EXHIBIT 13.1 Financial Review 21 Selected Five-Year Financial Data 22 Management's Discussion and Analysis of Financial Condition and Results of Operations 33 Consolidated Statement of Income 34 Consolidated Balance Sheet 35 Consolidated Statement of Cash Flows 36 Consolidated Statement of Stockholders' Equity 37 Notes to Consolidated Financial Statements 51 Report of Ernst & Young LLP, Independent Auditors 52 Directors, Executive Officers, and Officers Selected Five-Year Financial Data Fiscal year ended January 31, ----------------------------- (In thousands, except per share data, percentages, and employees) 1998 1997/1/ 1996/1/ 1995/1/ 1994 - ------------------------------------------------------------------------------------------------------ For the fiscal year Net revenues $617,126 $496,693 $534,167 $454,612 $405,596 Cost of revenues 70,858 64,217 66,812 61,725 63,338 Marketing and sales 237,107 199,939 183,550 154,562 137,788 Research and development 122,432 93,702 78,678 65,176 56,231 General and administrative 83,287 74,280 76,100 65,738 58,536 Nonrecurring charges/2/ 58,087 4,738 -- 25,500 -- Income from operations 45,355 59,817 129,027 81,911 89,703 Interest and other income, net 9,644 6,695 9,253 7,233 7,055 Income before income taxes 54,999 66,512 138,280 89,144 96,758 Net income 15,364 41,571 87,788 56,606 62,166 Net cash provided by operating activities 158,612 114,183 106,632 104,412 88,853 - ------------------------------------------------------------------------------------------------------ At year end Cash, cash equivalents, and marketable securities $301,319 $286,308 $272,402 $255,373 $217,011 Current assets 307,702 297,671 335,013 360,725 279,557 Total assets 533,683 492,233 517,929 482,076 404,874 Current liabilities 199,487 150,171 144,295 154,990 102,316 Long-term liabilities 31,064 33,948 31,306 3,602 5,679 Total liabilities 230,551 184,119 175,601 158,592 107,995 Put warrants -- 64,500 -- -- -- Stockholders' equity 303,132 243,614 342,328 323,484 296,879 Working capital 108,215 147,500 190,718 205,735 177,241 Number of employees 2,470 2,044 1,894 1,788 1,788 - ------------------------------------------------------------------------------------------------------ Common stock data Basic net income per share/2/, /3/ $ 0.33 $ 0.91 $ 1.86 $ 1.20 $ 1.30 Diluted net income per share/2/, /3/ $ 0.31 $ 0.88 $ 1.76 $ 1.14 $ 1.25 Book value per share $ 6.67 $ 5.40 $ 7.39 $ 6.85 $ 6.25 Dividends paid per share $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.24 Shares used in computing basic net income per share/3/ 46,760 45,540 47,090 47,320 47,770 Shares used in computing diluted net income per share/3/ 49,860 47,190 49,800 49,840 49,740 Shares outstanding at year end 45,465 45,108 46,351 47,241 47,480 - ------------------------------------------------------------------------------------------------------ Financial ratios Current ratio 1.5 2.0 2.3 2.3 2.7 Return on net revenues/2/ 2.5% 8.4% 16.4% 12.5% 15.3% Return on average assets/2/ 3.0% 8.2% 17.6% 12.8% 16.3% Return on average stockholders' equity/2/ 5.6% 14.2% 26.4% 18.2% 22.0% - ------------------------------------------------------------------------------------------------------ Growth percentages Net revenues 24.2% (7.0%) 17.5% 12.1% 14.8% Net income/2/ (63.0%) (52.6%) 55.1% (8.9%) 41.7% Basic net income per share/2/, /3/ (63.7%) (51.1%) 55.0% (7.7%) 42.9% Diluted net income per share/2/, /3/ (64.8%) (50.0%) 54.4% (8.8%) 42.0% - ------------------------------------------------------------------------------------------------------ /1/ Certain reclassifications have been made to the 1997, 1996, and 1995 amounts presented herein to conform to the 1998 presentation. /2/ Amounts include the effects of nonrecurring charges of $58.1 million, $4.7 million, and $25.5 million recorded in fiscal years 1998, 1997, and 1995, respectively. Nonrecurring charges consist of charges for purchased in- process research and development from business acquisitions in fiscal years 1998 and 1997. The fiscal year 1995 amount represents a legal judgment against the Company. /3/ Amounts have been restated to comply with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share." Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains trend analyses and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, trend analyses, and other information contained herein relative to markets for Autodesk's products and trends in revenues, as well as other statements including such words as "anticipate," "believe," "plan," "estimate," "expect," "goal," and "intend" and other similar expressions, constitute forward-looking statements. These forward-looking statements are subject to business and economic risks, and Autodesk's actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth elsewhere herein, including "Certain Risk Factors Which May Impact Future Operating Results." Results of Operations - ------------------------------------------------------------------------------- The following table sets forth, as a percentage of net revenues, consolidated statement of income data for the periods indicated. These operating results are not necessarily indicative of results for any future periods. Fiscal year ended January 31, ------------------------------ 1998 1997 1996 - ----------------------------------------------------------------------------- Net revenues 100% 100% 100% Costs and expenses: Cost of revenues 12 13 13 Marketing and sales 38 40 34 Research and development 20 19 15 General and administrative 14 15 14 Nonrecurring charges 9 1 -- - ----------------------------------------------------------------------------- Total costs and expenses 93 88 76 Income from operations 7 12 24 Interest and other income, net 2 1 2 - ----------------------------------------------------------------------------- Income before income taxes 9 13 26 Provision for income taxes 6 5 9 - ----------------------------------------------------------------------------- Net income 3% 8% 17% - ----------------------------------------------------------------------------- Net revenues Autodesk's consolidated net revenues in fiscal year 1998 were $617.1 million, which represented a 24.2 percent increase from fiscal year 1997 net revenues of $496.7 million. Revenues in the Americas and Europe increased $101.0 million or 54 percent and $19.3 million or 10 percent, respectively, from the prior fiscal year, while remaining flat in Asia Pacific. These increases were due largely to higher sales of AutoCAD(R) software, the Company's flagship product, and significant growth in the Company's market group revenues. The most recent release of AutoCAD software, AutoCAD Release 14 ("AutoCAD R14"), was released in the United States in May 1997 and in most other regions shortly thereafter. Also contributing to the increased revenues in fiscal year 1998 were revenues contributed by Softdesk, which was acquired by the Company in March 1997. Net revenues in fiscal year 1997 decreased 7 percent from the $534.2 million posted in fiscal year 1996, reflecting primarily slowdowns in the US dealer channel, Germany, Switzerland, and France. The lower fiscal 1997 revenues reflected slowing sales of AutoCAD and AutoCAD update software as the then most recent version of the product, Release 13, entered the end of its product life cycle. AutoCAD and AutoCAD updates represented approximately 70 percent, 70 percent, and 80 percent of total consolidated revenues in fiscal years 1998, 1997, and 1996, respectively. During fiscal year 1998, approximately 244,000 new AutoCAD licenses were added worldwide, compared to 207,000 and 233,000 licenses added during fiscal years 1997 and 1996, respectively. AutoCAD upgrade revenues were $108 million, $45 million, and $49 million in fiscal years 1998, 1997, and 1996, respectively. Foreign revenues, including exports from the United States, accounted for approximately 58 percent, 65 percent, and 64 percent of consolidated revenues in fiscal years 1998, 1997, and 1996, respectively. The stronger value of the dollar, relative to international currencies, primarily the Japanese yen and German mark, negatively affected international revenues by approximately $30 million in fiscal year 1998 compared to fiscal year 1997 and $17 million in fiscal year 1997 compared to fiscal year 1996. Fluctuations in foreign exchange rates positively impacted international operating expenses by $11 million in fiscal year 1998, and did not materially impact operating expenses in fiscal years 1997 and 1996. A summary of revenues by geographic area is presented in Note 9 to the consolidated financial statements. The Company records product returns as a reduction of revenues. In fiscal years 1998, 1997, and 1996, product returns, consisting principally of stock rotation, totaled $35.4 million, $44.3 million, and $51.2 million (or 6 percent, 9 percent, and 9 percent of total consolidated revenues, respectively). Total product returns decreased $8.9 million from fiscal year 1997 to fiscal year 1998 due largely to continued management focus on the level of inventories with the Company's resellers, sell-through sales activities and programs in Autodesk's distribution channel, and fewer returns associated with AutoCAD R14 compared to the prior version. Returns of AutoCAD products accounted for 40 percent, 61 percent, and 79 percent of total product returns in fiscal years 1998, 1997, and 1996, respectively. The lower level of product returns in fiscal year 1998 compared to fiscal years 1997 and 1996 reflected a lower level of product rotation that had previously been associated with performance issues relating to AutoCAD Release 13 and customers' perception issues associated with this product. The nature and technical complexity of Autodesk's software is such that defect corrections have occurred in the past and may occur in future releases of AutoCAD and other products offered by the Company. As is the case with most complex software, the Company has experienced performance issues with previous releases of its AutoCAD software, and performance issues could occur in future releases of AutoCAD and other products offered by the Company. Delays in the introduction of planned future product releases, or failure to achieve significant customer acceptance for these new products, may have a material adverse effect on the Company's revenues and consolidated results of operations in future periods. Additionally, slowdowns in any of the Company's geographical markets, including the recent economic instability in certain countries of the Asia Pacific region, could also have a material adverse effect on Autodesk's business and consolidated results of operations. The foregoing forward-looking information is based upon the Company's current expectations. 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 Risk Factors Which May Impact Future Operating Results." Cost of revenues Cost of revenues includes the purchase of disks and compact disks (CD-ROMs), costs associated with transferring the Company's software to electronic media, printing of user manuals and packaging materials, freight, royalties, amortization of purchased technology and capitalized software, and, in certain foreign markets, software protection locks. When expressed as a percentage of net revenues, cost of revenues decreased approximately 1 percent in fiscal year 1998 as compared to the prior fiscal year. Gross margins in fiscal year 1998 were positively impacted by continued operational efficiencies, lower royalties for licensed technology embedded in Autodesk's products, and the geographic distribution of sales. The one-half of 1 percent decrease in gross margins between fiscal year 1996 and 1997 was largely due to the mix of product sales, particularly the fact that a smaller portion of revenues was contributed by AutoCAD and a larger portion was contributed by AutoCAD LT(R), and, to a lesser extent, the impact of increased fixed costs on a lower net revenue base. In the future, cost of revenues as a percentage of net revenues may be impacted by the mix of product sales, royalty rates for licensed technology embedded in Autodesk's products, and the geographic distribution of sales. Marketing and sales Marketing and sales expenses include salaries, sales commissions, travel, and facility costs for the Company's marketing, sales, dealer training, and support personnel. These expenses also include programs aimed at increasing revenues, such as advertising, trade shows, and expositions, as well as various sales and promotional programs designed for specific sales channels and end users. When expressed as a percentage of net revenues, marketing and sales expenses decreased from 40 percent in fiscal year 1997 to 38 percent in fiscal year 1998. Actual fiscal year 1998 marketing and sales expenses of $237.1 million increased by 19 percent from the $199.9 million of expense incurred in the prior fiscal year. The increase in spending was largely due to higher employee costs and increases in advertising and promotional costs associated