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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 JULY 31, 1998
OR
- --- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 0-14338
AUTODESK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2819853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 MCINNIS PARKWAY
San Rafael, California 94903
(Address of principal executive offices)
TELEPHONE NUMBER (415) 507-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- -----
As of September 2, 1998, there were 46,382,000 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 six months ended July 31, 1998 and 1997..... 3
Condensed Consolidated Balance Sheet
July 31, 1998 and January 31, 1998.................... 4
Condensed Consolidated Statement of Cash Flows
Six months ended July 31, 1998 and 1997............... 6
Notes to Condensed Consolidated Financial Statements.. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 21
ITEM 5. OTHER INFORMATION................................... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................... 21
SIGNATURES.......................................... 22
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 Six months ended
July 31, July 31,
------------------- ---------------------
1998 1997 1998 1997
--------- -------- --------- ----------
Net revenues $186,638 $154,096 $373,844 $273,080
Costs and expenses:
Cost of revenues 18,296 18,725 37,983 34,766
Marketing and sales 65,485 58,750 130,698 111,356
Research and development 35,133 30,426 70,510 58,035
General and administrative 28,190 20,726 55,466 39,163
Nonrecurring charges 37,692 - 37,692 58,087
Gain on litigation settlement (18,200) - (18,200) -
-------- -------- -------- --------
166,596 128,627 314,149 301,407
-------- -------- -------- --------
Income (loss) from operations 20,042 25,469 59,695 (28,327)
Interest and other income, net 6,419 2,399 8,646 4,774
-------- -------- -------- --------
Income (loss) before income taxes 26,461 27,868 68,341 (23,553)
Provision for income taxes 17,349 10,033 31,588 11,357
-------- -------- -------- --------
Net income (loss) $ 9,112 $ 17,835 $ 36,753 $(34,910)
======== ======== ======== ========
Basic net income (loss) per share $ 0.20 $ 0.37 $ 0.79 $ (0.78)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.18 $ 0.34 $ 0.74 $ (0.78)
======== ======== ======== ========
Shares used in computing
basic net income (loss) per share 46,610 48,000 46,500 45,045
======== ======== ======== ========
Shares used in computing
diluted net income (loss) per share 49,400 51,880 49,670 45,045
======== ======== ======== ========
See accompanying notes.
3
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(In thousands)
July 31, 1998 January 31, 1998
------------- -----------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 43,402 $ 96,089
Marketable securities 249,998 100,399
Accounts receivable, net 84,079 60,856
Inventories 6,358 7,351
Deferred income taxes 28,486 27,577
Prepaid expenses and other current assets 17,051 15,430
--------- --------
Total current assets 429,374 307,702
--------- --------
Marketable securities, including a restricted
balance of $18,000 at January 31, 1998 - 104,831
Computer equipment, furniture, and leasehold
improvements, at cost:
Computer equipment and furniture 126,133 117,434
Leasehold improvements 21,560 20,505
Less accumulated depreciation (108,391) (98,800)
--------- --------
Net computer equipment, furniture, and leasehold improvements 39,302 39,139
Purchased technologies and capitalized software, net 36,241 31,553
Goodwill, net 36,751 16,995
Deferred income taxes 7,086 13,782
Other assets 16,912 19,681
--------- --------
$ 565,666 $533,683
========= ========
See accompanying notes.
4
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands)
July 31, 1998 January 31, 1998
-------------- -----------------
(Unaudited) (Audited)
Current liabilities:
Accounts payable $ 27,500 $ 26,417
Accrued compensation 30,054 34,962
Accrued income taxes 84,575 76,465
Deferred revenues 17,747 18,934
Other accrued liabilities 54,098 42,709
-------- --------
Total current liabilities 213,974 199,487
-------- --------
Deferred income taxes 492 481
Litigation accrual - 29,328
Other liabilities 2,007 1,255
Stockholders' equity:
Common stock 337,284 299,315
Retained earnings 30,612 20,472
Foreign currency translation adjustment (18,703) (16,655)
-------- --------
Total stockholders' equity 349,193 303,132
-------- --------
$565,666 $533,683
======== ========
See accompanying notes.
5
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
July 31,
---------------------
1998 1997
-------- --------
Operating activities
Net income (loss) $ 36,753 $(34,910)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Charge for acquired in-process research and
development 28,806 58,087
Depreciation and amortization 24,243 20,105
Gain on litigation settlement (20,900) -
Net gain on disposition of business unit (1,307) -
Write-off of purchased technology 2,233 -
Changes in operating assets and liabilities (12,100) 11,649
--------- --------
Net cash provided by operating activities 57,728 54,931
--------- --------
Investing activities
Purchases of marketable securities (44,768) (61,005)
Business combinations, net of cash acquired (69,279) (5,766)
Purchases of computer equipment, furniture, and leasehold
improvements (9,859) (7,924)
Proceeds from disposition of business unit 5,137 -
Purchases of software technologies, capitalization of software
costs, and other (3,416) 6,857
--------- --------
Net cash used in investing activities (122,185) (67,838)
--------- --------
Financing activities
Proceeds from issuance of common stock 66,226 29,250
Repurchase of common stock (48,866) (38,243)
Dividends paid (5,590) (5,748)
--------- --------
Net cash provided by (used in) financing activities 11,770 (14,741)
--------- --------
Net decrease in cash and cash equivalents (52,687) (27,648)
Cash and cash equivalents at beginning of year 96,089 64,814
--------- --------
Cash and cash equivalents at end of quarter $ 43,402 $ 37,166
========= ========
Supplemental cash flow information:
Cash paid during the period for income taxes $ 1,496 $ 4,280
========= ========
Supplemental noncash information:
Common stock received in relation to the
equity collar (see Note 5) $ 4,265 $ -
========= ========
Common stock issued in connection with the
acquisition of Softdesk, Inc. $ - $ 92,021
========= ========
See accompanying notes.
