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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
-----------10-Q/A
-------------------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- - --- Act of 1934
FOR THE PERIOD ENDED JULYOCTOBER 31, 1996
OR
___
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
COMMISSION FILE NUMBER: 0-14338
AUTODESK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2819853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 MCINNIS PARKWAY
SAN RAFAEL, CALIFORNIA 94903
(Address of principal executive offices)
TELEPHONE NUMBER (415) 507-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
----- -----
As of September 6,December 13, 1996, there were 45,648,00044,882,000 shares of the Registrant's
Common Stock outstanding.
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AUTODESK, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Statement of Income
Three and sixNine months ended JulyOctober 31, 1996 and 1995...........1995... 3
Condensed Consolidated Balance Sheet
JulyOctober 31, 1996 and January 31, 1996..........................1996................... 4
Condensed Consolidated Statement of Cash Flows
SixNine months ended JulyOctober 31, 1996 and 1995.....................1995............. 6
Notes to Condensed Consolidated Financial Statements......... 7Statements.... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 8OPERATIONS............................... 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................ 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 14PROCEEDINGS....................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 15
SIGNATURES................................................... 158-K........................ 16
SIGNATURES.............................................. 17
2
PART I. FINANCIAL INFORMATION
-
- ------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
(Unaudited)
Three months ended SixNine months ended
JulyOctober 31, JulyOctober 31,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues $132,594 $143,947 $271,807 $285,724$119,735 $131,779 $391,542 $417,503
Direct commissions 3,849 3,261 6,781 6,3803,088 3,242 9,869 9,622
-------- -------- -------- --------
Net revenues 128,745 140,686 265,026 279,344116,647 128,537 381,673 407,881
Costs and expenses:
Cost of revenues 16,622 17,362 33,914 34,64715,220 16,118 49,134 50,765
Marketing and sales 50,555 45,895 99,892 90,89850,233 46,246 150,125 137,144
Research and development 22,947 19,496 45,809 38,66223,662 19,584 69,471 58,246
General and administrative 18,269 19,036 36,934 37,83218,521 18,543 55,455 56,375
Charge for acquired in-process
research and development 3,2291,509 - 3,2294,738 -
-------- -------- -------- --------
111,622 101,789 219,778 202,039109,145 100,491 328,923 302,530
-------- -------- -------- --------
Income from operations 17,123 38,897 45,248 77,3057,502 28,046 52,750 105,351
Interest and other income, net 1,441 2,551 2,867 5,0511,604 2,201 4,471 7,252
-------- -------- -------- --------
Income before income taxes 18,564 41,448 48,115 82,3569,106 30,247 57,221 112,603
Provision for income taxes 7,919 15,149 18,410 30,0803,233 11,040 21,643 41,120
-------- -------- -------- --------
Net income $ 10,6455,873 $ 26,29919,207 $ 29,70535,578 $ 52,276
-------- -------- -------- --------71,483
======== ======== ======== ========
Net income per share $.22 $.52 $.62 $1.03
-------- -------- -------- --------$ .13 $ .38 $ .75 $ 1.41
======== ======== ======== ========
Shares used in computing
net income per share 47,570 50,460 48,100 50,535
-------- -------- -------- --------45,410 50,180 47,480 50,520
======== ======== ======== ========
See accompanying notes.
3
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(In thousands)
JulyOctober 31, 1996 January 31, 1996
------------- --------------------------------- -----------------
(Unaudited) (Unaudited)(Audited)
Current assets:
Cash and cash equivalents $116,803$ 87,759 $129,305
Marketable securities 76,42872,842 64,001
Accounts receivable, net 87,87386,384 93,919
Inventories 10,9799,012 9,685
Deferred income taxes 30,04826,791 33,769
Prepaid expenses and other current assets 18,47016,086 17,155
-------- --------
Total current assets 340,601298,874 347,834
-------- --------
Marketable securities, including a restricted balance
of $28,000 at JulyOctober 31, 1996 and January 31, 1996 80,40693,265 79,096
Computer equipment, furniture, and leasehold improvements:
Computer equipment and furniture 114,692104,574 106,643
Leasehold improvements 17,74919,574 21,100
Accumulated depreciation (83,704)(75,794) (78,778)
-------- --------
Net computer equipment, furniture, and
leasehold improvements 48,73748,354 48,965
Capitalized software and purchased technologies 19,51617,768 22,141
Other assets 21,50518,902 19,893
-------- --------
$510,765$477,163 $517,929
-------- --------======== ========
See accompanying notes.
4
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands)
JulyOctober 31, 1996 January 31, 1996
------------------------------- -----------------
(Unaudited) (Audited)
Current liabilities:
Accounts payable $ 25,03722,486 $ 24,547
Accrued compensation 19,95118,258 22,441
Accrued income taxes 68,91762,774 65,517
Other accrued liabilities 36,36134,082 31,790
-------- --------
Total current liabilities 150,266137,600 144,295
-------- --------
Deferred income taxes 1,660275 1,912
Litigation accrual 28,56129,021 27,640
Other liabilities 1,8711,907 1,754
Put warrants 64,500 -
Stockholders' equity:
Common stock 150,214141,472 140,765
Retained earnings 176,815103,640 191,109
Foreign currency translation adjustment 1,378(1,252) 10,454
-------- --------
Total stockholders' equity 328,407243,860 342,328
-------- --------
$510,765$477,163 $517,929
-------- --------======== ========
See accompanying notes.
