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) 1998/4/ 1997/1/ 1996/1/ 1995/1/ 1994
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For the fiscal year
Net revenues $617,126 $496,693 $534,167 $454,612 $405,596
Cost of revenues 71,338 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 88,900 74,280 76,100 65,738 58,536
Nonrecurring charges/2/ 22,187 4,738 -- 25,500 --
Income from operations 75,162 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 84,806 66,512 138,280 89,144 96,758
Net income 45,171 41,571 87,788 56,606 62,166
Net cash provided by
operating activities 158,612 114,183 106,632 104,412 88,853
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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 563,490 492,233 517,929 482,076 404,874
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 332,939 243,614 342,328 323,484 296,879
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
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Common stock data
Basic net income per
share/2/, /3/ $ 0.97 $ 0.91 $ 1.86 $ 1.20 $ 1.30
Diluted net income per
share/2/, /3/ $ 0.91 $ 0.88 $ 1.76 $ 1.14 $ 1.25
Book value per share $ 7.32 $ 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
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Financial ratios
Current ratio 1.5 2.0 2.3 2.3 2.7
Return on net revenues/2/ 7.3% 8.4% 16.4% 12.5% 15.3%
Return on average assets/2/ 8.6% 8.2% 17.6% 12.8% 16.3%
Return on average
stockholders' equity/2/ 15.7% 14.2% 26.4% 18.2% 22.0%
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Growth percentages
Net revenues 24.2% (7.0%) 17.5% 12.1% 14.8%
Net income/2/ 8.7% (52.6%) 55.1% (8.9%) 41.7%
Basic net income per
share/2/, /3/ 6.6% (51.1%) 55.0% (7.7%) 42.9%
Diluted net income per share/2/,
/3/ 3.4% (50.0%) 54.4% (8.8%) 42.0%
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/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 $22.2 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."
/4/ Subsequent to the Securities and Exchange Commission's letter to the AICPA
dated September 9, 1998, regarding its views on in-process research and
development ("IPR&D"), the Company has re-evaluated its IPR&D charges on the
Softdesk, Inc. acquisition, revised the purchase price allocation and
restated its financial statements. Amounts for fiscal 1998 have been
restated to adjust the allocation of the purchase price of this business
combination. The adjustment had the effect of increasing net income (diluted
net income per share) by $29,8 million, ($0.60), for the fiscal year ended
January 31, 1998.
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."
RESTATEMENT OF FINANCIAL STATEMENTS
On March 31, 1997, Autodesk acquired Softdesk, Inc. ("Softdesk"), a leading
supplier of AutoCAD-based applications software for the architecture,
engineering, and construction market. The acquisition of Softdesk was accounted
for as a business combination using the purchase method of accounting. In
accordance with Accounting Principles Board Opinion No. 16, "Accounting for
Business Combinations," the cost of the Softdesk acquisition was allocated to
the assets acquired and the liabilities assumed (including in-process research
and development) based on their estimated fair values using valuation methods
believed to be appropriate at the time. The estimated fair value of the in-
process research and development of $55.1 million was expensed in the first
quarter of fiscal 1998 (the period in which the acquisition was consummated) in
accordance with FASB Interpretation No. 4, "Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method." Subsequent to
the Securities and Exchange Commission's letter to the AICPA dated September 9,
1998, regarding its views on in-process research and development ("IPR&D"), the
Company has re-evaluated its IPR&D charges on the Softdesk acquisition, revised
the purchase price allocation and restated its financial statements. As a
result, Autodesk has made an adjustment to decrease the amount previously
expensed as IPR&D by $35.9 million.
