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 quarterly period ended April 30, 2003
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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
111 McInnis Parkway
San Rafael, California 94903
(Address of principal executive offices)
Telephone Number (415) 507-5000
(Registrants 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 ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No ¨
As of May 30, 2003, there were approximately 111.8 million shares of the Registrants Common Stock outstanding.
INDEX
2
Item 1. Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended April 30, |
||||||||
2003 |
2002 |
|||||||
Net revenues |
$ | 210,766 | $ | 229,327 | ||||
Costs and expenses: |
||||||||
Cost of revenues |
36,951 | 40,692 | ||||||
Marketing and sales |
85,538 | 87,336 | ||||||
Research and development |
47,392 | 45,207 | ||||||
General and administrative |
34,278 | 33,159 | ||||||
Amortization of purchased intangibles |
| 203 | ||||||
Restructuring and other |
| 1,542 | ||||||
204,159 | 208,139 | |||||||
Income from operations |
6,607 | 21,188 | ||||||
Interest and other income, net |
3,272 | 2,978 | ||||||
Income before income taxes |
9,879 | 24,166 | ||||||
Provision for income taxes |
(2,371 | ) | (6,525 | ) | ||||
Net income |
$ | 7,508 | $ | 17,641 | ||||
Basic net income per share |
$ | 0.07 | $ | 0.16 | ||||
Diluted net income per share |
$ | 0.07 | $ | 0.15 | ||||
Shares used in computing basic net income per share |
111,775 | 113,258 | ||||||
Shares used in computing diluted net income per share |
113,446 | 118,402 | ||||||
See accompanying notes.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 30, 2003 |
January 31, 2003 |
|||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 179,443 | $ | 186,377 | ||||
Marketable securities |
59,047 | 60,643 | ||||||
Accounts receivable, net |
133,596 | 132,803 | ||||||
Inventories |
8,849 | 12,284 | ||||||
Deferred income taxes |
26,579 | 28,923 | ||||||
Prepaid expenses and other current assets |
28,329 | 28,602 | ||||||
Total current assets |
435,843 | 449,632 | ||||||
Marketable securities |
163,297 | 164,029 | ||||||
Computer equipment, software, furniture and leasehold improvements, at cost: |
||||||||
Computer equipment, software and furniture |
209,902 | 210,900 | ||||||
Leasehold improvements |
32,758 | 32,913 | ||||||
Less accumulated depreciation |
(171,101 | ) | (167,691 | ) | ||||
Net computer equipment, software, furniture and leasehold improvements |
71,559 | 76,122 | ||||||
Purchased technologies and capitalized software, net |
27,574 | 30,125 | ||||||
Goodwill, net |
160,293 | 155,945 | ||||||
Deferred income taxes |
6,059 | | ||||||
Other assets |
7,838 | 7,797 | ||||||
$ | 872,463 | $ | 883,650 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 43,966 | $ | 45,122 | ||||
Accrued compensation |
48,527 | 44,869 | ||||||
Accrued income taxes |
47,322 | 39,802 | ||||||
Deferred revenues |
96,168 | 93,241 | ||||||
Other accrued liabilities |
74,282 | 86,994 | ||||||
Total current liabilities |
310,265 | 310,028 | ||||||
Deferred income taxes, net |
| 1,678 | ||||||
Other liabilities |
2,860 | 2,736 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock |
| | ||||||
Common stock and additional paid-in capital |
470,041 | 479,874 | ||||||
Accumulated other comprehensive loss |
(11,399 | ) | (11,568 | ) | ||||
Deferred compensation |
(1,440 | ) | (2,185 | ) | ||||
Retained earnings |
102,136 | 103,087 | ||||||
Total stockholders equity |
559,338 | 569,208 | ||||||
$ | 872,463 | $ | 883,650 | |||||
See accompanying notes.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended April 30, |
||||||||
2003 |
2002 |
|||||||
Operating activities |
||||||||
Net income |
$ | 7,508 | $ | 17,641 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
12,307 | 12,637 | ||||||
Write-downs of cost method investments |
26 | 200 | ||||||
Tax benefits from employee stock plans |
| 7,898 | ||||||
Changes in operating assets and liabilities |
(2,551 | ) | (23,172 | ) | ||||
Net cash provided by operating activities |
17,290 | 15,204 | ||||||
Investing activities |
||||||||
Net sales or maturities of marketable securities |
1,876 | 61,365 | ||||||
Capital and other expenditures |
(4,083 | ) | (9,901 | ) | ||||
Acquisitions, net of cash acquired |
(5,150 | ) | (133,531 | ) | ||||
Other investing activities |
52 | (635 | ) | |||||
Net cash used in investing activities |
(7,305 | ) | (82,702 | ) | ||||
Financing activities |
||||||||
Repurchases of common stock |
(29,881 | ) | (9,996 | ) | ||||
Proceeds from issuance of common stock |
15,239 | 58,108 | ||||||
Dividends paid |
(3,347 | ) | (3,423 | ) | ||||
Net cash (used in) provided by financing activities |
(17,989 | ) | 44,689 | |||||
Effect of exchange rate changes on cash and cash equivalents |
1,070 | 2,749 | ||||||
Net decrease in cash and cash equivalents |
(6,934 | ) | (20,060 | ) | ||||
Cash and cash equivalents at beginning of year |
186,377 | 157,687 | ||||||
Cash and cash equivalents at end of period |
$ | 179,443 | $ | 137,627 | ||||
Supplemental cash flow information: |
||||||||
Net cash (received) paid during the period for income taxes |
$ | (123 | ) | $ | 5,630 | |||
See accompanying notes.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These statements should be read in conjunction with the consolidated financial statements and related notes, together with managements discussion and analysis of financial condition and results of operations, contained in Autodesks fiscal 2003 Annual Report on Form 10-K. The results of operations for the three months ended April 30, 2003 are not necessarily indicative of the results for the entire fiscal year ending January 31, 2004.
Certain reclassifications involving cash equivalents and short-term marketable securities have been made to prior year numbers to conform to current quarter presentation.
2. Stock Based Compensation
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (SFAS 148) amends the disclosure requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123) to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has elected to continue to follow the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) to account for employee stock options.
As permitted by SFAS 123, as amended by SFAS 148, Autodesk measures compensation expense for its stock-based employee compensation plans using the intrinsic method prescribed by APB 25.
The Company is required under SFAS 123 to disclose pro forma information regarding option grants made to its employees based on specified valuation techniques that produce estimated compensation charges. The pro forma information is as follows (in thousands, except per-share amounts):
Three months ended April 30, |
||||||||
2003 |
2002 |
|||||||
Net incomeas reported |
$ | 7,508 | $ | 17,641 | ||||
Add: Stock-based compensation cost, net of related tax effects, included in the determination of net income as reported |
347 | 277 | ||||||
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects |
(11,806 | ) | (14,216 | ) | ||||
Pro forma net income (loss) |
$ | (3,951 | ) | $ | 3,702 | |||
Net income (loss) per share: |
||||||||
Basicas reported |
$ | 0.07 | $ | 0.16 | ||||
Basicpro forma |
$ | (0.04 | ) | $ | 0.03 | |||
Dilutedas reported |
$ | 0.07 | $ | 0.15 | ||||
Dilutedpro forma |
$ | (0.04 | ) | $ | 0.03 | |||
6
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
3. Inventories
Inventories consisted of the following (in thousands):
April 30, 2003 |
January 31, 2003 | |||||
Raw materials and finished goods |
$ | 5,859 | $ | 9,851 | ||
Demonstration inventory, net |
2,990 | 2,433 | ||||
$ | 8,849 | $ | 12,284 | |||
Inventories are stated at the lower of standard cost (determined on the first-in, first-out method) or market. Appropriate consideration is given to excess and obsolete inventory levels in evaluating lower of cost or market.
4. Purchased Technologies and Capitalized Software
Purchased technologies and capitalized software and the related accumulated amortization were as follows (in thousands):
April 30, 2003 |
January 31, 2003 |
|||||||
Purchased technologies |
$ | 133,949 | $ | 133,029 | ||||
Capitalized software |
18,594 | 18,444 | ||||||
152,543 | 151,473 | |||||||
Less: Accumulated amortization |
(124,969 | ) | (121,348 | ) | ||||
Purchased technologies and capitalized software, net |
$ | 27,574 | $ | 30,125 | ||||
Expected future amortization expense for purchased technologies and capitalized software for the nine months ended January 31, 2004 and each of the fiscal years thereafter is as follows (in thousands):
Period ending January 31, |
|||
2004 |
$ | 10,274 | |
2005 |
12,739 | ||
2006 |
3,095 | ||
2007 |
928 | ||
2008 |
538 | ||
Total |
$ | 27,574 | |
5. Goodwill
The changes in the carrying amount of goodwill during the three months ended April 30, 2003 are as follows (in thousands):
Design Solutions |
Discreet |
Total |
|||||||||
Balance as of January 31, 2003 |
$ | 149,539 | $ | 6,406 | $ | 155,945 | |||||
Linius acquisition goodwill(1) |
978 | | 978 | ||||||||
VIA acquisition goodwill(1) |
3,450 | | 3,450 | ||||||||
Other |
(80 | ) | | (80 | ) | ||||||
Balance as of April 30, 2003 |
$ | 153,887 | $ | 6,406 | $ | 160,293 | |||||
(1) | See Note 13. Business Combinations for a description of these acquisitions. |
7
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
6. Restructuring Reserves
The following table sets forth the restructuring activities during the first three months of fiscal 2004 (in thousands). The balance at April 30, 2003 is included in Other accrued liabilities on our Condensed Consolidated Balance Sheet.