6
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The condensed consolidated financial statements at July 31, 1998 and for the
three- and six- 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 July 31, 1998 should be read in conjunction
with the consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report to Stockholders
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1998. The results of operations for the three and
six months ended July 31, 1998 are not necessarily indicative of the results for
the entire fiscal year ending January 31, 1999.
2. Nonrecurring Charges
--------------------
On May 4, 1998, the Company entered into an agreement with Genius CAD Software
GmbH ("Genius"), a German limited liability company to purchase various
mechanical computer-aided-design ("CAD") software applications and technologies
(the "acquisition"). In consideration for this acquisition, the Company paid
Genius approximately $69 million in cash. The acquisition has been accounted
for using the purchase method of accounting with the purchase price being
principally allocated to in-process research and development, developed
technology, assembled workforce and goodwill. Amortization of these purchased
intangibles is provided on the straight-line basis over the respective useful
lives of the assets, ranging from three to seven years. The operating results
of Genius, which have not been material in relation to those of the Company,
have been included in Autodesk's consolidated financial statements from the
acquisition date.
In-Process Research and Development
Management estimates that $29 million of the purchase price represents purchased
in-process technology that has not yet reached technological feasibility and has
no alternative future use. Accordingly, this amount was expensed in the second
quarter of the current fiscal year following consummation of the acquisition.
The value assigned to purchased in-process technology, based on a valuation
prepared by an independent third-party appraisal, 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.
Developed technology
To determine the value of the developed technology ($13.4 million), the expected
future cash flows of the existing developed technologies were discounted taking
into account the characteristics and applications of the product, the size of
existing markets, growth rates of existing and future markets as well as an
evaluation of past and anticipated product-life cycles.
Assembled work force
To determine the value of the assembled work force ($1.0 million), the Company
evaluated the work force in place at the acquisition date and utilized the cost
approach to estimate the value of replacing the
7
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.
During the three months ended July 31, 1998, the Company recorded charges of
approximately $8.9 million relating to restructuring charges associated with the
consolidation of certain development centers; the write-off of purchased
technologies associated with these operations; staff reductions in Asia Pacific
in response to current economic conditions in the region; and costs in relation
to potential legal settlements.
On March 31, 1997, the Company exchanged 2.9 million shares of its common stock
for all of the outstanding stock of Softdesk, Inc. Based on the value of
Autodesk stock and options exchanged, the transaction, including transaction
costs, was valued at approximately $94 million. This transaction was accounted
for using the purchase method of accounting with the purchase price being
principally allocated to capitalized software, purchased technologies, and
intangible assets. Approximately $55.1 million of the total purchase price
represented the value of in-process research and development that had not yet
reached technological feasibility and had no alternative future use.
Approximately $3.0 million of technology acquired from 3D/Eye during the first
quarter of fiscal year 1998 also represented the value of in-process research
and development that had not yet reached technological feasibility and had no
alternative future use. The $55.1 million and the $3.0 million were charged to
operations in the first quarter of fiscal year 1998.
3. Gain on Litigation Settlement
-----------------------------
In December 1994, a $25.5 million judgment was entered into against the Company
on a claim of trade-secret misappropriation brought by Vermont Microsystems, Inc
("VMI"). The initial judgment and related expenses were accrued in fiscal year
1995, as well as interest expense in subsequent periods in accordance with this
judgment. The Company appealed this decision, and in May 1998, final judgment
was entered in the VMI litigation in the amount of $7.8 million plus accrued
interest. Following entry of judgment, the Company made a final payment of
approximately $8.4 million, including interest, to VMI. During the quarter
ended July 31, 1998, the Company recognized $18.2 million and $2.7 million as
operating income and interest income, respectively, to reflect the remaining
unutilized litigation and related interest accruals.
4. Recently Issued Accounting Standards
------------------------------------
In the first quarter of fiscal year 1999, the Company adopted the provisions of
the American Institute of Certified Public Accountants' Statement of Position
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This standard requires companies to capitalize qualifying
computer software costs which are incurred during the application development
stage and amortize them over the software's estimated useful life. The adoption
of this standard did not have a material effect on the Company's consolidated
operating results or financial position.
5. Common Stock Repurchase Programs
--------------------------------
The Company sold put warrants to an independent third party in December 1997
that entitled the holder of the warrants to sell 1.5 million shares of common
stock to the Company at $38.12 per share. Additionally, the Company purchased
call options from the same independent third party that entitled the Company to
buy 1 million shares at $39.88 per share. The premiums received with respect to
the equity options totaled $4.5 million and equaled the premiums paid.
Consequently, there was no exchange of cash. The put warrants permitted a net
share settlement at the Company's option. In March 1998, the Company exercised
the call option, electing the net share settlement option and retired
approximately 97,000 shares of its common stock. The put warrants expired
unexercised.
8
6. Net Income Per Share
--------------------
Basic net income per share is calculated using the weighted average number of
common shares outstanding. Diluted net income per share is computed using the
weighted average number of common shares outstanding and dilutive common stock
equivalents outstanding during the period. A reconciliation of the numerators
and denominators used in the basic and diluted net income (loss) per share
amounts follows:
Three months ended Six months ended
July 31, July 31,
------------------ -------------------
1998 1997 1998 1997
-------- -------- -------- ---------
Numerator:
Numerator for basic
and diluted per share
amounts--net income (loss) $ 9,112 $17,835 $36,753 $(34,910)
======== ======== ======== =========
Denominator:
Denominator for basic
net income (loss) per share--
weighted average shares 46,610 48,000 46,500 45,045
Effect of dilutive common
stock options 2,790 3,880 3,170 -
-------- -------- -------- ---------
Denominator for
dilutive net income (loss)
per share 49,400 51,880 49,670 45,045
======== ======== ======== =========
7. Comprehensive Income
--------------------
Effective February 1, 1998, Autodesk adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. This Statement requires
unrealized gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to
the requirements of SFAS 130.