The effect of this adjustment on the previously reported consolidated
financial statements as of and for the year ended January 31, 1998 are as
follows (in thousands):
YEAR ENDED
JANUARY 31, 1998
--------------------
AS REPORTED RESTATED
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Nonrecurring charges................................. $58,087 $22,187
General and administrative........................... $83,287 $88,900
Cost of revenues..................................... $70,858 $71,338
Income from operations............................... $45,355 $75,162
Net income........................................... $15,364 $45,171
Basic net income per share........................... $ 0.33 $ 0.97
Diluted net income per share......................... $ 0.31 $ 0.91
AS OF JANUARY 31,
1998
--------------------
AS REPORTED RESTATED
----------- --------
Purchased technologies and capitalized
software, net....................................... $31,553 $33,373
Goodwill, net........................................ $16,995 $44,982
Deferred income taxes (non-current asset)............ $13,782 $13,782
Retained earnings.................................... $19,895 $49,702
Results of Operations
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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
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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 4 1 --
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Total costs and expenses 88 88 76
Income from operations 12 12 24
Interest and other income, net 1 1 2
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Income before income taxes 13 13 26
Provision for income taxes 6 5 9
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Net income 7% 8% 17%
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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, Inc., 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 $88.9
million increased 20 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
On March 31, 1997, Autodesk issued approximately 2.9
million shares of its common stock for all outstanding shares of Softdesk.
Based upon the value of Autodesk stock and options exchanged, the transaction,
including transaction costs, was valued at approximately $94 million. In
connection with the acquisition, the Company recorded a charge for in-process
research and development of $19.2 million, all of which was recorded as a
nonrecurring charge in the fiscal quarter ended April 30, 1997. These charges
reduced net income for the period by approximately $21.1 million ($0.46 per
share on a diluted basis) and reflect the fact the one-time charge for acquired
in-process research and development recorded in connection with the Softdesk
transaction was not deductible for income tax purposes.
IN-PROCESS TECHNOLOGIES OVERVIEW
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relate to the
completion of all planning, designing and testing activities that are
necessary to establish that the product or service can be produced to meet its
design requirements, including functions, features and technical performance
requirements.
As of the acquisition date, Softdesk had spent a significant amount of
research and development effort related to the re-programming of all its
existing products to a new ARX technology (AutoCAD Runtime Extension) code
base. The new ARX technology is expected to provide significant improvement in
the orientation of objects in CAD products. As of the acquisition date,
Softdesk had completed improvements of ARX technology in various development
projects associated within the following technology categories: (i) AutoCAD-
Architectural/Structural, (ii) AutoCAD-Civil, (iii) AutoCAD-Imaging, (iv)
AutoCAD-Maintenance, (v) AutoCAD-Productivity, and (vi) AutoCAD-Retail.
In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of
software purchased to be integrated with another product or process will be
capitalized only if technological feasibility was established for the software
component and if all research and development activities for the other
components of the product or process were completed at the time of the
purchase." Although Autodesk purchased a set of professional products from
Softdesk, as described above, these products were built on top of AutoCAD
Release 13 and AutoCAD Release 12 software; they did not utilize AutoCAD's
ObjectARX programming system in any significant way. With this new technology,
AutoCAD developers and users could transform ordinary drawing geometry such as
lines, arcs, circles, and other entities into "intelligent" custom drawing
objects. Commercially shipped Softdesk products, as of the valuation date,
were limited to working with the native AutoCAD drafting entities and command
set--an environment in which real-world objects were represented by geometric
entities that could seldom respond directly to user commands. Higher level
entities that represented building elements could be built as groups or
collections of geometric entities but these collections were very rigid and
did not exhibit intelligent behavior.
With the relational database and the ObjectARX application programming
interface (API) in AutoCAD Release 13 software, objects could "know" their
form and function. For example, an ObjectARX-based custom door positioned in a
wall will not let itself be placed where it cannot open. In other
applications, clicking on a fastener or flange, or a land parcel or
topographical feature, can access additional design data in that custom object
and trigger operations ranging from a simple on-screen notice to the
preparation of a comprehensive spreadsheet. ObjectARX was a significant
departure from previous AutoCAD development environments. Programming
ObjectARX required a high level of skill in object-oriented programming.
Furthermore, development was being done on a new object oriented development
platform which did not have significant prior development built on top.
