SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 16, 1999
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Autodesk, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 0-14338 94-2819853
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
111 McInnis Parkway, San Rafael, California 94903
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 507-5000
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(Former name or former address, if changed since last report)
This Amendment No. 1 to the Registrant's Current Report on Form 8-K dated March
31, 1999, relates to the Registrant's completion of the acquisition of Discreet
Logic Inc. ("Discreet"), a Quebec Company, pursuant to the Amended and Restated
Agreement and Plan of Acquisition and Amalgamation dated as of November 18,
1998, as amended on December 18, 1998 and on January 18, 1999. The purpose of
this Amendment is to amend Item 7(b) to provide the required pro forma financial
information relating to the acquisition, which was impracticable to provide at
the time the Registrant filed this Report.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
Selected Five-Year Financial Data
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(In thousands, except per share data, percentages, and Fiscal year ended January 31,
employees)
For the Fiscal Year 1999 1998(restated)/2/ 1997(restated)/2/
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Net revenues $871,879 $768,684 $598,617
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Cost of revenues 134,247 133,371 111,788
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Marketing and sales 295,890 271,428 223,145
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Research and development 158,856 138,387 104,106
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General and administrative 140,976 105,207 80,781
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Nonrecurring charges/1/ 19,694 26,810 13,501
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Litigation accrual reversal (18,605) (405) --
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Income from operations/1/ 140,821 93,886 65,296
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Interest and other income, net 17,134 11,710 7,685
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Income before income taxes 157,955 105,596 72,981
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Net income/1/ 97,132 56,215 42,247
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Net cash provided by operating activities 175,053 175,719 140,194
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At Year End
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Cash, cash equivalents, and marketable securities $427,962 $347,778 $317,976
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Current assets 544,415 403,639 374,490
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Total assets 823,260 699,901 595,610
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Current liabilities 279,114 255,015 208,454
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Long-term liabilities 6,819 33,293 34,661
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Total liabilities 285,933 288,308 243,115
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Stockholders' equity 537,327 411,593 287,995
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Working capital 265,301 148,624 166,036
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Number of employees 3,126 2,885 2,343
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Common Stock Data
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Basic net income per share/1/ $ 1.72 $ 1.00 $ 0.77
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Diluted net income per share/1/ $ 1.64 $ 0.94 $ 0.74
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Book value per share $ 9.39 $ 7.45 $ 5.30
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Dividends paid per share $ 0.20 $ 0.20 $ 0.20
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Shares used in computing basic net income per share 56,394 56,340 54,763
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Shares used in computing diluted net income per share 59,141 60,022 56,725
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Shares outstanding at year end 57,221 55,239 54,387
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Financial Ratios
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Current ratio 2.0 1.6 1.8
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Return on net revenues/1/ 11% 7% 7%
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Return on average assets/1/ 13% 9% 7%
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Return on average stockholders' equity/1/ 20% 16% 13%
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(In thousands, except per share data, percentages, and Fiscal year ended January 31,
employees)
For the Fiscal Year 1996 1995
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Net revenues $618,164 $519,161
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Cost of revenues 116,145 91,334
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Marketing and sales 209,638 167,150
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Research and development 93,080 69,213
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General and administrative 86,682 70,593
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Nonrecurring charges/1/ 28,506 25,500
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Litigation accrual reversal -- --
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Income from operations/1/ 84,113 95,371
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Interest and other income, net 11,461 7,063
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Income before income taxes 95,574 102,434
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Net income/1/ 43,647 64,391
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Net cash provided by operating activities 82,207 112,716
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At Year End
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Cash, cash equivalents, and marketable securities $294,060 $296,360
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Current assets 395,406 428,045
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Total assets 598,077 558,934
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Current liabilities 180,658 180,463
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Long-term liabilities 32,748 4,863
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Total liabilities 213,406 185,326
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Stockholders' equity 384,671 373,608
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Working capital 214,748 247,582
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Number of employees 2,176 2,058
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Common Stock Data
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Basic net income per share/1/ $ 0.78 $ 1.17
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Diluted net income per share/1/ $ 0.74 $ 1.11
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Book value per share $ 6.93 $ 6.73
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Dividends paid per share $ 0.20 $ 0.20
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Shares used in computing basic net income per share 55,946 54,916
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Shares used in computing diluted net income per share 59,331 58,052
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Shares outstanding at year end 55,492 55,546
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Financial Ratios
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Current ratio 2.2 2.4
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Return on net revenues/1/ 7% 12%
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Return on average assets/1/ 8% 13%
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Return on average stockholders' equity/1/ 12% 19%
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/1/ Amounts include the effects of nonrecurring charges of $19.7 million, $26.8
million, $13.5 million, $28.5 million, and $25.5 million recorded in fiscal
years 1999, 1998, 1997, 1996, and 1995, respectively. Nonrecurring charges
consist primarily of charges for purchased in-process research and
development from business acquisitions in fiscal years 1999, 1998, 1997,
and 1996. The fiscal year 1995 amount represents a legal judgment against
the Company.
/2/ Fiscal year 1998 and 1997 results have been restated to reflect a decrease
in the amount previously expensed as in-process research and development
and increase the amounts capitalized as goodwill and purchased
technologies.
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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."
Business Combination and Basis of Presentation
In March 1999, Autodesk acquired Discreet Logic Inc., a company that develops,
assembles, markets, and supports nonlinear, online digital systems and software
for creating, editing, and compositing imagery and special effects for film,
video, HDTV, broadcast, and the Web, in a transaction accounted for as a pooling
of interests. In the acquisition, Autodesk acquired all of Discreet's voting
stock, issuing 0.33 shares of Autodesk common stock or 0.33 exchangeable shares
for each outstanding share of Discreet. Autodesk issued approximately 10 million
shares of its stock, or exchangeable shares, in the acquisition. Each
exchangeable share can be exchanged, at its holder's election, for Autodesk
common stock. The Company anticipates that it will incur transaction,
restructuring, and other one-time costs associated with this business
combination of approximately $18.5 million. These costs will be charged to
operations in the first quarter of fiscal year 2000.
The consolidated financial statements of Autodesk and Discreet have been
combined and all prior periods have been restated to give effect to the
combination. Information concerning common stock and per share data has been
restated on an equivalent share basis. As a result of differing year-ends of
Autodesk and Discreet, results of operations for dissimilar year-ends have been
combined. Autodesk's historical consolidated statements of income, stockholders'
equity, and cash flows for the fiscal years ended January 31, 1999, 1998, and
1997, have been combined with the consolidated statements of operations,
stockholders' equity, and cash flows of Discreet for the twelve months ended
December 31, 1998, the fiscal year ended June 30, 1998, and the eleven months
ended June 30, 1997. Operating results for the period from January 1, 1998, to
June 30, 1998, for Discreet are duplicated in the consolidated statement of
income of the combined operating results for the years ended January 31, 1999
and 1998. An adjustment in an amount equal to the results of operations for this
six-month period is included in the consolidated statement of stockholders'
equity. Discreet's revenues, net income, basic net income per share, and diluted
net income per share were $75.9 million, $9.1 million, $0.16, and $0.15,
respectively, for the period January 1, 1998 through June 30, 1998.
Results of Operations
The following table sets forth, as a percentage of net revenues, consolidated
statement of income data for the periods indicated. These operating results are
not necessarily indicative of results for any future periods.
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Fiscal year ended January 31,
1999 1998 1997
(restated) (restated)
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Net revenues 100% 100% 100%
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Costs and expenses:
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Cost of revenues 15 17 19
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Marketing and sales 34 35 37
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Research and development 18 18 17
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General and administrative 17 15 14
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Nonrecurring charges 2 3 2
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Litigation accrual reversal (2) -- --
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Total costs and expenses 84 88 89
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Income from operations 16 12 11
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Interest and other income, net 2 2 1
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Income before income taxes 18 14 12
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Provision for income taxes 7 7 5
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Net income 11% 7% 7%
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Net revenues
Autodesk's consolidated net revenues in fiscal year 1999 were $871.9 million,
which represented a 13 percent increase from fiscal year 1998 net revenues of
$768.7 million. Revenues in the Americas and Europe increased $49.7 million or
14 percent and $72.0 million or 28 percent, respectively, from the prior fiscal
year, while net revenues in Asia Pacific decreased slightly for the same period.
The increased revenues resulted primarily from increased license revenues from
new and upgrade product offerings from the Company's market groups and to a
lesser extent from recent acquisitions. Net revenues in fiscal year 1998
increased 28 percent from the $598.6 million posted in fiscal year 1997,
primarily due to higher sales of AutoCAD(R) software, the Company's flagship
product, and significant growth in the Company's market group revenues. Also
contributing to the increased revenues in fiscal year 1998 were revenues
contributed by Softdesk, Inc. ("Softdesk"), which was acquired by the Company in
March 1997 and the introduction of the New Media software products acquired
through the Denim, D-Vision, and Lightscape acquisitions.
AutoCAD and AutoCAD upgrades represented approximately 52 percent, 56 percent,
and 58 percent of consolidated revenues in fiscal years 1999, 1998, and 1997,
respectively. On a stand-alone basis, AutoCAD and AutoCAD upgrades were 43
percent, 52 percent, and 56 percent of consolidated revenues in fiscal years
1999, 1998, and 1997, respectively. During fiscal year 1999, approximately
263,000 new AutoCAD licenses were added worldwide, compared to 244,000 and
207,000 licenses added during fiscal years 1998 and 1997, respectively. AutoCAD
upgrade revenues were $112 million, $108 million, and $45 million in fiscal
years 1999, 1998, and 1997, respectively. On a stand-alone basis, AutoCAD
upgrade revenues were $99 million, $101 million, and $44 million, respectively.