with the launch of AutoCAD Release 14 during the second quarter and other new and enhanced products released throughout the year. Fiscal year 1997 marketing and sales expenses of $199.9 million increased 9 percent over fiscal year 1996 expenses of $183.6 million due to higher employee costs as well as marketing and sales costs associated with the launch of certain new products introduced by the Company's market groups during fiscal year 1997. The Company expects to continue to invest in marketing and sales of its products, to develop market opportunities, and to promote Autodesk's competitive position. Accordingly, the Company expects marketing and sales expenses to continue to be significant, both in absolute dollars and as a percentage of net revenues. Research and development Research and development expenses consist primarily of salaries and benefits for software engineers, contract development fees, expenses associated with product translations, costs of computer equipment used in software development, and facilities expenses. During fiscal years 1998, 1997, and 1996, Autodesk incurred $122.4 million, $93.7 million, and $78.7 million, respectively, of research and development expenses (excluding capitalized software development costs of $2.2 million during fiscal year 1998; no software development costs were capitalized during fiscal years 1997 and 1996). Research and development expenses increased both in absolute dollars and as a percentage of net revenues in fiscal year 1998 due to the addition of software engineers, expenses associated with the development of new and enhanced products, and incremental research and development personnel expenses associated with the March 1997 business combination with Softdesk. The increase in research and development expenses between fiscal years 1996 and 1997 was due to the addition of software engineers and fiscal year 1997 business combinations. The Company anticipates that research and development expenses will increase in fiscal year 1999 as a result of product development efforts by the Company's market groups and incremental personnel costs. Additionally, the Company intends to continue recruiting and hiring experienced software developers and to consider the licensing and acquisition of complementary software technologies and businesses. General and administrative General and administrative expenses include the Company's information systems, finance, human resources, legal, purchasing, and other administrative operations. Fiscal year 1998 general and administrative expenses of $83.3 million increased 12 percent from the $74.3 million recorded in the prior fiscal year, primarily due to higher employee-related costs and amortization expense associated with intangible assets recorded in connection with the acquisition of Softdesk, Inc. Fiscal year 1997 general and administrative expenses decreased 2 percent from fiscal year 1996 spending of $76.1 million reflecting lower professional fees, partially offset by increased expenses to maintain and expand the Company's worldwide information systems. The Company currently expects that general and administrative expenses in the coming year will increase to support spending on infrastructure, including continued investment in Autodesk's worldwide information systems and making any additional corrections to the Company's hardware, software, and products for compliance in the year 2000. Nonrecurring charges Nonrecurring charges represent charges for purchased in-process research and development associated with the Company's acquisition of Softdesk, Inc. ($55.1 million) and licensing of 3D/Eye technology ($3.0 million) in fiscal year 1998 and acquisitions of Teleos Research ($3.2 million) and Argus Technologies, Inc. ($1.5 million) in fiscal year 1997. For additional information, see "Business Combinations" in Note 1 of the consolidated financial statements. As discussed in Note 4 to the consolidated financial statements, a $25.5 million judgment was entered against Autodesk in fiscal year 1995 on a claim of trade secret misappropriation brought by Vermont Microsystems, Inc. ("VMI"). The Company recorded this nonrecurring charge in the fourth quarter of fiscal year 1995. The Company appealed and a reduced judgment was entered against the Company in February 1998 in the amount of $7.8 million. Because the case is still subject to post judgment motions and appeals, Autodesk has not reflected the reduction of damages in its consolidated financial statements. Interest and other income Interest income was $9.8 million, $8.8 million, and $10.6 million for fiscal years 1998, 1997, and 1996, respectively. The increase in fiscal year 1998 interest income over fiscal year 1997 interest income was largely due to an increase in average cash, cash equivalents, and marketable securities balances. The decrease in fiscal year 1997 interest income from the prior fiscal year resulted from a lower average balance of cash, cash equivalents, and marketable securities, partially offset by higher interest rates on the Company's international investment portfolio when compared to the same period in the prior fiscal year. Interest and other income for fiscal years 1998, 1997, and 1996 was net of interest expense of $0.2 million, $1.8 million, and $1.8 million, respectively. The Company has a hedging program to minimize foreign exchange gains or losses, where possible, from recorded foreign-denominated assets and liabilities. This program involves the use of forward foreign exchange contracts in the primary European and Asian currencies. The Company does not hedge anticipated foreign-denominated revenues and expenses not yet incurred. Gains (losses) resulting from foreign currency transactions primarily in Europe and Asia Pacific, which are included in interest and other income, were ($68,000), ($197,000), and $554,000 in fiscal years 1998, 1997, and 1996, respectively. Provision for income taxes Autodesk's effective income tax rate, excluding one-time charges for acquired in-process research and development associated with the March 1997 acquisition of Softdesk and fiscal year 1997 acquisitions, was 36.0 percent in fiscal year 1998 compared to 35.5 percent and 36.5 percent in fiscal years 1997 and 1996, respectively. The increase in the effective income tax rate in fiscal year 1998 compared to fiscal year 1997 was principally due to the amortization of certain intangible assets not deductible for tax purposes and foreign earnings which are taxed at rates different than the U.S. statutory rate. The decrease in the tax rate between fiscal years 1997 and 1996 was due largely to a decrease in the Company's effective state income tax rate. See Note 3 to the consolidated financial statements for an analysis of the differences between the U.S. statutory and the effective income tax rates. The Company's United States income tax returns for fiscal years ended January 31, 1992 through 1996 are under examination by the Internal Revenue Service. On August 27, 1997, the Internal Revenue Service issued a Notice of Deficiency proposing increases to the amount of the Company's United States income taxes for fiscal years 1992 and 1993. On November 25, 1997, the Company filed a petition with the United States Tax Court to contest these alleged tax deficiencies. Management believes that adequate amounts have been provided for any adjustments that may ultimately result from these examinations. Recently issued accounting standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements and which is required to be adopted by the Company beginning in its fiscal year 1999. Additionally, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for the way public business enterprises report information in annual statements and interim financial reports regarding operating segments, products and services, geographic areas, and major customers. SFAS 131 will first be reflected in the Company's fiscal year 1999 Annual Report and will apply to both annual and interim financial reporting subsequent to this date. The Company is currently evaluating the impact of SFAS 130 and SFAS 131 on its financial disclosures. In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which supersedes SOP 91-1. SOP 97-2 will be effective beginning in fiscal year 1999. In March 1998, the AICPA issued Statement of Position 98- 4 ("SOP 98-4"), which amends certain provisions of SOP 97-2. The Company believes it is in compliance with the provisions of SOP 97-2 as amended by SOP 98-4. However, detailed implementation guidelines for this standard have not been issued. Once issued, such guidance could lead to unanticipated changes in the Company's current revenue recognition practices and such changes could be material to the Company's results of operations. In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This standard requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. The Company is required to adopt this standard in fiscal year 2000 and is currently evaluating the impact that its adoption will have on the consolidated financial position and results of operations of the Company. Certain Risk Factors Which May Impact Future Operating Results - -------------------------------------------------------------------------------- Autodesk operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks and the possible impact of these factors on future results of operations. Competition The software industry has limited barriers to entry, and the availability of desktop computers with continually expanding capabilities at progressively lower prices contributes to the ease of market entry. Because of these and other factors, competitive conditions in the industry are likely to intensify in the future. Increased competition could result in price reductions, reduced revenues and profit margins, and loss of market share, an of which could adversely affect Autodesk's business, consolidated results of operations, and financial condition. The AEC family of products competes directly with software offered by companies such as Bentley Systems, Inc. ("Bentley"); Computervision Corporation (a subsidiary of Parametric Technologies, Inc.); CADAM Systems Company, Inc.; Diehl Graphsoft, Inc.; EaglePoint Software; International Microcomputer Software, Inc. ("IMSI"); Intergraph Corporation; Ketiv Technologies; Nemetschek Systems, Inc.; and Visio Corporation ("Visio"). the Companys MCAD products compete with products offered by Bentley; Visionary Design Systems; Hewlett-Packard Corporation; Parametric Technologies, Inc.; Structural Dynamics Research Corporation; Unigraphics; Computervision Corporation (a subsidiary of Parametric Technologies); Dassault System's; Solidworks Corporation (a subsidiary of Dassault); and Baystate Technologies, Inc. The Company's GIS Market Group faces competition from Bentley; Intergraph; MapInfo Corporation; Earth Sciences Research Institute ("ESRI"); and MCI Systemhouse. Kinetix product offerings compete with products offered by other multimedia companies such as Adobe Systems Inc.; Macromedia, Inc.; Microsoft Corporation; and Silicon Graphics, Inc. The Personal Solutions Group family of products competes with Broderbund Software, Inc.; IMSI; Visio; and Micrografx Inc. Certain of the competitors of the Company have greater financial, technical, sales and marketing, and other resources than the Company. Autodesk believes that the principal factors affecting competition in its markets are price, product reliability, performance, range of useful features, continuing product enhancements, reputation, and training. In addition, the availability of third-party application software is a competitive factor within the CAD market. Autodesk believes that it competes favorably in these areas and that its competitive position will depend, in part, upon its continued ability to enhance existing products, and to develop and market new products. In April 1998, the Company received notice that the Federal Trade Commission ("FTC") has undertaken a nonpublic investigation of its business practices. The FTC has not made any claims or allegations regarding the Company's current business practices or policies, nor have any charges been filed. Autodesk intends to cooperate fully with the FTC in its inquiry. The Company does not believe that the investigation will have a material impact on its business or 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. 