Balance at January 31, 2003 |
Additions |
Charges Utilized |
Reversals |
Balance at April 30, 2003 | ||||||||||
Office closure costs |
$ | 10,156 | | $ | (2,635 | ) | | $ | 7,521 | |||||
Employee termination costs |
8,252 | | (3,934 | ) | | 4,318 | ||||||||
Total |
$ | 18,408 | | $ | (6,569 | ) | | $ | 11,839 | |||||
7. Commitments and Contingencies
Guarantees and Indemnifications
Some of the software licenses granted by Autodesk contain provisions that indemnify licensees of Autodesks software from damages and costs resulting from claims alleging that Autodesks software infringes the intellectual property rights of a third party. Occasionally, in certain business transactions, such as the sale of assets, contracts may contain certain indemnity provisions typical for such transactions. Autodesk has historically received only a limited number of requests for indemnification under these provisions and has not been required to make material payments pursuant to these provisions. Accordingly, Autodesk has not recorded a liability related to these indemnification provisions.
Legal Proceedings
On December 27, 2001, Spatial Corp. (Spatial) filed suit in Marin County Superior Court against Autodesk and D-Cubed Ltd. (D-Cubed), seeking (1) a declaration that (a) Autodesk had breached the ten year old development agreement between Spatial and Autodesk (Development Agreement) and (b) that Autodesk and D-Cubed had misappropriated the trade secrets of Spatial (2) an injunction preventing Autodesk from disclosing ACIS source code to D-Cubed and (3) an injunction preventing Autodesk from working with individuals who had previously worked on ACIS source code for Spatial. ACIS is a geometric solid modeler upon which Autodesk ShapeManager is derived. Autodesk ShapeManager is incorporated into a number of Autodesk products, including Autodesk Inventor Series, AutoCAD based products and 3ds max.
After a hearing on January 23, 2002, the Superior Court denied Spatials motion for a preliminary injunction, finding that Spatial had failed to establish that it was likely to prevail on the merits at trial. On August 1, 2002, Spatial amended its complaint to seek the following additional remedies: (1) a declaration regarding the appropriate location of the ACIS source code and (2) termination of Development Agreement, including our right to work with third party contractors on the ACIS source code and the perpetual right to incorporate and distribute ACIS with our products. On October 16, 2002, Spatial dismissed all of its claims for misappropriation of trade secrets against Autodesk and D-Cubed. On February 13, 2003, the Court granted D-Cubed Ltd.s motion for summary judgment and denied our motion for summary adjudication of issues. The trial is expected to begin in the summer or fall of calendar year 2003.
8
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Autodesk believes that Spatials claims are without merit, and is contesting them vigorously. Although the results of litigation are inherently uncertain, Autodesk believes that the ultimate resolution of this matter will not have material effect on its consolidated statements of financial condition, results of operations or cash flows. However, if Spatial were to prevail at trial on its request to terminate the perpetual license to ACIS, and Autodesk could not obtain a license on acceptable terms or license or develop a substitute technology, its business and operating results could be materially adversely affected. During the fourth quarter of fiscal 2003 Autodesk recorded a $2.5 million reserve related to this matter.
On October 7, 2002, Digimation Inc. filed a demand for arbitration against Autodesk with the American Arbitration Association alleging breach of contract and interference with prospective economic advantage and business relations. The claims arise out of a November 1998 Preferred Publisher Agreement (the PPA) entered into with the Discreet division and relate to the marketing, publishing, development and support of software plug-ins for its 3ds max application. Autodesk has counter-claimed against Digimation for, among other things, Digimations failure to perform under the PPA. The arbitration hearing is set for July 2003. Autodesk believes that the ultimate resolution of this matter will not have a material effect on its consolidated statements of financial condition, results of operations or cash flows.
Generally, Autodesk is involved in various legal proceedings arising from the normal course of business activities. In its opinion, resolution of these matters is not expected to have a material adverse impact on its consolidated results of operations, cash flows or our financial position. However, depending on the amount and timing, an unfavorable resolution of a matter could materially affect the future results of operations, cash flows or financial position in a particular period.
8. Changes in Stockholders Equity
During the three months ended April 30, 2003 Autodesk repurchased and retired 2.0 million shares of its common stock through open market purchases at an average repurchase price of $14.93 per share. As a result, common stock and additional paid-in capital and retained earnings were reduced for the three months ended April 30, 2003 by $24.8 million and $5.1 million, respectively.
In addition, during the three months ended April 30, 2003 Autodesk paid cash dividends of $0.03 per common share reducing retained earnings by $3.3 million.
9. Comprehensive Income
Autodesks total comprehensive income was as follows, net of tax (in thousands):
Three months ended April 30, | ||||||
2003 |
2002 | |||||
Net income |
$ | 7,508 | $ | 17,641 | ||
Other comprehensive income, net |
169 | 1,376 | ||||
Total comprehensive income |
$ | 7,677 | $ | 19,017 | ||
9
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
10. Net Income Per Share
The following is a reconciliation of the numerators and denominators used in the basic and diluted net income per share amounts (in thousands):
Three months ended April 30, | ||||||
2003 |
2002 | |||||
Numerator: |
||||||
Numerator for basic and diluted per share amountnet income |
$ | 7,508 | $ | 17,641 | ||
Denominator: |
||||||
Denominator for basic net income per shareweighted average shares |
111,775 | 113,258 | ||||
Effect of dilutive common stock options |
1,671 | 5,144 | ||||
Denominator for dilutive net income per share |
113,446 | 118,402 | ||||
For the three months ended April 30, 2003 and 2002, options to purchase 17.4 million weighted average shares and 4.1 million weighted average shares, respectively, were excluded from the computation of diluted net income per share. Such options were excluded because the options had exercise prices greater than the average market prices of common stock during the period and therefore were not dilutive.
11. Segments
Autodesks operating results are aggregated into two reportable segments: the Discreet Segment and the Design Solutions Segment. In the first quarter of fiscal 2004, Autodesk modified its segment disclosure to align the segment disclosure with how Autodesks business is currently being managed and evaluated. Under the revised segment disclosure, a significant amount of costs previously not allocated to either reportable segment, such as geographic sales and marketing expenditures, are being allocated to the Design Solutions Segment, thereby reducing the Design Solutions Segment profitability. Also, certain costs of operations previously allocated to the Discreet and the Design Solutions segments are no longer being allocated. Additionally, the Locations Services Division is no longer included with the Design Solutions Segment and is reflected as Other. Prior period numbers have been restated to reflect the current segment alignment.
The Discreet Segment derives revenues from the sale of its products to creative professionals for a variety of applications, including feature films, television programs, commercials, music and corporate videos, interactive game production, web design and interactive web streaming.
The Design Solutions Segment derives revenues from the sale of design software products for professionals or consumers who design, draft and diagram, and from the sale of mapping and geographic information systems technology to public and private users. The Design Solutions Segment consists primarily of the following business divisions, all of which have industry-specific focuses: Manufacturing Solutions Division, Infrastructure Solutions Division (formerly Geographic Information Services), Building Solutions Division and the Platform Technology Division and Other which includes Autodesk Professional Services. Sales of AutoCAD, AutoCAD upgrades and AutoCAD LT accounted for 44% of Autodesks consolidated net revenues during each of the three months ended April 30, 2003 and 2002.
10
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Both segments primarily distribute their respective products through authorized dealers and distributors, and, in some cases, sell their products directly to end-users. Autodesk evaluates each segments performance on the basis of income from operations before income taxes. Autodesk currently does not separately accumulate and report asset information by segment, except for certain assets such as goodwill. Information concerning the operations of Autodesks reportable segments is as follows (in thousands):
Three months ended April 30, |
||||||||
2003 |
2002(1) |
|||||||
Net revenues: |
||||||||
Design Solutions |
$ | 172,591 | $ | 193,032 | ||||
Discreet |
38,175 | 35,368 | ||||||
Other |
| 927 | ||||||
$ | 210,766 | $ | 229,327 | |||||
Income (loss) from operations: |
||||||||
Design Solutions |
$ | 54,423 | $ | 74,425 | ||||
Discreet |
680 | (5,358 | ) | |||||
Unallocated amounts(2) |
(48,496 | ) | (47,879 | ) | ||||
$ | 6,607 | $ | 21,188 | |||||
(1) | For purposes of comparison with the current quarter, the segment data for the three months ended April 30, 2002 have been restated to reflect the current segment reporting. |
(2) | Unallocated amounts are attributed primarily to corporate expenses and other geographic costs and expenses that are managed outside the reportable segments. |
Net revenues attributable to the major divisions within the Design Solutions Segment are as follows (in thousands):
Three months ended April 30, | ||||||
2003 |
2002 | |||||
Net revenues: |
||||||
Manufacturing Solutions Division |
$ | 30,126 | $ | 33,643 | ||
Infrastructure Solutions Division |
22,669 | 27,145 | ||||
Building Solutions Division |
15,929 | 21,807 | ||||
Platform Technology Division and Other |
103,867 | 110,437 | ||||
$ | 172,591 | $ | 193,032 | |||
Information regarding Autodesks operations by geographic area is as follows:
Three months ended April 30, | ||||||
2003 |
2002 | |||||
Net revenues: |
||||||
United States |
$ | 78,774 | $ | 91,627 | ||
Other Americas |
13,377 | 15,040 | ||||
Total Americas |
92,151 | 106,667 | ||||
Europe |
68,062 | 71,926 | ||||
Asia Pacific |
50,553 | 50,734 | ||||
Total net revenues |
$ | 210,766 | $ | 229,327 | ||
11
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
12. Financial Instruments
Autodesk uses derivative instruments to manage its earnings and cash flow exposures to fluctuations in foreign currency exchange rates. Under its risk management strategy, Autodesk uses foreign currency forward and option contracts to manage its exposures of underlying assets, liabilities and other obligations, which exist as part of the ongoing business operations. These foreign currency instruments by policy have maturities of less than three months and settle before the end of each quarterly period. Generally, Autodesks practice is to hedge a majority of its short-term foreign exchange transaction exposures. Contracts are primarily denominated in Euro, British pounds and Japanese yen, and Autodesk does not enter into any foreign exchange derivative instruments for trading or speculative purposes.