5
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
SixNine months ended
JulyOctober 31,
-----------------------------------------
1996 1995
--------- -----------------
Operating activities
Net income $ 29,70535,578 $ 52,27671,483
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 15,957 13,58924,998 20,195
Charge for acquired in-process research and development 3,2294,738 -
Changes in operating assets and liabilities, net of
business combinations 11,721 (18,957)6,960 (9,629)
-------- --------
Net cash provided by operating activities 60,612 46,90872,274 82,049
-------- --------
Investing activities
Purchases of available-for-sale marketable securities, net (13,737) (49,245)(23,010) (55,141)
Purchases of computer equipment, furniture and leasehold
improvements (8,825) (9,570)(15,304) (13,987)
Business combinations, net of cash acquired (6,689) -
Other (9,830) 13,457(9,653) (7,194)
Capitalization of software costs and other (8,338) 16,936
-------- --------
Net cash used in investing activities (39,081) (45,358)(56,305) (59,386)
-------- --------
Financing activities
Proceeds from issuance of common stock 13,051 35,09017,643 44,419
Repurchase of common stock (41,489) (48,836)(67,045) (81,314)
Dividends paid (5,595) (5,678)(8,113) (8,498)
-------- --------
Net cash used in financing activities (34,033) (19,424)(57,515) (45,393)
-------- --------
Net decrease in cash and cash equivalents (12,502) (17,874)(41,546) (22,730)
Cash and cash equivalents at beginning of year 129,305 195,038
-------- --------
Cash and cash equivalents at end of quarter $116,803 $177,164
-------- --------$ 87,759 $172,308
======== ========
See accompanying notes.
6
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements at JulyOctober 31, 1996 and for
the three- and six-monthnine-month periods then ended are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report to Stockholders
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1996. The results of operations for the three
and sixnine months ended JulyOctober 31, 1996 are not necessarily indicative of the
results for the entire fiscal year ending January 31, 1997.
2. During the sixnine months ended JulyOctober 31, 1996, the Company acquired assets
from Creative Imaging Technologies, Inc. ("CIT"), and CadZooks, Inc., Argus
Technologies, Inc. ("Argus"), as well as the outstanding stock of Teleos
Research ("Teleos"). The aggregate cash purchase price for these threefour
transactions was $6.7$9.7 million. Additional
consideration may also be payable to the former shareholders of Teleos and
CIT based on product milestones and operating results. These acquisitions were accounted for using
the purchase method of accounting with the purchase price being principally
allocated to capitalized software, and purchased technologies, and intangible
assets. Approximately $3.2 million of the Teleos purchase price and $1.5
million of the Argus purchase price represented the value of in-process
research and development that had not yet reached technological feasibility
and had no alternative future use and was included as a one-time chargeuse. These amounts were charged to operations
induring the second
quarternine-month period ended October 31, 1996. Additional consideration
may also be payable to the former shareholders of fiscalCIT, Argus, and Teleos
based on product milestones and operating results which are expected to be
allocated to intangible assets and amortized on a straight-line basis over
two-to-five year 1997.periods.
The operating results of the acquired entities, which have not been material
in relation to those of the Company, have been included in the consolidated
financial results from their respective acquisition dates.
3. In August 1996, the Company announced a stock repurchase program under which
the Company may purchase up to 5 million shares of common stock in open
market transactions as market and business conditions warrant. The Company
may also utilize equity options as part of theits repurchase program. This
program is in addition to shares previously reserved pursuant to an on-going
and systematic repurchase plan to reduce the dilutive effect of common stock
to be issued under the Company's stock option plans.
In connection with the new repurchase program, the Company sold 3 million put warrants
to an independent third party in September 1996 that entitle the holder of
the warrants to sell one share3 million shares of common stock to the Company at
a
fixed price$21.50 per share. Additionally, the Company purchased 2 million call options that
entitle the Company to buy one share2 million shares of its common stock at a
fixed price$25.50 per
share. The put warrants and call options expire in September 1997. The
premiums received with respect to the equity options totaled $8.1 million and
equaled the premiums paid. Consequently, there was no exchange of cash. The
amount related to the Company's maximum potential repurchase obligation under
the put warrants will behas been reclassified from stockholders' equity to put
warrants. The pro-forma impact of this reclassification has not
been presented in the accompanying condensed consolidated balance sheet as of
Julywarrants at October 31, 1996. The Company has the right to settle the put
warrants with stock or a cash settlement equal to the difference between the
exercise price and market value at the date of exercise. These securities
had no significant dilutive effect on net income per share for the periods
presented.