Autodesk's total comprehensive income was as follows:
Three months ended Six months ended
July 31, July 31,
------------------- ---------------------
1998 1997 1998 1997
--------- -------- --------- ----------
Net income (loss) $ 9,112 $17,835 $36,753 $(34,910)
Other comprehensive income (loss) (1,977) 6,544 (2,490) 2,615
--------- -------- --------- ----------
Total comprehensive income (loss) $ 7,135 $24,379 $34,263 $(32,295)
========= ======== ========= ==========
9
8. Restructuring Charges
---------------------
During the quarter ended July 31, 1998, the Company's management approved
restructuring plans, which include initiatives to address current economic
conditions in the Asia Pacific region, consolidate duplicative facilities and
reduce overhead. These plans resulted in a charge of $5.4 million, which
includes $2.3 million for the cost of involuntary employee separation benefits
relating to approximately 87 employees. Employee separation benefits include
severance, medical and other benefits. Employee separation will affect certain
engineers and sales and marketing employees. The remaining charge of $3.1
million relates to other exit costs, namely the write-off of purchased
technologies, lease termination buyout costs, the disposal of fixed assets in
these regions, and professional fees. As of July 31, 1998, the number of
employee separations due to restructuring actions was 32 and actual payments of
approximately $331,000 have been made.
9. Subsequent Events
-----------------
On August 20, 1998, the Company announced a definitive agreement to acquire
Discreet Logic Inc. ("Discreet"), a company that develops, assembles, markets
and supports non-linear, digital systems and software for creating, editing and
compositing imagery and special effects for film, video, and HDTV. Under the
terms of the agreement, the Company will exchange 0.525 shares of its common
stock for each outstanding share of Discreet. The transaction is expected to
result in the issuance of between 15.8 million and 16.0 million shares of
Autodesk common stock. The transaction, which will be accounted for using the
pooling of interests method, is expected to be completed during the Company's
fourth fiscal quarter, subject to certain regulatory approvals and the approval
of Discreet and Autodesk shareholders.
On September 14, 1998, Discreet notified the Company that it had been named as a
defendant in a purported class action lawsuit filed in California Superior Court
for the County of Marin on behalf of owners of Discreet's common stock. The
complaint alleges that the defendants breached their fiduciary duties in
connection with the previously announced acquisition transaction with the
Company. Discreet believes the claims asserted in the complaint are without
merit and intends to vigorously contest them. The Company does not expect the
lawsuit to affect consummation of the transaction with Discreet.
10
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 16, AS WELL AS FACTORS SET FORTH IN AUTODESK'S ANNUAL REPORT ON
FORM 10-K.
Results of Operations
Three Months Ended July 31, 1998 and 1997
- -----------------------------------------
Net revenues. The Company's second quarter net revenues of $186.6 million
increased 21 percent from the second quarter of the prior fiscal year. The
Company achieved significant net revenue growth in the Americas and Europe when
compared to the same period in the prior fiscal year, while net revenues
decreased in Asia Pacific. The Company recorded net revenues in the Americas
of $88.6 million, a 23 percent increase from the same period in the prior fiscal
year, and net revenues in Europe of $72.5 million, an increase of 52 percent.
This net revenue growth was the result of strong demand for products offered by
the Company's Design Solutions and Personal Solutions operating segments such as
AutoCAD Mechanical Desktop 2.0, AutoCAD LT97, AutoCAD Map 2.0, and incremental
revenues associated with the May 1998 acquisition of certain assets from Genius
(see Note 2 to the condensed consolidated financial statements). Sales of
AutoCAD and AutoCAD upgrades accounted for approximately 65 percent and 74
percent of the Company's consolidated net revenues in the second quarter of
fiscal years 1999 and 1998, respectively. The stronger value of the US dollar,
relative to certain international currencies, primarily the Japanese yen and the
Australian dollar, negatively impacted net revenues in the second quarter of the
current fiscal year by $4.4 million when compared to the same period in the
prior fiscal year. International sales, including exports from the U.S.,
accounted for approximately 57 percent of the Company's revenues in the first
quarter of fiscal year 1999 as compared to 58 percent in the same period of the
prior fiscal year.
The Company experienced a decline in Asia Pacific net revenues during the second
quarter of fiscal year 1999 compared to the corresponding period of the prior
year due to weak economic conditions in the region, most notably Japan and South
Korea. The Company expects that these adverse conditions in Asia Pacific will
continue in the short term, and that they may continue to adversely affect the
Company's revenue and earnings.
The Company derives a substantial portion of its revenues from sales of AutoCAD
software, AutoCAD upgrades, and adjacent products which are interoperable with
AutoCAD. As such, any factor adversely affecting sales of AutoCAD and AutoCAD
upgrades, including such factors as product life cycle, market acceptance,
product performance and reliability, reputation, price competition, and the
availability of third-party applications, could have a material adverse effect
on the Company's business and consolidated results of operations. Additionally,
slowdowns in any of the Company's geographical markets could also have a
material adverse impact on the Company's business and consolidated results of
operations.
Product returns, consisting principally of stock rotation, are recorded as a
reduction of revenues and represented approximately 4 percent and 6 percent of
consolidated revenues in the second quarter of fiscal years 1999 and 1998,
respectively. The decrease in product returns as a percentage of revenues is
primarily due to the Company's continued focus on channel inventory management
and sell through sales activities and programs. Although product returns
decreased as a percentage of consolidated revenues,
11
comparing the second quarter of fiscal year 1999 to the same period in the prior
year, management anticipates that the level of product returns in future periods
will continue to be impacted by the timing of new product releases, as well as
the quality and market acceptance of new products.