Forwards
Autodesks forward contracts, which are not designated as hedging instruments under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133), have average maturities of 90 days or less. The forwards are used to reduce the exchange rate risk associated primarily with receivables and payables. Forward contracts are marked-to-market at the end of each reporting period, with gains and losses recognized as other income or expense to offset the gains or losses resulting from the settlement of the underlying foreign currency denominated receivables and payables. Autodesk recorded net gains on foreign currency transactions of $0.7 million and $0.3 million for the three months ended April 30, 2003 and 2002, respectively.
The notional amounts of foreign currency contracts were $33.0 million at April 30, 2003 and $32.0 million at January 31, 2003. While the contract or notional amount is often used to express the volume of foreign exchange contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties obligations under the agreements exceed the obligations of Autodesk to the counterparties.
Options
In addition to the forward contracts, Autodesk utilizes foreign currency option collar contracts to reduce the exchange rate impact on the net revenue of certain anticipated transactions. These option contracts, which are designated and documented as cash flow hedges and qualify for hedge accounting treatment under SFAS 133, have maturities of less than three months and settle before the end of each fiscal quarter. For cash flow hedges, derivative gains and losses included in comprehensive income are reclassified into earnings at the time the forecasted revenue is recognized or the option expires. Autodesks financial exposure is generally limited to the amount paid for the options.
The notional amounts of foreign currency option contracts were $34.5 million at April 30, 2003 and $36.2 million at January 31, 2003 and the critical terms were generally the same as those of the underlying exposure. Gains, if any, from the effective portion of the option contracts, as determinable under SFAS 133, are recognized as net revenues, while the ineffective portion of the option contract is recorded in other income. During the three months ended April 30, 2003, there were no settlement gains recorded as net revenue. Amounts associated with net settlement losses totaling $0.2 million were recorded in Interest and other income, net during the three months ended April 30, 2003. During the three months ended April 30, 2002, there were no settlement gains recorded as net revenues. Amounts associated with net settlement losses totaling $0.2 million were recorded in Interest and other income, net during the three months ended April 30, 2002.
12
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
13. Business Combinations
The following acquisitions were accounted for under the purchase method of accounting and, accordingly, the results of operations of each acquisition are included in the accompanying condensed consolidated statements of operations since the acquisition date, and the related assets and liabilities were recorded based upon their relative fair values at the date of acquisition. Pro forma results of operations have not been presented for either of the acquisitions because the effects of these acquisitions were not material to Autodesk on either an individual or an aggregate basis. These acquisitions will help Autodesk customers create accurate 3D models of both electrical and mechanical components of their products as well as 2D representations of electrical systems, document all of the systems inherent to these products, and manage and share design data inside the engineering workgroup and throughout its internal and external enterprise.
Linius Technologies, Inc.
In February 2003, Autodesk acquired certain assets of Linius Technologies, Inc. (Linius) for approximately $1.0 million in cash. In addition, Autodesk assumed approximately $0.2 million in liabilities. Linius developed and sold software that allows a wire harness designer to create 3D prototypes. Autodesk allocated the purchase consideration to the following intangible assets, which are deductible for tax purposes: $0.2 million to purchased technology and $1.0 million to goodwill. The purchased technology is being amortized on a straight-line basis over an estimated useful life of 3 years. The goodwill was assigned to the Manufacturing Solutions Division of the Design Solutions Segment.
VIA Development Corporation
In March 2003, Autodesk acquired certain assets of VIA Development Corporation (VIA) for approximately $4.2 million in cash. VIA developed and provided various electrical schematics, wire diagram, and controls engineering automation software. Autodesk allocated the purchase consideration to the following intangible assets, which are deductible for tax purposes: $0.7 million to purchased technology and $3.5 million to goodwill. The purchased technology is being amortized on a straight-line basis over an estimated useful life of 2 years. The goodwill was assigned to the Manufacturing Solutions Division of the Design Solutions Segment.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The discussion in Managements 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. Forward-looking statements consist of, among other things, statements regarding net revenues, revenue mix, costs and expenses, gross margins, allowance for bad debts, level of product returns, restructuring activity and short-term and long-term cash requirements, as well as statements involving trend analyses and statements including such words as we believe and similar expressions. These forward-looking statements are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below, included in Risk Factors Which May Impact Future Operating Results and in our other reports filed with the Securities and Exchange Commission.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, net revenues, costs and expenses and related disclosures. We regularly evaluate our estimates and assumptions. Actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies the following policies involve a higher degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition. Our accounting policies and practices are in compliance with Statement of Position 97-2, Software Revenue Recognition, as amended, and Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is probable. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
Based on whether the sale is product or service related, we recognize revenue as follows. Product sales are recognized at the time of shipment as long as all other criteria for revenue recognition have been met. Subscription, customer support and hosted service revenues are recognized ratably over the contract periods. Customer consulting and training revenues are recognized as the services are performed.
Allowance for Bad Debts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. At April 30, 2003, we had a bad debt reserve of $9.8 million.
Estimated reserves are determined based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with specific problem accounts. While we believe our existing reserve for doubtful accounts is adequate and proper, additional reserves may be required should the financial condition of our customers deteriorate or as unusual circumstances arise.
14
Product Return Reserves. With the exception of contracts with certain distributors, our sales contracts do not contain specific product-return privileges. However, we permit our distributors and resellers to return product in certain instances, generally when new product releases supercede older versions. At April 30, 2003, we had a product returns reserve of $20.7 million.
Product returns as a percentage of applicable revenues were 5.1% and 4.8% for the three months ended April 30, 2003 and 2002, respectively. The product return reserves are based on estimated channel inventory levels, the timing of new product introductions and other factors. The greater the channel inventory level or the closer the proximity of a major new product release such as AutoCAD 2004, the more product returns we expect. During the three months ended April 30, 2003, we recorded a charge for product returns of $9.1 million, which reduced our gross revenue.
While we believe our accounting practice for establishing and monitoring product returns reserves is adequate and proper, any adverse activity or unusual circumstances could result in an increase in reserve levels in the period in which such determinations are made.
Realizability of Long-Lived Assets. We review the realizability of our long-lived assets and related intangible assets annually during the fourth fiscal quarter, or sooner whenever events or changes in circumstances indicate the carrying values of such assets may not be recoverable. We consider some of the following factors important in deciding when to perform an impairment review: significant under-performance of a business or product line relative to budget; shifts in business strategies which impact the continued uses of the assets; significant negative industry or economic trends; and the results of past impairment reviews.
In assessing the recoverability of these long-lived assets, we first determine their fair values, which are based on assumptions regarding the estimated future cash flows that could reasonably be generated by these assets. When assessing long-lived assets, we use undiscounted cash flow models. Impairment charges, if any, result in situations when the fair values of these assets are less than their carrying values.
In addition to our recoverability assessments, we routinely review the remaining estimated useful lives of our long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the quarter when such determinations are made, as well as in subsequent quarters.
We will continue to evaluate the values of our long-lived assets in accordance with applicable accounting rules. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.
Goodwill. On February 1, 2002, we adopted Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets. Therefore, we no longer amortize goodwill. We test goodwill for impairment annually in the fourth quarter or sooner should events or changes in circumstances indicate potential impairment. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.
Deferred Tax Assets. We currently have $32.6 million of net deferred tax assets, mostly arising from net operating losses, tax credits, reserves and timing differences for purchased technologies and capitalized software partially offset by the establishment of U.S. deferred tax liabilities on unremitted earnings from certain foreign subsidiaries. We perform a quarterly assessment of the recoverability of these net deferred tax assets, which is
15
principally dependent upon our achievement of future taxable income of approximately $84.0 million in specific geographies. Our judgments regarding future profitability may change due to future market conditions and other factors. These changes, if any, may require possible material adjustments to these net deferred tax assets, resulting in a reduction in net income in the period when such determinations are made.
Restructuring Expenses Associated with Office Closures. During the year ended January 31, 2003, we recorded restructuring charges of $25.9 million of which $12.5 million related to the closure of several domestic and international offices. These office closure costs were based upon the projected rental payments through the remaining terms of the underlying operating leases, offset by projected subleasing income. The projected subleasing income amounts were calculated by using information provided by third-party real estate brokers and management judgments and were based on assumptions for each of the real estate markets where the leased offices were located. Should real estate markets worsen and we are not able to sublease the properties as expected, we will record additional expenses in the period when such determinations are made. This situation occurred during fiscal 2002 and 2003 and we therefore recorded additional charges as a result of the inability to sublease abandoned offices. If the real estate markets subsequently improve, and we are able to sublease the properties earlier or at more favorable rates than projected, we will reverse some of the underlying restructuring accruals, which will result in increased net income in the period when such determinations are made.