The first two AEC applications acquired from Softdesk were developed in this
new environment. Architectural Desktop and the Land Development desktop, both
released in the last half of fiscal year 1999, were developed on top of the
Object/ARX environment. The ObjectARX environment provided general mechanisms,
but the Softdesk development teams had to adapt these mechanisms specifically
for architectural and civil use. A significant amount of effort was undertaken
to develop these products in this new environment. They had to draw upon their
experience to arrive at object definitions which would function appropriately
in their specific markets. In addition, these object definitions had to be
general enough that they could be localized to meet the unique needs of the
design and construction practices in a variety of international markets. These
two products both attempted to move functionality from a "drafting-based" to
"model-based" approach. Although some model-based design systems have been
attempted in the past, none had been developed on top of a leading design and
drafting platform such as AutoCAD. Finally, none had been developed with a
tight linkage to the design and drafting functions inherent in a broad
platform such as AutoCAD.
Although the functionality of these products is somewhat similar to previous
Softdesk products, there was significant technological risk in developing
products in a new, unproven development environment. While such development
had been conducted within Autodesk--in the mechanical CAD division (Mechanical
Desktop), it had not been successfully done by other companies.
With respect to the acquired in-process technologies, as previously
discussed, the calculations of value were adjusted to reflect the value
creation efforts of Softdesk prior to the close of the acquisition. Following
are the estimated completion percentages, estimated technology lives and
projected introduction dates:
PERCENT TECHNOLOGY INTRODUCTION
SOFTDESK IN-PROCESS TECHNOLOGIES COMPLETED LIFE DATES
- -------------------------------- --------- ---------- ---------------
AutoCAD Architectural/Structural Modules... 65% 7 years Sept 98/Jun 97
AutoCAD Civil Modules...................... 90% 7 years May/Jun 97
AutoCAD Imaging Modules.................... 75% 5 years May/Jun 97
AutoCAD Maintenance Modules................ 65% 7 years May/Jun 97
AutoCAD Productivity Modules............... 65% 7 years May/Jun 97
AutoCAD Retail Modules..................... 70% 7 years July 97
VALUATION ANALYSIS
Revenue
Future revenue estimates were generated from the following product families:
(i) AutoCAD-Architectural/Structural, (ii) AutoCAD-Civil, (iii) AutoCAD-
Imaging, (iv) AutoCAD-Maintenance, (v) AutoCAD-Productivity, and (vi) AutoCAD-
Retail. Aggregate revenue for Softdesk products was estimated to be less than
$30 million for the 10 months ended January 31, 1998. Revenues, including
revenues associated with yet-to-be-developed products utilizing the acquired
technologies, as well as most of the in-process projects identified in the
valuation analysis, were estimated to increase on an annualized basis by more
than 250 percent in fiscal year 1999. Thereafter, revenue was estimated to
increase at rates ranging from 11 to 17 percent for fiscal years 2000 through
2002, and stabilize at 10 percent for the remainder of the estimation period.
Revenue estimates were based on (i) aggregate revenue growth rates for the
business as a whole, (ii) individual product revenues, (iii) growth rates for
the CAD software market, (iv) the aggregate size of the CAD software market, (v)
anticipated product development and introduction schedules, (vi) product sales
cycles, and (vii) the estimated life of a product's underlying technology. The
estimated product development cycle for the new modules ranged from 6 to 24
months (averaging 12 months).
Operating expenses
Operating expenses used in the valuation analysis of Softdesk included (i)
cost of goods sold, (ii) general and administrative expense, (iii) marketing
and sales expense, and (iv) research and development expense. In developing
future expense estimates, it was assumed that the Softdesk operations would be
merged into Autodesk's operating structure. Selected operating expense
assumptions were based on an evaluation of Autodesk's overall business model,
specific product results, including both historical and expected direct
expense levels (as appropriate), and an assessment of general industry
metrics.
Cost of revenues. Cost of revenues, expressed as a percentage of revenue,
for the developed technology identified in the valuation analysis ranged from
approximately 19 percent in fiscal 1998 to approximately 14 percent in fiscal
2002. Cost of revenues, expressed as a percentage of revenue, for the in-
process technology ranged from approximately 17 percent in fiscal 1998 to
approximately 15 percent in fiscal 2004. Autodesk's cost of revenues was 13
percent for fiscal 1996 and fiscal 1997, and 12 percent for fiscal 1998.