Cost of revenues. When expressed as a percentage of net revenues, cost of
revenues decreased from 12 percent of net revenues in the second quarter of
fiscal year 1998 to 10 percent of net revenues in the corresponding period of
the current fiscal year. This reduction is largely due to continued efficiencies
in production and distribution activities. Cost of revenues as a percentage of
net revenues has been and may continue to be impacted by the mix of product
sales, software amortization costs, royalty rates for licensed technology
embedded in Autodesk's products, and the geographic distribution of sales.
Marketing and sales. Marketing and sales expenses were 35 percent and 38
percent of net revenues in the second quarter of fiscal years 1999 and 1998,
respectively. Actual spending increased 11 percent as a result of higher
employee costs and incremental spending related to the May 1998 acquisition of
certain assets from Genius (see Note 2). The Company expects to continue to
invest in marketing and sales of its products, to develop market opportunities,
and to promote Autodesk's competitive position. Accordingly, the Company
expects marketing and sales expenses to continue to be significant, both in
absolute dollars and as a percentage of net revenues.
Research and development. Research and development expenses represented 19
percent and 20 percent of net revenues in the second quarter of fiscal years
1999 and 1998, respectively. Actual research and development spending
(including capitalized software development costs of $434,000 in the second
quarter of fiscal year 1998) increased by 14 percent from the same period in the
prior fiscal year due to the addition of software engineers, expenses associated
with the development of new and enhanced products, including the next release of
AutoCAD, and incremental costs associated with the acquisition of certain assets
from Genius (see Note 2). The Company anticipates that research and development
expenses will increase in future periods as a result of product development
efforts by the Company's market groups and incremental personnel costs.
Additionally, the Company intends to continue recruiting and hiring experienced
software developers and to consider the licensing and acquisition of
complementary software technologies and businesses.
General and administrative. General and administrative expenses were 15 percent
of net revenues in the second quarter of fiscal year 1999 as compared to 14
percent of net revenues in the second quarter of the prior fiscal year. In
absolute dollar terms, general and administrative expenses increased 36 percent
from the same period of the prior fiscal year, resulting primarily from
increased employee-related expenses, amortization of intangibles recorded in
connection with the acquisition of certain assets from Genius (see Note 2),
costs related to the Company's Year 2000 compliance program, and costs
associated with the ongoing nonpublic Federal Trade Commission investigation of
Autodesk's business practices. The Company currently expects that general and
administrative expenses will increase in future periods to support spending on
infrastructure, including continued investment in Autodesk's worldwide
information systems and making any additional corrections to the Company's
infrastructure in connection with its Year 2000 compliance program;
and to amortize goodwill and other intangible assets associated with recent
business combinations.
Nonrecurring charges--Genius acquisition. On May 4, 1998, the Company entered
into an agreement with Genius CAD Software GmbH ("Genius"), a German limited
liability company to purchase various mechanical computer-aided-design ("CAD")
software applications and technologies (the "acquisition"). In consideration for
this acquisition, the Company paid Genius approximately $69 million in cash. The
acquisition has been accounted for using the purchase method of accounting.
In connection with the acquisition, the Company recorded a charge for in-process
research and development of $29 million, all of which was recorded in the
quarter ended July 31, 1998. The value was computed using a discounted cash flow
analysis on the anticipated income stream of the related product sales. The
discounted cash flow analysis was based on management's forecast of future
revenues, costs 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
12
application software designed to work in conjunction with Autodesk's mechanical
CAD products. The Genius technology and product families identified includes
Genius Desktop, Genius AutoCAD and Genius AutoCAD LT.
Revenues and related expenses for the in-process technology were estimated from
the acquisition date through the end of Autodesk's fiscal year 2004.
Management's analysis considered anticipated product release dates for the
Company's mechanical CAD products, as well as release dates for the various
acquired Genius products and technologies which are interpoerable with
Autodesk's mechanical CAD products. The overall technology life was estimated to
be approximately three years for the Genius Desktop products, and approximately
six years for all other Genius products and technologies purchased by Autodesk.
Management's aggregate projections reflect moderate revenue growth in earlier
periods resulting from expansion in the Company's existing channels,
particularly in North America and Asia Pacific, which historically have not been
significant for the Genius products, as well as anticipated growth in the
overall mechanical CAD market.
The cost to complete the in-process technology was also based on management's
estimates, which considered the number of man-months required to reach
technological feasibility for each of the Genius projects classified as
"in-process"; the type of professional and engineering staff involved in the
completion process and their fully burdened monthly salaries. Management
estimated the direct costs to achieve technological feasibility to be
approximately $2.5 million, covering a period of time extending into the first
half of Autodesk's fiscal year 2000. Beyond this period, management estimates
significantly less expense in supporting and maintaining active products
identified at the acquisition date to be in-process technology. The effective
tax rate utilized in the analysis of in-process technology was 34 percent, which
reflects the Company's current combined federal and state statutory tax rate,
exclusive of nonrecurring charges.
Management discounted the net cash flows of the in-process technology to its
present value using a discount rate of 20 percent, which was determined to be
higher than Autodesk's weighted average cost of capital ("WACC") due to the fact
that the technology had not yet reached technological feasibility as of the date
of valuation. In utilizing a discount rate greater than Autodesk's WACC,
management has reflected the risk premium associated with achieving the
forecasted cash flows associated with these projects.
If the in-process projects contemplated in management's forecast are not
successfully developed, future revenue and profitability of Autodesk may be
adversely affected. Additionally, the value of other intangible assets acquired
from Genius may become impaired.