Legal Contingencies. As described in Part II. Item 1. Legal Proceedings, we are periodically involved in various legal claims and proceedings. We routinely review the status of each significant matter and assess our potential financial exposure. If the potential loss from any matter is considered probable and the amount can be reasonably estimated, we record a liability for the estimated loss. Because of inherent uncertainties related to these legal matters, we base our loss reserves on the best information available at the time. As additional information becomes available, we reassess our potential liability and may revise our estimates. Such revisions could have a material impact on future quarterly results of operations.
Stock Option Accounting. We do not record compensation expense when stock option grants are awarded to employees at exercise prices equal to the fair market value of Autodesk common stock on the date of grant.
Had we recorded compensation expense, our net income would have been substantially less. The impact of expensing employee stock awards is further described in Note 2 in the Notes to Condensed Consolidated Financial Statements.
Overview of First Quarter 2004
Three months April 30, 2003 |
As a % of Net Revenues |
Three months April 30, 2002 |
As a % of Net Revenues |
|||||||||
Net Revenues |
$ | 210,766 | 100 | % | $ | 229,327 | 100 | % | ||||
Cost of revenues |
36,951 | 18 | 40,692 | 18 | ||||||||
Operating expenses |
167,208 | 79 | 165,702 | 72 | ||||||||
Amortization of purchased intangibles |
| | 203 | | ||||||||
Restructuring and other |
| | 1,542 | 1 | ||||||||
Income from Operations |
$ | 6,607 | 3 | % | $ | 21,188 | 9 | % |
Our net revenues for the three months ended April 30, 2003 were down 8% from the three months ended April 30, 2002. This revenue decline resulted in an operating margin of 3% for the three months ended April 30, 2003 as compared to 9% for the three months ended April 30, 2002. The decline in revenue this quarter was primarily due to a difficult customer purchasing environment across several of the industries we serve, particularly manufacturing and commercial construction. Our customers both delayed purchases and purchased
16
in smaller quantities than we would normally expect, as it appears that they were impacted by economic pressures in their own businesses. We believe that a stronger product portfolio, with new releases during the quarter of AutoCAD-based products, Autodesk Inventor and Revit, may have provided partial relief from the difficult customer purchasing environment.
During fiscal 2002, we introduced in the U.S. the Autodesk Subscription Program. Under the program, customers who own the most recent version of the underlying product participate in a simplified upgrade process, feature-enhancing extensions, downloadable e-Learning courses and optional on-line support. During the first quarter of fiscal 2004, we completed the rollout of the Autodesk Subscription Program. Subscriptions are now available to our customers around the globe. Through this program, which is available for a majority of our products, generally for a term of one year, we offer customers access to the most current product enhancements while allowing us to reduce our dependence on revenues from customer upgrades when new product cycles occur. As a result of the progress of the Autodesk Subscription Program, we experienced fewer traditional upgrades. Deferred subscription revenues grew to $61.1 million as of April 30, 2003 from $56.7 million as of January 31, 2003. Subscription revenue is recognized ratably over the life of the contracts.
We generate a significant amount of revenue in the U.S., Japan, Germany, United Kingdom, Italy, France, Canada, Korea and China. During the first quarter of 2004, we began to see signs of recovery in our business in Japan. However, net revenues in the U.S. declined due primarily to poor economic conditions in the industries that constitute our customer base and geopolitical uncertainty, both of which negatively affected our customers purchasing patterns. Additionally, a reorganization of the Americas sales organization may have had a moderate adverse effect on net revenues.
The weaker value of the U.S. dollar, relative to international currencies, had a positive impact of $9.7 million on operating results in the first quarter of fiscal quarter 2004. Had exchange rates from the comparable period last year been in effect during the three months ended April 30, 2003, translated international revenue billed in local currencies would have been $16.4 million lower and operating expenses would have been $6.7 million lower.
Our operating margins are very sensitive to reductions in revenues, given the relatively fixed nature of most of our operating expenses, which consist primarily of employee-related expenditures, facilities costs and depreciation and amortization expense. During first quarter of fiscal 2004, we continued to invest in several internal product initiatives which we believe will contribute to future operating margin growth. These investments were in areas such as product lifecycle management, building lifecycle management, infrastructure lifecycle management, location based services, online collaborative services and desktop video.
We have chosen to continue each of these important investments during our current sales slowdown because we believe each of them has the potential to accelerate future growth, and we believe our ability to fund such investments during an economic slowdown will yield a long-term competitive advantage. By continuing to fund these initiatives, we have explicitly chosen not to reduce our costs to a level that would achieve historical operating margin levels for either a quarter or a full year basis.
During the three months ended April 30, 2003, we acquired two new businesses, Linius Technologies, Inc. and VIA Development Corporation. These investments supplement existing technology. For a more detailed discussion, see Note 13. Business Combinations, in the Notes to Consolidated Financial Statements.
We sell our software products both directly to customers and through a network of distributors and resellers. The inventory carried by our distributors and resellers (channel inventory) was at the high end of our 5 to 6 week target range at April 30, 2003. At January 31, 2003, our channel inventory was just under the bottom end of this range. These changes in channel inventory followed the expected pattern, with the channel reducing
17
inventory in anticipation of a major new product release, and then restocking to higher levels once the new products are released.
Throughout the first quarter of fiscal 2004, we maintained a financially strong balance sheet and we generated $17.3 million of cash from our operating activities. We finished the quarter with $401.8 million in cash and marketable securities and a higher deferred revenue balance as compared to the previous quarter. Over 60% of the deferred revenues balance at April 30, 2003 consisted of customer subscription contracts, which as described previously will be recognized as revenue ratably over the life of the contracts.
Results of Operations
Net Revenues
Three Months April 30, 2003 |
Increase (decrease) compared to prior year |
Three Months ended April 30, 2002 | |||||||||||
$ |
% |
||||||||||||
(in millions) | |||||||||||||
Net Revenues by Geographic Area: |
|||||||||||||
Americas |
$ | 92.1 | $ | (14.6 | ) | (14 | )% | $ | 106.7 | ||||
Europe |
68.1 | (3.8 | ) | (5 | ) | 71.9 | |||||||
Asia Pacific |
50.6 | (0.1 | ) | | 50.7 | ||||||||
$ | 210.8 | $ | (18.5 | ) | (8 | )% | $ | 229.3 | |||||
Net Revenues by Operating Segment: |
|||||||||||||
Design Solutions |
$ | 172.6 | $ | (20.4 | ) | (11 | )% | $ | 193.0 | ||||
Discreet |
38.2 | 2.8 | 8 | 35.4 | |||||||||
Other |
| (0.9 | ) | (100 | ) | 0.9 | |||||||
$ | 210.8 | $ | (18.5 | ) | (8 | )% | $ | 229.3 | |||||
Net Design Solutions Revenues: |
|||||||||||||
Manufacturing Solutions Division |
$ | 30.1 | $ | (3.6 | ) | (11 | )% | $ | 33.7 | ||||
Infrastructure Solutions Division |
22.7 | (4.4 | ) | (16 | ) | 27.1 | |||||||
Building Solutions Division |
15.9 | (5.9 | ) | (27 | ) | 21.8 | |||||||
Platform Technology Division and Other |
103.9 | (6.5 | ) | (6 | ) | 110.4 | |||||||
$ | 172.6 | $ | (20.4 | ) | (11 | )% | $ | 193.0 | |||||
Our net revenues for the three months ended April 30, 2003 were $210.8 million as compared to $229.3 million in the same period last year. Net revenues in the Americas decreased by 14%, net revenues in Europe decreased by 5% and net revenues in Asia Pacific stayed essentially constant. As previously described, the decrease in net revenues was primarily due to a difficult selling environment across the industries we serve. Should the difficult environment continue, our net revenues in future periods will be adversely impacted. Additionally, we believe that the impact of severe acute respiratory syndrome (SARS) may have an adverse effect on our future sales in Asia Pacific.
Net revenues in the Americas for the three months ended April 30, 2003 decreased to $92.1 million compared to $106.7 million for the three months ended April 30, 2002 due primarily to lower sales of Design Solutions products as a result of poor economic conditions in the industries that constitute our customer base. A
18
reorganization of the Americas sales organization also may have had a moderate adverse effect on the quarter. Net revenues in Europe for the three months ended April 30, 2003 decreased to $68.1 million from $71.9 million for the three months ended April 30, 2002 due to the impact of lower customer spending across Design Solutions product lines.
Net revenues for the Discreet Segment were $38.2 million in the three months ended April 30, 2003 as compared to $35.4 million in the same period last year. The increase in Discreet Segment revenues was primarily due to several new advanced system product releases and a strong performance at the National Association of Broadcasters Show during the quarter. In addition, there may be potential early signs of recovery in media and entertainment markets since the first quarter of fiscal 2003. However, because of an expected hardware upgrade by Silicon Graphics, Inc. during the second or third quarter of fiscal 2004, advanced system sales may be adversely impacted over the near term. As a result, net revenues for the Discreet Segment may be lower in the second quarter of fiscal 2004 due to customers delaying purchases.
Net revenues for the Design Solutions Segment were $172.6 million in the three months ended April 30, 2003 as compared to $193.0 million in the same period last year. Net revenues from sales of combined AutoCAD and AutoCAD LT products decreased to $92.8 million in the three months ended April 30, 2003 from $100.5 million in the same period last year due primarily to a weak spending environment across the industries we serve. Although we have been shifting our focus to more vertically-oriented product lines, sales of AutoCAD, AutoCAD upgrades and AutoCAD LT continue to be a significant portion of our net revenues. Such sales, which are reflected in the net revenues for the Platform Technology Division and Other, accounted for 44% of our consolidated net revenues for each of the three month periods ended April 30, 2003 and 2002. Should sales of AutoCAD, AutoCAD upgrades and AutoCAD LT products continue to decrease as a result of weakened demand due to poor economic conditions in the industries that constitute our customer base, geopolitical uncertainty or SARS, our results of operations will be adversely affected.