7
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4 On December 10, 1996, the Company entered into a merger agreement with
Softdesk, Inc. ("Softdesk"), a leading supplier of AutoCAD-based application
software for the architecture, engineering and construction (AEC) market, in
a transaction anticipated to be accounted for as using the purchase method.
The terms of the merger agreement were subsequently amended on December 19,
1996. If the transaction is consummated under the terms of the agreement,
Autodesk will issue $15.00 worth of its common stock for each outstanding
share of Softdesk stock, subject to adjustment based on the average closing
price of Autodesk's common stock over a specified period preceding the
closing date of the transaction. Based upon closing stock prices on December
13, 1996, the transaction is valued at approximately $90 million for Softdesk
shareholders.
The merger is expected to close in the first calendar quarter of 1997. The
merger is subject to the approval of Softdesk's stockholders and appropriate
government agencies. The Company estimates that it will incur direct
transaction costs associated with this merger in the range of approximately
$2.5 million to $3.5 million. At closing, this transaction is expected to
result in one time charges of approximately $50 million to $60 million with
respect to in-process research and development based on the preliminary
purchase price allocation. Following this merger, the Company also expects to
incur approximately $3 million for personnel redeployment and related costs.
In addition, the Company expects to incur additional expenses of
approximately $3 million to $4 million with regard to integrating the two
companies. There can be no assurance that the Company will not incur
additional material charges in subsequent quarters to reflect additional
costs associated with the merger.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, which reflect management's
best judgment based on factors currently known, involve risks and uncertainties.
Actual results could differ materially from those anticipated in these forward-
looking statements as a result of a number of factors, including but not limited
to those discussed below. Forward-looking information provided by Autodesk
pursuant to the safe harbor established by recent securities legislation should
be evaluated in the context of these factors.
RESULTS OF OPERATIONS
Three Months Ended JulyOctober 31, 1996 and 1995
- - -------------------------------------------------------------------------------------
Net revenues. Autodesk's worldwide net revenues in the secondthird quarter of fiscal
year 1997 were $128.7$116.6 million compared to $140.7$128.5 million in the prior fiscal
year, a decrease of 89 percent. The lower revenues resulted principally from
lower revenues and unit shipments of new AutoCAD licensesand AutoCAD updates as the current version,
AutoCAD Release 13, which began shipping in the fourth quarter of fiscal year
1995, experiences a slow downslowdown in sales as it enters the latter stages of its life
cycle. SecondNet revenues by geography for the third fiscal quarter were $46.3
million, $26.6 million, and $43.7 million in the Americas, Asia/Pacific, and
Europe, respectively. Third quarter revenues in fiscal year 1997 as compared to
the same period in the prior fiscal year were also adversely impacted by
approximately $6$2.5 million resulting principally from the stronger value of the
dollar relative to internationalforeign currencies, most notably the Japanese yen.yen and the
German mark. These decreases were partially offset by higher sales of new and
enhanced products introduced during the first half ofcurrent fiscal year, 1997, including Autodesk
Mechanical Desktop, 3D Studio MAX,Autodesk Map, and AutoCAD LT for Windows 95, as
well as increased AutoCAD update revenues. Second95. Third quarter
net revenues in fiscal year 1997 as compared to fiscal year 1996 decreased by 189
percent and 718 percent in the Americas and Europe, respectively, resulting from
lower shipments of AutoCAD shipments
and revenues in both regions as well as softness in the German economy.
Consolidated revenuesAutoCAD updates. Revenues derived from AutoCAD
and AutoCAD updates represented approximately 7065 percent of consolidated
revenues in the secondthird quarter of fiscal year 1997 as compared to approximately
75 percent in the same period of the prior fiscal year. Revenue decreases
included reductions in the US dealer channel as well as reductions in Germany
and Switzerland. Partially offsetting the decreases in Europe and the Americas
was a 7an 8 percent increase in Asia/Pacific revenues whichrevenues. The increase posted higher
revenuesin
Asia/Pacific resulted primarily from revenue increases in Japan and South Korea
from sales of AutoCAD LT and the Company's multimedia and mechanical and multimedia product
offerings.offerings which were partially offset by lower AutoCAD shipments. International
sales, including exports from the US, accounted for approximately 6663 percent of
the Company's revenues in the secondthird quarter of fiscal year 1997 as compared to
6364 percent for the secondthird quarter of fiscal year 1996.
Direct commissions paid to dealers represented 3 percent of net revenues in the
second quarter of fiscal year 1997 as compared to 2 percent in the same period
of the prior fiscal year. The increase in direct commissions, both in absolute
dollars and as a percentage of net revenues, resulted from higher sales to
major accounts and US educational institutions.