International revenues, including exports from the United States, accounted for
approximately 59 percent, 59 percent, and 66 percent of consolidated revenues in
fiscal years 1999, 1998, and 1997, respectively. The stronger value of the U.S.
dollar, relative to international currencies, primarily the Japanese yen and the
Australian dollar, negatively affected international revenues by approximately
$5 million in fiscal year 1999 as compared to fiscal year 1998 and by $36
million in fiscal year 1998 as compared to fiscal year 1997. Fluctuations in
foreign exchange rates positively impacted international operating expenses by
$4 million in fiscal year 1999 as compared to fiscal year 1998 and by $13
million in fiscal year 1998 as compared to fiscal year 1997. 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
1999, 1998, and 1997, product returns, consisting principally of stock rotation,
totaled $30.9 million, $35.4 million, and $44.3 million (or 4 percent, 6
percent, and 9 percent of total consolidated revenues, respectively). Total
product returns decreased $4.5 million in fiscal year 1999 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 Release 14 compared to the
prior version. Returns of AutoCAD and AutoCAD upgrades accounted for 23 percent,
40 percent, and 61 percent of total product returns in fiscal years
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1999, 1998, and 1997, respectively. The lower level of product returns in fiscal
year 1999 compared to fiscal years 1998 and 1997 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 software 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.
Cost of revenues
Cost of revenues includes the purchase of disks and compact disks (CDs), cost of
hardware sold (mainly workstations manufactured by Silicon Graphics, Inc.), cost
of hardware service contracts, 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, facility costs, and in certain foreign markets, software protection
locks. When expressed as a percentage of net revenues, cost of revenues
decreased approximately 2 percent in fiscal year 1999 as compared to fiscal year
1998 and 2 percent in fiscal year 1998 as compared to fiscal year 1997. Gross
margins in fiscal year 1999 were positively impacted by continued operating
efficiencies, lower royalties for licensed technology embedded in Autodesk's
products, a higher proportion of software as opposed to hardware sales, and the
geographic distribution of sales, partially offset by an increase in the
amortization of purchased technologies and capitalized software. 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 35 percent in fiscal year 1998 to 34 percent in fiscal year 1999.
Actual fiscal year 1999 marketing and sales expenses of $295.9 million increased
by 9 percent from the $271.4 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
certain new and enhanced products introduced by the Company's market groups
during fiscal year 1999. Fiscal year 1998 marketing and sales expenses increased
22 percent over fiscal year 1997 expenses of $223.1 million due to higher
employee costs as well as marketing and sales costs associated with the launch
of AutoCAD Release 14 and other new and enhanced products released throughout
the year. 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 1999, 1998, and 1997, Autodesk incurred
$158.9 million, $138.4 million, and $104.1 million, respectively, of research
and development expenses (excluding capitalized software development costs of
$1.3 million and $2.2 million during fiscal years 1999 and 1998, respectively;
no software development costs were capitalized during fiscal year 1997).
Research and development expenses increased in fiscal year 1999 primarily due to
higher employee-related costs ($15.1 million increase) and incremental research
and development expenses associated with the May 1998 acquisition of Genius CAD
Software GmbH ("Genius") ($4.7 million increase). The increase in research and
development expenses between fiscal years 1998 and 1997 was due to the addition
of software engineers and incremental research and development personnel
expenses associated with the March 1997 business combination with Softdesk. The
Company anticipates that research and de-
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velopment expenses will increase in fiscal year 2000 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, and other administrative operations. Fiscal
year 1999 general and administrative expenses of $141.0 million increased 34
percent from the $105.2 million recorded in the prior fiscal year, primarily due
to higher employee-related costs ($12 million increase), amortization expense
associated with intangible assets recorded in connection with the acquisitions
of Genius and Softdesk ($6.7 million increase), costs incurred to ensure that
the Company's infrastructure is year 2000 compliant ($3.5 million increase), and
consulting fees related to enhancing the information systems infrastructure
($5.0 million increase). Fiscal year 1998 general and administrative expenses
increased 30 percent from fiscal year 1997 spending of $80.8 million, primarily
due to higher employee-related costs and amortization expense associated with
the intangible assets recorded in connection with the acquisitions of Softdesk,
Denim, D-Vision, and Lightscape. 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.
Nonrecurring charges
Genius CAD Software GmbH
On May 4, 1998, Autodesk entered into an agreement with Genius, a German limited
liability company, to purchase various mechanical computer-aided-design ("CAD")
software applications and technologies (the "acquisition"). In consideration for
this acquisition, Autodesk paid Genius approximately $69 million in cash. The
acquisition has been accounted for using the purchase method of accounting. In
connection with the acquisition, the Company recorded a nonrecurring charge for
in-process research and development of $13.1 million, all of which was recorded
during the three months ended July 31, 1998.
In-process technologies overview. The nature of the efforts required to develop
the acquired in-process technology into commercially viable products principally
relates 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, Genius had initiated the research and development
effort related to the product features and functionality that will reside in the
next versions of the (i) Genius AutoCAD and AutoCAD LT, (ii) Genius(TM) Desktop,
(iii) Genius(TM) Vario, and (iv) Genius Modules product families.
With respect to the acquired in-process technologies, the calculations of value
were adjusted to reflect the value creation efforts of Genius prior to the close
of the acquisition. At the time of the acquisition, the following were the
estimated completion percentages, estimated technology lives, and projected
introduction dates:
Percent Technology Introduction
Genius in-process technologies completed life dates
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Genius AutoCAD Version R15 45% 6 years mid/late 1999
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Genius Desktop Version 3.0 40% 4 years September 1998
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Genius AutoCAD LT 1998 20% 5 years mid/late 1999
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Genius Vario Version R15 20% 3 years mid/late 1999
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Genius Modules Version R15 20% 3 years mid/late 1999
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A brief description of the acquired in-process projects is set forth below.
For Genius AutoCAD and Genius Desktop, the substantial technological
improvements under development at the time of the acquisition included
modernizing the code and significantly improving the ease of use of the
products.
Modernization of the code for Genius AutoCAD and Genius Desktop included a
complete replacement of the existing LISP-based code with modern object-oriented
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code based on Autodesk's ObjectARX(TM) technology. The Company determined
through technical due diligence that a substantial portion of the source code in
both Genius AutoCAD and Genius Desktop was based on LISP, with remaining code
based on ADS. Replacing the LISP and ADS code was anticipated to significantly
improve the flexibility (for example, to add additional features) and
performance of the products.
It was uncertain, however, whether all of the existing features could be easily
converted to ObjectARX code and what impact this conversion would have on any
new features currently being developed. Autodesk estimates that this conversion
may take several releases to be fully complete. Partially completed conversions
for the interim product releases are expected to rely on a combination of source
code from LISP and ObjectARX.
Working through an application-programming interface ("API") for the Autodesk
products, a significant issue under continual development is the level of
functionality and ease of use of the features that require access to the
Autodesk product code. As a result of the acquisition, the Company anticipates
that a significant level of effort would be required to either expand or remove
these APIs to increase the functionality and usability of features, and to
improve the interoperability of the products with Autodesk's offerings.
A significant risk factor associated with this development effort is the impact
that removal of the API may have on the functionality of a given feature, and
the additional development effort required to restore a feature to its current
functionality (before any improvements in this functionality can be made). As is
the case with development effort associated with modernizing the code, the
Company expects that it may take several releases of both of these products to
fully achieve this technological milestone. The Company estimated, for purposes
of its valuation, that at the date of the Genius acquisition, development
projects associated with the next release of Genius AutoCAD and Genius Desktop
were approximately 45 percent and 40 percent completed, respectively. Estimated
costs to be incurred to reach technological feasibility as of the date of
acquisition were less than $800,000 for Genius AutoCAD. The costs incurred to
reach technological feasibility for Genius Desktop, which first shipped in
September 1998, were approximately $500,000.
For the Genius AutoCAD LT product offering, the most significant technological
challenge was the fact that APIs to AutoCAD LT(R) software (the Autodesk product
on which Genius(TM) LT runs) did not exist. To develop features for Genius
AutoCAD LT, work-arounds through the Windows interface are required. Genius had
reverse-engineered the AutoCAD LT product to build the Genius AutoCAD LT
software product. This resulted in a product that was extremely fragile and
vulnerable to change in AutoCAD LT and Microsoft Windows. Therefore, the product
is dependent on both the AutoCAD LT releases and the Microsoft Windows releases.
Expanding and improving the features given Genius's limited access to the
platform product, AutoCAD LT, was expected, before the acquisition, to result in
a substantial development effort. In addition, improving the interoperability of
the Genius LT product and AutoCAD LT after the acquisition also posed a
significant technological challenge to Autodesk. The Company estimated that the
next release of Genius AutoCAD LT, for purposes of its valuation, was
approximately 20 percent complete at the date of the acquisition. Estimated
costs to be incurred to reach technological feasibility as of the date of
acquisition were less than $200,000.