The weaker value of the U.S. dollar, relative to international currencies, had a positive impact on net revenues in the three months ended April 30, 2003. Had exchange rates from the same period last year been in effect in the three months ended April 30, 2003, translated international revenue billed in local currencies would have been $16.4 million lower. Changes in the value of the U.S. dollar may have a significant impact on net revenues in future periods. To minimize this impact, we utilize foreign currency option collar contracts to reduce the exchange rate impact on the net revenue of certain anticipated transactions.
International sales accounted for approximately 63% of our net revenues in the three months ended April 30, 2003 as compared to 60% in the same period last year. We believe that international sales will continue to be a significant portion of total revenues.
Cost of Revenues
Three Months April 30, 2003 |
Increase (decrease) compared to prior year |
Three Months ended April 30, 2002 |
|||||||||||||
$ |
% |
||||||||||||||
(in millions) | |||||||||||||||
Cost of revenues |
$ | 37.0 | $ | (3.7 | ) | (9 | )% | $ | 40.7 | ||||||
As a percentage of net revenues |
18 | % | 18 | % |
Cost of revenues includes direct material and overhead charges, royalties, amortization of purchased technology and capitalized software and the labor cost of processing orders and fulfilling service contracts. Direct material and overhead charges include the cost of hardware sold (mainly workstations manufactured by
19
Silicon Graphics Inc. for the Discreet Segment), costs associated with transferring our software to electronic media, printing of user manuals and packaging materials, and shipping and handling costs.
The decrease of $3.7 million or 9% between the three months ended April 30, 2003 and 2002 is primarily due to the overall decrease in revenues during the same periods. Cost of revenues as a percentage of revenues was 18% for the three months ended April 30, 2003 and 2002.
In the future, cost of revenues as a percentage of net revenues is likely to continue to be impacted by the mix of product sales, increased consulting costs, software amortization costs, royalty rates for licensed technology embedded in our products, and the geographic distribution of sales. However, we expect future cost of revenues as a percentage of net revenues to remain within the historical range of 16 to 20 percent during the remainder of this fiscal year.
Marketing and Sales
Three Months April 30, 2003 |
Increase (decrease) compared to prior year |
Three Months ended April 30, 2002 |
|||||||||||||
$ |
% |
||||||||||||||
(in millions) | |||||||||||||||
Marketing and sales |
$ | 85.5 | $ | (1.8 | ) | (2 | )% | $ | 87.3 | ||||||
As a percentage of net revenues |
41 | % | 38 | % |
Marketing and sales expenses include salaries, dealer and sales commissions, and travel and facility costs for our marketing, sales, dealer training and support personnel. These expenses also include programs aimed at increasing revenues, such as advertising, trade shows and expositions as well as various sales and promotional programs designed for specific sales channels and end users.
Marketing and sales expenses decreased to $85.5 million in the three months ended April 30, 2003 from $87.3 million in the comparable period of the prior fiscal year primarily due to a $3.8 million decrease in dealer and sales commissions resulting from decreased revenues and a $2.6 million decrease in professional fees, partially offset by a $4.8 million increase in advertising and promotion costs resulting from several new product releases during the quarter, including AutoCAD 2004.
We expect to continue to invest in marketing and sales of our products, to develop market opportunities and to promote our competitive position. Accordingly, we expect marketing and sales expenses to continue to be significant, both in absolute dollars and as a percentage of net revenues.
Research and Development
Three Months April 30, 2003 |
Increase (decrease) compared to prior year |
Three Months ended April 30, 2002 |
||||||||||||
$ |
% |
|||||||||||||
(in millions) | ||||||||||||||
Research and development |
$ | 47.4 | $ | 2.2 | 5 | % | $ | 45.2 | ||||||
As a percentage of net revenues |
22 | % | 20 | % |
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Research and development expenses consist primarily of salaries and benefits for software engineers, contract development fees and depreciation of computer equipment used in software development. The $2.2 million increase in research and development expenses between the three months ended April 30, 2003 and 2002 was primarily due to incremental costs associated with the acquisition of Revit Technology Corporation in April 2002 and higher costs associated with the product releases during the quarter.
We expect that research and development spending will continue to be significant for the remainder of fiscal 2004 as we continue to invest in product development.
General and Administrative
Three Months April 30, 2003 |
Increase (decrease) compared to prior year |
Three Months ended April 30, 2002 |
||||||||||||
$ |
% |
|||||||||||||
(in millions) | ||||||||||||||
General and administrative |
$ | 34.3 | $ | 1.1 | 3 | % | $ | 33.2 | ||||||
As a percentage of net revenues |
16 | % | 14 | % |
General and administrative expenses include our information systems, finance, human resources, legal and other administrative operations. We generally do not allocate these costs to the business divisions they support, so such expenses impact general and administrative rather than cost of revenues, marketing and sales or research and development expenses. The increase of $1.1 million was due primarily to a slight headcount increase in the general and administrative area compared to the first quarter in the prior year.
We currently expect that throughout fiscal 2004, general and administrative expenses, as a percentage of net revenues, will remain consistent with the level experienced in fiscal 2003.
Restructuring and Other
There were no restructuring charges in the three months ended April 30, 2003. During the three months ended April 30, 2002, Autodesk recognized $1.5 million of restructuring charges related to the consolidation of certain European offices. The restructuring costs, which were part of a formal plan approved by our Board of Directors during fiscal 2002, were in connection with our effort to reduce operating expense levels.
For additional information regarding restructuring reserves see Note 6. Restructuring Reserves, in the Notes to Condensed Consolidated Financial Statements.
Interest and Other Income
The following table sets forth the components of interest and other income, net (in thousands):
Three Months Ended April 30, |
||||||||
2003 |
2002 |
|||||||
Interest and investment income |
$ | 1,685 | $ | 2,700 | ||||
Gains on foreign currency transactions |
721 | 280 | ||||||
Write-downs of cost method investments |
(26 | ) | (200 | ) | ||||
Realized gains (losses) on sales of marketable securities |
663 | (13 | ) | |||||
Other |
229 | 211 | ||||||
$ | 3,272 | $ | 2,978 |
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Interest and other income increased primarily due to an increase in gains on foreign currency transactions and gains on sales of marketable securities. These gains were primarily offset by a decrease in interest income. Investment income fluctuates based on average cash and marketable securities balances, average maturities and interest rates. The decrease in interest and investment income when comparing the three months ended April 30, 2003 and 2002 was primarily due to a trend of declining interest rates on the investment of cash and marketable securities balances combined with lower cash and marketable securities balances.
Provision for Income Taxes
Our effective income tax rate was 24% in the three months ended April 30, 2003 and 27% in the three months ended April 30, 2002. Consistent with previous years, the effective tax rate is less than the federal statutory rate of 35% due to the benefits associated with our foreign earnings which are taxed at rates different from the federal statutory rate, research credits, and tax-exempt interest. The first three months of fiscal 2004 tax rate was lower than the same period last year due to a relatively higher impact of these permanent items.
Our future effective tax rate may be materially impacted by the amount of benefits associated with our foreign earnings, which are taxed at rates different from the federal statutory rate, extraterritorial income exclusion, research credits, and tax-exempt interest.
At April 30, 2003, we had net deferred tax assets of $32.6 million. Realization of these assets is dependent on our ability to generate approximately $84.0 million of future taxable income in appropriate tax jurisdictions. We believe that sufficient income will be earned in the future to realize these assets.
Business Combinations
During the three months ended April 30, 2003, we acquired new technology or supplemented our existing technology by purchasing businesses focused in specific markets or industries. During this time period, we acquired the following businesses:
Date |
Company and Cash Paid |
Details | ||
February 2003 |
Linius Technologies, Inc. $1.0 million |
Linius Technologies, Inc. developed and sold software that allows a wire harness designer to create 3D prototypes. This acquisition has been integrated into our Manufacturing Solutions Division within the Design Solutions Segment. | ||
March 2003 |
VIA Development Corporation $4.2 million |
VIA Development Corporation developed and provided various electrical schematics, wire diagram, and controls engineering automation software. This acquisition has been integrated into our Manufacturing Solutions Division within the Design Solutions Segment. |
These acquisitions were accounted for under the purchase method of accounting pursuant to Statement of Financial Accounting Standards No. 141, Business Combinations, (SFAS 141). None of the purchase price for these acquisitions was allocated to in-process research and development. For a more detailed discussion of the allocation of the total purchase price for each of the acquired businesses described above see Note 13. Business Combinations in the Notes to Condensed Consolidated Financial Statements.
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Liquidity and Capital Resources
At April 30, 2003, our principal sources of liquidity were cash and marketable securities totaling $401.8 million and net accounts receivable of $133.6 million. Additionally, we currently have a $40.0 million line of credit with a financial institution. Other than operating leases we do not engage in off-balance sheet financing arrangements or have any variable-interest entities.
During the three months ended April 30, 2003, we generated $17.3 million of cash from operating activities as compared to $15.2 million in the same period last year. Cash flows from operating activities, together with the proceeds from stock issuances resulting from our employee stock plans, continue to be our principal means of generating cash. Cash flows from operating activities have historically resulted from sales of our software products and changes in working capital accounts.