The Company believes that net revenues in its third fiscal quarter ending
October 31, 1996the coming quarters will be negatively
impacted by an anticipated reductiona slowdown in sales of AutoCAD and related updates as AutoCAD
Release 13 enters intonears the latter stagesend of its product life cycle and duecycle. As a result, AutoCAD
revenues are expected to seasonal slowdowns in Europe
and Asia/Pacific. Accordingly, the Company expects revenuescontinue to decrease by
approximately 5 to 10 percent in its third fiscal quarter ending October 31,
1996 and currently estimates that fiscal year 1997decline as a percentage of consolidated revenues will be
below fiscal year 1996
revenues. While the Company expects that new products introduced in recent
quarters, including 3D Studio MAX, AutoCAD LT for Windows 95, Autodesk Map, and
Autodesk Mechanical Desktop, as well as products expected to be
introduced during the last half of fiscal year 1997, will partially offset the decrease in AutoCAD
revenues, delaysthe Company currently does not anticipate revenue growth on a
sequential basis in the quarter ending January 31, 1997. The Company
anticipates, however, that following the commencement of shipping the next
release of AutoCAD, which is currently anticipated to occur in the first half of
the fiscal year ending January 31, 1998, AutoCAD sales will increase as a
percentage of consolidated revenues. While the Company has anticipated a
slowdown in AutoCAD revenues based on historical experiences and known market
conditions, any variations from the Company's current expectations may have a
material impact on the Company's financial results.
9
Delays in the introduction of thesethe next version of AutoCAD or other new and
enhanced products planned for the coming quarters, or failure to achieve
significant customer acceptance for these new products may have a material
adverse effect on the Company's revenues and consolidated results of operations
in future periods. Additionally, continued softnessslowdowns in the Americas,
particularly in the US, and in various European markets including Germany and
Italy, could also have a material adverse effect on the Company's business and
consolidated results of operations.
8
The foregoing forward-looking information is based upon current expectations of
the Company. Actual results could differ materially for the reasons noted and
due to other risks, including but not limited to those mentioned above and
otherwise discussed under "Certain Factors Which May Impact Future Operating
Results," page 11.12.
Cost of revenues. Cost of revenues as a percentage of net revenues increased
approximately one-half percent in the secondthird quarter of fiscal 1997 as compared
to 13 percent from 12 percent in the secondthird quarter of the prior fiscal year. This increase resulted from a changeGross margins in the current
quarter were adversely impacted by the mix of productproducts sales which included increased update sales of AutoCAD and
AutoCAD LT for Windows 95, which have lower gross margin than commercial
versions of these products, and to a lesser
extent, the impact of increased fixed costs associated withon a lower net revenue base.
Revenues from commercial versions of AutoCAD, which historically have yielded a
higher gross margin than many of the transitionCompany's other commercial products,
decreased as a percentage of certain European software manufacturing from Switzerland to
Ireland.consolidated revenues. Similarly, AutoCAD LT,
which has a lower gross margin than AutoCAD commercial versions, increased as a
percentage of total revenues. In the future, cost of revenues as a percentage
of net revenues may be impacted by the mix of product sales, royalty rates for
licensed technology embedded in the Company's products, and the geographic
distribution of sales.
Marketing and sales. Marketing and sales expenses increased from 3336 percent of
net revenues in the secondthird quarter of fiscal year 1996 to 3943 percent in the secondthird
quarter of fiscal year 1997. Actual spending increased 109 percent as a result of
higher employee costs as well as marketing and sales costs associated with the
launch of AutoCAD LT for Windows 95, and AutoCAD Map Release 1.0, which
was released at the end of the second fiscal quarter.1.0. The Company
expects to continue to invest in marketing and sales of its products, to develop
market opportunities, and to promote Autodesk's competitive position.
Accordingly, the Company expects marketing and sales expenses to continue to be
significant, both in absolute dollars and as a percentage of net revenues.
Research and development. Research and development expenses as a percentage of
net revenues for the secondthird quarter of fiscal year 1997 increased to 1820 percent
from 1415 percent in the secondthird quarter of the prior fiscal year. Actual research
and development spending increased by 1821 percent in absolute dollars on a year
over year basis due to the addition of software engineers and increased
personnel costs, costs associated with the development of new and enhanced
products, including the next release of AutoCAD, and the translation of certain
of these products into foreign languages. The Company anticipates that research
and development expenses will increase in fiscal year 1997 over the prior fiscal
year as a result of acquisitions and product development efforts by the
Company's market groups. Additionally, the Company intends to continue
recruiting and hiring experienced software developers and to consider the
licensing and acquisition of complementary software technologies and businesses.
General and administrative. General and administrative expenses were 1416 percent
of net revenues in the secondthird quarter of boththe current fiscal years 1997 and 1996.
Expenses decreased 4year as compared to
14 percent in absolute dollars over the same period in the
priorof fiscal year resulting primarily from1996. Actual spending remained
flat between the periods and reflect increased costs associated with recent
acquisitions offset by lower professional fees. The Company currently expects
that general and administrative expenses will increase moderately in future
periods to support spending on infrastructure, including continued investment in
Autodesk's worldwide information systems.systems, and to a lesser extent, as a result of
recent acquisitions. During the quarter ending January 31, 1997, the Company
expects to incur $500,000 to $1,000,000 in expenses associated with its merger
agreement with Softdesk, Inc., a leading supplier of AutoCAD-based application
software for the architecture, engineering and construction (AEC) market. This
transaction, which is anticipated to be accounted for as a pooling of interests,
is expected to close in the first calendar quarter of 1997.