Genius Vario, which runs on top of AutoCAD, was shipping at the date of
acquisition in a two-dimensional ("2D") version. At the date of acquisition, a
three-dimensional ("3D") version was under development. The 3D version is a
significant shift in technology, from handling 2D drawings to 3D models, and the
resulting complexity increases are significant. Developing 3D Vario involved
developing parametric modeling in three dimensions--an area that has significant
new development challenges and is far more speculative than 2D parametric
modeling. In addition, the 3D Genius Vario product is intended to provide much
more Internet functionality than is currently available. The Company estimated
that the next release of Genius Vario and Modules projects were approximately 20
percent complete at the date of the acquisition. Estimated costs to be incurred
to reach technological feasibility for the Genius Vario and Modules projects as
of the date of acquisition were less than $25,000.
Valuation analysis. The value of the acquired in-process technology was computed
using a discounted cash flow analysis on the anticipated income stream of the
related product sales. The discounted cash flow analysis was based on
management's forecast of future revenues, cost of revenues, and operating
expenses related to the products and technologies purchased from Genius which
represent the process and expertise employed to develop mechanical design
application software designed to work in conjunction with Autodesk's mechanical
CAD products. Future revenue estimates were generated from the following product
families: (i) Genius AutoCAD, (ii) Genius Desktop, (iii) Genius AutoCAD LT, (iv)
Genius Vario, and (v) Genius Modules. Aggregate revenue for Genius products was
estimated to be less than $20 million for the period from May 4,
6
1998, to January 31, 1999. Thereafter, revenue was estimated to increase at
rates ranging from 25 to 33 percent for fiscal years 2000 through 2004,
stabilizing at 20 percent growth for the remainder of the estimation period.
Year-to-year revenue growth estimates were developed based on an expanding
market for CAD software products and the ability of Autodesk to maintain its
position in the market. The growth rates contained in the first five years of
the projections are greater than those historically experienced by Autodesk and
are largely a result of the expansion of the Genius products into Autodesk's
existing worldwide sales channels, particularly in North America and Asia
Pacific, which historically have not contributed significant revenues to Genius.
As stated previously, revenues for developed technology were estimated by
management for the remainder of fiscal year 1999 through fiscal year 2004.
Management's estimates reflect a gradual decline in revenues from developed
technologies after considering historical product life cycles and anticipated
product release dates. While revenues derived from both developed and in-process
technologies are estimated to decline over the next several fiscal years,
overall revenues attributable to the Genius products and technologies are
anticipated to grow in absolute dollars and as a percentage of aggregate revenue
to reflect the growth of future (yet-to-be-developed) technologies.
Management's analysis also considered anticipated product release dates for
Autodesk's mechanical CAD products, as well as release dates for the various
acquired Genius products and technologies which are interoperable with
Autodesk's mechanical CAD products. The overall technology life was estimated to
be approximately three to four years for the Genius Desktop, Genius Vario, and
Genius Modules products, and approximately five to six years for all other
Genius products and technologies purchased by Autodesk.
Operating expenses used in the valuation analysis of Genius included (i) cost of
revenues, (ii) general and administrative expense, (iii) marketing and sales
expense, and (iv) research and development expense. In developing future expense
estimates, it was estimated that the Genius 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, expressed as a percentage of revenue, for the developed and
in-process technologies identified in the valuation was estimated to be 11
percent throughout the estimation period.
General and administrative expense, expressed as a percentage of revenue, for
the developed and in-process technologies identified in the valuation ranged
from 8.5 percent for fiscal year 1999 to 6 percent for fiscal year 2002.
Thereafter, general and administrative expenses, expressed as a percentage of
revenue for the developed and in-process technologies identified in valuation,
were estimated to stabilize at 5 percent of revenue. For the fiscal year ended
January 31, 1998, Autodesk's general and administrative expense, excluding
depreciation and amortization, was approximately 9 percent.
Marketing and sales expense, expressed as a percentage of revenue, for the
developed and in-process technologies identified in the valuation, was estimated
to be 25 percent throughout the estimation period, based on the Company's
historical experience with similar products.
Research and development ("R&D") expenses consist of the costs associated with
activities undertaken to correct errors or keep products updated with current
information (also referred to as "maintenance" R&D). 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.
The effective income tax rate utilized in the analysis of in-process technology
was 34 percent for fiscal year 1999 and in the mid-30 percentage range
thereafter, which reflects Autodesk's current combined federal and state
statutory income tax rate, exclusive of nonrecurring charges and its estimated
income tax rate in future years.
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 Company's Weighted Average
Cost of Capital ("WACC") (15.0 percent) and (ii) the Company's Weighted Average
Return on Assets (15.7 percent) at the date of acquisition. 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
7
with achieving the forecasted cash flows associated with these projects.
The fair values of the assets acquired from Genius were allocated between Europe
and the rest of the world ("ROW"), which consisted of the United States and Asia
Pacific. The allocation of assets among Europe and ROW was based on revenue
expected to be generated on Genius products. Based on management's revenue
forecast for fiscal years 1998 through 2003, it was determined that 60 percent
of Genius products' total sales are expected to be generated in Europe, while
the remaining 40 percent of sales are expected to be generated in ROW.
Accordingly, the identified intangible assets were allocated 60 percent to
Europe and 40 percent to ROW. The results of the allocation of values between
Europe- and ROW-based assets are as follows:
- ---------------------------------------------------------- ---------------------------------
(In thousands) Geographic allocation
Identified intangible asset Europe ROW
- ---------------------------------------------------------- -------------- --------------
Developed technology $7,620 $5,080
- ---------------------------------------------------------- -------------- --------------
In-process technology 7,860 5,240
- ---------------------------------------------------------- -------------- --------------
Trademarks, trade names, and other intangible assets 660 440
- ---------------------------------------------------------- -------------- --------------
Comparison to actual results. To date, revenues and operating expenses
attributable to in-process technologies associated with the Genius acquisition
are consistent with management's projections. Based upon factors currently
known, management believes the revenues and operating expenses associated with
these in-process technologies will favorably impact Autodesk's consolidated
results of operations and financial position. Failure to complete the
development of these projects in their entirety, or in a timely manner, could
have an adverse impact on Autodesk's operating results, financial condition, and
results of operations. Additionally, the value of other intangible assets
acquired from Genius may become impaired.
Softdesk
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.
In-process technologies overview. The nature of the efforts required to develop
the acquired in-process technology into commercially viable products principally
relates 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
reprogramming of all its existing products to a new ARX technology (AutoCAD
Runtime Extension) code base. The new ARX technology was 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 Autodesk'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(R) 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 collec-
8
tions of geometric entities, but these collections were very rigid and did not
exhibit intelligent behavior.
With the relational database and the ObjectARX 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. AutoCAD Architectural Desktop(TM) and AutoCAD(R) Land Development
Desktop software, both released in the last half of fiscal year 1999, were
developed in the ObjectARX 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. The
development teams 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 (for Mechanical
Desktop(R) software)--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 as of the date of the acquisition of Softdesk:
Percent Technology Introduction
Softdesk in-process technologies completed life dates
- ---------------------------------------------------- ------------- -------------- ----------------------
AutoCAD Architectural/Structural modules 65% 7 years Sept 1998/June 1997
- ---------------------------------------------------- ------------- -------------- ----------------------
AutoCAD Civil modules 90% 7 years May/June 1997
- ---------------------------------------------------- ------------- -------------- ----------------------
AutoCAD Imaging modules 75% 5 years May/June 1997
- ---------------------------------------------------- ------------- -------------- ----------------------
AutoCAD Maintenance modules 65% 7 years May/June 1997
- ---------------------------------------------------- ------------- -------------- ----------------------
AutoCAD Productivity modules 65% 7 years May/June 1997
- ---------------------------------------------------- ------------- -------------- ----------------------
AutoCAD Retail modules 70% 7 years July 1997
- ---------------------------------------------------- ------------- -------------- ----------------------
Estimated costs to be incurred to reach technological feasibility as of the date
of acquisition for all of the Softdesk in-process technologies totaled
approximately $1.8 million, with the AutoCAD Architectural/Structural modules
comprising approximately $1.2 million of the total. The remaining in-process
projects each had estimated costs to complete of less than $200,000. These in-
process projects have been completed.
Valuation analysis. 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 for fiscal year 1999. Thereafter, revenue was estimated to
increase at rates ranging from 11 to 17 percent for fiscal years 2000 through
2002 and to stabilize at 10 percent for the remainder of the estimation period.
9
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 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, expressed as a percentage of revenue, for the developed
technology identified in the valuation analysis ranged from approximately 19
percent for fiscal year 1998 to approximately 14 percent for fiscal year 2002.
Cost of revenues, expressed as a percentage of revenue, for the in-process
technology ranged from approximately 17 percent for fiscal year 1998 to
approximately 15 percent for fiscal year 2004.
General and administrative expense, expressed as a percentage of revenue, for
the developed technology identified in the valuation analysis ranged from
approximately 6 percent for fiscal year 1998 to approximately 7 percent for
fiscal year 2002. General and administrative expense, expressed as a percentage
of revenue, for the in-process technology ranged from approximately 8 percent
for fiscal year 1998 to approximately 7 percent for fiscal year 2002.
Marketing and sales expense, expressed as a percentage of revenue, for the
developed technology identified in the valuation ranged from approximately 31
percent for fiscal year 1998 to approximately 28 percent for fiscal year 2002.
Marketing and sales expense, expressed as a percentage of revenue, for the in-
process technology ranged from approximately 32 percent for fiscal year 1998 to
approximately 29 percent for fiscal year 2002.
Research and development expenses consist of the costs associated with
activities undertaken to correct errors or keep products updated with current
information. 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.
The effective income tax rate utilized in the analysis of in-process technology
was 36 percent for fiscal year 1998, 34 percent for 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.