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 technology industry is particularly susceptible to fluctuations in operating results within a quarter. While the Company experienced more linear operating results within fiscal year 1998 compared to prior years, historically the majority of the Company's orders within a fiscal quarter have frequently been concentrated within the last weeks or days of that quarter. These fluctuations are caused by a number of factors, including the relatively long sales cycle of some of the Company's products, the timing of the introduction of new products by the Company or its competitors, and other economic factors experienced by the Company's customers and the geographic regions in which the Company does business. Additionally, the Company's operating expenses are based in part on its expectations for future revenues and are relatively fixed in the short term. Accordingly, any revenue shortfall below expectations could have an immediate and significant adverse effect on the Company's consolidated results of operations and financial condition. Similarly, shortfalls in Autodesk's revenues or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock. Moreover, the Company's stock price is subject to the volatility generally associated with technology stocks and may also be affected by broader market trends unrelated to performance. Product concentration Autodesk derives a substantial portion of its revenues from sales of AutoCAD software, AutoCAD updates, and adjacent products which are interoperable with AutoCAD. As such, any factor adversely affecting sales of AutoCAD and AutoCAD updates, including such factors as product life cycle, market acceptance, product performance and reliability, reputation, price competition, and the availability of third-party applications, could have a material adverse effect on the Company's business and consolidated results of operations. Product development and introduction The software industry is characterized by rapid technological change as well as changes in customer requirements and preferences. The software products offered by the Company are internally complex and, despite extensive testing and quality control, may contain errors or defects ("bugs"), especially when first introduced. In fiscal year 1996, Autodesk experienced quality and performance issues associated with AutoCAD Release 13, including issues related 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. There can be no assurance that defects or errors will not occur in future releases of AutoCAD or other software products offered by the Company. Such defects or errors could result in corrective releases to the Company's software products, damage to Autodesk's reputation, loss of revenues, an increase in product returns, or lack of market acceptance of its products, any of which could have a material and adverse effect on the Company's business and consolidated results of operations. The Company believes that its future results will depend largely upon its ability to offer products that compete favorably with respect to price, reliability, performance, range of useful features, continuing product enhancements, reputation, and training. Delays or difficulties may result in the delay or cancellation of planned development projects, and could have a material and adverse effect on the Company's business and consolidated results of operations. Further, increased competition in the market for design, mapping, or multimedia software products could also have a negative impact on the Company's business and consolidated results of operations. More specifically, gross margins may be adversely affected if sales of low-end CAD products, which historically have had lower margins, grow at a faster rate than the Company's higher-margin products. Certain of the Company's historical product development activities have been performed by independent firms and contractors, while other technologies are licensed from third parties. Autodesk generally either owns or licenses the software developed by third parties. Because talented development personnel are in high demand, there can be no assurance that independent developers, including those who have developed products for the Company in the past, will be able to provide development support to the Company in the future. Similarly, there can be no assurance that the Company will be able to obtain and renew license agreements on favorable terms, if at all, and any failure to do so could have a material adverse effect on the Company's business and consolidated results of operations. Autodesk's business strategy has historically depended in large part on its relationships with third-party developers, who provide products that expand the functionality of Autodesk's design software. There can be no assurance that certain developers will not elect to support other products or otherwise experience disruption in product development and delivery cycles. Such disruption in particular markets could negatively impact these third-party developers and end users, which could have a material adverse effect on Autodesk's business and consolidated results of operations. Further, increased merger and acquisition activity currently experienced in the technology industry could affect relationships with other third-party developers, and thus adversely affect operating results. International operations The Company anticipates that international operations will continue to account for a significant portion of its consolidated revenues. Risks inherent in the Company's international operations include the following: unexpected changes in regulatory practices and tariffs; difficulties in staffing and managing foreign operations; longer collection cycles; potential changes in tax laws; greater difficulty in protecting intellectual property; and the impact of fluctuating exchange rates between the US dollar and foreign currencies in markets where Autodesk does business. During fiscal year 1998, changes in exchange rates from the same period of the prior fiscal year adversely impacted revenues, principally due to changes in the Japanese yen and the German mark. As more fully described in Note 2 to the consolidated financial statements, the Company's risk management strategy uses derivative financial instruments in the form of forward foreign exchange contracts for the purpose of hedging foreign currency market exposures of underlying assets, liabilities, and other obligations which exist as a part of its ongoing business operations. The Company does not enter into derivative contracts for the purpose of trading or speculative transactions. The Company's international results may also be impacted by general economic and political conditions in these foreign markets, including the ongoing economic volatility currently experienced in certain Asia Pacific countries. There can be no assurance that these and other factors will not have a material adverse effect on the Company's future international operations and, consequently, on the Company's business and consolidated results of operations. Dependence on distribution channels The Company sells its software products primarily to distributors and resellers (value-added resellers, or "VARs"). Autodesk's ability to effectively distribute products depends in part upon the financial and business condition of its VAR network. Although the Company has not currently experienced any material problems with its VAR network, computer software dealers and distributors are typically not highly capitalized and have experienced difficulties during times of economic contraction and may do so in the future. While no single customer accounted for more than 10 percent of the Company's consolidated revenues in fiscal years 1998, 1997, or 1996, the loss of or a significant reduction in business with any one of the Company's major international distributors or large US resellers could have a material adverse effect on the Company's business and consolidated results of operations in future periods. Product returns With the exception of certain European distributors, agreements with the Company's VARs do not contain specific product-return privileges. However, Autodesk permits its VARs to return product in certain instances, generally during periods of product transition and during update cycles. While the Company experienced a decrease in the overall level of product returns in fiscal year 1998 compared to fiscal years 1997 and 1996, management anticipates that product returns in future periods will continue to be impacted by product update cycles, new product releases, and software quality. Autodesk establishes reserves, including reserves for stock balancing and product rotation, based on estimated future returns of product and after taking into account channel inventory levels, the timing of new product introductions, and other factors. While the Company maintains strict measures to monitor channel inventories and to provide appropriate reserves, actual product returns may differ from the Company's reserve estimates, and such differences could be material to Autodesk's consolidated financial statements. Intellectual property The Company relies on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures, and contractual provisions to protect its proprietary rights. Despite such efforts to protect the Company's proprietary rights, unauthorized parties may attempt to copy aspects of the Company's software products or to obtain and use information that Autodesk regards as proprietary. Policing unauthorized use of the Company's software products is time-consuming and costly. Although the Company is unable to measure the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that its competitors will not independently develop similar technology. The Company expects that software product developers will be increasingly subject to infringement claims as the number of products and competitors in its industry segments grows and the functionality of products in different industry segments overlaps. There can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted against the Company or that any such assertions will not have a material adverse effect on its business. Any such claims, whether with or without merit, could be time-consuming, result in costly litigation and diversion of resources, cause product shipment delays, or require the Company to enter into royalty or licensing agreements. In addition, such royalty or license agreements, if required, may not be available on acceptable terms, if at all, which could have a material adverse effect on the Company's business and consolidated results of operations. The Company also relies on certain software that it licenses from third parties, including software that is integrated with internally developed software and used in its products to perform key functions. There can be no assurance that these third-party software licenses will continue to be available on commercially reasonable terms, or that the software will be appropriately supported, maintained, or enhanced by the licensors. The loss of licenses to, or inability to support, maintain, and enhance any such software, could result in increased costs, or in delays or reductions in product shipments until equivalent software could be developed, identified, licensed, and integrated, which could have a material adverse effect on the Company's business and consolidated results of operations. Risks associated with acquisitions and investments The Company periodically acquires or invests in businesses, software products, and technologies which are complementary to the Company's business through strategic alliances, debt and equity investments, joint ventures, and the like. The risks associated with such acquisitions or investments include, among others, the difficulty of assimilating the operations and personnel of the companies, the failure to realize anticipated synergies, and the diversion of management's time and attention. In addition, such investments and acquisitions may involve significant transaction-related costs. There can be no assurance that the Company will be successful in overcoming such risks or that such investments and acquisitions will not have a material adverse impact on the Company's business, financial condition, or results of operations. In addition, such investments and acquisitions may contribute to potential fluctuations in quarterly results of operations due to merger-related costs and charges associated with eliminating redundant expenses or write-offs of impaired assets recorded in connection with acquisitions, any of which could negatively impact results of operations for a given period or cause lack of linearity quarter to quarter in the Company's operating results or financial condition. During the first quarter of fiscal year 1998, the Company completed its acquisition of all of the outstanding stock of Softdesk, Inc. The Company continues to integrate the operations acquired in the Softdesk merger with its own. There can be no assurance that the anticipated benefits of the Softdesk merger and any future mergers or acquisitions will be realized. Attraction and Retention of Employees The continued growth and success of the Company depends significantly on the continued service of highly skilled employees. Competition for these employees in today's marketplace, especially in the technology industries, is intense. The Company's ability to attract and retain employees is dependent on a number of factors including its continued ability to grant stock incentive awards, which are described in