10
Charge for acquired in-process research and development. In JuneAugust 1996, the
Company acquired the outstanding stock of Teleos Research ("Teleos") in exchange
for cash. The transaction was accounted for using the purchase method of
accounting with the purchase price being principally allocated to capitalized
software and intangible assets. Approximately $3.2 million of the total
purchase price represented the value of in-process research and development that
had not yet reached technological feasibility and had no alternative future use
and was charged to the Company's operating expenses in the second quarter of
fiscal year 1997.
9
In August 1996, the Company acquiredcash certain assets of Argus Technologies, Inc. ("Argus"),
a Canadian Company engaged in the development of mapping software and geographic
information systems technology for use on the Internet and corporate intranets.
The acquisition has been accounted for using the purchase method of accounting
with the purchase price being principally allocated to capitalized software and
purchased technologies, and intangible assets and is expected to
include a one-time charge of approximatelyassets. Approximately $1.5 million to $2.0 million forof
the total purchase price represented the value of acquired in-process research and
development.development that had not yet reached technological feasibility and had no
alternative future use and was charged to the Company's operating expenses in
the third quarter of fiscal year 1997.
The results of Argus will
behave been included in the Company's consolidated financial
results from the acquisition date. In the near term, the Company expects the
operating expenses associated with the Argus acquisition and theother acquisitions
completed during the first half
of fiscal year 1997 will exceed revenues, resulting in a negative
impact of up to $0.02 per share in each of the third and fourth quartersquarter of the current fiscal
year, exclusive of the anticipated one-time charge for in-process
research and development related to the Argus transaction.year.
Interest and other income. Interest and other income in the secondthird quarter of
fiscal year 1997 was $1.4$1.6 million, including foreign currency lossesgains of
approximately $173,000,$76,000, compared to $2.6$2.2 million in the same quarter of the prior
fiscal year, which included foreign currency gainslosses of approximately $470,000.$92,000.
Interest income for the secondthird quarter of fiscal year 1997 was $1.6$2.1 million, a
decrease of approximately $1.1$.6 million from the same period in the prior fiscal
year resulting from lower average cash balances and lower interest rates on the
Company's international investment portfolio when compared to the same period in
the prior fiscal year.
Provision for income taxes. The Company's effective income tax rate was 42.735.5
percent in the secondthird quarter of fiscal year 1997 as compared to 36.5 percent in
the same quarter of the prior fiscal year. The increasedecrease in the effective income
tax rate resulted from a one-time charge for in-process acquired research and
development recorded during the quarter which is not deductible for income tax
purposes, partially offset by a reduction in the effective income tax rate dueprincipally attributable to increased foreign earnings which are
taxed at rates lower than the US statutory rate.
SixNine Months Ended JulyOctober 31, 1996 and 1995
- - ----------------------------------------------------------------------------------
Net revenues. Autodesk's net revenues for the sixnine months ended JulyOctober 31,
1996 were $265.0$381.7 million which represented a five6 percent decrease from the same
period of the prior fiscal year. The decrease resulted from revenue decreases
in all geographies, most notably a 14 percent decrease in the Americas and an 11Europe of 14 percent decreaseand 6 percent respectively, reflecting
slowdowns in Europe, principally due tothe US dealer channel, Germany, Switzerland, and France. The
reductions reflect lower sales of AutoCAD and AutoCAD updates.updates as the current
release enters the end of its product life cycle, as well as a general slowdown
in the German market and its impact on other European economies. Net revenues
for the first sixnine months of fiscal year 1997 were also negatively affected by
approximately $11.4$14.0 million due to changes in foreign exchange rates when
compared to the same period in the prior fiscal year. These decreasesyear primarily due to changes in
the exchange rates of the Japanese yen and German mark, partially offset by
favorable variances in the Italian lire and Swedish krona. The decreased
revenues as compared to the prior fiscal year were partially offset by revenues
from new and enhanced products introduced during the first half of fiscal year 1997, most notably
Autodesk Mechanical Desktop, AutoCAD LT for Windows 95, Autodesk Map, and 3D
Studio MAX.
For the three- and nine- month periods in fiscal year 1996 ended October 31,
1995, product returns which are accounted for as a reduction of revenues, were
11 percent and 9 percent of consolidated net revenues, respectively. For the
comparable periods in fiscal year 1997, product returns were 8 percent and 9
percent of consolidated net revenues. While the Company experienced a decrease
in product returns in absolute dollars during the first nine months of fiscal
year 1997, management anticipates that product returns in future periods will
continue to be impacted by product update cycles, new product releases, and
software quality.