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 Company's WACC (14.0 percent)
and (ii) the Company's Weighted Average Return on Assets (20.0 percent) at the
date of acquisition. 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, 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. Additionally,
the value of other intangible assets acquired from Softdesk may become impaired.
Lightscape
In December 1997, the Discreet business unit entered into an Agreement and Plan
of Merger and Reorganization (the "Merger Agreement") with Lightscape
Technologies, Inc., a Delaware corporation ("Lightscape"). As a result of the
Lightscape Merger, the Company acquired, among other products, the Lightscape
(TM) product, a
10
software application which integrates radiosity and raytracing with physically
based lighting, including related know-how and goodwill. The aggregate purchase
price for Lightscape includes the assumption of approximately $5,700,000 of net
liabilities (of which approximately $3,400,000 was paid at the closing), not
including costs associated with the transaction, and up to $6,800,000 in
contingent consideration to be paid only if certain revenue objectives are
achieved by Lightscape in calendar 1999. The Lightscape Merger has been
accounted for as a purchase. A portion of the purchase price and transaction
costs was allocated to purchased in-process research and development that had
not yet reached technological feasibility and had no alternative use for which
the Company incurred a one-time charge against earnings in the amount of
$1,646,000 in the quarter ended January 31, 1998 and approximately $5,241,000
was allocated to intangible assets, which include goodwill and acquired
technology, and is being amortized on a straight-line basis over their estimated
useful lives of three to five years. The terms of the transaction were the
result of arms-length negotiations between the representatives of the Company
and Lightscape.
In-process technologies overview. The nature of the efforts required to develop
the acquired in-process technology
into commercially viable products principally relates to the completion of all
planning, designing and testing activities that are necessary to establish that
the products can be produced to meet their design requirements, including
functions, features and technical performance requirements. Generally, if the
R&D project and technologies are not completed as planned, they will neither
satisfy the technical requirements of a changing market nor be cost effective.
As of the acquisition date, Lightscape Technologies, Inc. ("Lightscape"), had
initiated the research and development effort related to the product features
and functionality that will reside in a technology and application platform for
a next-generation lighting algorithm and software system.
With respect to the acquired in-process technology, the calculations of value
were adjusted to reflect the value creation efforts of Lightscape prior to the
close of the acquisition. Following are, as of the acquisition date, the
estimated completion percentage, estimated technology life and projected
introduction date:
Percent Technology Introduction
Lightscape in-process technologies completed life dates
- ----------------------------------------- ------------------ ------------------ ----------------------
Next generation Lightscape technology 25% 5 years April 1999
- ----------------------------------------- ------------------ ------------------ ----------------------
A brief description of the acquired in-process project is set forth below:
The in-process technology under development at the time of the acquisition
included improved performance and progressive refinement control, improved
accuracy and iterative design control, and improved ease of use of the
Lightscape product.
Using this process, light is transferred from every surface to every other
surface (not just from the brightest surfaces), yielding correct local
brightness much earlier during the simulation as well as more accurate numerical
results. The simulation can be multi-threaded to take advantage of multi-
processor computers and distributed processing environments.
The accuracy of the simulation can be refined interactively without having to
restart the simulation from scratch. Furthermore, the user can interactively
direct the refinement process to regions of interest within the
scene or change materials and luminaires and the radiosity engine can
immediately compensate for these changes.
The simulation is controlled by fewer parameters than ever possible before
making the technology immediately useful to inexperienced users. In addition,
advanced model conditioning techniques are used to reduce artifacts due to
inconsistent data and non-physical models generated by CAD systems.
Currently, the Company is also developing progressive refinement radiosity
technology, integration of radiosity effects into non-physical renderers, and
new technology to offer a much higher degree of flexibility and control than the
progressive refinement radiosity-based approach. As previously mentioned, these
efforts are an attempt to make substantial technological improvements over the
lighting software product offerings available today.
11
Valuation analysis. The value of the acquired in-process technology was computed
using a discounted cash flow analysis on the anticipated income stream of the
related product sales. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net cash
flows from the projects and discounting the net cash flows to their present
value. The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. Future revenue estimates were
generated from the next generation Lightscape product family. Aggregate revenue
for Lightscape products was estimated to be approximately $5 million for the
period from January 1, 1998 to December 31, 1998, increasing to approximately
$25 million by 2002 (representing a compound annual growth rate of 35%) and
stabilizing at a 5 percent growth rate for the remainder of the estimation
period.
The estimated revenues for the in-process technologies assumed compound annual
growth rates of 54% in the four years following introduction, assuming the
successful completion and market acceptance of the major R&D programs. Revenues
for developed technology were estimated for 1998 through 2002, and were expected
to decline gradually as new products are expected to enter the marketplace. The
estimated revenues for the in-process projects were expected to peak within five
years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market.
Management's analysis also considered anticipated product release dates for a
next-generation version of the Company's Lightscape product scheduled for
release in April 1999, as well as release dates for the various acquired
products and technologies which are scheduled for release in 2001. The overall
technology life was estimated to be approximately five years for both the
Company's Lightscape product and the various products and technologies acquired
from Lightscape.
The Company anticipated incurring costs of approximately $2.0 million over the
24 months following the acquisition to complete the R & D projects.
Operating expenses used in the valuation analysis of Lightscape included (i)
selling, general and administrative expenses and (ii) research and development
expenses. Operating expenses were estimated based on historical results and
anticipated cost savings. Due to general economies of scale, improved
infrastructure, and greater management breadth, estimated operating expense as a
percentage of revenues were expected to decrease after the acquisitions.
Cost of sales, expressed as a percentage of revenue, for the developed and in-
process technologies identified in the valuation was estimated to be 15 percent
for 1998 through 2002.
Selling, general and administrative expenses, expressed as a percentage of
revenue for the developed and in- process technologies identified in the
valuation, were 70.8 percent in 1998, 55.8 percent in 1999, 53.8 percent in
2000, 44.7 percent in 2001, and 37.0 percent in 2002. Thereafter, selling,
general and administrative expenses, expressed as a percentage of revenue for
the developed and in-process technologies identified in the valuation were
estimated to stabilize at 37.0 percent of revenue.
Research and development ("R&D") expenses consist of the costs associated with
activities undertaken to develop new software and to correct errors or to keep
products updated with current information. The R&D expense was estimated to be
20.1 percent of revenues in 1998, declining to 10.0% of revenues in 2003.
The effective income tax rate utilized in the analysis of the in-process
technology was 35 percent throughout the valuation period. The 35 percent
reflects the Discreet business unit's estimated combined federal and state
statutory income tax rate, exclusive of nonrecurring charges, and its estimated
income tax rate, as provided by management, in future years.
The discount rate selected for developed and in-process technology was 25 and 40
percent, respectively. In the selection of the appropriate discount rate,
consideration was given to the Weighted Average Cost of Capital ("WACC"), which
was determined, in part, by using the Capital Asset Pricing Model (CAPM) and by
reviewing venture capital rates of return. The discount rate utilized for the
in-process technology was higher than the Company's WACC due to the risk of
realizing cash flows from products that had yet to reach technological
feasibility as of the valuation date.
The fair values of the assets acquired from Lightscape were allocated between:
Intellectual property--in-process research and development and developed
technology; and other intangible assets--assembled work force and goodwill/other
intangibles. The results of the allocation of values between the assets are as
follows:
12
(In thousands) Fair Market Value
- ---------------------------------------------------------- ---------------------------------
In-process research and development $1,646
- ---------------------------------------------------------- -------------- --------------
Acquired technology 990
- ---------------------------------------------------------- -------------- --------------
Assembled work force 100
- ---------------------------------------------------------- -------------- --------------
Goodwill and other intangible assets 4,151
- ---------------------------------------------------------- -------------- --------------
Comparison to Actual Results. The Company believed that the foregoing
assumptions used in the Lightscape's in-process R&D analysis were reasonable at
the time of the acquisition. The underlying assumptions used to estimate
expected project sales, development costs or profitability, or the events
associated with such projects, however, may not transpire as estimated. Actual
results have been lower than forecasts with respect to acquired in-process
revenues. This has been primarily due to the following factors: (1)
unanticipated delays in the integration of the Lightscape product into the
Company's corporate branding initiatives, resulting in a longer than anticipated
period of reduced marketing effort; (2) slow progress in the development of a
distribution channel; (3) delays in integrating retained Lightscape personnel
into the Company's research and development and sales and marketing groups; and
(4) unforeseen difficulties in the development of an application program
interface which would enable the Company to derive substantial OEM revenues from
this product. Due to missed market opportunities, the Company anticipates
greater uncertainty, regarding future revenue levels, than originally
forecasted. The Company does not account for operating expenses by product line.
Therefore, the Company has not determined the actual expenses associated with
this product. However, the Company believes that expenses incurred to date
associated with the development and integration of the in-process R&D projects
are approximately consistent with the Company's previous estimates.
The Company has completed many of the original R&D projects in accordance with
the plans outlined above. The Company continues to work toward the completion of
other projects. The majority of the projects are on schedule, but delays have
occurred due to changes in technological and market requirements for digital
video systems. Further, factors such as the inherent complexity and breadth of
the projects have delayed the development process as well. The risks associated
with these efforts are still considered high and no assurance can be made that
Lightscape's upcoming products will meet with market acceptance. Delays in the
introduction of certain products may have adversely affected The Company's
revenues and earnings in prior quarters. Further delays may have a similar
impact on financial results going forward.