During the three months ended April 30, 2003 the cash generated, together with cash and securities available at the start of the year, was used to fund repurchases of our common stock of $29.9 million, acquisitions of two businesses for an aggregate of $5.2 million, capital and other expenditures of $4.1 million and payment of dividends of $3.3 million.
Between November 1999 and March 2001, the Board of Directors approved plans to repurchase up to 44.0 million shares of our common stock. Of these 44.0 million shares, 35.9 million have been repurchased and retired as of April 30, 2003. The purpose of the stock repurchase program is, among other things, to help offset the dilution to earnings per share caused by the issuance of stock under our employee stock plans.
We have a U.S. line of credit permitting short-term, unsecured borrowings of up to $40.0 million, which may be used from time to time for working capital or other business needs. This credit facility expires in February 2004 and contains restrictive covenants that, among other provisions, require us to maintain certain financial ratios. As of April 30, 2003, we were in compliance with these restrictive covenants and there were no borrowings outstanding under the agreement.
We generally do not enter into binding purchase commitments. Principal commitments at April 30, 2003, consisted of obligations under operating leases for facilities and some computer equipment.
In June 2003, we entered into a Software License and Services Agreement for customer relationship management software and services, providing for payment of $3.8 million in license fees and up to $6.7 million in services over the first 18 months of the contract.
We believe our existing cash, cash equivalents, marketable securities, available line of credit and cash generated from operations will be sufficient to satisfy our currently anticipated short-term and long-term cash requirements. Long-term cash requirements, other than normal operating expenses, are anticipated for the development of new software products and incremental product offerings resulting from the enhancement of existing products; financing anticipated growth; dividend payments; the share repurchase program; the acquisition of businesses, software products, or technologies complementary to our business; and capital expenditures, including the purchase of customer relationship management software and services.
Our international operations are subject to currency fluctuations. To minimize the impact of these fluctuations, we use foreign currency option contracts to hedge our exposure on anticipated transactions and forward contracts to hedge our exposure on firm commitments, primarily certain receivables and payables denominated in foreign currencies. Our foreign currency instruments by policy have maturities of less than three months and settle before the end of each quarterly period. The principal currencies hedged during the three months ended April 30, 2003 were the Euro, British pound, and Japanese yen. We monitor our foreign exchange exposures to ensure the overall effectiveness of our foreign currency hedge positions.
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Stock Compensation
Option Program Description
Autodesk maintains three active stock option plans for the purpose of granting stock options to employees and members of Autodesks Board of Directors: the 1996 Stock Plan (available only to employees), the Nonstatutory Stock Option Plan (available only to non-executive employees and consultants) and the 2000 Directors Option Plan (available only to non-employee directors). Additionally, there are five expired plans with options outstanding. In addition to its stock option plans, the Companys employees are also eligible to participate in Autodesks 1998 Employee Qualified Stock Purchase Plan.
Our stock option program is broad-based and designed to promote long-term retention. Essentially all of our employees participate. Options granted under our equity plans vest over periods ranging from one to five years and expire within ten years of date of grant. The exercise price of the stock options is equal to the closing price of our Common Stock on the Nasdaq National Market on the grant date.
All stock option grants to executive officers are made by the Compensation and Human Resources Committee of the Board of Directors. All members of the Compensation and Human Resources Committee are independent directors, as defined in the application rules for issuers traded on The Nasdaq Stock Market. See the Report of the Compensation and Human Resources Committee of the Board of Directors in our 2003 Proxy Statement for further information concerning Autodesks policies and procedures regarding the use of stock options. Grants to our non-employee directors are non-discretionary and are pre-determined by the terms of the 2000 Directors Option Plan.
The following tables provide information about our stock option programs, including distribution and dilutive effect, option plan balances and in-the-money and out-of-the-money options, including participation by the Chief Executive Officer and each of the four other most highly compensated executive officers during the fiscal year ended January 31, 2003 (the Named Executive Officers).
Distribution and Dilutive Effect of Options
The following table provides information about the distribution and dilutive effect of our stock options:
Three months 2003 |
Fiscal year ended January 31, |
||||||||
2003 |
2002 |
||||||||
Net grants during the period as % of outstanding shares(1) |
0.1 | % | 3.1 | % | 6.5 | % | |||
Grants to Named Executive Officers during the period as % of total options granted |
39.1 | %(2) | 9.3 | % | 14.1 | % | |||
Grants to Named Executive Officers during the period as % of outstanding shares |
0.3 | % | 0.6 | % | 1.1 | % | |||
Cumulative options held by Named Executive Officers as % of total options outstanding |
19.4 | % | 18.0 | % | 18.9 | % |
(1) | Net grants are total grants less cancellations. |
(2) | The executive staff, which includes the Named Executive Officers, received option grants during the first quarter of fiscal 2004. Employee grants are made throughout the year. |
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General Option Information
Our stock option activity for the relevant periods, is summarized as follows:
Options Outstanding | |||||||||
Shares Available for Options |
Number of Shares |
Weighted Average Price Per Share | |||||||
(Shares in thousands) | |||||||||
Options outstanding at January 31, 2002 |
8,998 | 29,164 | $ | 16.50 | |||||
Granted |
(7,356 | ) | 7,356 | 15.41 | |||||
Options assumed in an acquisition |
12 | 255 | 1.51 | ||||||
Exercised |
| (3,428 | ) | 14.42 | |||||
Canceled |
3,902 | (3,902 | ) | 17.64 | |||||
Additional shares reserved |
4,001 | | | ||||||
Options outstanding at January 31, 2003 |
9,557 | 29,445 | $ | 16.19 | |||||
Granted |
(909 | ) | 909 | 14.58 | |||||
Exercised |
| (324 | ) | 11.75 | |||||
Canceled |
752 | (752 | ) | 17.19 | |||||
Expired |
(84 | ) | | | |||||
Additional shares reserved |
4,084 | | | ||||||
Options outstanding at April 30, 2003 |
13,400 | 29,278 | $ | 16.17 |
In-the-Money and Out-of-the-Money Option Information
The following table compares the number of shares subject to option grants with exercise prices at or below the closing price of our common stock at April 30, 2003 (in-the-money) with the number of shares subject to option grants with exercise prices greater than the closing price of our Common Stock at the same date (out-of-the-money). Exercisable shares are those that are vested at April 30, 2003. The closing price of our Common Stock on April 30, 2003, was $15.56 per share.
Exercisable |
Unexercisable |
Total | |||||||||||||
Number of Shares |
Weighted Average Exercise Price |
Number of Shares |
Weighted Average Exercise Price |
Number of Shares |
Weighted Average Exercise Price | ||||||||||
(Shares in thousands) | |||||||||||||||
In-the-Money |
5,656 | $ | 12.49 | 7,543 | $ | 12.83 | 13,199 | $ | 12.69 | ||||||
Out-of-the-Money |
9,931 | 19.56 | 6,148 | 18.14 | 16,079 | 19.02 | |||||||||
Total Options Outstanding |
15,587 | $ | 17.00 | 13,691 | $ | 15.22 | 29,278 | $ | 16.17 |
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Option Grants in Last Fiscal Quarter
The following table sets forth, as to the Named Executive Officers, information concerning stock options granted during the three months ended April 30, 2003.
Individual Grants |
||||||||||||||||
Name |
Options Granted(1) |
% of Total Options Granted to Employees(2) |
Exercise Price Per Share |
Expiration Date(3) |
Potential Realizable Value at Assumed Annual Rates of | |||||||||||
5% |
10% | |||||||||||||||
Carol A. Bartz |
200,000 | 22.0 | % | $ | 14.73 | 3/13/13 | $ | 1,852,724 | $ | 4,695,165 | ||||||
Chairman of the Board, |
||||||||||||||||
Chief Executive Officer |
||||||||||||||||
and President |
||||||||||||||||
Joseph H. Astroth |
30,000 | 3.3 | % | $ | 14.73 | 3/13/13 | $ | 277,909 | $ | 704,275 | ||||||
Executive Vice President, |
||||||||||||||||
Location Services Division |
||||||||||||||||
Carl Bass |
75,000 | 8.3 | % | $ | 14.73 | 3/13/13 | $ | 694,771 | $ | 1,760,687 | ||||||
Executive Vice President, |
||||||||||||||||
Design Solutions Group |
||||||||||||||||
Michael E. Sutton |
30,000 | 3.3 | % | $ | 14.73 | 3/13/13 | $ | 277,909 | $ | 704,275 | ||||||
Executive Vice President, |
||||||||||||||||
Business Operations |
||||||||||||||||
Tom Vadnais (5) |
20,000 | 2.2 | % | $ | 14.73 | 3/13/13 | $ | 185,272 | $ | 469,517 | ||||||
Executive Vice President, |
||||||||||||||||
Autodesk Professional Services |
(1) | The options in this table are incentive stock options or nonstatutory stock options granted under the 1996 Stock Plan, and have exercises prices equal to the fair market value of the Companys Common Stock on the date of grant. Generally, all such options have ten year terms and vest over one to five years. The shares subject to each option will immediately vest in full in the event the Company is acquired by merger or asset sale, unless the option is to be assumed by the acquiring entity. In addition, in the event that the Company terminates any of the Named Executive Officers within 12 months following a change in control, the shares subject to each option will vest as to the number of shares that would have vested within the 12 months following such termination. |
(2) | The Company granted options to purchase 0.9 million shares of Common Stock during the three months ended April 30, 2003 to 208 employees. |
(3) | The options in this table may terminate before their expiration upon the termination of the optionees status as an employee or consultant or upon the optionees disability or death. |
(4) | Under rules promulgated by the SEC, the amounts in these two columns represent the hypothetical gain or option spread that would exist for the options in this table based on assumed stock price appreciation from the date of grant until the end of such options ten-year term at assumed annual rates of 5%, and 10%. Annual compounding results in total appreciation of 63% (at 5% per year) and 159% (at 10% per year). The 5% and 10% assumed annual rates of appreciation are specified in SEC rules and do not represent the Companys estimate or projection of future stock price growth. The Company does not necessarily agree that this method can properly determine the value of an option, and there can be no assurance that the potential realizable values shown in this table will be achieved. |
(5) | Mr. Vadnais departed the Company in May 2003. |
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Equity Compensation Plan Information
The following table summarizes the number of outstanding options granted to employees and directors, as well as the number of securities remaining available for future issuance, under the Companys compensation plans at April 30, 2003 (number of securities in thousands).