General and administrative. General and administrative expense, expressed as
a percentage of revenue, for the developed technology identified in the
valuation analysis, ranged from approximately 6 percent in fiscal 1998 to
approximately 7 percent in fiscal 2002. General and administrative expense,
expressed as a percentage of revenue, for the in-process technology ranged
from approximately 8 percent in fiscal 1998 to approximately 7 percent in
fiscal 2002.
Marketing and sales. Marketing and sales expense, expressed as a percentage
of revenue, for the developed technology identified in the valuation ranged
from approximately 31 percent in fiscal 1998 to approximately 28 percent in
fiscal 2002. Marketing and sales expense, expressed as a percentage of
revenue, for the in-process technology ranged from approximately 32 percent in
fiscal 1998 to approximately 29 percent in fiscal 2002.
Research and development. Research and development expenses consist of the
costs associated with activities undertaken to correct errors or keep products
updated with current information. Maintenance R&D includes all activities
undertaken after a product is available for general release to customers to
correct errors or keep the product updated with current information. These
activities include routine changes and additions. The maintenance R&D expense
was estimated to be 2.5 percent of revenue for the developed and in-process
technologies throughout the estimation period.
Effective income tax rate
The effective income tax rate utilized in the analysis of in-process
technology was 36 percent in fiscal year 1998, 34 percent in fiscal year 1999
and in the mid 30 percentage-range--thereafter, which reflects Autodesk's
combined federal and state statutory income tax rate, exclusive of
nonrecurring charges at the time of the acquisition and estimated for future
years.
Discount rate
The discount rates selected for developed and in-process technology were 15.0
percent and 20.0 percent, respectively. In the selection of the appropriate
discount rates, consideration was given to (i) the Weighted Average Cost of
Capital ("WACC") (14.0 percent) and (ii) the Weighted Average Return on Assets
(20.0 percent). The discount rate utilized for the in-process technology was
determined to be higher than Autodesk's WACC due to the fact that the technology
had not yet reached technological feasibility as of the date of valuation. In
utilizing a discount rate greater than Autodesk's WACC, management has reflected
the risk premium associated with achieving the forecasted cash flows associated
with these projects.
COMPARISON TO ACTUAL RESULTS
To date, the assumptions used in the projections of revenues from in-process
technologies and the estimated costs and completion dates for those
technologies were reasonable based on factors known at the acquisition date.
Actual revenues from in-process technologies have been less than amounts
projected in connection with the analysis of the Softdesk acquisition. This
shortfall reflects competitive factors related to price, difficulties in
developing robust commercial applications in the new ObjectARX environment,
functionality and performance in the architecture, the engineering and
construction software industry, particularly in regard to localized building
services applications. Partially offsetting the variance from management's
original revenue projections is a favorable variance in spending such that
Autodesk's return on its investment in such technologies, as well as its
current and future results of operations and financial position have not been
and are not expected to be adversely impacted. However, if the in-process
projects contemplated in management's forecast are not successfully developed,
future revenue and profitability of Autodesk may be adversely affected.
Additionally, the value of other intangible assets acquired from Softdesk may
become impaired.
Other nonrecurring charges
Nonrecurring charges in fiscal year 1998 also included charges for purchased
in-process research and development associated with Autodesk's licensing of
3D/Eye technology ($3.0 million) in fiscal year 1998 and Autodesk's
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 Autodesk Consolidated Financial Statements.
As discussed in Note 4 to the Autodesk 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"). Autodesk recorded this nonrecurring charge in the fourth quarter of
fiscal year 1995. Autodesk appealed and a reduced judgment was entered against
Autodesk in February 1998 in the amount of $7.8 million. Because the case is
still subject to post-judgment motions and appeals, Auotdesk 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 38.0 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.
Comprehensive income
As of February 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income," which establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's net
income or stockholders' equity. Statement 130 requires unrealized gains or
losses on the Company's available-for-sale securities and the foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130. For further discussion, see Note 1 to the Consolidated Financial
Statements.
Recently issued accounting standards
In June 1997,
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 131 on its financial disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. The Statement
requires Autodesk to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change in
fair value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. SFAS 133 is effective as of the beginning of
Autodesk's fiscal year 2001. Autodesk is currently evaluating the impact of SFAS
133 on its financial statements and related disclousres.