11
Cost of revenues. Cost of revenues as a percentage of net revenues for the sixnine
months ended JulyOctober 31, 1996 was 13 percent as compared to 12 percent for the
same period of the prior fiscal year. The increase resulted from increased
royalty payments associated with Autodesk Mechanical Desktop and 3D Studio MAX,
andas well as a higher percentage of revenues from update salesAutoCAD LT which has a lower
gross margin than many of AutoCAD and AutoCAD LT.the Company's other commercial products.
Operating expenses. Operating expenses for the Company's marketing and sales,
research and development, and general and administrative functions for the sixnine
months ended JulyOctober 31, 1996 increased approximately 911 percent to $182.6$279.8
million as compared to $167.4$251.8 million for the same period of the prior fiscal
year. The growth in operating expenses from the prior fiscal year was due to
increased headcount, higher spending to support the marketing and development of
new and enhanced products, expenditures to support the Company's market group
structure, and increased spending in order to support the Company's increased
operations and related infrastructure.
10
Operating expenses for the first halfthree quarters of fiscal year 1997 also
included a one-time
chargecharges of $3.2$4.7 million for acquired in-process research and
development associated with the Teleos acquisition.and Argus acquisitions.
Interest and other income. Interest and other income for the sixnine months ended
JulyOctober 31, 1996 was $2.9$4.5 million as compared to $5.1$7.3 million in the same period
of the prior fiscal year. Interest income was $3.1$5.3 million for the first sixnine
months of fiscal year 1997 as compared to $5.6$8.2 million in the same period of the
prior fiscal year. The decrease in interest income from the same period of the
prior fiscal year resulted from lower average cash balances and lower interest
rates on the Company's international investment portfolio.
Income taxes. The Company's effective income tax rate was 38.337.8 percent infor the
first half of fiscal year 1997nine-month period ended October 31, 1996 as compared to 36.5 percent in the same
period of the prior fiscal year. The increase in the effective income tax rate
resulted from a one-time charge for acquired in-process research and development
recorded in the second quarter of fiscal year 1997 associated with the Teleos
acquisition which is not deductible for income tax purposes, partially offset by
a reduction in the effective income tax rate attributable to increased foreign
earnings which are taxed at rates lower than the US statutory rate.
CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
Autodesk operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. The following discussion
highlights some of these risks and the possible impact of these factors on
future results of operations.
Fluctuations in quarterly operating results. The Company has experienced
fluctuations in operating results in interim periods in certain geographic
regions due to seasonality and general economic conditions in these markets.
The Company's operating results in Europe during the third fiscal quarter are
usually impacted by a slow summer period while the Asia/Pacific operations
typically experience seasonal slowing in the third and fourth fiscal quarters.
The Company typically receives and fulfills a majority of its orders within the
quarter, with a substantial portion occurring in the third month of the fiscal
quarter. As a result, the Company may not learn of revenue shortfalls until
late in a fiscal quarter. Additionally, the Company's operating expenses are
based in part on its expectations for future revenues and are relatively fixed
in the short term. Any revenue shortfall below expectations could have an
immediate and significant adverse effect on results of operations.
12
Similarly, shortfalls in Autodesk's revenues or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock. Moreover, the Company's stock
price is subject to the volatility generally associated with software and
technology stocks and may also be affected by broader market trends unrelated to
the Company's performance.
Product concentration. Autodesk derives a substantial portion of its revenues
from sales of AutoCAD, AutoCAD updates, and adjacent computer-aided design
("CAD") products which are interoperable with AutoCAD. As such, any factor
adversely affecting sales of AutoCAD and AutoCAD updates, including such factors
as product life cycle, market acceptance, product performance and reliability,
reputation, price competition, and the availability of third-party applications,
could have a material adverse effect on the Company's business and consolidated
results of operations and financial condition. The current version of AutoCAD,
AutoCAD Release 13, is entering the latter stages of its product life cycle which is
expected to result in lower AutoCAD sales and unit shipments in future periods.
11
While the Company has anticipated a slowdown in AutoCAD revenues based on
historical experiences and known market conditions, any variations from the
Company's current expectations may have a material impact on the Company's
financial results.
A substantial portion of the Company's CAD sales, including sales of AutoCAD and
AutoCAD updates, are used by the Architecture, Engineering, and Construction
("AEC") industry. The Company's product sales to the AEC markets, particularly
in the US and parts of Euorpe,in various European markets, including Germany, France, and Italy,
relative to prior periods, have slowed due in part to general market conditions
and short-term growth is not anticipated for these markets. Contraction in the
AEC industry in other markets where the Company operates or a greater than
anticipated slowdown in the US and parts of
Europe particularly in Germany, could have a material adverse effect
on Autodesk's business and consolidated results of operations in future periods.