D-Vision
On July 15, 1997, the Discreet business unit acquired all of the outstanding
shares of capital stock of D-Vision pursuant to a Stock Purchase Agreement
dated as of July 10, 1997, among the Company, D-Vision, the former stockholders
of D-Vision and certain other individuals. As a result of the D-Vision
acquisition, the Company acquired the D-Vision OnLINE and PRO software products
for non-linear video and digital media editing solutions including related know-
how and goodwill. The purchase price was paid in a combination of 183,000 newly
issued Common Shares and approximately $10,750,000 in cash. In addition,
approximately $4,000,000 of the cash consideration is being held in escrow until
September 30, 1999, subject to (i) earlier release from escrow of up to
$1,900,000 on September 30, 1998, pending satisfactory resolution of a dispute
regarding an indemnification claim against such escrow, and (ii) the resolution
of any indemnification claims made by the Company pursuant to the Stock Purchase
Agreement. The D-Vision acquisition was accounted for as a purchase. The cash
used by the Company to fund the acquisition was derived primarily from cash flow
from operations. A portion of the purchase price, net liabilities of D-Vision
and transaction costs was allocated to purchased in-process research and
development that had not yet reached technological feasibility and had no
alternative use for which the Company incurred a one-time charge against
earnings in the amount of $5,269,000 in the quarter ending July 31, 1997. The
terms of the transaction and the consideration received by the D-Vision
stockholders were the result of arms-length negotiations between the
representatives of the Company and D-Vision. D-Vision develops Microsoft Windows
NT-based non-linear, digital editing solutions.
In-process technologies overview. The nature of the efforts required to develop
the acquired in-process technology into commercially viable products principally
relates to the completion of all planning, designing and testing activities that
are necessary to establish that the products can be produced to meet their
design requirements, including functions, features and technical performance
requirements. Generally, if the R&D projects and technologies are not completed
as planned, they will neither satisfy the technical requirements of a changing
market nor be cost effective.
As of the acquisition date, D-Vision Systems, Inc. ("D-Vision"), had initiated
research and development efforts
13
related to the product features and functionality that will reside in the
advancement of its WindowsNT with other operating systems to develop an
advanced, cross-platform editing/effects product capable of performing complete
video editing functions for a broad array of customers.
With respect to the acquired in-process technology, the calculations of value
were adjusted to reflect the value creation efforts of D-Vision prior to the
close of the acquisition. Following are, as of the acquisition date, the
estimated completion percentage, estimated technology life and projected
introduction date:
- -------------------------------------------- ------------------ ------------------ ----------------------
Percent Technology Introduction
D-Vision In-Process Technology completed life dates
- -------------------------------------------- ------------------ ------------------ ----------------------
Next generation D-Vision technology 26% 4 to 5 years April 1999
- -------------------------------------------- ------------------ ------------------ ----------------------
A brief description of the acquired in-process project is set forth below:
The substantial technological improvements under development at the time of the
acquisition included the introduction of advanced user interface concepts and
structures to the combined product that support both the editing and effects
paradigms and building advanced product features. Examples of the advanced
product features being built included: remote editing capabilities with live
interaction between remote users; a text or script-based interface designed to
allow the user to customize the application by typing common statements or
words; and text command interpretation that will read film or program scripts
and provide computer-generated "virtual" clips allowing users to visualize a
scene even before the first field shot begins.
The Company anticipated incurring costs of approximately $2.6 million over the
24 months following the acquisition to complete the R & D projects.
Valuation analysis. The value of the acquired in-process technology was computed
using a discounted cash flow analysis on the anticipated income stream of the
related product sales. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net cash
flows from the projects and discounting the net cash flows to their present
value. The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. Future revenue estimates were
generated from the next generation D-Vision product family. Aggregate revenue
for D-Vision products was estimated to be approximately $11 million for the
period from January 1, 1997 to December 31, 1997, increasing to approximately
$48 million by 2002 (representing a compound annual growth rate of 21%) and
stabilizing at a 5 percent growth rate in 2002 and for the remainder of the
estimation period.
The estimated revenues for the in-process technologies assumed compound annual
growth rates of 45% in the four years following introduction, assuming the
successful completion and market acceptance of the major R&D programs. The
estimated revenues for the in-process projects were expected to peak within five
years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market. Revenues for developed technology
were estimated for 1997 through 2002, and were expected to decline gradually as
new products are expected to enter the marketplace.
Management's analysis also considered anticipated product release dates for a
next-generation version of the Company's D-Vision product scheduled for release
in April 1999, as well as the release date for a significantly enhanced version
of D-Vision's existing product originally scheduled for release in April 1999.
The overall technology life was estimated to be approximately five years for
both the Company's next generation D-Vision product and the significantly
enhanced version of its D-Vision's existing product.
Operating expenses used in the valuation analysis of D-Vision included (i) cost
of sales, (ii) selling, general and administrative expenses, and (iii) research
and development expenses. Operating expenses were estimated based on historical
results and anticipated cost savings. Due to general economies of scale,
improved infrastructure, and greater management breadth, estimated operating
expense as a percentage of revenues were expected to decrease after the
acquisitions.
Cost of sales, expressed as a percentage of revenue, for the developed and in-
process technologies identified in the valuation was estimated to range from 10
to 45.2 percent for 1997 through 2002. The cost of sales was forecast by
management for 1997 and 1998. Cost of sales as a percentage of revenue were
stabilized for 2003 based on fiscal 2002 data.
14
Selling, general and administrative expenses, expressed as a percentage of
revenue for the developed and in-process technologies identified in the
valuation, ranged from 52.2 percent in 1997 to 30.0 percent in 2002. Selling,
general and administrative expenses were forecast by management for 1997 through
2002. Thereafter, selling, general and administrative expenses, expressed as a
percentage of revenue, were estimated to stabilize at 25.0 percent of revenue.
Long-term margins were expected to decline due to increased competitive
pressures within the maturing industry.
Research and development ("R&D") expenses consist of the costs associated with
activities undertaken to develop new software and to correct errors or to keep
products updated with current information. The R&D expense was estimated to be
6.5 percent of revenues throughout the forecast period.
The effective income tax rate utilized in the analysis of the in-process
technology was 32 percent throughout the valuation period. The 32 percent
reflects the Discreet business unit's estimated combined federal and state
statutory income tax rate, exclusive of nonrecurring charges, and its estimated
income tax rate, as provided by management, in future years.
The discount rate selected for developed and in-process technology was 20 and 25
percent, respectively. In the selection of the appropriate discount rate,
consideration was given to the Weighted Average Cost of Capital ("WACC"), which
was determined, in part, by using the Capital Asset Pricing Model (CAPM). The
discount rate utilized for the in-process technology was higher than the
Company's WACC due to the risk of realizing cash flows from products that had
yet to reach technological feasibility.
The fair values of the assets acquired from D-Vision were allocated between:
Intellectual property--in-process research and development and developed
technology; and other intangible assets--assembled work force and goodwill/other
intangibles. The results of the allocation of values between the assets are as
follows:
15
(In thousands) Fair Market Value
- ---------------------------------------------------------- ---------------------------------
In-process research and development $ 5,269
- ---------------------------------------------------------- -------------- --------------
Developed technology 3,100
- ---------------------------------------------------------- -------------- --------------
Assembled work force 200
- ---------------------------------------------------------- -------------- --------------
Goodwill and other intangible assets 16,448
- ---------------------------------------------------------- -------------- --------------
Comparison to Actual Results. The Company believed that the foregoing
assumptions used in the D-Vision in-process R&D analysis were reasonable at the
time of the acquisition. No assurance can be given, however, that the underlying
assumptions used to estimate expected project sales, development costs or
profitability, or the events associated with such projects, will transpire as
estimated. Actual results to date have been lower than forecasts with respect to
acquired in- process revenues. This has been primarily due to the following
factors: (1) unanticipated delays in the integration of the D-Vision product
into the Company's corporate branding initiatives, resulting in a longer than
anticipated period of reduced marketing effort; (2) slow progress in resolving
disputes with D-Vision's existing resellers and the development of a
distribution channel; (3) following the acquisition, the Company generated
revenues solely from the sale of D-Vision software and not from the sale of
software/hardware bundles (including D-Vision software and Truevision graphics
boards) as originally forecasted; (4) following the acquisition, Truevision
discontinued selling D-Vision software, however, the forecasts were prepared
using the assumption that these sales would continue; (5) delays in the
realization of synergies from fully integrated products based on the D-Vision
technology due to delays in the completion and integration of this technology.
Due to missed market opportunities, the Company anticipates greater uncertainty,
regarding future revenue levels, than originally forecasted. The Company does
not account for operating expenses by product line. Therefore, the Company has
not determined the actual expenses associated with this product. However, the
Company believes that expenses incurred to date associated with the development
and integration of the in-process R&D projects are approximately consistent with
the Company's previous estimates.
The Company has completed many of the original R&D projects in accordance with
the plans outlined above. The Company continues to work toward the completion of
other projects. The majority of the projects are on schedule, but delays have
occurred due to changes in technological and market requirements for digital
video systems. Further, factors such as the inherent complexity and breadth of
the projects have delayed the development process as well. The risks associated
with these efforts are still considered high and no assurance can be made that
D-Vision's upcoming products will meet with market acceptance. Delays in the
introduction of certain products may have adversely affected the Company's
revenues and earnings in prior quarters. Further delays may have a similar
impact on financial results going forward.
Denim
On June 12, 1997, the Discreet business unit acquired substantially all of the
assets and assumed certain liabilities of Denim Software L.L.C., a Delaware
limited liability company ("Denim"), pursuant to the terms of an Asset Purchase
Agreement. The purchased assets consist primarily of Denim software products,
including ILLUMINAIRE Paint, ILLUMINAIRE Composition and ILLUMINAIRE Studio and
related know-how and goodwill.