more detail in Note 6 to the consolidated financial statements. There can be no assurance that the Company will be successful in continuing to recruit new personnel and to retain existing personnel. The loss of one or more key employees or the Company's inability to maintain existing employees or recruit new employees could have a material adverse impact on the Company. In addition, the Company may experience increased compensation costs to attract and retain skilled personnel. Impact of Year 2000 Some of the computer programs used by the Company in its internal operations rely on time-sensitive software that was written using two digits rather than four to identify the applicable year. These programs may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Additionally, as the Company is in the business of software production, year 2000 issues may affect the Company's products which are being sold externally. The Company launched a six-phase year 2000 compliance program in the third quarter of fiscal year 1998. The first and second phases, respectively, included conducting preliminary and detailed assessments of vendor hardware and software to determine the Company's overall exposure to the year 2000 issue. The third phase included implementing a year-2000- compliant procurement process and testing the current desktop operating environment. These three phases were complete as of the end of fiscal year 1998 and cost approximately $500,000. These costs have been charged to expense as incurred. The fourth phase of the compliance program involves determining a working plan, including defining the future analyses needed, the scope, and total budget for required compliance actions. The fifth phase involves the repair or replacement of any noncompliant hardware or software currently purchased or developed internally. The sixth and final phase will involve a final systems check to ensure that all hardware and software in use by the Company is compliant. The Company expects to spend between $5 million and $6 million during fiscal year 1999 to complete phases four, five, and six. Of the total cost, Autodesk plans to capitalize up to $1.7 million as it relates primarily to the purchase of new software. The remaining $3.3 million to $4.3 million relates to modifying existing software and will be expensed as incurred in accordance with EITF 96-14, "Accounting for the Costs Associated with Modifying Computer Software for the Year 2000." There can be no assurance, however, that there will not be a delay in the completion of these procedures or that the cost of such procedures will not exceed original estimates, either of which could have a material adverse effect on future results of operations. In addition to correcting the business and operating systems used by the Company in the ordinary course of business as described above, the Company has also reviewed all products it produces internally for sale to third parties to determine compliance of its products. Products either have been found to be compliant or are currently being tested for compliance. However, many Autodesk/R/ products run on application systems produced and sold by third-party vendors. There can be no assurance that these application systems will be converted in a timely manner, and any failure in this regard may cause Autodesk products not to function as designed. Any future costs associated with ensuring that the Company's products are compliant with the year 2000 are not expected to have a material impact on the Company's results of operations or financial position. The Company anticipates that all compliance procedures will be completed before the beginning of the Company's fiscal year 2000, which begins February 1, 1999. 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 bills, totaled $301.3 million at January 31, 1998, compared to $286.3 million at January 31, 1997. The $15.0 million increase in cash, cash equivalents, and marketable securities was due primarily to cash generated from operations ($158.6 million) and cash proceeds from the issuance of shares through employee stock option and stock purchase programs ($80.1 million). This increase was partially offset by cash used to repurchase shares of the Company's common stock ($174.9 million), to acquire complementary software technologies and businesses ($19.8 million), to purchase computer equipment, furniture, and leasehold improvements ($15.0 million), and to pay dividends on the Company's common stock ($11.3 million). During fiscal years 1998, 1997, and 1996, the Company repurchased and retired a total of 2,332,500, 1,659,500, and 2,671,000 shares of its common stock at average repurchase prices of $38.39, $32.44, and $40.43, respectively, pursuant to an ongoing and systematic repurchase plan ("Systematic Plan") approved by the Company's Board of Directors to reduce the dilutive effect of common shares to be issued under the Company's employee stock plans. In December 1997, the Board of Directors authorized the purchase of an additional 4 million shares under the Systematic Plan. In August 1996, the Company announced another 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 "Supplemental Plan." In December 1997, the Board authorized the purchase of an additional 5 million shares under the Supplemental Plan. The Company may also utilize equity options as part of the Supplemental Plan. In connection with the Supplemental Plan, the Company sold put warrants to an independent third party in September 1996 and purchased call options from the same independent third party. The premiums received with respect to the equity options equaled the premiums paid. Consequently, there was no exchange of cash. The Company exercised the call options, repurchasing 2,000,000 shares of its common stock during the third quarter of fiscal year 1998 for $51 million. The put warrants expired unexercised in September 1997 and were reclassified from put warrants to stockholders' equity during the third quarter of fiscal year 1998. For additional information, see Note 7 to the consolidated financial statements. In addition to the exercise of the call options in fiscal year 1998, the Company repurchased an additional 1,000,000 shares in the open market at an average per share repurchase price of $34.37. During fiscal year 1997, the Company repurchased 557,500 shares at an average per share repurchase price of $24.09 subject to the Supplemental Plan. In December 1997, the Company sold put warrants to an independent third party that entitle the holder of the warrants to sell 1.5 million shares of common stock to the Company at $38.12 per share. Additionally, the Company purchased call options from the same independent third party that entitle the Company to buy 1 million shares at $39.88 per share. The premiums received with respect to the equity options totaled $4.5 million and equaled the premiums paid. Consequently, there was no exchange of cash. The outstanding put warrants at January 31, 1998, permitted a net share settlement at the Company's option. As a result, the transaction did not result in a put warrant liability on the consolidated balance sheet. The Company has an unsecured $40 million bank line of credit, of which $20 million is guaranteed, that may be used from time to time to facilitate short- term cash flow. At January 31, 1998, there were no borrowings outstanding under this credit agreement, which expires in January 1999. The Company's principal commitments at January 31, 1998, consisted of obligations under operating leases for facilities. For additional information, see Note 5 to the 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 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. Consolidated Statement of Income Fiscal year ended January 31, ----------------------------------- (In thousands, except per share data) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues $ 632,358 $ 509,630 $ 546,884 Direct commissions 15,232 12,937 12,717 - ------------------------------------------------------------------------------------------------------------------------------------ Net revenues 617,126 496,693 534,167 Costs and expenses: Cost of revenues 70,858 64,217 66,812 Marketing and sales 237,107 199,939 183,550 Research and development 122,432 93,702 78,678 General and administrative 83,287 74,280 76,100 Nonrecurring charges 58,087 4,738 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total costs and expenses 571,771 436,876 405,140 - ------------------------------------------------------------------------------------------------------------------------------------ Income from operations 45,355 59,817 129,027 Interest and other income, net 9,644 6,695 9,253 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 54,999 66,512 138,280 Provision for income taxes 39,635 24,941 50,492 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 15,364 $ 41,571 $ 87,788 - ------------------------------------------------------------------------------------------------------------------------------------ Basic net income per share $ 0.33 $ 0.91 $ 1.86 - ------------------------------------------------------------------------------------------------------------------------------------ Diluted net income per share $ 0.31 $ 0.88 $ 1.76 - ------------------------------------------------------------------------------------------------------------------------------------ Shares used in computing basic net income per share 46,760 45,540 47,090 - ------------------------------------------------------------------------------------------------------------------------------------ Shares used in computing diluted net income per share 49,860 47,190 49,800 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes. Consolidated Balance Sheet January 31, ----------- (In thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 96,089 $ 64,814 Marketable securities 100,399 117,971 Accounts receivable, net of allowance for doubtful accounts of $7,136 ($6,635 in 1997) 60,856 68,577 Inventories 7,351 7,340 Deferred income taxes 27,577 22,759 Prepaid expenses and other current assets 15,430 16,210 - --------------------------------------------------------------------------------------------------------------------------------- Total current assets 307,702 297,671 Marketable securities, including a restricted balance of $18,000 ($28,000 in 1997) 104,831 103,523 Computer equipment, furniture, and leasehold improvements: Computer equipment and furniture 117,434 103,903 Leasehold improvements 20,505 17,818 Accumulated depreciation (98,800) (77,671) - --------------------------------------------------------------------------------------------------------------------------------- Net computer equipment, furniture, and leasehold improvements 39,139 44,050 Purchased technologies and capitalized software, net of accumulated amortization of $31,400 ($18,700 in 1997) 31,553 15,916 Goodwill 16,995 6,470 Deferred income taxes 13,782 12,857 Other assets 19,681 11,746 - --------------------------------------------------------------------------------------------------------------------------------- $ 533,683 $ 492,233 - --------------------------------------------------------------------------------------------------------------------------------- Liabilities and stockholders' equity Current liabilities: Accounts payable $ 26,417 $ 24,557 Accrued compensation 34,962 18,099 Accrued income taxes 76,465 75,061 Deferred revenues 18,934 3,141 Other accrued liabilities 42,709 29,313 - --------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 199,487 150,171 Deferred income taxes 481 2,974 Litigation accrual 29,328 29,328 Other liabilities 1,255 1,646 Commitments and contingencies Put warrants -- 64,500 Stockholders' equity: Common stock, $0.01 par value; 100,000 shares authorized, 45,465 issued and outstanding (45,108 in 1997) 299,315 147,091 Retained earnings 20,472 106,587 Foreign currency translation adjustment (16,655) (10,064) - --------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 303,132 243,614 - --------------------------------------------------------------------------------------------------------------------------------- $ 533,683 $ 492,233 - --------------------------------------------------------------------------------------------------------------------------------- See accompanying notes. Consolidated Statements of Cash Flows Fiscal year ended January 31, ------------------------------- (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Operating activities Net income $ 15,364 $ 41,571 $ 87,788 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 43,854 34,833 25,247 Charge for acquired in-process research and development 58,087 4,738 -- Changes in operating assets and liabilities, net of business combinations: Accounts receivable 8,829 25,365 (7,579) Inventories 534 2,345 (3,850) Deferred income taxes (10,947) (785) (4,567) Prepaid expenses and other current assets 1,501 890 (6,443) Accounts payable and accrued liabilities 40,125 (4,318) 3,721 Accrued income taxes 1,265 