Product development and introduction. The software products offered by the
Company are internally complex and, despite extensive testing and quality
control, may contain errors or defects ("bugs"), especially when first
introduced. In fiscal year 1996, the Company experienced quality and
performance issues associated with AutoCAD Release 13 including issues relating
to compatibility with certain hardware platforms and peripheral equipment,
interoperability problems with products designed to work in conjunction with
AutoCAD Release 13, and other issues associated with the software's object-
oriented design. These factors resulted in a high rate of product returns in
fiscal year 1996. While the Company believes the AutoCAD Release 13 performance
issues have been satisfactorily addressed, there can be no assurance that
defects or errors will not be discovered in future releases of AutoCAD and other
software products offered by the Company. Such defects or errors could result
in corrective releases to the Company's software products, damage to the
Company's reputation, loss of revenues, an increase in product returns, or lack
of market acceptance of its products, any of which could have a material and
adverse effect on the Company's business and consolidated results of operations.
The software industry is characterized by rapid technological change as well as
changes in customer requirements and preferences. The Company believes that its
future results will depend largely upon its ability to offer products that
compete favorably with respect to price, reliability, performance, range of
useful features, continuing product enhancements, reputation, and training.
Delays or difficulties, including the discovery of product defects similar to
those experienced with new product
introductions or product enhancements planned for releaseAutoCAD Release 13, may result in the second halfdelay or
cancellation of fiscal year 1997planned development projects and could have a material and
adverse effect on the Company's business and consolidated results of operations.
Further, increased competition in the market for design, mapping, multimedia, data
management, or data publishing software products could also have a negative
impact on the Company's business and consolidated results of operations.
The software products offered by the Company are internally complex and may
contain errors or defects ("bugs"), especially when first introduced. Despite
extensive product testing and quality control, there can be no assurance that
defects and errors will not be found in the Company's products. Such defects or
errors could result in damage to the Company's reputation, loss of revenues, or
lack of market acceptance of its products, any of which could have a material
adverse effect on the Company's business and consolidated results of operations.13
Certain of the Company's product development activities are performed by
independent firms and contractors while other technologies are licensed from
third parties. Autodesk generally either owns or has an exclusive license for
use of the software developed by third parties. Because talented development
personnel are in high demand, there can be no assurance that independent
developers, including those who have developed products for the Company in the
past, will be able to provide development support to Autodesk in the future.
Similarly, there can be no assurance that the Company will be able to obtain and
renew license agreements on favorable terms, if at all, and any failure to do so
could have a material adverse effect on the Company's business and consolidated
results of operations.
International revenues. The Company anticipates that international revenues
will continue to account for a significant portion of its consolidated revenues.
Risks inherent in the Company's international sales include the following:
unexpected changes in regulatory practices and tariffs; difficulties in staffing
and managing foreign operations; longer collection cycles; potential changes in
tax laws; greater difficulty in protecting intellectual property; and the impact
of fluctuating exchange rates between the US dollar and foreign currencies in
markets where Autodesk does business. During the first nine months of the
current fiscal year, changes in exchange rates from the same period of the prior
fiscal year have adversely impacted revenues principally due to changes in the
Japanese yen and Germany mark. The Company's international results may also be
impacted by general economic and political conditions in these foreign markets.markets
including a current slowdown in the German market and its adverse impact on
other European markets where the Company operates. There can be no assurance
that these and other factors will not have a material adverse effect on the
Company's future international sales and consequently on the Company's business
and consolidated results of operations.
Dependence on distribution channels. The Company sells its software products
primarily to distributors and dealers (value-added resellers or "VARs").
Autodesk's ability to effectively distribute its products depends in part upon
the financial and business condition of its VAR network. Although the Company
has not to date experienced any material problems with its VAR network, computer
software dealers and distributors are typically not highly capitalized and have
experienced difficulties especially during times of economic contraction and may
do so in the future. The loss of or a significant reduction in business with
any one of the Company's major international distributors or large US dealers
could have a material adverse effect on the Company's business and consolidated
results of operations in future periods.
12
Product returns. With the exception of certain European distributors,
agreements with the Company's VARs do not contain specific product-return
privileges. However, the Company permits its VARs to return product in certain
instances, generally during periods of product transition and update cycles. In
fiscal year 1996, the Company experienced a higher level of product returns than
in prior
periods,fiscal years 1995 and 1994, most notably in the US, which management
attributed primarily to performance issues associated with initial versions of
AutoCAD Release 13 software. DuringWhile the Company experienced a decrease in
product returns in absolute dollars during the first halfnine months of fiscal year
1997 relative to the Company continued to experience a high
levelcorresponding period of the prior fiscal year, management
anticipates that product returns relativein future periods will continue to prior periods due to transition andbe impacted
by product update cycles, related to the Company'snew product releases, and software products.quality.
14
Autodesk establishes allowances, including allowances for stock balancing and
product rotation, based on estimated future returns of product and after taking
into account channel inventory levels, the timing of new product introductions,
and other factors. While the Company maintains strict measures to monitor
channel inventories and to provide appropriate allowances, actual product
returns may differ from the Company's reserve estimates, and such differences
could be material to Autodesk's consolidated financial statements.