The nature of the efforts required to develop the acquired in-process technology
into commercially viable products principally relates to the completion of all
planning, designing and testing activities that are necessary to establish that
the products can be produced to meet their design requirements, including
functions, features and technical performance requirements. Generally, if the
R&D project and technologies are not completed as planned, they will neither
satisfy the technical requirements of a changing market nor be cost effective.
As of the acquisition date, Denim Software LLC ("Denim"), had initiated research
and development efforts related to the product features and functionality that
would reside in the advancement of its WindowsNT technology with other operating
systems to develop a revolutionary, cross-platform editing/effects product
capable of performing complete video special effects functions for a broad array
of customers. This next-generation product is designed to deliver technology
across all major platforms for digital video systems
16
and will enable the Company to provide a range of solutions designed to meet the
needs of all digital artists.
With respect to the acquired in-process technology, the calculations of value
were adjusted to reflect the value creation efforts of Denim prior to the close
of the acquisition. Following are, as of the acquisition date, the estimated
completion percentage, estimated technology life and projected introduction
date:
- ------------------------------------------------------------------- --------------- --------------- ----------------
Percent Technology Introduction
Denim In-Process Technology completed life dates
- ------------------------------------------------------------------- --------------- --------------- ----------------
Next generation Denim technology 24% 4 to 5 years April 1999
- ------------------------------------------------------------------- --------------- --------------- ----------------
A brief description of the acquired in-process project is set forth below:
The substantial technological improvements under development at the time of the
acquisition included providing new advanced editing capabilities and developing
productivity tools, such as machine control, media management and video card
support. This will involve reconstructing the internal architecture of the
existing products to achieve complete compatibility, as well as developing new
technology for adding the desired editing and productivity functions.
At the time of the acquisition, Denim had initiated development of new
technologies aimed at offering new products that could gain market share in the
nascent digital video systems market by extending the Company's product line and
targeting new markets. Development plans center on developing a stand-alone
effect/editing product, migrating products to more advanced platforms, and
creating new features.
The Company anticipated incurring costs of approximately $1.0 million over the
24 months following the acquisition to complete the R & D projects.
Valuation analysis. The value of the acquired in-process technology was computed
using a discounted cash flow analysis on the anticipated income stream of the
related product sales. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net cash
flows from the projects and discounting the net cash flows to their present
value. The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. Future revenue estimates were
generated from the next-generation Denim product family. Aggregate revenue for
Denim products was estimated to be approximately $400,000 for the period from
July 1, 1996 to June 30, 1997 increasing to approximately $17 million by 2002
(representing a compound annual rate of 46 percent) and stabilizing at a 5
percent growth rate in 2003 and for the remainder of the estimation period.
Year-to-year revenue growth estimates were developed based on management's
forecasts for 1997 through 2002.
Beyond 2002, the estimated revenues for the in-process technologies were assumed
to normalize at a stable growth rate. Revenues for developed technology were
estimated for 1997 through 2002, and were expected to decline gradually as new
products are expected to enter the marketplace.
Management's analysis also considered anticipated product release dates for a
next-generation version of the Company's Denim product scheduled for release in
April of 1999, as well as the release date for a significantly enhanced version
of Denim's existing product scheduled for release in April of 1998. The overall
technology life was estimated to be approximately four to five years for both
the Company's next generation Denim product and the significantly enhanced
version of its Denim's existing product.
Operating expenses used in the valuation analysis of Denim included (i) cost of
sales, (ii) selling, general and administrative expenses, and (iii) research and
development expenses. Operating expenses were estimated based on historical
results and anticipated cost savings. Due to general economies of scale,
improved infrastructure, and greater management breadth, estimated operating
expense as a percentage of revenues were expected to decrease after the
acquisitions.
Cost of sales, expressed as a percentage of revenue, for the developed and in-
process technologies identified in the valuation was estimated to range from 8.6
to 13.2 percent for fiscal 1997 through 2002. The cost of sales was forecast by
management for fiscal 1998 to 2002. Cost of sales as a percentage of revenue
were stabilized for 2003 based on fiscal 2002 data.
Selling, general and administrative expenses, expressed as a percentage of
revenue for the developed and in-process technologies identified in the
valuation, ranged
17
from 137.5 percent in fiscal 1997 to 19.4 percent in fiscal 2002. Selling,
general and administrative expenses were forecast by management for fiscal 1998
to 2002. Thereafter, selling, general and administrative expenses, expressed as
a percentage of revenue were estimated to stabilize at 25.0 percent of revenue.
Long-term margins were expected to decline due to increased competitive
pressures within the maturing industry.
Research and development ("R&D") expenses consist of the costs associated with
activities undertaken to develop new software and to correct errors or to keep
products updated with current information. The R&D expense was estimated to be
14.4 percent of revenues in fiscal 1998, declining to 6.5 percent of revenues by
2002.
The effective income tax rate utilized in the analysis of the in-process
technology was 32 percent throughout the valuation period. The 32 percent
reflects the Discreet business unit's estimated combined federal and state
statutory income tax rate, exclusive of nonrecurring charges, and its estimated
income tax rate, as provided by management, in future years.
The discount rate selected for developed and in-process technology was 20 and 25
percent, respectively. In the selection of the appropriate discount rate,
consideration was given to the Weighted Average Cost of Capital ("WACC"), which
was determined, in part, by using the Capital Asset Pricing Model (CAPM). The
discount rate utilized for the in-process technology was higher than The
Company's WACC due to the risk of realizing cash flows from products that had
yet to reach technological feasibility.
The fair values of the assets acquired from Denim were allocated between:
Intellectual property--in-process research and development and developed
technology; and other intangible assets--assembled work force and goodwill/other
intangibles. The results of the allocation of values between the assets are as
follows:
- ---------------------------------------------------------- ---------------------------------
(In thousands) Fair Market Value
- ---------------------------------------------------------- -------------- --------------
In-process research and development $2,263
- ---------------------------------------------------------- -------------- --------------
Acquired technology 1,464
- ---------------------------------------------------------- -------------- --------------
Assembled work force 100
- ---------------------------------------------------------- -------------- --------------
Goodwill and other intangible assets 7,752
- ---------------------------------------------------------- -------------- --------------
Comparison to Actual Results. The Company believed that the foregoing
assumptions used in the Denim in-process R&D analysis were reasonable at the
time of the acquisition. No assurance can be given, however, that the underlying
assumptions used to estimate expected project sales, development costs or
profitability, or the events associated with such projects, will transpire as
estimated. The Company currently believes that actual results have been lower
than forecasts with respect to acquired in-process revenues. This has been
primarily due to the following factors: (1) unanticipated delays in the
integration of the Denim product into the Company's corporate branding
initiatives, resulting in a longer than anticipated period of reduced marketing
effort; (2) slow progress in the development of a distribution channel; and (3)
delays in the realization of synergies from fully integrated products based on
the Denim technology due to delays in the integration of this technology. Due to
missed market opportunities, the Company anticipates greater uncertainty,
regarding future revenue levels, than originally forecasted. The Company does
not account for operating expenses by product line. Therefore, the Company has
not determined the actual expenses associated with this product. However, the
Company believes that expenses incurred to date associated with the development
and integration of the in-process R&D projects are approximately consistent with
the Company's previous estimates.
The Company has completed many of the original R&D projects in accordance with
the plans outlined above. The Company continues to work toward the completion of
other projects. The majority of the projects are on schedule, but delays have
occurred due to changes in technological and market requirements for digital
video systems. Further, factors such as the inherent complexity and breadth of
the projects have delayed the development process as well. The risks associated
with these efforts are still considered high and no assurance can be made that
Denim's upcoming products will meet with market acceptance. Delays in the
introduction of certain products may have adversely affected the Company's
revenues and earnings in prior quarters. Further delays may have a similar
impact on financial results going forward.
Other nonrecurring charges--fiscal year 1999
During the second quarter of fiscal year 1999, Autodesk recorded charges of
approximately $8.9 million relating primarily to restructuring charges
associated with the consolidation of certain development centers ($1.5 million);
the write-off of purchased technologies associated
18
with these operations ($2.2 million); staff reductions in Asia Pacific in
response to current economic conditions in the region ($1.7 million); costs in
relation to potential legal settlements ($2.5 million); and the write-down to
fair market value of older computer equipment that the Company planned to
dispose of ($1.0 million). These charges reduced income after tax by
approximately $5.9 million ($0.12 per share on a diluted basis).
During the quarter ended April 30, 1996, the Company recorded a write-down of
its investment in the preferred shares of Essential Communications Corporation
("Essential"), in the amount of $2.5 million to reflect the uncertainty
regarding the realizability of this investment. The Company made the investment
in Essential in anticipation of realizing benefits from the networking
technology that Essential was developing. When it became doubtful that Essential
would be able to realize its development efforts, due to financial constraints,
and that the technological benefits may not be achieved on time to meet market
demand, the investment was written down to reflect the other than temporary
impairment in its value.
In May 1998, Essential was sold. As a result of this sale, the Company received
proceeds of $2.5 million in exchange for its preferred shares. Upon receipt of
the proceeds, the Company realized a gain of approximately $2.5 million.