9,544 12,315 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 158,612 114,183 106,632 - ------------------------------------------------------------------------------------------------------------------------------- Investing activities Purchases of available-for-sale marketable securities (1,102,015) (683,550) (224,655) Maturities of available-for-sale marketable securities 1,126,174 604,727 141,893 Purchase of computer equipment, furniture, and leasehold improvements (15,000) (17,409) (16,306) Business combinations, net of cash acquired (5,766) (9,908) (7,194) Purchases of software technologies and capitalization of software costs (19,833) (995) (1,409) Other (4,759) (16,698) 8,042 - ------------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (21,199) (123,833) (99,629) - ------------------------------------------------------------------------------------------------------------------------------- Financing activities Proceeds from issuance of common stock 80,059 23,307 46,424 Repurchase of common stock (174,907) (67,269) (107,976) Dividends paid (11,290) (10,879) (11,184) - ------------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (106,138) (54,841) (72,736) - ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 31,275 (64,491) (65,733) Cash and cash equivalents at beginning of year 64,814 129,305 195,038 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 96,089 $ 64,814 $ 129,305 - ------------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of noncash investing and financing activities: Common stock issued in connection with the acquisition of Softdesk $ 92,021 $ -- $ -- See accompanying notes. Consolidated Statement of Stockholders' Equity Three-year period ended January 31, 1998 ---------------------------------------- Foreign currency Total Common stock Retained translation stockholders' (In thousands) Shares Amount earnings adjustment equity - ------------------------------------------------------------------------------------------------------------------------------------ Balances, January 31, 1995 47,241 $100,870 $215,064 $ 7,550 $323,484 Common shares issued under stock option and stock purchase plans 1,781 35,712 35,712 Tax effect of stock options 10,712 10,712 Net income 87,788 87,788 Dividends paid (11,184) (11,184) Repurchase of common shares (2,671) (6,529) (101,447) (107,976) Foreign currency translation adjustment 2,904 2,904 Unrealized gains on available-for-sale securities, net of tax 888 888 - ---------------------------------------------------------------------------------------------------------------------------------- Balances, January 31, 1996 46,351 140,765 191,109 10,454 342,328 Common shares issued under stock option and stock purchase plans 974 20,729 20,729 Tax effect of stock options 2,578 2,578 Reclassification of put warrants (9,870) (54,630) (64,500) Net income 41,571 41,571 Dividends paid (10,879) (10,879) Repurchase of common shares (2,217) (7,111) (60,158) (67,269) Foreign currency translation adjustment (20,518) (20,518) Unrealized losses on available-for-sale securities, net of tax (426) (426) - ---------------------------------------------------------------------------------------------------------------------------------- Balances, January 31, 1997 45,108 147,091 106,587 (10,064) 243,614 Common shares issued under stock option and stock purchase plans 2,790 63,829 63,829 Tax effect of stock options 16,230 16,230 Reclassification of put warrants 9,870 54,630 64,500 Shares issued in connection with business combination 2,900 92,021 92,021 Net income 15,364 15,364 Dividends paid (11,290) (11,290) Repurchase of common shares (5,333) (29,726) (145,181) (174,907) Foreign currency translation adjustment (6,591) (6,591) Unrealized gains on available-for-sale securities, net of tax 362 362 - ---------------------------------------------------------------------------------------------------------------------------------- Balances, January 31, 1998 45,465 $299,315 $ 20,472 $(16,655) $303,132 - ---------------------------------------------------------------------------------------------------------------------------------- See accompanying notes. Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies - -------------------------------------------------------------------------------- Operations Autodesk, Inc. ("Autodesk" or the "Company"), is a leader in the development and marketing of design and drafting software and multimedia tools, primarily for the business and professional environment. Autodesk's flagship product, AutoCAD, is one of the world's leading computer-aided design ("CAD") tools, with an installed base of 1.9 million seats worldwide. Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to the 1996 and 1997 consolidated financial statements to conform to the 1998 presentation. The asset and liability accounts of foreign subsidiaries are translated from their respective functional currencies at the rates in effect at the balance sheet date, and revenue and expense accounts are translated at weighted average rates during the period. Foreign currency translation adjustments are reflected as a separate component of stockholders' equity. Gains (losses) resulting from foreign currency transactions, which are included in interest and other income, were ($68,000), ($197,000), and $554,000 in fiscal years 1998, 1997, and 1996, respectively. Business combinations On March 31, 1997, the Company issued approximately 2.9 million shares of its common stock for all outstanding shares of Softdesk, Inc. ("Softdesk"), a leading supplier of AutoCAD-based application software for the architecture, engineering, and construction market, and exchanged Autodesk options for outstanding Softdesk options. Based upon the value of Autodesk stock and options exchanged, the transaction, including transaction costs, was valued at approximately $94 million. This transaction has been accounted for using the purchase method. To assist in the allocation of the purchase price, an independent valuation of Softdesk was completed. Approximately $55.1 million of the Softdesk purchase price represented the value of in-process research and development that had not yet reached technological feasibility and had no alternative future use, and as such, was charged to operations in the first quarter of fiscal year 1998. The remaining purchase price was allocated primarily to assets acquired, developed technology, and other intangibles. Specifically, costs of $14,300,000 and $6,700,000 were allocated to goodwill and other intangibles and are being amortized over five and four years, respectively. The operating results of Softdesk, which have not been material in relation to those of the Company, have been included in the accompanying consolidated financial statements since the date of acquisition. In the first quarter of fiscal year 1998, the Company also acquired certain assets of and licensed technology from 3D/Eye for $5.8 million. Of the total cost, $3.0 million represented the value of in-process research and development that had not yet reached technological feasibility and had no alternative future use and was charged to operations. During fiscal year 1997 the Company acquired certain businesses for an aggregate of $9.9 million. Included in these acquisitions were the purchases of assets from Creative Imaging Technologies, Inc. ("CIT"), CadZooks, Inc., Argus Technologies, Inc. ("Argus"), as well as the outstanding stock of Teleos Research ("Teleos"). Approximately $3.2 million of the Teleos purchase price and $1.5 million of the Argus purchase price represented the value of in-process research and development that had not yet reached technological feasibility and had no alternative future use. These amounts were charged to operations during fiscal year 1997 and classified as nonrecurring charges in the accompanying statement of income. In fiscal year 1996, the Company acquired certain assets of Automated Methods (Pty) Ltd. and made final payments to the former stockholders of Ithaca Software, which was acquired by the Company in August 1993, based on revenues as specified in the acquisition agreement. Cash payments in fiscal year 1996 associated with these transactions totaled approximately $7.2 million. All of these acquisitions were accounted for using the purchase method of accounting with the purchase price being principally allocated to purchased technologies and capitalized software, intangible assets, and for the Teleos and Argus acquisitions, in-process research and development. The Company is amortizing these intangible assets on a straight-line basis over the remaining useful lives of the assets. The operating results of the acquired businesses, which have not been material in relation to those of the Company, have been included in the accompanying consolidated financial statements from their respective dates of acquisition. Additional consideration may also be payable to the former stockholders of CIT, Argus, Automated Methods, 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 the remaining useful lives of the assets. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Foreign currency translation The Company hedges a portion of its exposure on certain receivables and payables denominated in foreign currencies using forward foreign exchange contracts in European and Asian foreign currencies. Gains and losses associated with exchange rate fluctuations on forward foreign exchange contracts are recorded currently in interest and other income and offset corresponding gains and losses on the foreign currency assets being hedged. The costs of forward foreign exchange contracts are amortized on a straight-line basis over the life of the contract as interest and other income. Cash and cash equivalents The Company considers all highly liquid investments with insignificant interest rate risk and original maturities of three months or less to be cash equivalents. Cash equivalents are recorded at cost, which approximates fair value. Marketable securities Marketable securities, consisting principally of high-quality municipal bonds, tax-advantaged money market instruments, and US treasury notes, are stated at fair value. Marketable securities maturing within one year that are not restricted are classified as current assets. The Company determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such classification as of each balance sheet date. The Company has classified all of its marketable securities as available-for-sale and carries such securities at fair value, with unrealized gains and losses, net of tax, reported in stockholders' equity until disposition. Concentration of credit risk The Company places its cash, cash equivalents, and marketable securities with financial institutions with high credit standing and, by policy, limits the amounts invested with any one institution, type of security, and issuer. Autodesk's accounts receivable are derived from software sales to a large number of resellers and distributors in the Americas, Europe, and Asia Pacific. The Company performs ongoing evaluations of its customers' financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. Inventories Inventories, consisting principally of disks, compact disks (CD-ROMs), and technical manuals, are stated at the lower of cost (determined on the first-in, first-out method) or market. Computer equipment, furniture, and leasehold improvements Computer equipment, furniture, and leasehold improvements are stated at cost. Computer equipment and furniture are depreciated using the straight-line method over the estimated useful lives of the assets, which range from two to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life or the lease term. Depreciation expense was $22,876,000, $21,252,000, and $13,482,000 in fiscal years 1998, 1997, and 1996, respectively. Purchased technologies and capitalized software Costs incurred in the initial design phase of software development are expensed as incurred. Once the point of technological feasibility is reached, production costs (programming and testing) are capitalized. Certain acquired software-technology rights are also capitalized. Capitalized software costs are amortized ratably as revenues are recognized, but not less than on a straight- line basis over two- to seven-year periods. Amortization expense was $12,668,000, $9,563,000, and $11,765,000 in fiscal years 1998, 1997, and 1996, respectively. The actual lives of the Company's purchased technologies or capitalized software may differ from the Company's estimates, and such differences could cause carrying amounts of these assets to be reduced materially. Other assets and goodwill Amortization of purchased intangibles and goodwill is provided on a straight- line basis over the respective useful lives of the assets, which range from three to ten years. Accumulated amortization was $22,556,000 and $14,293,000 in fiscal years 1998 and 1997, respectively. The Company evaluates the realizability and the related periods of amortization of these assets on