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 December 1998, the AICPA
issued Statement of Position 98-9, which amends certain provisions of SOP 97-2
and extends the deferral of the application of certain passages of SOP 97-2
provided by SOP 98-4 until the beginning of Autodesk's fiscal year 2000.
Autodesk is currently evaluating the impact of SOP 98-9 on its financial
statements and related disclosures.
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, any of which could
adversely affect Autodesk's business, consolidated results of operations, and
financial condition. The design software market in particular is characterized
by vigorous competition in each of the vertical markets in which Autodesk
competes, both by entry of competitors with innovative technologies and by
consolidation of companies with complementary products and technologies.
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.) ("Computervision"); 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; Dassault
System's ("Dassault"); 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 product reliability, performance, range of useful features,
continuing product enhancements, reputation, price 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 to determine whether Autodesk
or others have engaged in or are engaging in unfair methods of competition.
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.
In April 1998, the Company received notice that the Federal Trade Commission
("FTC") has undertaken a nonpublic investigation to determine whether Autodesk
or others have engaged in or are engaging in unfair methods of competition. 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.
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 reliability,
performance, ease of use, range of useful features, continuing product
enhancements, reputation, price 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. Autodesk's international results have been
impacted by recent unfavorable economic and political conditions in the Asian
markets. There can be no assurance that the economic crisis and currency issues
currently being experienced 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 to date experienced any material
problems with its VAR network, computer software dealers and distributors are
typically not highly capitalized and have experienced difficulties during times
of economic contraction and may do so in the future. 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. Autodesk's largest
international distributor is Computer 2000 AG in Germany. Autodesk's largest
resellers in the United States are Avatech, Advanced Enterprise Solutions and
Integrated Systems Technologies.
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 currently produces internally for sale to third
parties to determine compliance of its products. Products currently sold either
have been found to be substantially compliant or are currently being tested for
compliance. However, many Autodesk/R/ products run on computer hardware and
operating systems produced and sold by third-party vendors. There can be no
assurance that these computer hardware and operating 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. Autodesk believes that its
existing cash, cash equivalents, marketable securities, available line of
credit, and cash generated from operations will be sufficient to satisfy its
currently anticipated cash requirements for fiscal year 1999.
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 longer-term cash requirements.
Consolidated Statement of Income
Fiscal year ended January 31,
-----------------------------------
(In thousands, except per share data) 1998 1997 1996
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Restated
Revenues $ 632,358 $ 509,630 $ 546,884
Direct commissions 15,232 12,937 12,717
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Net revenues 617,126 496,693 534,167
Costs and expenses:
Cost of revenues 71,338 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 88,900 74,280 76,100
Nonrecurring charges 22,187 4,738 --
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Total costs and expenses 541,964 436,876 405,140
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Income from operations 75,162 59,817 129,027
Interest and other income, net 9,644 6,695 9,253
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Income before income taxes 84,806 66,512 138,280
Provision for income taxes 39,635 24,941 50,492
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Net income $ 45,171 $ 41,571 $ 87,788
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Basic net income per share $ 0.97 $ 0.91 $ 1.86
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Diluted net income per share $ 0.91 $ 0.88 $ 1.76
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Shares used in computing basic net income per share 46,760 45,540 47,090
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Shares used in computing diluted net income per share 49,860 47,190 49,800
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See accompanying notes.