In June 1998, the Company announced a mutual termination of its Arrangement
Agreement entered into on March 9, 1998 with MGI Software Corp. ("MGI"). Both
the Company and MGI determined that, in light of current conditions which could
result in significant delays in the realization of previously discussed
anticipated benefits and synergies of the merger, it was in the best interests
of both companies to terminate the agreement and remain independent companies.
The Company incurred approximately $1.7 million of costs, expensed in the fiscal
year ended January 31, 1999, related to this terminated agreement.
During the fiscal year ended January 31, 1999, the Company reversed
approximately $2.3 million of excess restructuring reserves, related primarily
to the estimated cost of terminating leases and accrued an additional $.8
million for the closure of its U.K. research and development facility (see Note
12.)
During fiscal year 1998, the Company's Discreet business unit recorded a
provision of $6.5 million to accrue additional estimated settlement costs to be
borne by the Company's Discreet busines unit.
Other nonrecurring charges--fiscal year 1998
In the first quarter of fiscal year 1998, the Company 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 1998, the Company's Discreet business unit recorded a
provision of $6.5 million to accrue additional estimated settlement costs to be
borne by the Company's Discreet business unit.
Other nonrecurring charges--fiscal year 1997
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., and
Argus Technologies, Inc. ("Argus"), as well as the outstanding stock of Teleos
Research ("Teleos"). Approximately $3.2 million of the Teleos purchase price and
$1.5 million of the Argus purchase price represented the value of in-process
research and development and were charged to operations during fiscal year 1997.
In the fiscal year ended January 31, 1997, the Company's Discreet business unit
had provided a $2.5 litigation reserve for legal costs associated with defending
the class action lawsuits (see Note 4).
Interest and other income
Interest income was $16.1 million, $10.9 million, and $10.0 million in fiscal
years 1999, 1998, and 1997, respectively. The increase in fiscal year 1999
interest income over fiscal year 1998 and 1997 interest income was largely due
to an increase in average cash, cash equivalents, and marketable securities
balances. Interest and other income in fiscal years 1999, 1998, and 1997 was net
of interest expense of $0.5 million, $0.3 million, and $1.9 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. Losses resulting from
foreign currency transactions primarily in Europe and Asia Pacific, which are
included in interest and other income, were $0.4 million, $0.1 million, and $0.2
million in fiscal years 1999, 1998, and 1997, respectively.
Provision for income taxes
Autodesk's effective income tax rate, excluding the impact of nonrecurring
charges, was 36.6 percent in fiscal year 1999 compared to 38.3 percent and 36.5
percent in fiscal years 1998 and 1997, respectively. The decrease in the
effective income tax rate in fiscal year 1999 compared to fiscal year 1998 was
due to incremental tax
19
benefits associated with the Company's foreign earnings which are taxed at rates
different from the U.S. statutory rate, and a reduction in the relative impact
of amortization of certain intangible assets, partially offset by a reduction of
the benefit from utilization of net operating losses. The increase in the tax
rate between fiscal years 1998 and 1997 was due to the amortization of certain
intangible assets not deductible for tax purposes and foreign earnings, which
are taxed at rates different from the U.S. statutory rate partially offset by an
increase of the benefit from utilization of net operating losses. See Note 3 to
the consolidated financial statements for an analysis of the differences between
the U.S. statutory and 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. The resolution of these alleged tax deficiencies and any
adjustments that may ultimately result from these examinations are not expected
to have a material adverse impact on the Company's consolidated results of
operations or its financial position.
Recently issued accounting standards
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9 ("SOP 98-9"), which amends certain
provisions of SOP 97-2 "Software Revenue Recognition" 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 2001. Autodesk does not expect the
adoption of this standard to have a material effect on its consolidated
operating results or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The
statement requires companies 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 2002. Autodesk is currently evaluating
the impact of SFAS 133 on its financial statements and related disclosures.
In the first quarter of fiscal year 1999, the Company adopted the provisions of
the AICPA's 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 adoption of this standard did not have a material effect on the Company's
consolidated operating results or financial position in fiscal year 1999.
Restatement
As described in Note 10, Autodesk's acquisition of Softdesk, Inc. ("Softdesk"),
and Denim Software LLC ("Denim"), D-Vision Systems, Inc. ("D-Vision"), and
Lightscape Technologies, Inc. ("Lightscape") were accounted for as a business
combinations using the purchase method of accounting. In accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations," the cost of the acquisitions were 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 amounts allocated to in-process
research and development of $91.7 million were expensed in the period in which
the acquisitions were 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"), Autodesk has reevaluated its IPR&D charges
on the acquisitions, revised the purchase price allocations, and restated the
financial statements. As a result, Autodesk made adjustments to decrease the
amounts previously expensed as IPR&D and increase the amounts capitalized as
goodwill and other intangibles relating to the acquisitions by $63.3 million.
The effect of these adjustments on previously reported consolidated financial
statements as of and for the years ended January 31, 1998 and 1997 are as
follows:
20
- ----------------------------------------------------------------------------- ------------------ ------------------
(In thousands, except per share data) 1998 1997
As reported As restated As reported As restated
- ----------------------------------------------------------------------------- ------------------ ------------------
Nonrecurring charges $ 82,595 $ 26,810 $ 21,038 $ 13,501
- ----------------------------------------------------------------------------- ------------------ ------------------
General and administrative 91,364 105,207 80,676 80,781
- ----------------------------------------------------------------------------- ------------------ ------------------
Cost of revenues 132,891 133,371 111,788 111,788
- ----------------------------------------------------------------------------- ------------------ ------------------
Income from operations 52,424 93,886 57,864 65,296
- ----------------------------------------------------------------------------- ------------------ ------------------
Net income 14,753 56,215 34,815 42,247
- ----------------------------------------------------------------------------- ------------------ ------------------
Basic net income per share $ 0.26 $ 1.00 $ 0.64 $ 0.77
- ----------------------------------------------------------------------------- ------------------ ------------------
Diluted net income per share 0.25 0.94 0.61 0.74
- ----------------------------------------------------------------------------- ------------------ ------------------
Purchased technologies and capitalized
software, net 36,595 38,415 18,261 18,261
- ----------------------------------------------------------------------------- ------------------ ------------------
Goodwill, net 17,897 64,971 6,785 14,217
- ----------------------------------------------------------------------------- ------------------ ------------------
Retained earnings (deficit) (23,356) 25,539 63,733 71,165
- ----------------------------------------------------------------------------- ------------------ ------------------
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities, which consist primarily of
high-quality municipal bonds, tax-advantaged money market instruments, and U.S.
Treasury bills, totaled $428.0 million at January 31, 1999, compared to $347.8
million at January 31, 1998. The $80.2 million increase in cash, cash
equivalents, and marketable securities was due primarily to cash generated from
operations ($175.1 million) and cash proceeds from the issuance of shares
through employee stock option and stock purchase programs ($106.4 million). This
increase was partially offset by cash used to acquire complementary technologies
and businesses ($69.3 million), to repurchase shares of the Company's common
stock ($48.9 million), to purchase computer equipment, furniture, and leasehold
improvements ($38.0 million), and to pay dividends on the Company's common stock
($11.7 million).
During fiscal years 1999, 1998, and 1997, the Company repurchased and retired a
total of 600,000, 2,332,500, and 1,659,500 shares of its common stock at average
repurchase prices of $42.56, $38.39, and $32.44, 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, Autodesk announced another stock repurchase program for the
purchase of up to 5 million shares of common stock in open market transactions
as market and business conditions warranted--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 could 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 8 to the consolidated financial
statements. During fiscal years 1999, 1998, and 1997, the Company repurchased
and retired a total of 545,000, 1,000,000, and 557,500 shares of its common
stock at average repurchase prices of $42.81, $34.37, and $24.09, respectively,
subject to the Supplemental Plan.
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 entitled the Company to
buy 1 million shares at $39.88 per share. The premiums received with respect to
the equity options totaled $4.5 million and equaled the premiums paid.
Consequently, there was no exchange of cash. The outstanding put warrants at
January 31, 1998 permitted a net share settlement at the Company's option. In
March 1998, the Company exercised the call option, electing the net share
settlement option and retired approximately 97,000 shares of its common stock.
The put warrants expired unexercised.
In connection with the acquisition of Discreet Logic Inc., in August 1998, the
Autodesk Board of Directors rescinded its authorization of the Systematic Plan
and the Supplemental Plan, both of which have been terminated.
21
The Company has a revolving demand line of credit with its bank, under which it
may borrow up to Cdn$7,000,000 (approximately $4,569,000 at January 31, 1999).
Advances under the line accrue interest monthly at the Canadian prime rate
(6.75% at January 31, 1999) plus 0.25%. Additionally, the agreement provides for
a Cdn$600,000 (approximately $392,000 at January 31, 1999) demand leasing
facility, and a Cdn$600,000 (approximately $392,000 at January 31, 1999) demand
research and development tax credit facility. Advances under these facilities
accrue interest monthly at the Canadian prime rate (6.75% at January 31, 1999)
plus 1%. The line and facilities are secured by essentially all of the Company's
Discreet business unit's North American assets. As additional security, the
Company assigned to the bank its insurance on these assets. The Company is
required to maintain certain financial ratios, including minimum levels of
working capital, debt service coverage and equity to assets ratios. As of
January 31, 1999, there were no amounts outstanding under the demand leasing and
demand research and development tax credit facilities, however, the amount
available to the Company under the line of credit was reduced by the letter of
guarantee discussed below.