Revenues for developed technology were estimated by management for the remainder
of fiscal year 1999 through fiscal year 2004. Management's estimates reflect a
gradual decline in revenues from developed technologies after considering
historical product life cycles and anticipated product release dates. While
revenues derived from both developed and in-process technologies are estimated
to decline over the next several fiscal years, overall revenues attributable to
the Genius products and technologies are anticipated to grow in absolute dollars
and as a percentage of aggregate revenue to reflect the growth of future (yet-
to-be-developed) technologies. Operating expenses, including general and
administrative, marketing and sales, were based on anticipated costs after the
Genius operations were merged into Autodesk's operating structure. Because
Autodesk and Genius share the same marketing and distribution channel, operating
expenses related to the developed technology were estimated to be lower than
the historical operating expense structure of Autodesk.
Management discounted the net cash flows for developed technology to its present
value using a discount rate of 15 percent which reflects Autodesk's current
weighted average costs of capital.
If the projects contemplated in management's forecast are not successfully
developed, future revenue and profitability of Autodesk may be adversely
affected. Additionally, the value of other intangible assets acquired from
Genius may become impaired.
13
Nonrecurring charges -- Other. During the three months ended July 31, 1998, the
Company recorded charges of approximately $8.9 million relating to restructuring
charges associated with the consolidation of certain development centers; the
write-off of purchased technologies associated with these operations; staff
reductions in Asia Pacific in response to current economic conditions in the
region; and costs in relation to potential legal settlements.
Gain on litigation settlement. The Company recorded a $25.5 million nonrecurring
charge during fiscal year 1995 on a claim of trade-secret misappropriation
brought by Vermont Microsystems, Inc. ("VMI"). As of the end of the first
quarter of fiscal year 1999, the total amount accrued related to the initial
judgment plus accrued interest was approximately $29.3 million. The Company
appealed this decision, and in May 1998, final judgment was entered in the VMI
litigation and a corresponding final payment of approximately $8.4 million,
including interest, was made to VMI. During the quarter ended July 31, 1998, the
Company recognized $18.2 million and $2.7 million as operating income and
interest income, respectively, to reflect the remaining unutilized litigation
and related interest accruals.
Interest and other income. Interest and other income was $6.4 million in the
second quarter of fiscal year 1999 compared to $2.4 million in the corresponding
period of the prior year. The increase is largely due to the reversal of $2.7
million into interest income related to the VMI settlement (see Note 3) and the
$1.3 million net gain on the disposition of a business unit.
Provision for income taxes. Excluding the nonrecurring $29 million charge for
in-process research and development expenses associated with the acquisition of
certain assets from Genius, the Company's effective income tax rate was 34
percent in the second quarter of fiscal year 1999 compared to 36 percent in the
same quarter of the prior fiscal year. The decrease in the effective income tax
rate was due to incremental tax benefits associated with the Company's foreign
sales corporation and foreign earnings that are taxed at rates different than
the U.S. statutory rate. The tax provision includes a $1.6 million benefit on
the $29 million charge for in-process research and development. The benefit
from this charge is less than the U.S. statutory rate since a portion of it will
not be deductible for U.S. tax purposes. Additionally, a valuation allowance
has been established for a portion of the deferred tax asset which is deductible
for U.S. tax purposes over an extended period of time.
The Company's United States income tax returns for fiscal years ended January
31, 1992 through 1996, are under examination by the Internal Revenue Service
("IRS"). On August 27, 1997, the IRS issued a Notice of Deficiency proposing
increases to the amount of the Company's federal income taxes for fiscal years
1992 and 1993. On November 25, 1997, the Company filed a petition with the
United States Tax Court to contest these alleged tax deficiencies. The
resolution of these alleged tax deficiencies and any adjustments that may
ultimately result from these examinations are not expected to have a material
adverse impact on the Company's consolidated results of operations or its
financial position.
RESULTS OF OPERATIONS
Six Months Ended July 31, 1998 and 1997
- ---------------------------------------
Net revenues. Autodesk's net revenues for the six months ended July 31, 1998
were $373.8 million, which represented a 37 percent increase from the same
period of the prior fiscal year. The increase resulted from strong demand for
AutoCAD Release 14, which began shipping in the second quarter of fiscal year
1998, and higher sales of vertical products offered by the Company's Design
Solutions and Personal Solutions operating segments.
Cost of revenues. Cost of revenues as a percentage of net revenues for the six
months ended July 31, 1998 was 10 percent, compared to 13 percent in the same
period in the prior fiscal year. This reduction is largely due to efficiencies
in production and distribution activities. Cost of revenues as a percentage of
net revenues has been and may continue to be impacted by the mix of product
sales, software amortization, royalty rates for licensed technology embedded in
Autodesk's products, and the geographic distribution of sales.
14
Marketing and sales. As a percentage of net revenues, marketing and sales
expenses decreased from 41 percent in the six months ended July 31, 1997 to 35
percent in the corresponding period of the current fiscal year. Actual spending
for this period increased 17 percent as a result of higher employee costs as
well as increased marketing costs associated with the launch of products
acquired from Genius and other new and enhanced product offerings.
Research and development. Research and development expenses as a percentage of
net revenues for the six months ended July 31, 1998 decreased to 19 percent from
21 percent for the same period in the prior fiscal year. Actual research and
development spending (including capitalized software costs of $2,184,000
recorded during the first six months of fiscal year 1998) increased 17 percent
as compared to the same period in the prior fiscal year. The absolute dollar
increase is due primarily to the addition of software engineers, expenses
associated with the development and translation of new products including
AutoCAD Release 14, and incremental research and development personnel expenses
associated with the acquisition of certain assets from Genius during May, 1998.
General and administrative. General and administrative expenses were 15 percent
of net revenues for the six months ended July 31, 1998, and 14 percent of net
revenues in the same period of the prior fiscal year. In absolute dollar terms,
general and administrative expenses increased 42 percent for the six months
ended July 31, 1998 from the same period of the prior fiscal year, primarily
because of increased employee-related expenses, amortization of intangibles
recorded in connection with the Softdesk merger and the acquisition of certain
assets from Genius, costs incurred to ensure that the Company's infrastructure
is year 2000 compliant, and costs incurred in the ongoing nonpublic FTC
investigation.