Consolidated Balance Sheet
January 31,
-----------
(In thousands) 1998 1997
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Restated
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
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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)
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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) 33,373 15,916
Goodwill 44,982 6,470
Deferred income taxes 13,782 12,857
Other assets 19,681 11,746
- ---------------------------------------------------------------------------------------------------------------------------------
$ 563,490 $ 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
Accumulated other comprehensive income (16,078) (9,849)
Retained earnings 49,702 106,372
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 332,939 243,614
- ---------------------------------------------------------------------------------------------------------------------------------
$ 563,490 $ 492,233
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
Consolidated Statements of Cash Flows
Fiscal year ended January 31,
-------------------------------
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Restated
Operating activities
Net income $ 45,171 $ 41,571 $ 87,788
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 49,947 34,833 25,247
Charge for acquired in-process research and development 22,187 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 (36) (3,407) 3,083
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (16,476) (110,542) (104,588)
- -------------------------------------------------------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (4,723) (13,291) 4,959
- -------------------------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------
Accumulated
Common Stock Other Total
---------------- Comprehensive Comprehensive Retained Stockholders'
Shares Amount Income Income Earnings Equity
------ -------- ------------- ------------- --------- -------------
Balances, January 31,
1995................... 47,241 $100,870 $ 7,303 $ 215,311 $ 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
Comprehensive income:
Net income............. $ 87,788 87,788 87,788
--------
Other comprehensive
income, net of tax:
Unrealized gains on
available-for-sale
securities, net of
reclassification
adjustments.......... 888 888
Foreign currency
translation
adjustment........... 2,904 2,904
--------
Other comprehensive
income................ 3,792 3,792
--------
Comprehensive income.... $ 91,580
========
Dividends paid.......... (11,184) (11,184)
Repurchase of common
shares................. (2,671) (6,529) (101,447) (107,976)
------ -------- -------- --------- ---------
Balances, January 31,
1996................... 46,351 140,765 11,095 190,468 342,328
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)
Comprehensive income:
Net income............. 41,571 41,571 41,571
--------
Other comprehensive
loss, net of tax:
Unrealized losses on
available-for-sale
securities, net of
reclassification
adjustments.......... (426) (426)
Foreign currency
translation
adjustment........... (20,518) (20,518)
--------
Other comprehensive
income................ (20,944) (20,944)
--------
Comprehensive income.... $ 20,627
========
Dividends paid.......... (10,879) (10,879)
Repurchase of common
shares................. (2,217) (7,111) (60,158) (67,269)
------ -------- -------- --------- ---------
Balances, January 31,
1997................... 45,108 147,091 (9,849) 106,372 243,614
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
Comprehensive income:
Net income (restated).. 45,171 45,171 45,171
--------
Other comprehensive
income (loss), net of
tax:
Unrealized gains on
available-for-sale
securities, net of
reclassification
adjustments.......... 362 362
Foreign currency
translation
adjustment........... (6,591) (6,591)
--------
Other comprehensive
income................ (6,229) (6,229)
--------
Comprehensive income
(restated)............. $ 38,942
========
Dividends paid.......... (11,290) (11,290)
Repurchase of common
shares................. (5,333) (29,726) (145,181) (174,907)
------ -------- -------- --------- ---------
Balances, January 31,
1998 (restated)........ 45,465 $299,315 $(16,078) $ 49,702 $ 332,939
====== ======== ======== ========= =========
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.
Restatement of Financial Statements
As described later in this footnote, the acquisition of Softdesk, Inc.
("Softdesk") was accounted for as a business combination using the purchase
method of accounting. In accordance with Accounting Principles Board Opinion No.
16, "Accounting for Business Combinations," the cost of the Softdesk acquisition
was allocated to the assets acquired and the liabilities assumed (including in-
process research and development) based on their estimated fair values using
valuation methods believed to be appropriate at the time. The estimated fair
value of the in-process research and development of $55.1 million was expensed
in the first quarter of fiscal 1998 (the period in which the acquisition was
consummated) in accordance with FASB Interpretation No. 4, "Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method." Subsequent to the Securities and Exchange Commission's letter to the
AICPA dated September 9, 1998, regarding its views on in-process research and
development ("IPR&D"), the Company has re-evaluated its IPR&D charges on the
Softdesk acquisition, revised the purchase price allocation and restated its
financial statements. As a result, Autodesk has made adjustments to decrease the
amount previously expensed as IPR&D and increase the amount capitalized as
goodwill and other intangibles relating to the Softdesk acquisition by $35.9
million.
The effect of this adjustment on previously reported consolidated financial
statements as of and for the year ended January 31, 1998 is as follows (in
thousands):
As Reported As Restated
----------- -----------
Nonrecurring charges.................................... $58,087 $22,187
General and administrative.............................. 83,287 88,900
Income from operations.................................. 45,355 75,162
Net income.............................................. 15,364 45,171
Basic net income per share.............................. $0.33 $0.97
Diluted net income per share............................ $0.31 $0.91
Purchased technologies and capitalized software, net.... 31,553 33,373
Goodwill, net........................................... 16,995 44,982
Retained earnings....................................... 19,895 49,702
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
within accumulated other comprehensive income, a 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 exchanged 2.9 million shares of its common
stock for all of the outstanding stock of Softdesk, Inc. ("Softdesk").