(a) | (b) | (c) | ||||||
Plan category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|||||
Equity compensation plans approved by security holders(1) |
19,554 | $ | 16.06 | 19,485 | (2) | |||
Equity compensation plans not approved by security holders(3) |
9,724 | $ | 16.38 | 340 | ||||
Total |
29,278 | $ | 16.17 | 19,825 |
(1) | Included in these amounts are 0.4 million securities available to be issued upon exercise of outstanding options with a weighted-average exercise price of $15.50 related to equity compensation plans assumed in connection with previous business mergers and acquisitions. |
(2) | Included in this amount are 6.4 million securities available for future issuance under Autodesks 1998 Employee Qualified Stock Purchase Plan. |
(3) | Amounts correspond to Autodesks Nonstatutory Stock Option Plan, which is not subject to shareholder approval. |
Risk Factors Which May Impact Future Operating Results
We operate in a rapidly changing environment that involves a number of risks, many of which are beyond our control. The following discussion highlights some of these risks and the possible impact of these factors on future results of operations. If any of the following risks actually occur, our business, financial condition or results of operations may be adversely impacted, causing the trading price of our common stock to decline.
General economic conditions may continue to reduce our net revenues and harm our business.
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions, including the potential economic impact from current concerns about SARS. Because of the continued slowdown in the U.S. and other countries economies, many customers are delaying or reducing technology purchases. If this slowdown continues, particularly in industries or countries that contribute a significant portion of our net revenues, it will likely continue to result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, weakness in the end-user market could continue to negatively affect the cash flow of our distributors and resellers who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure. Any of these events would likely harm our business, results of operations and financial condition.
Because we derive a substantial portion of our net revenues from a limited number of products, if these products are not successful, our net revenues will be adversely affected.
We derive a substantial portion of our net revenues from sales of AutoCAD software, including products based on AutoCAD that serve specific vertical markets, upgrades to those products and products that are interoperable with AutoCAD. As such, any factor adversely affecting sales of these products, including product life cycle, market acceptance, product performance and reliability, reputation, price competition and the availability of third-party applications, would likely harm our operating results.
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In the Discreet business, our customers buying patterns are heavily influenced by advertising and entertainment industry cycles, which has resulted in and may continue to have a negative impact on our operating results. In addition, Discreets advanced systems products rely on workstations manufactured by Silicon Graphics and failure of Silicon Graphics to deliver products or product upgrades in a timely manner would likely result in an adverse effect upon our financial results for a given period.
Our operating results fluctuate within each quarter and from quarter to quarter making our future revenues and operating results difficult to predict.
Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to change significantly or experience declines. Some of the factors that could cause our operating results to fluctuate include the timing of the introduction of new products by us or our competitors, changes in marketing or other operating expenses, changes in product pricing or product mix, platform changes, delays in product releases, distribution channel management, changes in sales compensation practices, the timing of large systems sales and general economic or political conditions, particularly in countries where we derive a significant portion of our net revenues.
We have also experienced fluctuations in operating results in interim periods in certain geographic regions due to seasonality or regional economic conditions. In particular, our operating results in Europe during the third quarter are usually impacted by a slow summer period, and the Asia Pacific operations typically experience seasonal slowing in the third and fourth quarters. Operating expenses may also increase in periods when major product releases occur.
Additionally, our operating expenses are based in part on our expectations for future revenues and are relatively fixed in the short term. Accordingly, any revenue shortfall below expectations could have an immediate and significant adverse effect on our profitability. Further, gross margins may be adversely affected if our sales of AutoCAD LT, upgrades and systems products, which historically have had lower margins, grow at a faster rate than sales of our higher-margin products.
Existing and increased competition may reduce our net revenues and profits.
The software industry has limited barriers to entry, and the availability of desktop computers with continually expanding performance at progressively lower prices contributes to the ease of market entry. The markets in which we compete are fairly mature and characterized by vigorous competition, both by entry of competitors with innovative technologies and by consolidation of companies with complementary products and technologies. In addition, some of our competitors have greater financial, technical, sales and marketing and other resources. Furthermore, a reduction in the number and availability of comparable third-party applications may adversely affect the sale of our products. Because of these and other factors, competitive conditions in the industry are likely to intensify in the future. Increased competition could result in continued price reductions, reduced net revenues and profit margins and loss of market share, any of which would likely harm our business.
We believe that our future results depend largely upon our ability to offer products that compete favorably with respect to reliability, performance, ease of use, range of useful features, continuing product enhancements, reputation and price.
We rely on third party technologies and if we are unable to use or integrate these technologies, our product and service development may be delayed.
We rely on certain software that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. An example of this type of software is the ACIS geometric solid modeler we license from Spatial. These third-party software licenses may not continue to be available on commercially reasonable terms, and the software may not be appropriately
28
supported, maintained or enhanced by the licensors. The loss of licenses to, or inability to support, maintain and enhance any such software could result in increased costs, or in delays or reductions in product shipments until equivalent software could be developed, identified, licensed and integrated, which would likely harm our business.
In addition, for certain of our products and services, we rely on third party hardware and services. Financial difficulties or even failure of these third parties may impact our ability to deliver such on-line collaboration applications and, as a result, may adversely impact our business.
Disruptions with licensing relationships, independent developers and third party developers could adversely impact our business.
Independent firms and contractors perform some of our product development activities, while other technologies are licensed from third parties. Licenses may restrict use of such technology in ways that negatively affect our business. We generally either own or license the software developed by third parties.
Because talented development personnel are in high demand, independent developers, including those who currently develop products for us, may not be able or willing to provide development support to us in the future. Similarly, we may not be able to obtain and renew license agreements on favorable terms, if at all, and any failure to do so could harm our business.
Our business strategy has historically depended in part on our relationships with third-party developers, who provide products that expand the functionality of our design software. Some developers may elect to support other products or may experience disruption in product development and delivery cycles or financial pressure during periods of economic downturn. In particular markets, this disruption would likely negatively impact these third-party developers and end users, which could harm our business.
Net revenues or earnings shortfalls or the volatility of the market generally may cause the market price of our stock to decline, which could harm our business.
The market price for our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price for our common stock may be affected by a number of factors, including the following: net revenues or earnings shortfalls and changes in estimates or recommendations by securities analysts; the announcement of new products or product enhancements by us or our competitors; quarterly variations in our or our competitors results of operations; developments in our industry; and general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
In addition, stock prices for many companies in the technology sector have experienced wide fluctuations that have often been unrelated to the operating performance of such companies. Historically, after extended periods of volatility in the market price of a companys securities, a company becomes more susceptible to securities class action litigation. This type of litigation is often expensive and diverts managements attention and resources.
Our efforts to develop and introduce new products and service offerings expose us to risks such as limited customer acceptance, costs related to product defects and large expenditures that may not result in additional net revenues.
Rapid technological change as well as changes in customer requirements and preferences characterize the software industry. We are devoting significant resources to the development of technologies and service offerings to address demands in the marketplace for increased connectivity and use of digital data created by computer-aided design software. As a result, we are transitioning to new business models, requiring a
29
considerable investment of technical and financial resources. Such investments may not result in sufficient revenue generation to justify their costs, or competitors may introduce new products and services that will achieve acceptance among our current customers, adversely affecting our competitive position.
Additionally, the software products we offer are complex, and despite extensive testing and quality control, may contain errors or defects. These defects or errors could result in corrective releases to our software products, damage to our reputation, loss of revenues, an increase in product returns or lack of market acceptance of our products, any of which would likely harm our business.
Our business could suffer as a result of risks associated with strategic acquisitions and investments.
We periodically acquire or invest in businesses, software products and technologies that are complementary to our business through strategic alliances, equity investments and the like. For example, in February 2003 we acquired Linius and in March 2003 we acquired VIA. 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 managements time and attention. In addition, such investments and acquisitions may involve significant transaction-related costs. We may not be successful in overcoming such risks, and such investments and acquisitions may negatively impact our business. In addition, such investments and acquisitions have in the past and may in the future contribute to potential fluctuations in quarterly results of operations. The fluctuations could arise from merger-related costs and charges associated with eliminating redundant expenses or write-offs of impaired assets recorded in connection with acquisitions. These costs or charges could negatively impact results of operations for a given period or cause lack of a consistent increase quarter to quarter in our operating results.
Our international operations expose us to significant regulatory, intellectual property, collections, exchange fluctuations and other risks, which could adversely impact our future net revenues.
We anticipate that international operations will continue to account for a significant portion of our consolidated net revenues. Risks inherent in our international operations include the following: unexpected changes in regulatory practices and tariffs, difficulties in staffing and managing foreign operations, longer collection cycles for accounts receivable, potential changes in tax laws and laws regarding the management of data, greater difficulty in protecting intellectual property and the impact of fluctuating exchange rates between the U.S. dollar and foreign currencies in markets where we do business.