Nonrecurring charges--Genius acquisition. The Genius acquisition comprised of
approximately $29 million of in-process research and development that had not
yet reached technological feasibility and had no alternative future use and,
accordingly, this amount was charged to operations in the second quarter of
fiscal year 1999.
Nonrecurring charges--Other. During the three months ended July 31, 1998, the
Company recorded charges of approximately $8.9 million relating to restructuring
charges associated with the consolidation of certain development centers; the
write-off of purchased technologies associated with these operations; staff
reductions in Asia Pacific in response to current economic conditions in the
region; and costs in relation to potential legal settlements.
On March 31, 1997, the Company exchanged 2.9 million shares of its common stock
for all of the outstanding stock of Softdesk Inc. Based on the value of
Autodesk stock and options exchanged, the transaction, including transaction
costs, was valued at approximately $94 million. This transaction was accounted
for using the purchase method of accounting with the purchase price being
principally allocated to capitalized software, purchased technologies, and
intangible assets. Approximately $55.1 million of the total purchase price
represented the value of in-process research and development that had not yet
reached technological feasibility and had no alternative future use.
Approximately $3.0 million of technology acquired from 3D/Eye during the first
quarter of fiscal year 1998 also represented the value of in-process research
and development that had not yet reached technological feasibility and had no
alternative future use. The $55.1 million and the $3.0 million were charged to
operations in the first quarter of fiscal year 1998.
Gain on litigation settlement. The Company recorded a $25.5 million nonrecurring
charge during fiscal year 1995 on a claim of trade-secret misappropriation
brought by Vermont Microsystems, Inc. ("VMI"). As of the end of the first
quarter of fiscal year 1999, the total amount accrued related to the initial
judgment plus accrued interest was approximately $29.3 million. The Company
appealed this decision, and in May 1998, final judgment was entered in the VMI
litigation and a corresponding final payment of approximately $8.4 million was
made to VMI. During the quarter ended July 31, 1998, the Company recognized
$18.2 million and $2.7 million to operating income and interest income,
respectively, to reflect the remaining unutilized litigation and related
interest accruals.
15
Interest and other income. Interest and other income for the six months ended
July 31, 1998 was $8.6 million as compared to $4.8 million for the same period
in the prior fiscal year. The increase is largely due to the interest portion
of the VMI settlement (see Note 3 to the condensed consolidated financial
statements) and the net gain on the disposition of one of the Company's business
units.
Provision for income taxes. The Company's effective income tax rate, excluding
the one-time charge for acquired in-process research and development, was 34.0
percent for the first half of fiscal year 1999 as compared to 36.0 percent for
the same period in the prior fiscal year. The decrease in the effective income
tax rate was due to incremental tax benefits associated with the Company's
foreign sales corporation and foreign earnings that are taxed at rates different
than the U.S. statutory rate. The $1.6 million benefit from the $29 million
charge for in-process research and development associated with the acquisition
of certain assets from Genius is less than the U.S. statutory rate as a portion
of it will not be deductible for U.S. tax purposes. Additionally, a valuation
allowance has been established for a portion of the deferred tax asset which is
deductible for U.S. tax purposes over an extended period of time.
The Company's United States income tax returns for fiscal years ended January
31, 1992 through 1996, are under examination by the Internal Revenue Service
("IRS"). On August 27, 1997, the IRS issued a Notice of Deficiency proposing
increases to the amount of the Company's federal income taxes for fiscal years
1992 and 1993. On November 25, 1997, the Company filed a petition with the
United States Tax Court to contest these alleged tax deficiencies. Resolution
of these alleged tax deficiencies and any adjustments that may ultimately result
from these examinations are not expected to have a material adverse impact on
the Company's consolidated results of operations or its financial position.
CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
Autodesk operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. The following discussion
highlights some of these risks and the possible impact of these factors on
future results of operations.
Competition. The software industry has limited barriers to entry, and the
availability of desktop computers with continually expanding capabilities at
progressively lower prices contributes to the ease of market entry. Because of
these and other factors, competitive conditions in the industry are likely to
intensify in the future. Increased competition could result in price
reductions, reduced revenues and profit margins, and loss of market share, any
of which could adversely affect Autodesk's business, consolidated results of
operations, and financial condition.
Autodesk believes that the principal factors affecting competition in its
markets are price, product reliability, performance, range of useful features,
continuing product enhancements, reputation, and training. In addition, the
availability of third-party application software is a competitive factor within
the CAD market. Autodesk believes that it competes favorably in these areas and
that its competitive position will depend, in part, upon its continued ability
to enhance existing products, and to develop and market new products.
In April 1998, the Company received notice that the Federal Trade Commission
("FTC") has undertaken a nonpublic investigation of its business practices. The
FTC has not made any claims or allegations regarding the Company's current
business practices or policies, nor have any charges been filed. Autodesk
intends to cooperate fully with the FTC in its inquiry. The Company does not
believe that the investigation will have a material adverse impact on its
business or consolidated results of operations.
Fluctuations in quarterly operating results. 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.
16
The Company receives and fulfills a majority of its orders within a particular
quarter, with the majority of the sales to distributors and dealers (value-added
resellers or "VARs"). These resellers typically carry inventory of the
Company's products and place volume orders equivalent to a few days or a few
weeks of sales. The timing of these orders could have a material impact on
quarterly operating results. 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.
Product concentration. Autodesk derives a substantial portion of its revenues
from sales of AutoCAD software, AutoCAD upgrades, and adjacent products which
are interoperable with AutoCAD. As such, any factor adversely affecting sales of
AutoCAD and AutoCAD upgrades, including such factors as product life cycle,
market acceptance, product performance and reliability, reputation, price
competition, and the availability of third-party applications, could have a
material adverse effect on the Company's business and consolidated results of
operations.