a regular basis. Amortization expense was $8,310,000 and $4,018,000 in fiscal years 1998 and 1997, respectively. (The Company did not incur amortization expense in fiscal year 1996.) Employee stock compensation The Company accounts for its employee stock plans under the intrinsic-value- based method under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Revenue recognition Autodesk's revenue recognition policy is in compliance with the provisions of the American Institute of Certified Public Accountants' Statement of Position 91-1, "Software Revenue Recognition" ("SOP 91-1"). Revenue is recognized at the time of shipment, provided that no significant vendor obligations exist and collection of the resulting receivable is deemed probable. A portion of revenues related to certain customer consulting and training obligations is deferred, while costs associated with certain postsale customer obligations are accrued. Autodesk establishes allowances for product returns, including allowances for stock balancing and product rotation, based on estimated future returns of product and after taking into consideration channel inventory levels at its resellers, the timing of new product introductions, and other factors. These allowances are recorded as direct reductions of accounts receivable. While the Company maintains strict measures to monitor channel inventories and to provide appropriate allowances, actual product returns may differ from the Company's estimates, and such differences could be material to the consolidated financial statements. Advertising Advertising costs are expensed the first time the advertising takes place. Total advertising expenses incurred during fiscal years 1998, 1997, and 1996 were $12,194,000, $10,830,000, and $8,489,000, respectively. Royalties The Company licenses software used to develop components of AutoCAD, Mechanical Desktop(R), 3D Studio MAX(R), and certain other software products. Royalties are payable to developers of the software at various rates and amounts generally based on unit sales or revenues. Royalty expense was $7,640,000, $8,000,000, and $6,102,000 in fiscal years 1998, 1997, and 1996, respectively. Such costs are included as a component of cost of revenues. Net income per share The Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings Per Share" ("SFAS 128") in the fourth quarter of fiscal year 1998. SFAS 128 requires companies to present both basic net income per share and diluted net income per share. Basic net income per share excludes dilutive common stock equivalents and is calculated as net income divided by the weighted average number of common shares outstanding. Diluted net income per share is computed using the weighted average number of common shares outstanding and dilutive common stock equivalents outstanding during the period. A reconciliation of the numerators and denominators used in the basic and diluted net income per share amounts follows: Fiscal Year Ending January 31, ------------------------------ (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Numerator: Numerator for basic and diluted net income per share--net income $15,364 $41,571 $87,788 - ------------------------------------------------------------------------------------------------------ Denominator: Denominator for basic net income per share--weighted average shares 46,760 45,540 47,090 Effect of dilutive common stock options 3,100 1,650 2,710 - ------------------------------------------------------------------------------------------------------ Denominator for diluted net income per share 49,860 47,190 49,800 - ------------------------------------------------------------------------------------------------------ The Company has restated all prior year amounts to comply with this standard. See Note 8 to see related quarterly financial data amounts, as restated. Recently issued accounting standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements and is required to be adopted by the Company beginning in its fiscal year 1999. Additionally, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for the way public business enterprises report information in annual statements and interim financial reports regarding operating segments, products and services, geographic areas, and major customers. SFAS 131 will first be reflected in the Company's fiscal year 1999 Annual Report and will apply to both annual and interim financial reporting subsequent to this date. The Company is currently evaluating the impact of SFAS 130 and SFAS 131 on its financial disclosures. In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which supersedes SOP 91-1. SOP 97-2 will be effective beginning in fiscal year 1999. In March 1998, the AICPA issued Statement of Position 98-4 ("SOP 98-4"), which amends certain provisions of SOP 97-2. The Company believes it is in compliance with the provisions of SOP 97-2 as amended by SOP 98-4. However, detailed implementation guidelines for this standard have not been issued. Once issued, such guidance could lead to unanticipated changes in the Company's current revenue recognition practices, and such changes could be material to the Company's results of operations. In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This standard requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. The Company is required to adopt this standard in fiscal year 2000 and is currently evaluating the impact that its adoption will have on the consolidated financial position and results of operations of the Company. Note 2. Financial Instruments - ------------------------------------------------------------------------------- Fair values of financial instruments Estimated fair values of financial instruments are based on quoted market prices. The carrying amounts and fair value of the Company's financial instruments are as follows: January 31, 1998 January 31, 1997 ---------------- ---------------- Carrying Fair Carrying Fair (In thousands) amount value amount value - ------------------------------------------------------------------------------------ Cash and cash equivalents $ 96,089 $ 96,089 $ 64,814 $ 64,814 Marketable securities 205,230 205,230 221,494 221,494 Forward foreign currency contracts (124) (124) (458) (458) - ------------------------------------------------------------------------------------ Foreign currency contracts The Company utilizes derivative financial instruments in the form of forward foreign exchange contracts only for the purpose of hedging foreign currency market exposures of underlying assets, liabilities, and other obligations which exist as a part of its ongoing business operations. The Company, as a matter of policy, does not engage in trading or speculative transactions. In general, instruments used as hedges must be effective at reducing the foreign currency risk associated with the underlying transaction being hedged and must be designated as a hedge at the inception of the contract. Substantially all forward foreign currency contracts entered into by the Company have maturities of 60 days or less. The Company uses the forward contracts only as hedges of existing transactions. Amounts receivable and payable on forward foreign exchange contracts are recorded as other current assets and other accrued liabilities, respectively. For these contracts, mark-to-market gains and losses are recognized as other income or expense in the current period, generally consistent with the period in which the gain or loss of the underlying transaction is recognized. Cash flows associated with derivative transactions are classified in the statement of cash flows in a manner consistent with those of the transactions being hedged. The notional amounts of foreign currency contracts were $38.8 million and $35.7 million at January 31, 1998 and 1997, respectively, and were predominantly to buy Swiss francs. While the contract or notional amount is often used to express the volume of foreign exchange contracts, the amounts potentially subject to credit risk are generally limited to the amounts, if any, by which the counterparties' obligations under the agreements exceed the obligations of the Company to the counterparties. Marketable securities Marketable securities include the following available-for-sale securities at January 31, 1998 and 1997: January 31, 1998 ---------------- (In thousands) Cost Gross unrealized gains Gross unrealized losses Estimated fair value - ---------------------------------------------------------------------------------------------------------------------- Short-term: Municipal bonds $ 24,383 $ -- $ (22) $ 24,361 Treasury bills 9,994 2 -- 9,996 Preferred stock 2,000 -- -- 2,000 Money market deposits 64,042 -- -- 64,042 - ---------------------------------------------------------------------------------------------------------------------- 100,419 2 (22) 100,399 Long-term: Municipal bonds 85,911 935 -- 86,846 US Treasury bills 17,987 -- (2) 17,985 - ---------------------------------------------------------------------------------------------------------------------- 103,898 935 (2) 104,831 - ---------------------------------------------------------------------------------------------------------------------- $204,317 $937 $ (24) $205,230 - ---------------------------------------------------------------------------------------------------------------------- January 31, 1997 ---------------- (In thousands) Cost Gross unrealized gains Gross unrealized losses Estimated fair value - ---------------------------------------------------------------------------------------------------------------------- Short-term: Municipal bonds $ 70,325 $ 43 $ -- $ 70,368 Preferred Stock 2,000 -- -- 2,000 Time deposits 45,603 -- -- 45,603 - ---------------------------------------------------------------------------------------------------------------------- 117,928 43 -- 117,971 Long-term: Municipal bonds 72,565 -- (74) 72,491 US Treasury notes 28,592 -- (592) 28,000 Preferred stock and other 3,022 10 -- 3,032 - ---------------------------------------------------------------------------------------------------------------------- 104,179 10 (666) 103,523 - ---------------------------------------------------------------------------------------------------------------------- $222,107 $ 53 $(666) $221,494 - ---------------------------------------------------------------------------------------------------------------------- Long-term US Treasury bills included a restricted balance of $18.0 million at January 31, 1998, and $28.0 million at January 31, 1997 (see Note 4). The contractual maturities of Autodesk's short-term marketable securities at January 31, 1998, were one year or less while the Company's long-term marketable securities had contractual maturities as follows: $59.6 million between one and two years; $13.7 million maturing in three years; $9.6 million maturing in four to five years; and $21.9 million beyond five years. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay or call obligations without prepayment penalties. Realized gains and losses on sales of available-for-sale securities were immaterial in fiscal years 1998, 1997, and 1996. The cost of securities sold is based on the specific identification method. Note 3. Income Taxes - -------------------------------------------------------------------------------- The provision for income taxes consists of the following: Fiscal year ended January 31, ------------------------------- (In thousands) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Federal: Current $31,749 $5,546 $26,711 Deferred (7,978) 1,133 (3,392) State: Current 5,594 4,796 8,779 Deferred (1,398) (1,148) (856) Foreign: Current 14,083 15,503 19,569 Deferred (2,415) (889) (319) - ---------------------------------------------------------------------------------------------------------------------------------- $39,635 $24,941 $50,492 - ---------------------------------------------------------------------------------------------------------------------------------- The principal reasons that the aggregate income tax provisions differ from the US statutory rate of 35 percent are as follows: Fiscal year ended January 31, ----------------------------- (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Income tax provision at statutory rate $19,250 $23,279 $48,398 Foreign income taxed at rates different from the US statutory rate (1,005) (1,644) (7,863) State income taxes, net of federal benefit 2,727 2,371 8,616 Tax-exempt interest (2,031) (1,348) (1,668) Acquired in-process research and development 19,285 1,130 -- Other 1,409 1,153 3,009 - ---------------------------------------------------------------------------------------------------------------------------------- $39,635 $24,941 $50,492 - ---------------------------------------------------------------------------------------------------------------------------------- Significant sources of the Company's deferred tax assets and liabilities are as follows: January 31, ----------- (In thousands) 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Accrued