Our international results may also continue to be impacted by general economic and political conditions in these foreign markets or in specific large foreign markets. In particular, the potential economic impact from concerns about SARS could disrupt trade and market relationships in a way that could harm our business. These and other factors may adversely impact our future international operations and consequently our business as a whole.
Our risk management strategy uses derivative financial instruments in the form of foreign currency forward and option contracts for the purpose of hedging foreign currency market exposures, which exist as a part of our ongoing business operations. Nevertheless, significant fluctuations in exchange rates between the U.S. dollar and foreign currency markets may adversely impact our future net revenues.
If we do not maintain our relationship with the members of our distribution channel, or achieve anticipated levels of sell-through, our ability to generate net revenues will be adversely affected.
We sell our software products both directly to customers and through a network of distributors and resellers. Our ability to effectively distribute our products depends in part upon the financial and business condition of our reseller network. Computer software dealers and distributors are typically not highly capitalized and have previously experienced difficulties during times of economic contraction, such as current worldwide economic
30
conditions, and may do so in the future. In addition, the changing distribution models resulting from the Internet, from increased focus on direct sales to major accounts or from two-tiered distribution may impact our reseller network in the future. No single customer, distributor or reseller accounted for more than 10% of our consolidated net revenues in the three months ended April 30, 2003 or during fiscal 2003, 2002 or 2001. We rely significantly upon major distributors and resellers in both the U.S. and international regions. The loss of or a significant reduction in business with those distributors or resellers or the failure to achieve anticipated levels of sell-through with any one of our major international distributors or large resellers could harm our business. In particular, if one or more of such resellers should be unable to meet their obligations with respect to accounts payable to us, we could be forced to write off such accounts, which could have a material adverse effect on our results of operations in a given period.
Product returns could exceed our estimates and harm our net revenues.
With the exception of contracts with some distributors, our sales contracts do not contain specific product-return privileges. However, we permit our distributors and resellers to return products in certain instances. For example, we generally allow our distributors and resellers to return older versions of products which have been superceded by new product releases. We anticipate that product returns will continue to be impacted by product update cycles, new product releases such as AutoCAD 2004 and software quality.
We establish reserves for stock balancing and product rotation. These reserves are based on historical experience, estimated channel inventory levels and the timing of new product introductions and other factors. While we maintain strict measures to monitor these reserves, actual product returns may differ from our reserve estimates, and such differences could harm our business.
If we are not able to adequately protect our proprietary rights, our business could be harmed.
We rely on a combination of patents, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. Despite such efforts to protect our proprietary rights, unauthorized parties from time to time have copied aspects of our software products or have obtained and used information that we regard as proprietary. Policing unauthorized use of our software products is time-consuming and costly. While we have recovered some revenues resulting from the unauthorized use of our software products, we are unable to measure the extent to which piracy of our software products exists, and software piracy can be expected to be a persistent problem. Furthermore, our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop similar technology.
We may face intellectual property infringement claims that could be costly to defend and result in our loss of significant rights.
We expect that software product developers will be increasingly subject to infringement claims as the number of products and competitors in our industry segments grows and as the functionality of products in different industry segments overlaps. Infringement, invalidity claims or misappropriation claims may be asserted against us, and any such assertions could harm our business. Litigation often becomes more likely in times of economic downturn. Any such claims, whether with or without merit, could be time-consuming to defend, result in costly litigation and diversion of resources, cause product shipment delays, or require us to enter into royalty or licensing agreements. In addition, such royalty or license agreements, if required, may not be available on acceptable terms, if at all, which would likely harm our business.
The loss of key personnel or the inability to attract and retain additional personnel could harm our business.
Our continued growth and success depends significantly on the continued service of highly skilled employees and independent developers. Our ability to attract and retain key personnel is dependent on a number of factors, including our continued ability to grant stock incentive awards. Changes in the accounting rules for
31
stock options, which are granted to most of our employees and which have been a significant factor in attracting and retaining key technical and management experts, could have a material adverse effect on our business. The loss of key personnel or inability to recruit new employees or independent developers would negatively impact our business. In addition, we may experience increased compensation costs to attract and retain skilled personnel.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We have no material changes to the disclosure on this matter made in our report on Form 10-K for the fiscal year ended January 31, 2003.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after evaluating our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 (the Exchange Act) Rules 13a-14(c) and 15-d-14(c)) as of a date (the Evaluation Date) within 90 days before the filing date of this Quarterly Report on Form 10-Q have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls.
Our review of our internal controls was made within the context of the relevant professional auditing standards defining internal controls, reportable conditions, and material weaknesses. Internal controls are processes designed to provide reasonable assurance that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use, and our transactions are properly recorded and reported, all to permit the preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States. Significant deficiencies are referred to as reportable conditions, or control issues that could have a significant adverse effect on our ability to properly authorize transactions, safeguard our assets, or record, process, summarize or report financial data in the condensed consolidated financial statements. A material weakness is a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the condensed consolidated financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. As part of our internal controls procedures, we also address other, less significant control matters that we or our auditors identify, and we determine what revision or improvement to make, if any, in accordance with our on-going procedures. Subsequent to the Evaluation Date, there were no significant changes in our internal controls or in other factors that could significantly affect our internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
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On December 27, 2001, Spatial Corp. (Spatial) filed suit in Marin County Superior Court against Autodesk and D-Cubed Ltd. (D-Cubed), seeking (1) a declaration that (a) Autodesk had breached the ten year old development agreement between Spatial and Autodesk (Development Agreement) and (b) that Autodesk and D-Cubed had misappropriated the trade secrets of Spatial (2) an injunction preventing Autodesk from disclosing ACIS source code to D-Cubed and (3) an injunction preventing Autodesk from working with individuals who had previously worked on ACIS source code for Spatial. ACIS is a geometric solid modeler upon which Autodesk ShapeManager is derived. Autodesk ShapeManager is incorporated into a number of Autodesk products, including Autodesk Inventor Series, AutoCAD based products and 3ds max.
After a hearing on January 23, 2002, the Superior Court denied Spatials motion for a preliminary injunction, finding that Spatial had failed to establish that it was likely to prevail on the merits at trial. On August 1, 2002, Spatial amended its complaint to seek the following additional remedies: (1) a declaration regarding the appropriate location of the ACIS source code and (2) termination of Development Agreement, including our right to work with third party contractors on the ACIS source code and the perpetual right to incorporate and distribute ACIS with our products. On October 16, 2002, Spatial dismissed all of its claims for misappropriation of trade secrets against Autodesk and D-Cubed. On February 13, 2003, the Court granted D-Cubed Ltd.s motion for summary judgment and denied our motion for summary adjudication of issues. The trial is expected to begin in the summer or fall of calendar year 2003.
We believe that Spatials claims are without merit, and we are contesting them vigorously. Although the results of litigation are inherently uncertain, we believe that the ultimate resolution of this matter will not have material effect on our consolidated statements of financial condition, results of operations or cash flows. However, if Spatial were to prevail at trial on its request to terminate the perpetual license to ACIS, and we could not obtain a license on acceptable terms or license or develop a substitute technology, our business and operating results could be materially adversely affected. During the fourth quarter of fiscal 2003 we recorded a $2.5 million reserve related to this matter.
On October 7, 2002, Digimation Inc. filed a demand for arbitration against Autodesk with the American Arbitration Association alleging breach of contract and interference with prospective economic advantage and business relations. The claims arise out of a November 1998 Preferred Publisher Agreement (the PPA) entered into with our Discreet division and relate to the marketing, publishing, development and support of software plug-ins for our 3ds max application. We have counter-claimed against Digimation for, among other things, Digimations failure to perform under the PPA. The arbitration hearing is set for July 2003. We believe that the ultimate resolution of this matter will not have a material effect on our consolidated statements of financial condition, results of operations or cash flows.
Generally, we are involved in various legal proceedings arising from the normal course of business activities. In our opinion, resolution of these matters is not expected to have a material adverse impact on our consolidated results of operations, cash flows or our financial position. However, depending on the amount and timing, an unfavorable resolution of a matter could materially affect our future results of operations, cash flows or financial position in a particular period.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Submission of Matters to a Vote of Security Holders
None
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
The Exhibit listed below is filed as part of this Form 10-Q.
Exhibit 99.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended April 30, 2003.
34
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: June 13, 2003
AUTODESK, INC. (Registrant) |
/s/ ALFRED J. CASTINO |
Alfred J. Castino Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
35
I, Carol A. Bartz, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Autodesk, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and |
6. | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: June 13, 2003
/s/ CAROL A. BARTZ |
Carol A. Bartz Chairman, Chief Executive Officer and President |
36
I, Alfred J. Castino, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Autodesk, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and |
c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): |
a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and |
6. | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: June 13, 2003
/s/ ALFRED J. CASTINO |
Alfred J. Castino Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
37
EXHIBIT 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Based on my knowledge, I, Carol A. Bartz, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Autodesk, Inc. on Form 10-Q for the quarterly period ended April 30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Autodesk, Inc.
/s/ CAROL A. BARTZ |
Carol A. Bartz Chairman, Chief Executive Officer and President |
Based on my knowledge, I, Alfred J. Castino, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Autodesk, Inc. on Form 10-Q for the quarterly period ended April 30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Autodesk, Inc.
/s/ ALFRED J. CASTINO |
Alfred J. Castino Senior Vice President and Chief Financial Officer |