Intellectual property. The Company protects its intellectual property through
copyright, trade secret, patent, and trademark laws. There can be no assurance
that such measures will be adequate to protect the Company's proprietary
intellectual property or that claims or infringement of third parties'
intellectual property rights will not occur. In the normal course of business,
the Company receives and makes inquiries with regard to possible patent
infringement. Disputes regarding patent infringement or violations of other
intellectual property rights could lead to costly litigation or licensing
arrangements. Where deemed advisable, the Company may seek licenses or
negotiate settlements. Costs incurred in the future to litigate intellectual
property ownership or to acquirenegotiate license rights could negatively impact future
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and marketable securities, which consist primarily of
high-quality municipal bonds, tax-advantaged money market instruments, and US
treasury notes, totaled $273.6$253.9 million at JulyOctober 31, 1996 compared to $272.4
million at January 31, 1996. (Both amounts include a restricted balance of
$28.0 million related to a litigation judgment. See Part II, Item 1 of this
report.) During the first sixnine months of fiscal year 1996,1997, the Company
generated $60.6$72.3 million in cash from operations and realized cash proceeds of
$13.1$17.6 million from the issuance of shares through employee stock option and
stock purchase programs. These increases were partially offset by cash used to
purchase 1,152,0002,207,000 shares of the Company's stock ($67.0 million) under an
ongoing, systematic repurchase program ($41.5 million);and under a 5 million share repurchase
program approved by the Company's Board of Directors in August 1996; to purchase
computer equipment, furniture, and leasehold improvements ($8.815.3 million); to
effect businesses combinations ($6.79.7 million); and to pay dividends on the
Company's common stock ($5.68.1 million).
The Company's principal commitments to use cash at JulyOctober 31, 1996 consistedinclude
payments of obligations
under operating leases for facilities.facilities and Autodesk's potential put warrant
obligation under its new stock repurchase program. See Note 3. of Notes to
Condensed Consolidated Financial Statements.
Longer-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancement of existing
products; financing anticipated growth; dividend payments; repurchases of the
Company's common stock; and the possible acquisition of businesses, software
products, or technologies complementary to the Company's business. The Company
believes that its existing cash, cash equivalents, marketable securities,
available line of credit, and cash generated from operations will be sufficient
to satisfy its currently anticipated cash requirements for fiscal year 1997.
13requirements.
15
PART II. OTHER INFORMATION
-
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
In October 1992, Vermont Microsystems, Inc. ("VMI") filed a complaint against
the Company in the US District Court for the District of Vermont, alleging among
other things, misappropriation of trade secrets. In October 1994, the case was
tried before a Magistrate of the US District Court of Vermont. In December
1994, the US District Court ruled in favor of VMI on the trade secret claim and
the Company recorded a litigation charge of $25.5 million as a result of a
judgment in this matter. The Company appealed that judgment, and VMI cross-
appealed, before the US Court of Appeals for the Second Circuit in January 1996.
In July 1996, the Court of Appeals affirmed the lower court's finding of
liability but remanded the award for damages back to the US District Court of
Vermont to reconsider the appropriate calculation of damages. VMI's cross-
appeal was denied by the appellate court. Management believes the ultimate
resolution of this matter will not have a material adverse effect on the
Company's consolidated financial condition, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 27, 1996, the
following individuals were elected to the Board of Directors:
Votes For Votes Withheld
---------- --------------
Carol A. Bartz 39,233,736 6,944,160
Mark A. Bertelsen 39,236,035 6,941,861
Crawford W. Beveridge 39,237,083 6,940,813
J. Hallam Dawson 39,236,496 6,941,400
Jerre Stead 39,236,407 6,941,489
Mary Alice Taylor 39,234,353 6,943,543
Morton Topfer 39,233,897 6,943,999
The following proposals were approved at the Company's Annual Meeting:
Affirmative Negative Votes
Votes Votes Withheld
----------- -------- --------
1. Proposal to adopt the Company's 1996
Stock Plan and reservation of 1,500,000
additional shares of the Company's Common
Stock for issuance thereunder plus any
previously authorized but unissued shares
remaining under the Company's 1987 Stock
Option Plan. 27,604,848 10,609,583 7,963,465
2. Amendment of the Company's Employee Qualified
Stock Purchase Plan, increasing the reserved
shares by 500,000 and to increase the maximum
permitted payroll deduction level to fifteen
percent of an employee's compensation. 37,962,720 845,309 7,369,867
14
Affirmative Negative Votes
Votes Votes Withheld
----------- -------- --------
3. Amendment of the Company's 1990 Directors'
Stock Option Plan, including an increase
in the reserved shares by 200,000. 28,328,825 10,468,604 7,380,467
4. Ratify the appointment of Ernst & Young LLP
as independent auditors for the fiscal year
ending January 31, 1997. 39,424,325 52,802 6,700,769
operations, or cash
flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended JulyOctober 31, 1996.
SIGNATURES16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: September 12, 1996February 28, 1997
AUTODESK, INC.
(Registrant)
/s/ CAROL A. BARTZ
------------------
Carol A. Bartz
Chairman and Chief Executive Officer
/s/ JOHN E. CALONICO
--------------------
John E. Calonico
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
1517