state income taxes $ 5,667 $ 5,562 Accrued legal judgment, including accrued interest 13,863 13,822 Reserves for product returns and bad debts 9,728 7,864 Accrued compensation and benefits 3,809 2,950 Purchased technology and capitalized software 11,079 6,270 Unremitted earnings of certain subsidiaries (6,018) (6,018) Other, net 2,750 2,192 - ---------------------------------------------------------------------------------------------------------------------------------- Net deferred tax assets $40,878 $32,642 - ---------------------------------------------------------------------------------------------------------------------------------- The tax benefit associated with dispositions from employee stock plans reduced taxes currently payable for fiscal years 1998, 1997, and 1996 by $16,230,000, $2,578,000, and $10,712,000, respectively. No provision has been made for federal income taxes on unremitted earnings of certain of the Company's foreign subsidiaries (cumulative $159 million at January 31, 1998) since the Company plans to reinvest all such earnings for the foreseeable future. At January 31, 1998, the unrecognized deferred tax liability for these earnings was approximately $44.0 million. Foreign pretax income was $55.1 million, $45.0 million, and $64.4 million in fiscal years 1998, 1997, and 1996, respectively. The Company's United States income tax returns for fiscal years ended January 31, 1992 through 1996, are under examination by the Internal Revenue Service. On August 27, 1997, the Internal Revenue Service issued a Notice of Deficiency proposing increases to the amount of the Company's United States income taxes for fiscal years 1992 and 1993. On November 25, 1997, the Company filed a petition with the United States Tax Court to contest these alleged tax deficiencies. Management believes that adequate amounts have been provided for any adjustments that may ultimately result from these examinations. Cash payments for income taxes were approximately $33,272,000, $13,605,000, and $32,032,000 for fiscal years 1998, 1997, and 1996, respectively. Note 4. Litigation Accrual - -------------------------------------------------------------------------------- In December 1994, the Company recorded a $25.5 million litigation charge as the result of a judgment against the Company on a claim of trade secret misappropriation brought by Vermont Microsystems, Inc. ("VMI"). The Company appealed that judgment and, upon remand to the Federal District Court, a reduced judgment was entered against the Company in the amount of $14.2 million plus interest. On February 23, 1998, the U.S. Court of Appeals for the Second Circuit reduced the judgment to $7.8 million. Because the case is still subject to postjudgment motions and appeals, the Company has not reflected the reduction of damages in the accompanying consolidated financial statements. The Company was required by statute to post collateral approximating the amount of the initial judgment plus accrued interest. In May 1997, the escrow account was reduced to $17.3 million, with interest to accrue. At January 31, 1998, the Company's long-term marketable securities included a balance of $18.0 million which is restricted as to its use until final adjudication of this matter. Note 5. Commitments and Contingencies - -------------------------------------------------------------------------------- The Company leases office space and equipment under noncancelable lease agreements. The leases generally provide that the Company pay taxes, insurance, and maintenance expenses related to the leased assets. Future minimum lease payments for fiscal years ended January 31 are as follows: $19.2 million in 1999; $17.5 million in 2000; $13.3 million in 2001; $9.6 million in 2002; $13.2 million in 2003; and $17.8 million thereafter. Rent expense was $17,729,000, $17,358,000, and $16,992,000 in fiscal years 1998, 1997, and 1996, respectively. The Company has a line of credit permitting short-term, unsecured borrowings of up to $40 million, which may be used from time to time to facilitate short- term cash flow. There were no borrowings outstanding under this agreement at January 31, 1998, which expires in January 1999. The Company is a party to various legal proceedings arising from the normal course of business activities. In management's opinion, resolution of these matters is not expected to have a material adverse impact on the Company's consolidated results of operations or its financial position. However, depending on the amount and timing, an unfavorable resolution of a matter could materially affect the Company's future results of operations or cash flows in a particular period. Note 6. Employee Benefit Plans - -------------------------------------------------------------------------------- Stock option plans Under the Company's stock option plans, incentive and nonqualified stock options may be granted to officers, employees, directors, and consultants to purchase shares of the Company's common stock. Options vest over periods of one to five years and generally have terms of up to ten years. The exercise price of the stock options is determined by the Company's Board of Directors on the date of grant and is at least equal to the fair market value of the stock on the grant date. Stock option activity is as follows: Weighted average price (Shares in thousands) Number of shares Price per share per share - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at January 31, 1995 7,997 $ 12.56 - $ 38.25 $ 21.97 Granted 2,546 35.25 - 49.25 44.83 Exercised (1,484) 12.56 - 30.50 19.19 Canceled (368) 13.38 - 49.25 30.78 - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at January 31, 1996 8,691 13.38 - 49.25 28.75 Granted 5,271 0.01 - 42.00 29.99 Exercised (651) 0.01 - 38.25 19.66 Canceled (598) 16.25 - 49.25 36.98 - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at January 31, 1997 12,713 13.38 - 49.25 28.11 Granted 3,411 0.01 - 48.38 34.62 Assumed via acquisitions 306 0.34 - 36.40 23.72 Exercised (2,304) 0.01 - 49.25 23.15 Canceled (908) 13.38 - 49.25 33.22 - ----------------------------------------------------------------------------------------------------------------------------------- Options outstanding at January 31, 1998 13,218 $ 1.86 - $ 49.25 $ 30.20 - ----------------------------------------------------------------------------------------------------------------------------------- Options exercisable at January 31, 1998 5,174 $ 1.86 - $ 49.25 $ 28.83 - ----------------------------------------------------------------------------------------------------------------------------------- Options available for grant at January 31, 1998 918 - ----------------------------------------------------------------------------------------------------------------------------------- The following table summarizes information about options outstanding at January 31, 1998. Outstanding options weighted average Number of shares contractual life Weighted average (in thousands) (in years) exercise price - ---------------------------------------------------------------------------------------------------------- Range of per share exercise prices $ 1.86 -- $ 23.00 1,647 3.91 $16.78 $23.13 -- $ 30.25 5,430 5.54 $25.51 $30.38 -- $ 49.25 6,141 8.68 $37.94 - ---------------------------------------------------------------------------------------------------------- 13,218 6.80 $30.20 - ---------------------------------------------------------------------------------------------------------- The following table summarizes information about options outstanding and exercisable at January 31, 1998. Number of shares Weighted average (in thousands) exercise price - ------------------------------------------------------------------------------------------------------------ Range of per share exercise prices $ 1.86 -- $ 23.00 1,577 $ 16.58 $23.13 -- $ 30.25 2,034 $ 27.29 $30.38 -- $ 49.25 1,563 $ 43.18 - ------------------------------------------------------------------------------------------------------------ 5,174 $ 28.83 - ------------------------------------------------------------------------------------------------------------ These options will expire if not exercised at specific dates ranging from February 1998 to January 2008. Prices for options exercised during the three- year period ended January 31, 1998, range from $0.01 to $49.25. A total of 14.1 million shares of the Company's common stock have been reserved for future issuance under existing stock option programs. Employee stock purchase plan The Company has an employee stock purchase plan ("plan") for all employees meeting certain eligibility criteria. Under the plan, eligible employees may purchase shares of the Company's common stock, at their discretion up to 15 percent of their compensation subject to certain limitations, at not less than 85 percent of fair market value as defined in the plan. A total of 2,600,000 shares have been reserved for issuance under the plan. In fiscal years 1998, 1997, and 1996, shares totaling 490,000, 323,000, and 301,000, respectively, were issued under the plan at average prices of $21.99, $24.56, and $24.01 per share. At January 31, 1998, a total of 301,000 shares were available for future issuance under the plan. Pro forma information The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its employees' stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the Company's financial statements. Pro forma information regarding net income and net income per share is required by SFAS No. 123. This information is required to be determined as if the Company had accounted for its employee stock options (including shares issued under the Employee Stock Purchase Plan, collectively called "options") granted subsequent to January 31, 1995, under the fair value method of that statement. The fair value of options granted in 1998, 1997, and 1996 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: Employee stock options Employee stock purchase plan ---------------------- ---------------------------- 1998 1997 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Expected life (in years) 2.6 2.7 2.5 0.5 0.5 0.5 Risk-free interest rate 6.1% 6.1% 5.8% 5.4% 5.5% 5.8% Volatility .52 .42 .40 .50 .45 .45 Dividend yield 0.6% 0.8% 0.8% 0.6% 0.8% 0.8% - ---------------------------------------------------------------------------------------------- The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. The weighted average estimated fair value of employee stock options granted during fiscal years 1998, 1997, and 1996 was $13.50, $8.34, and $12.76 per share, respectively. The weighted average estimated fair value of shares granted under the Employee Stock Purchase Plan during fiscal years 1998, 1997, and 1996 was $7.17, $8.01, and $7.85, respectively. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income (loss) for fiscal years 1998, 1997, and 1996 was $(21,939,000), $15,343,000, and $77,952,000, respectively. Pro forma basic net income (loss) per share was $(0.47), $0.34, and $1.66 in fiscal years 1998, 1997, and 1996, respectively. In fiscal years 1998, 1997, and 1996, pro forma diluted net income (loss) per share was $(0.47), $0.30, and $1.52, respectively. The effects on pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on pro forma disclosures of future years. Because SFAS No. 123 is applicable only to options granted subsequent to January 31, 1995, the pro forma effect will not be fully reflected until 1999. Pretax savings plan The Company has a pretax savings plan covering nearly all US employees that qualify under Section 401(k) of the Internal Revenue Code. Eligible employees may contribute up to 15 percent of their pretax salary, subject to certain limitations. The Company makes voluntary contributions and matches a portion of employee contributions. Company contributions, which may be terminated at the Company's discretion, were $4,103,000, $3,068,000, and $2,442,000 in fiscal years 1998, 1997, and 1996, respectively. The Company provides defined-contribution plans in certain foreign countries where required by statute. The Company's funding policy for foreign defined- contribution plans is consistent with the local requirements in each country. Company contributions to these plans during fiscal year 1998 were $1,376,000. Company contributions to these plans in fiscal years 1997 and 1996 were not significant. Note 7. Stockholders' Equity - -------------------------------------------------------------------------------- Preferred stock The Company's Certificate of Incorporation authorizes 2 million shares of preferred stock, none of which is issued or outstanding. The Board of Directors has the authority to issue the preferred stock in one or more series and to fix rights, preferences, privileges and restrictions, including dividends, and the number of shares constituting any series or the designation of such series, without any further vote or action by the stockholders. Common stock repurchase program During fiscal years 1998, 1997, and 1996, the