Product development and introduction. The software industry is characterized by
rapid technological change as well as changes in customer requirements and
preferences. The software products offered by the Company are complex and,
despite extensive testing and quality control, may contain errors or defects
("bugs"), especially when first introduced. There can be no assurance that
defects or errors will not occur in future releases of AutoCAD or other software
products offered by the Company. Such defects or errors could result in
corrective releases to the Company's software products, damage to Autodesk's
reputation, loss of revenues, an increase in product returns, or lack of market
acceptance of its products, any of which could have a material and adverse
effect on the Company's business and consolidated results of operations.
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, mapping, or
multimedia software products could also have a negative impact on the Company's
business and consolidated results of operations. More specifically, gross
margins may be adversely affected if sales of low-end CAD products, which
historically have had lower margins, grow at a faster rate than the Company's
higher-margin products.
Certain of the Company's historical product development activities have been
performed by independent firms and contractors, while other technologies are
licensed from third parties. Autodesk generally either owns or licenses the
software developed by third parties. Because talented development personnel are
in high demand, there can be no assurance that independent developers, including
those who have developed products for the Company in the past, will be able to
provide development support to the Company in the future. Similarly, there can
be no assurance that the Company will be able to obtain and renew license
agreements on favorable terms, if at all, and any failure to do so could have a
material adverse effect on the Company's business and consolidated results of
operations.
International operations. The Company anticipates that international operations
will continue to account for a significant portion of its consolidated revenues.
Risks inherent in the Company's international operations include the following:
unexpected changes in regulatory practices and tariffs; difficulties in staffing
and managing foreign operations; longer collection cycles; potential changes in
tax laws; greater difficulty in protecting intellectual property; and the impact
of fluctuating exchange rates between the U.S. dollar and foreign currencies in
markets where Autodesk does business. During the first six months of fiscal year
1999, changes in exchange rates from the same period of the prior fiscal year
adversely
17
impacted revenues, principally due to changes in the rate of exchange between
the U.S. dollar and the Japanese yen and the Australian dollar.
The Company's international results have been impacted by recent unfavorable
economic and political conditions in the Asian markets as described above under
"Results of Operations - Net Revenues." There can be no assurance that the
economic crisis and currency issues currently being experienced in these markets
will not have a material adverse effect on the Company's future international
sales and consequently, on the Company's business and consolidated results of
operations.
Dependence on distribution channels. The Company sells its software products
primarily to distributors and 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 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. The loss of or a significant reduction in business with any one of
the Company's major international distributors or large U.S. resellers could
have a material adverse effect on the Company's business and consolidated
results of operations in future periods.
Product returns. With the exception of certain European distributors,
agreements with the Company's VARs do not contain specific product-return
privileges. However, Autodesk permits its VARs to return product in certain
instances, generally during periods of product transition and during update
cycles. Although product returns, comparing the second quarter of fiscal 1999 to
the same period in the prior year, decreased as a percentage of consolidated
revenues, management anticipates that product returns in future periods will
continue to be impacted by the timing of new product releases, as well as the
quality and market acceptance of new products.
Autodesk establishes reserves, including reserves for stock balancing and
product rotation, based on estimated future returns of product and after taking
into account channel inventory levels, the timing of new product introductions,
and other factors. While the Company maintains strict measures to monitor
channel inventories and to provide appropriate reserves, actual product returns
may differ from the Company's reserve estimates, and such differences could be
material to Autodesk's consolidated financial statements.
Intellectual property. The Company relies on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality procedures, and contractual
provisions to protect its proprietary rights. Despite such efforts to protect
the Company's proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's software products or to obtain and use information that
Autodesk regards as proprietary. Policing unauthorized use of the Company's
software products is time-consuming and costly. Although the Company is unable
to fully measure the extent to which piracy of its software products exists,
software piracy can be expected to be a persistent problem. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that its competitors will not independently develop similar
technology.
The Company expects that software product developers will be increasingly
subject to infringement claims as the number of products and competitors in its
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
18
reasonable terms, or that the software will be appropriately supported,
maintained, or enhanced by the licensors. The loss of licenses, or inability to
support, maintain, and enhance any such software, could result in increased
costs, or in delays or reductions in product shipments until equivalent software
could be developed, identified, licensed, and integrated, which could have a
material adverse effect on the Company's business and consolidated results of
operations.
Risks associated with recent acquisitions and investments. The Company
periodically acquires or invests in businesses, software products and
technologies which are complementary to the Company's business through strategic
alliances, debt and equity investments, joint ventures and the like. The risks
associated with such acquisitions or investments include, among others, the
difficulty of assimilating the operations and personnel of the companies, the
failure to realize anticipated synergies and the diversion of management's time
and attention. In addition, such investments and acquisitions may involve
significant transaction-related costs. There can be no assurance that the
Company will be successful in overcoming such risks or that such investments and
acquisitions will not have a material adverse impact upon the Company's
business, financial condition or results of operations. In addition, such
investments and acquisitions may contribute to potential fluctuations in
quarterly results of operations due to merger-related costs and charges
associated with eliminating redundant expenses or write-offs of impaired assets
recorded in connection with acquisitions, any of which could negatively impact
results of operations for a given period or cause lack of linearity quarter to
quarter in the Company's operating results or financial condition.
As further described in Note 2 to the condensed consolidated financial
statements, on May 4, 1998, the Company acquired certain assets related to the
mechanical applications business of Genius for approximately $69 million in
cash, which includes fees and expenses. As discussed in Note 9, on August 20,
1998, the Company announced a definitive agreement to acquire Discreet by the
issuance of 0.525 shares of Autodesk's common stock in exchange for each
outstanding share of Discreet. There can be no assurance that the anticipated
benefits of the Genius asset purchase, the Discreet acquisition, and any future
mergers, acquisitions, or asset purchases will be realized.