Softdesk is a leading supplier of AutoCAD-based applications software for the
architecture, engineering, and construction market. Based on the value of
Autodesk stock and options exchanged, the transaction, including transaction
costs, was valued at approximately $94.1 million.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:
(in thousands)
Accounts receivables and other current assets................... $ 15,600
Net fixed assets................................................ 3,200
Other long term assets.......................................... 4,000
Purchased in-process research and development charged to
operations in the quarter ended April 30, 1997................. 19,200
Purchased technologies and other intangible assets.............. 15,900
Goodwill........................................................ 48,000
Liabilities assumed............................................. (7,800)
Deferred tax liability.......................................... (4,000)
--------
Total purchase consideration.................................. $ 94,100
========
Purchased In-Process Research and Development. Management estimated that $19.2
million of the purchase price represented purchased in-process technology that
had not yet reached technological feasibility and had no alternative future use.
Accordingly, this amount was expensed in the second quarter of the current
fiscal year following consummation of the acquisition. The value assigned to
purchased in-process technology was determined by identifying research projects
in areas for which technological feasibility had not been achieved. The value
was determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net cash
flows from such projects, and discounting the net cash flows back to their
present value. The discount rate included a factor that took into account the
uncertainty surrounding the successful development of the purchased in-process
technology projects.
Purchased Technology. To determine the value of the purchased technology
($9.2 million), the expected future cash flows of the existing developed
technologies were discounted taking into account the characteristics and
applications of the product, the size of existing markets, growth rates of
existing and future markets as well as an evaluation of past and anticipated
product-life cycles.
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"). The purchase consideration was allocated to the acquired
assets and assumed liabilities based on fair values as follows:
(in thousands)
Accounts receivable and other current assets..................... $ 225
Net fixed assets................................................. 243
Other long term assets........................................... 37
Purchased in-process research and development charged to
operations in fiscal year 1997.................................. 4,738
Purchased technologies and other intangible assets............... 3,213
Goodwill......................................................... 2,528
Liabilities assumed.............................................. (1,077)
-------
$ 9,907
=======
Amortization of these purchased technologies and other intangibles is
provided on a straight-line basis over the respective useful lives of the
assets ranging from three to seven years. The operating results of these
acquisitions, which have not been material in relation to those of Autodesk,
have been included in the consolidated financial statements from the
respective acquisition dates.
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
$13,148,000, $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 $28,169,000 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 $13,923,000 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 from resellers and
distributors is recognized at the time of shipment to these parties, 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.
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.
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: Restated
Numerator for basic and diluted net income per share--net income $45,171 $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.
Comprehensive Income
As of February 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income," which establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
the foreign currency translation adjustments, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified
to conform to the requirements of Statement 130.
The components of total accumulated other comprehensive income in the
balance sheet are as follows:
January 31,
------------------
1998 1997
-------- --------
(In thousands)
Unrealized gains on available for sale securities, net
of tax................................................. $ 577 $ 215
Foreign currency translation adjustment................. (16,655) (10,064)
-------- --------
Total accumulated other comprehensive income.......... $(16,078) $ (9,849)
======== ========
The related income tax effect allocated to each component of other
comprehensive income are as follows:
Amount Income Tax Amount
Before (Expense) Net of
Taxes Benefit Taxes
-------- ---------- --------
(In Thousands)
Fiscal Year 1998
Net unrealized gains on available-for-sale
securities.................................. $ 565 $(203) $ 362
Foreign currency translation adjustments..... (6,591) -- (6,591)
-------- ----- --------
Total other comprehensive loss........... $ (6,026) $(203) $ (6,229)
======== ===== ========
Fiscal Year 1997
Net unrealized losses on available-for-sale
securities.................................. $ (660) $ 234 $ (426)
Foreign currency translation adjustments..... (20,518) -- (20,518)
-------- ----- --------
Total other comprehensive loss........... $(21,178) $ 234 $(20,944)
======== ===== ========
Fiscal Year 1996
Net unrealized gains on available-for-sale
securities.................................. $ 1,398 $(510) $ 888
Foreign currency translation adjustments..... 2,904 -- 2,904
-------- ----- --------
Total other comprehensive income......... $ 4,302 $(510) $ 3,792
======== ===== ========
Recently issued accounting standards
In June 1997, 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 131 on its financial disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement requires Autodesk to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset against the
change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. SFAS 133 is effective
as of the beginning of Autodesk's fiscal year 2001. Autodesk is currently
evaluating the impact of SFAS 133 on its financial statements and related
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 December 1998, the AICPA issued Statement of Position 98-9, which amends
certain provisions of SOP 97-2 and extends the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 until the beginning of
Autodesk's fiscal year 2000. Autodesk is currently evaluating the impact of SOP
98-9 on its financial statements and related disclosures.
