors are typically not highly capitalized and have
experienced difficulties during times of economic contraction and may do so in
the future. The loss of or a significant reduction in business with any one of
the Company's major international distributors or large US dealers could have a
material adverse effect on the Company's business and consolidated results of
operations in future periods.
Product returns. With the exception of certain European distributors,
agreements with the Company's VARs do not contain specific product-return
privileges. However, Autodesk permits its VARs to return product in certain
instances, generally during periods of product transition and during update
cycles. While the Company experienced a decrease in product returns both in
absolute dollars and as a percentage of consolidated revenues during the first
nine months of fiscal year 1998 as compared to the same period in the prior
fiscal year, management anticipates that product returns in future periods will
continue to be impacted by product update cycles, new product releases, and
software quality.
Autodesk establishes reserves, including reserves for stock balancing and
product rotation, based on estimated future returns of product and after taking
into account channel inventory levels, the timing of new product introductions,
and other factors. While the Company maintains strict measures to monitor
channel inventories and to provide appropriate reserves, actual product returns
may differ from the Company's reserve estimates, and such differences could be
material to Autodesk's consolidated financial statements.
Intellectual property. The Company relies on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality procedures, and contractual
provisions to protect its proprietary rights. Despite such efforts to protect
the Company's proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's software products or to obtain and use information that
Autodesk regards as proprietary. Policing unauthorized use of the Company's
software products is time-consuming and costly. Although the Company is unable
to measure the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that its competitors will not independently develop similar technology.
The Company expects that software product developers will be increasingly
subject to infringement claims as the number of products and competitors in its
market grows and the functionality of products in different market segments
overlap. There can be no assurance that infringement or invalidity claims (or
claims for indemnification resulting from infringement claims) will not be
asserted against the Company or that any such assertions will not have a
material adverse effect on its business. Any such claims, whether with or
without merit, could be time-consuming, result in costly litigation and
diversion of resources, cause product shipment delays, or require the Company to
enter into royalty or licensing agreements. Such royalty or license agreements,
if required, may not be available on acceptable terms, if at all, which could
have a material adverse effect on the Company's business and consolidated
results of operations.
The Company also relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in its products to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
on commercially reasonable terms, or that the software will be appropriately
supported, maintained, or enhanced by the licensors. The loss of licenses, or
inability to support, maintain, and enhance any such software, could result in
increased costs, or in delays or reductions in product shipments until
equivalent software could be developed, identified, licensed, and integrated,
which would have a material adverse effect on the Company's business and
consolidated results of operations.
15
Risks associated with recent acquisitions and investments. The Company
periodically acquires or invests in businesses, software products and
technologies which are complementary to the Company's business through strategic
alliances, debt and equity investments, joint ventures and the like. The risks
associated with such acquisitions or investments include, among others, the
difficulty of assimilating the operations and personnel of the companies, the
failure to realize anticipated synergies and the diversion of management's time
and attention. In addition, such investments and acquisitions may involve
significant transaction-related costs. There can be no assurance that the
Company will be successful in overcoming such risks or that such investments and
acquisitions will not have a material adverse impact upon the Company's
business, financial condition or results of operations. In addition, such
investments and acquisitions may contribute to potential fluctuations in
quarterly results of operations due to merger-related costs and charges
associated with eliminating redundant expenses or write-offs of impaired assets
recorded in connection with acquisitions, any of which could negatively impact
results of operations for a given period or cause lack of linearity quarter to
quarter in the Company's operating results or financial condition.
The Company consummated several acquisitions in fiscal year 1997, including
acquisitions of Teleos Research, Argus Technologies, Inc., and Creative Imaging
Technologies, Inc. In the first quarter of fiscal year 1998, Autodesk acquired
Softdesk. The Company is integrating the operations acquired in the Softdesk
merger with its own. There can be no assurance that the anticipated benefits of
the Softdesk merger or other business combinations completed in fiscal year 1997
or 1998 will be realized. The Softdesk merger entails a number of risks,
including managing a larger and more geographically disparate business. If
Autodesk is unsuccessful in integrating and managing the Softdesk business and
the businesses of other recently acquired entities, the Company's business and
consolidated results of operations in future periods could be adversely
affected.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $153.9 million at October 31, 1997, compared to $160.4
million at January 31, 1997. Cash, cash equivalents, and marketable securities,
which consist primarily of high-quality municipal bonds, tax-advantaged money
market instruments and US treasury notes, totaled $318.0 million at October 31,
1997, compared to $286.3 million at January 31, 1997. The $31.7 million increase
in cash, cash equivalents, and marketable securities was due primarily to cash
generated from operations ($102.0 million) and cash proceeds from the issuance
of shares through employee stock option and stock purchase programs ($74.3
million). This increase was partially offset by cash used to repurchase shares
of the Company's common stock under its repurchase programs ($116.1 million); to
purchase software technologies and capitalize software costs ($11.6 million); to
purchase computer equipment, furniture, and leasehold improvements ($10.5
million); and to pay dividends on the Company's common stock ($8.6 million).
The Company has an unsecured $40 million bank line of credit that may be used
from time to time to facilitate short-term cash flow. At October 31, 1997,
there were no borrowings outstanding under this credit agreement, which expires
in January 1999.
The Company's principal commitments at October 31, 1997 consisted of
obligations under operating leases for facilities.
Purchased technologies increased $18.1 million from January 31, 1997 to
October 31, 1997. The increase is largely due to the acquisition of the rights
to specific three-dimensional modeling, animation and design software, which was
previously licensed and subject to royalty payments. This transaction is not
expected to have a material impact on results of operations for current or
future periods.
16
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; repurchases of the
Company's common stock; 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 cash requirements for fiscal year 1998.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising from the normal
course of business activities. In management's opinion, resolution of these
matters is not expected to have a material adverse impact on the Company's
consolidated results of operations or its financial position. However,
depending on the amount and timing, an unfavorable resolution of a matter could
materially affect the Company's future results of operations or cash flows in a
particular period.
Additionally, reference is made to the Form 10-Q filed with the Securities and
Exchange Commission for the period ended April 30, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended October 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: December 12, 1997
AUTODESK, INC.
(Registrant)
/S/ CAROL A. BARTZ
-------------------
Carol A. Bartz
Chairman and Chief Executive Officer
/S/ STEVE CAKEBREAD
--------------------
Steve Cakebread
Vice President and Chief Financial Officer
(Principal Accounting Officer)
17
5
1,000
9-MOS
JAN-31-1998
OCT-31-1997
43,024
169,956
85,872
7,527
6,397
351,667
135,687
94,040
568,966
197,751
0
0
0
304,153
34,068
568,966
435,275
435,275
52,278
380,058
0
1,140
0
9,190
23,144
(13,954)
0
0
0
(13,954)
(.30)
0