Attraction and Retention of Employees. The continued growth and success of the
Company depends significantly on the continued service of highly skilled
employees. Competition for these employees in today's marketplace, especially
in the technology industries, is intense. The Company's ability to attract and
retain employees is dependent on a number of factors including its continued
ability to grant stock incentive awards. There can be no assurance that the
Company will be successful in continuing to recruit new personnel and to retain
existing personnel. The loss of one or more key employees or the Company's
inability to maintain existing employees or recruit new employees could have a
material adverse impact on the Company. In addition, the Company may experience
increased compensation costs to attract and retain skilled personnel.
Impact of Year 2000. Some of the computer programs used by the Company in its
internal operations rely on time-sensitive software that was written using two
digits rather than four to identify the applicable year. These programs may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company expects to successfully implement a six-phase year 2000 compliance
program and does not believe that the cost of such procedures will have a
material effect on the Company's results of operations or financial condition.
There can be no assurance, however, that there will not be a delay in the
completion of these procedures or that the cost of such procedures will not
exceed original estimates, either of which could have a material adverse effect
on future results of operations.
In addition to correcting the business and operating systems used by the Company
in the ordinary course of business as described above, the Company has also
reviewed all products it produces internally for sale to third parties to
determine compliance of its products. Currently sold products either have been
found to be compliant or are currently being tested for compliance. However,
many Autodesk products run on application systems produced and sold by third-
party vendors. There can be no assurance that these application systems will be
converted in a timely manner, and any failure in this regard may cause
19
Autodesk products not to function as designed. Any future costs associated with
ensuring that the Company's products are compliant with the year 2000 are not
expected to have a material impact on the Company's results of operations or
financial position.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and marketable securities, which consist primarily of
high-quality municipal bonds, tax-advantaged money market instruments and U.S.
treasury notes, totaled $293.4 million at July 31, 1998, compared to $301.3
million at January 31, 1998. The $7.9 million decrease in cash, cash
equivalents, and marketable securities was due primarily to the acquisition of
certain assets from Genius ($69.3 million), payments to retire common stock
($48.9 million), and purchases of fixed assets ($9.9 million). This decrease
was partially offset by cash generated from operations ($57.7 million) and
proceeds from the issuance of common stock ($66.2 million).
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 July 31, 1998, there were no borrowings outstanding under
this credit agreement, which expires in January 1999.
The Company's principal commitments at July 31, 1998 consisted of obligations
under operating leases for facilities.
Longer-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products including the incremental
product offerings resulting from the acquisition of Genius and enhancement of
existing products; financing anticipated growth; dividend payments; 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.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
In May 1998, final judgment was entered in the Vermont Microsystems, Inc.
("VMI") trade secret litigation in the amount of $7.8 million plus accrued
interest. Final payment of approximately $8.4 million was made to VMI and
charged against a previously recorded litigation accrual. During the quarter
ended July 31, 1998, the Company credited $18.2 million and $2.7 million to
operating income and interest income, respectively, to record the gain on the
litigation settlement and remaining unutilized interest accruals.
The Company is a party to various legal proceedings arising from the normal
course of business activities. While the outcome of these matters cannot be
predicted with certainty, in management's opinion, resolution of these matters
is not expected to have a material adverse impact on the Company's consolidated
results of operations or its financial position. However, depending on the
amount and timing, an unfavorable resolution of a matter could materially affect
the Company's future results of operations or cash flows in a particular period.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 25, 1998, the
following individuals were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
Carol A. Bartz 40,902,335 361,363
Mark A. Bertelsen 40,835,399 428,299
Crawford W. Beveridge 41,013,658 250,040
J. Hallam Dawson 41,013,084 250,614
Paul S. Otellini 40,772,390 491,308
Mary Alice Taylor 41,013,497 250,201
Morton Topfer 41,014,029 249,669
The following proposal was approved at the Company's Annual Meeting:
Affirmative Negative Votes
Votes Votes Withheld
------------------- ------------------- -------------------
1. Ratify the appointment of Ernst & Young 41,207,619 33,120 22,959
LLP as independent auditors for the fiscal
year ending January 31, 1999.
ITEM 5. OTHER INFORMATION
The Securities and Exchange Commission has recently amended Rule 14a-4( c )(1)
promulgated under the Securities Exchange Act of 1934, as amended. As amended,
Rule 14a-4( c )(1) provides that a proxy may confer discretionary authority to
vote on a matter for an annual meeting of stockholders if the proponent fails to
notify the Company at least 45 days prior to the month and day of mailing of the
prior year's proxy statement. The proxy statement for the Company's 1998 Annual
Meeting of Stockholders was mailed to stockholders on May 22, 1998.
Accordingly, if a proponent does not notify the Company on or before April 7,
1999 of a proposal for the 1999 Annual Meeting of Stockholders, management may
use its discretionary voting authority to vote on such proposal, even if the
matter is not discussed in the proxy statement for the 1999 Annual Meeting of
Stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
27.0 Financial Data Schedule for the period ended July 31, 1998
Reports on Form 8-K
-------------------
On May 15, 1998 the Company filed a report on Form 8-K describing the
May 4, 1998 purchase of certain assets by the Company from Genius. (See
Note 2 for further discussion).
21
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: September 14, 1998
AUTODESK, INC.
(Registrant)
/s/ CAROL A. BARTZ
-------------------
Carol A. Bartz
Chairman and Chief Executive Officer
/s/ STEVE CAKEBREAD
--------------------
Steve Cakebread
Vice President and Chief Financial Officer
(Principal Financial Officer)
22
5
1,000
6-MOS
JAN-31-1999
JUL-31-1998
43,402
249,998
91,043
6,964
6,358
429,374
147,693
108,391
565,666
213,974
0
0
0
337,284
11,909
565,666
373,844
373,844
37,983
275,003
0
1,163
296
68,341
31,588
36,753
0
0
0
36,753
0.79
0.74