Company repurchased and retired a total of 2,332,500, 1,659,500, and 2,671,000 shares of its common stock at average repurchase prices of $38.39, $32.44, and $40.43, respectively, pursuant to an ongoing and systematic repurchase plan ("Systematic Plan") approved by the Company's Board of Directors to reduce the dilutive effect of common shares to be issued under the Company's employee stock plans. In December 1997, the Board of Directors authorized the purchase of an additional 4 million shares under the Systematic Plan. In August 1996, the Company announced another 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 "Supplemental Plan." In December 1997, the Board of Directors authorized the purchase of an additional 5 million shares under the Supplemental Plan. The Company may also utilize equity options as part of the Supplemental Plan. During fiscal years 1998 and 1997, the Company repurchased 1,000,000 and 557,500 shares in the open market at average per share repurchase prices of $34.37 and $24.09, respectively, and entered into the equity options described below. In September 1996, the Company sold put warrants to an investment bank that entitle the holder of the warrants to sell 3 million shares of common stock to the Company at $21.50 per share. Additionally, the Company purchased call options from the same independent third party that entitle the Company to buy 2 million shares of its common stock at $25.50 per share. The premiums received with respect to the equity options totaled $8.1 million and equaled the premiums paid. Consequently, there was no exchange of cash. The Company exercised the call options, repurchasing 2,000,000 shares of its common stock during the third quarter for $51 million. The put warrants expired unexercised in September 1997 and were reclassified from put warrants to stockholders' equity during the third quarter of fiscal year 1998. In December 1997, the Company sold put warrants to an independent third party that entitle the holder of the warrants to sell 1.5 million shares of common stock to the Company at $38.12 per share. Additionally, the Company purchased call options from the same independent third party that entitle the Company to buy 1 million shares at $39.88 per share. The premiums received with respect to the equity options totaled $4.5 million and equaled the premiums paid. Consequently, there was no exchange of cash. The outstanding put warrants at January 31, 1998, permitted a net share settlement at the Company's option. As a result, the transaction did not result in a put warrant liability on the consolidated balance sheet. Note 8. Quarterly Financial Information (Unaudited) - ------------------------------------------------------------------------------------------------ Summarized quarterly financial information for fiscal years 1998, 1997, and 1996 is as follows: 1st 2nd 3rd 4th Fiscal (In thousands, except per share data) Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------------------------ Fiscal year 1998 Net revenues $118,984 $154,096 $162,195 $181,851 $617,126 Gross margin 102,943 135,371 144,683 163,271 546,268 Income (loss) from operations (53,796) 25,469 30,126 43,556 45,355 Net income (loss) (52,745) 17,835 20,956 29,318 15,364 Basic net income (loss) per share (1.15) 0.37 0.44 0.64 0.33 Diluted net income (loss) per share (1.15) 0.34 0.41 0.60 0.31 Fiscal year 1997 Net revenues $136,281 $128,745 $116,647 $115,020 $496,693 Gross margin 118,989 112,123 101,427 99,937 432,476 Income from operations 28,125 17,123 7,502 7,067 59,817 Net income 19,060 10,645 5,873 5,993 41,571 Basic net income per share 0.41 0.23 0.13 0.13 0.91 Diluted net income per share 0.39 0.22 0.13 0.13 0.88 Fiscal year 1996 Net revenues $138,658 $140,686 $128,537 $126,286 $534,167 Gross margin 121,373 123,324 112,419 110,239 467,355 Income from operations 38,408 38,897 28,046 23,676 129,027 Net income 25,977 26,299 19,207 16,305 87,788 Basic net income per share 0.55 0.56 0.41 0.35 1.86 Diluted net income per share 0.51 0.52 0.38 0.34 1.76 - ------------------------------------------------------------------------------------------------ Results for the first quarter of fiscal year 1998 included nonrecurring charges of approximately $55.1 million and $3.0 million, respectively, representing the value of in-process research and development that had not yet reached technological feasibility and had no alternative future use acquired in the Softdesk and 3D/Eye transactions. These charges resulted in a reduction in diluted net income per share of $1.25 in the first quarter of fiscal year 1998. Results for the second and third fiscal quarters of fiscal year 1997 included nonrecurring charges of $3.2 million and $1.5 million, respectively, related to in-process research and development acquired in the Teleos and Argus acquisitions that had not yet reached technological feasibility and had no alternative future use. These charges resulted in an $0.08 and $0.02 reduction in diluted net income per share in the second and third quarters of fiscal year 1997, respectively. Note 9. Information by Geographic Area - -------------------------------------------------------------------------------- Information regarding the Company's operations by geographic area at January 31, 1998, 1997, and 1996, and for the fiscal years then ended is as follows: Fiscal year ended January 31, ----------------------------- (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------- Revenues: The Americas Customers in the United States $ 266,921 $ 176,286 $ 195,272 Customers in Asia Pacific 46,542 40,284 42,262 Customers in Canada 18,695 10,671 14,619 Other exports 18,014 13,420 11,103 Intercompany revenues 47,445 65,758 67,728 - ------------------------------------------------------------------------- 397,617 306,419 330,984 Europe 208,340 189,082 211,480 Asia Pacific 73,846 79,887 72,148 Consolidating eliminations (47,445) (65,758) (67,728) - ------------------------------------------------------------------------- $ 632,358 $ 509,630 $ 546,884 Income (loss) from operations: The Americas $ (11,816) $ 22,734 $ 63,843 Europe 51,220 32,909 53,696 Asia Pacific 5,951 4,174 11,488 - ------------------------------------------------------------------------- $ 45,355 $ 59,817 $ 129,027 - ------------------------------------------------------------------------- Identifiable assets: The Americas $ 333,558 $ 329,171 $ 306,795 Europe 287,470 302,183 250,268 Asia Pacific 72,472 72,543 73,426 Consolidating eliminations (159,817) (211,664) (112,560) - ------------------------------------------------------------------------- $ 533,683 $ 492,233 $ 517,929 - ------------------------------------------------------------------------- Intercompany revenues consist of royalty revenue payable by the Company's subsidiaries under software license agreements with the US parent company. At January 31, 1998, 1997, and 1996, total foreign net equity was $247.2 million, $161.2 million, and $133.2 million, respectively. Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders Autodesk, Inc. We have audited the accompanying consolidated balance sheets of Autodesk, Inc., as of January 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Autodesk, Inc., at January 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP San Jose, California February 24, 1998 Directors, Executive Officers, and Officers Directors Carol Bartz Chairman of the Board and Chief Executive Officer Mark A. Bertelsen Senior Partner, Wilson, Sonsini, Goodrich & Rosati, Attorneys-at-Law Crawford W. Beveridge Chief Executive Officer, Scottish Enterprise, an economic development company J. Hallam Dawson Chairman, IDI Associates, a private investment bank Paul S. Otellini Executive Vice President, General Manager, Intel Architecture Business Group Mary Alice Taylor Corporate Executive Vice President of Global Operations and Technology, CitiCorp Morton L. Topfer Vice Chairman, Dell Computer Corporation Executive Officers Carol Bartz Chairman of the Board and Chief Executive Officer Eric Herr President and Chief Operating Officer Dr. Joseph Astroth Vice President, GIS Market Group Carl Bass Vice President, Engineering and Chief Technical Officer Steve Cakebread Vice President Chief Financial Officer James D'Arezzo Vice President, Corporate Marketing Dominic Gallello Vice President, Mechanical CAD Market Group Stephen McMahon Vice President, Human Resources and Facilities Tom Norring Vice President, Asia Pacific Michelle Pharr Vice President, the Americas Marcia Sterling Vice President, Business Development, and General Counsel Godfrey Sullivan Vice President, Personal Solutions Group Michael Sutton Vice President, Europe/Middle East/Africa Officers William Kredel Vice President and Chief Information Officer David Oppenheimer Vice President, Finance John Sanders Vice President, Worldwide Product Support Michael Tabatabai Vice President, Worldwide Operations Christine Tsingos Vice President and Treasurer Eric Wagner Vice President, Software Development Corporate Information Market Information and Dividend Policy Market Prices The Company's common stock is traded on the Nasdaq National Market under the symbol ADSK. The following table lists the high and low sales prices for each quarter in the last three fiscal years: High Low - ---------------------------------------------------------------- Fiscal year 1998 First quarter $ 36-3/8 $ 28-1/4 Second quarter $ 42-7/8 $ 34-9/16 Third quarter $ 51-1/8 $ 30-1/2 Fourth quarter $ 42-1/8 $ 32-1/4 Fiscal year 1997 First quarter $ 44-1/4 $ 29-3/4 Second quarter $ 42-3/4 $ 20-1/2 Third quarter $ 27-1/2 $ 18-1/2 Fourth quarter $ 35-3/8 $ 21 Fiscal year 1996 First quarter $ 44 $ 33 Second quarter $ 50-1/4 $ 34 Third quarter $ 53 $ 33 Fourth quarter $ 39-1/2 $ 27-3/4 - --------------------------------------------------------------- Dividends The Company paid quarterly dividends of $0.06 per share in fiscal years 1998, 1997, and 1996. The Company currently intends to continue paying regular cash dividends on a quarterly basis. Stockholders As of April 21, 1998, the approximate number of common stockholders of record was 1,240. Annual Meeting The Company's Annual Meeting of Stockholders will be held at 2:00 pm on June 25, 1998, at Embassy Suites Hotel, 101 McInnis Parkway, San Rafael, California. Form 10-K A copy of the Company's Annual Report on Form 10-K for fiscal year 1998 filed with the Securities and Exchange Commission may be obtained without charge by sending a written request to Investor Relations, Autodesk, Inc., 111 McInnis Parkway, San Rafael, CA 94903. Information about Autodesk and its business, including the company's periodic filings with the Securities and Exchange Commission, may be obtained from Autodesk's World Wide Web site at WWW.AUTODESK.COM. Corporate Headquarters Autodesk, Inc. 111 McInnis Parkway San Rafael, CA 94903 USA The Americas Autodesk, Inc. 20400 Stevens Creek Boulevard Cupertino, CA 95014-2217 USA Asia Pacific Autodesk, Inc. 20400 Stevens Creek Boulevard Cupertino, CA 95014-2217 USA Europe Autodesk (Europe) SA 20, route de Pre-Bois Case Postale 766 CH-1215 Geneva 15 Switzerland Legal Counsel Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 USA Transfer Agent Harris Trust & Savings Bank c/o Shareholder Services 14th Floor 311 West Monroe Street Chicago, IL 60606 USA Independent Auditors Ernst & Young LLP 55 Almaden Boulevard San Jose, CA 95113 USA For More Information For more information, please write Investor Relations, Autodesk, Inc., 111 McInnis Parkway, San Rafael, CA 94903, phone us at 415-507-5000, or visit our World Wide Web sites at WWW.AUTODESK.COM and WWW.KTX.COM. Autodesk, the Autodesk logo, AutoCAD, AutoCAD LT, AutoCAD Map, AutoSketch, Kinetix, Mechanical Desktop, Picture This Home!, Planix, and 3D Studio MAX are registered trademarks, and AutoCAD Architectural Desktop, AutoCAD Land Development, Autodesk MapGuide, Autodesk World, bringing information down to earth, Character Studio, Design Your World, ObjectARX, and 3D Studio VIZ are trademarks, of Autodesk, Inc., in the USA and/or other countries. Microsoft, Windows, and Windows NT are registered trademarks of Microsoft Corporation. All other brand names, product names, or trademarks belong to their respective holders. (C) Copyright 1998 Autodesk, Inc. All rights reserved. Customer image credits: cover inset (left to right), Roy Larosa, Jaime Laga/New Jersey Institute of Technology, School of Architecture, Doug King and Chuck Wootten, Yuba Heat Transfer, Tulsa, OK, Department of Public Works, City of San Rafael, CA, Unreal Pictures (created for Kinetix, a Division of Autodesk, Inc.), and Suarez-Kuehne Architects, San Francisco, CA; p. 9 top, Little & Associates, Charlotte, NC; p. 10 top, Jozef M. Nowobilski, Preferred Machine, Bedford Park, IL; p. 13 top, Greg V. Hess, Strata Web Systems Ltd., Calgary, Alberta, Canada; p. 14 bottom left, image courtesy of Xaos, Inc.; p. 14 bottom right, image courtesy of Liquid Light Studios; p. 17 top, Charles Miller, Charles Miller & Co., Fairburn, GA.