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 $29,682 $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 6,720 1,130 --
Goodwill amortization 3,597 695 723
Other (55) 458 2,286
- ----------------------------------------------------------------------------------------------------------------------------------
$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 for fiscal years 1998, 1997, and 1996 was $7,868,000,
$15,343,000, and $77,952,000, respectively. Pro forma basic net income per share
was $0.17, $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 per share was
$0.16, $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 entitled the Company to buy 2
million shares of its common stock at $25.50 per share. The premiums received
with respect to the equity options totaled $8.1 million and equaled the premiums
paid. Consequently, there was no exchange of cash. At any given date, the
amounts potentially subject to market risk are generally limited to the amount
by which the per share price of the put warrants exceeds the market value of
Autodesk's common stock. On January 31, 1997, the per share trading price of
Autodesk's common stock was $31.63 which exceeded the per share exercise price
of the put warrants which was $21.50. 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.
In December 1997, the Company sold put warrants to an independent third party
that entitled the holder of the warrants to sell 1.5 million shares of common
stock to the Company at $38.12 per share. Additionally, the Company purchased
call options from the same independent third party that 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. At any given date, the amounts
potentially subject to market risk are generally limited to the amount by which
the per share price of the put warrants exceeds the market value of Autodesk's
common stock. On January 31, 1998, the per share trading price of Autodesk's
common stock was $38.63 which exceeded the per share exercise price of the put
warrants which was $38.12. 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 are noted below:
The quarterly information for Fiscal 1998 have been restated to reflect the
adjustment described at Note 1.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Fiscal Year
As Reported As Reported As Reported As Reported As Reported
----------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
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
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Fiscal Year
Restated Restated Restated Restated Restated
----------- ----------- ----------- ----------- -----------
Fiscal year 1998
Net revenues $118,984 $154,096 $162,195 $181,851 $617,126
Gross margin 102,895 135,227 144,539 163,127 545,788
Income (loss) from operations (18,488) 23,624 28,298 41,728 75,162
Net income (loss) (17,437) 15,990 19,128 27,490 45,171
Basic net income (loss)
per share (0.38) 0.33 0.41 0.60 0.97
Diluted net income
(loss) per share (0.38) 0.31 0.37 0.56 0.91
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Fiscal Year
----------- ----------- ----------- ----------- -----------
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
- ------------------------------------------------------------------------------------------------
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 $ 17,991 $ 22,734 $ 63,843
Europe 51,220 32,909 53,696
Asia Pacific 5,951 4,174 11,488
- -------------------------------------------------------------------------
$ 75,162 $ 59,817 $ 129,027
- -------------------------------------------------------------------------
Identifiable assets:
The Americas $ 363,365 $ 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)
- -------------------------------------------------------------------------
$ 563,490 $ 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.
As discussed more fully in Note 1, the Company has modified the methods used
to value acquired in-process research and development recorded and written off
in connection with the Company's March 1997 acquisition of Softdesk, Inc. and,
accordingly, has restated the consolidated financial statements for the fiscal
year ended January 31, 1998 to reflect this change.
/s/ Ernst & Young LLP
San Jose, California
February 24, 1998, except for
the second paragraph of
Note 1, as to which the date is
January 25, 1999
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
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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.