During the fiscal year ended January 31, 1999, the Company's Japanese subsidiary
entered into a line of credit agreement with its bank. Under this agreement, the
subsidiary can borrow up to $3,000,000. Advances under this line accrue interest
at the prevailing overnight rate (approximately 2.1% at January 31, 1999) and
are secured by a letter of guarantee, in the amount of $3,000,000, issued by the
Company in favor of the subsidiary's bank. As of January 31, 1999, the
subsidiary had borrowed (Yen)300,372,000 (approximately $2,643,000 at January
31, 1999).
In March 1998, Discreet issued 213,000 Common Shares under a private placement
sale to Intel Corporation for proceeds of approximately $13,527,000, net of
issuance costs. During the fiscal year ended January 31, 1999, the Company
concluded a financing arrangement related to the Lightscape Acquisition with the
Societe de Developpement Industriel du Quebec, an agency of the Quebec
provincial government. This agreement provides for an interest free (until July
2004) loan in the amount of Cdn $2,800,000 (approximately $1,828,000 at January
31, 1999). The funds were received in July 1998 and are repayable in four annual
installments of Cdn $600,000 (approximately $392,000 at January 31, 1999)
commencing in July 2004, and a final installment of Cdn $400,000 (approximately
$261,000 at January 31, 1999) in July 2008. The loan is subject to standard
covenants for these arrangements, including covenants that may require early
repayment of the loan.
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, 1999, there were no borrowings outstanding under
this credit agreement, which expires in January 2000.
The Company's principal commitments at January 31, 1999, consisted of
obligations under operating leases for facilities. For additional information,
see Note 5 to the consolidated financial statements. The Company anticipates
making tax payments in connection with its federal tax audits in fiscal year
2000, none of which are expected to have a material adverse impact on the
Company's consolidated results of operations or financial position. 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 2000.
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; 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.
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 its 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 and its individual
market groups compete, both by entry of competitors with in-
22
novative technologies and by consolidation of companies with complementary
products and technologies.
The Architecture, Engineering, and Construction family of products competes
directly with software offered by companies such as Bentley Systems, Inc.
("Bentley"); Computervision Corporation (a subsidiary of Parametric Technology
Corporation) ("Computervision"); CADAM Systems Company, Inc.; Diehl Graphsoft,
Inc.; Eagle Point Software; International Microcomputer Software, Inc. ("IMSI");
Intergraph Corporation; Nemetschek Systems, Inc.; and Visio Corporation
("Visio"). Autodesk's MCAD products compete with products offered by Bentley;
Visionary Design Systems; Hewlett-Packard Corporation; Parametric Technology
Corporation; Structural Dynamics Research Corporation; Unigraphics;
Computervision; Dassault Systemes ("Dassault"); Solidworks Corporation (a
subsidiary of Dassault); Baystate Technologies, Inc.; and think3. Autodesk's GIS
Market Group faces competition from Bentley; Intergraph; MapInfo Corporation;
Environmental Systems Research Institute ("ESRI"); and Smallworldwide plc.
Discreet(R) product offerings compete with products offered by other multimedia
companies such as Adobe Systems Inc.; Macromedia, Inc.; Silicon Graphics, Inc.;
and Avid Technology, Inc. The Personal Solutions Group family of products
competes with IMSI; The Learning Company; Visio; Micrografx Inc.; and others.
Certain of the competitors of Autodesk have greater financial, technical, sales
and marketing, and other resources than Autodesk.
The future financial performance of Autodesk's Discreet business unit will
depend in part on the successful development, introduction, and customer
acceptance of existing and new or enhanced products. In addition, in order for
the unit to achieve sustained growth, the market for its systems and software
must continue to develop, and Autodesk must expand this market to include
additional applications within the film and video industries and develop or
acquire new products for use in related markets. Autodesk may not be successful
in marketing its existing or new or enhanced products. In addition, as Autodesk
enters new markets, distribution channels, technical requirements, and levels
and bases of competition may be different from those in Autodesk's current
markets; Autodesk may not be able to compete favorably.
Autodesk believes that the principal factors affecting competition in its
markets are product reliability, performance, ease of use, 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 depends, in part, upon its
continued ability to enhance existing products and to develop and market new
products.
In April 1998, Autodesk 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 Autodesk's current business
practices or policies, nor have any charges been filed. Autodesk intends to
cooperate fully with the FTC in its inquiry. Autodesk does not believe that the
investigation will have a material impact on its business or consolidated
results of operations.
Fluctuations in quarterly operating results
Autodesk has experienced fluctuations in operating results in interim periods in
certain geographic regions due to seasonality. Autodesk's operating results in
Europe during the third fiscal quarter are usually impacted by a slow summer
period, and 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 Autodesk experienced less fluctuation of
operating results within fiscal years 1999 and 1998 as compared to prior years,
historically the majority of Autodesk'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 timing of the
introduction of new products by Autodesk or its competitors and other economic
factors experienced by Autodesk's customers in the geographic regions in which
Autodesk does business.
The operating results of Autodesk's recently acquired Discreet business unit
could vary significantly from quarter to quarter. A limited number of system
sales may account for a substantial percentage of Discreet's quarterly revenue
because of the high average sales price of Discreet's products and the timing of
purchase orders. Historically, Discreet has generally experienced greater
revenues during the period following the completion of the NAB trade show, which
typically is held in April. In addition, the timing of revenue is influenced by
a number of other factors, including the timing of individual orders and
shipments, other industry trade shows, competition, seasonal customer buying
patterns, changes in customer buying patterns in response to platform changes
and changes in product development, and sales and marketing expenditures.
23
Additionally, Autodesk'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 Autodesk'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 Autodesk's common stock. Moreover, Autodesk's stock price
is subject to the volatility generally associated with technology stocks and may
also be affected by broader market trends unrelated to performance.
Product concentration
Autodesk derives a substantial portion of its revenues from sales of AutoCAD
software, AutoCAD upgrades, and adjacent products which are interoperable with
AutoCAD. As such, any factor adversely affecting sales of AutoCAD and AutoCAD
upgrades, including such factors as product life cycle, market acceptance,
product performance and reliability, reputation, price competition, and the
availability of third-party applications, could have a material adverse effect
on the Company's business and consolidated results of operations.
Product development and introduction
The software industry is characterized by rapid technological change as well as
changes in customer requirements and preferences. The software products offered
by Autodesk are internally complex, and despite extensive testing and quality
control, may contain errors or defects ("bugs"). Defects or errors may occur in
future releases of AutoCAD or other software products offered by Autodesk. Such
defects or errors could result in corrective releases to Autodesk'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 Autodesk's business and consolidated
results of operations.
Autodesk 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 Autodesk's business and consolidated results of
operations. Further, increased competition in the market for design, drafting,
mapping, or multimedia software products could also have a negative impact on
Autodesk's business and consolidated results of operations. More specifically,
gross margins may be adversely affected if sales of low-end CAD products and
AutoCAD upgrades, which historically have had lower margins, grow at a faster
rate than Autodesk's higher-margin products.
In particular, the success of Autodesk's Discreet business unit will depend in
part upon Autodesk's ability to enhance Discreet's existing systems and software
and to develop and introduce new products and features which meet changing
customer requirements and emerging industry standards on a timely basis. In
addition, in connection with Discreet's recent acquisitions, Autodesk must fully
integrate the edit* (formerly D-Vision OnLine), effect* (formerly Flint and
Illuminaire Composition), paint* (formerly Illuminaire Paint), and light*
(formerly Lightscape) products into its product line and operations. Discreet
from time to time experienced delays in introducing new products and product
enhancements, and the Discreet business unit post acquisition may experience
difficulties that could delay or prevent the successful development,
introduction, and marketing of new products or product enhancements. In
addition, such new products or product enhancements may not meet the
requirements of the marketplace and achieve market acceptance. Any such failure
could have a material adverse effect on Autodesk's business and consolidated
results of operations. From time to time the Discreet business unit or others
may announce products, features or technologies which have the potential to
shorten the life cycle of or replace its then existing products. Such
announcements could cause customers to defer the decision to buy or determine
not to buy its products or cause its distributors to seek to return products to
the Discreet business unit, any of which could have a material adverse effect on
Autodesk's business and consolidated results of operations. In addition, product
announcements by Silicon Graphics, Inc. ("SGI") and others in the past have
caused customers to defer their decision to buy or determine not to buy
Discreet's products. In addition, products or technologies developed by others
may render the Discreet business unit's products or technology noncompetitive or
obsolete.
Certain of Autodesk'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, independent developers, including those who have developed
products for Autodesk in the past, may not be able to provide development
support to Autodesk in the future. Similarly, Autodesk may not be able
24
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 Autodesk'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. Certain developers may 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
Autodesk anticipates that international operations will continue to account for
a significant portion of its consolidated revenues. Risks inherent in Autodesk's
international operations include the following: unexpected changes in regulatory
practices and tariffs; difficulties in staffing and managing foreign operations;
longer collection cycles for accounts receivable; potential changes in tax laws;
greater difficulty in protecting intellectual property; and the impact of
fluctuating exchange rates between the U.S. dollar and foreign currencies in
markets where Autodesk does business. During fiscal year 1999, 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 Australian
dollar. As more fully described in Note 2 to the consolidated financial
statements, the Company's risk management strategy uses derivative financial
instruments in the form of forward foreign exchange contracts for the purpose of
hedging foreign currency market exposures of underlying assets, liabilities, and
other obligations which exist as a part of its ongoing business operations. The
Company does not enter into derivative contracts for the purpose of trading or
speculative transactions. The Company's international results may also be
impacted by general economic and political conditions in these foreign markets,
including the ongoing economic volatility currently experienced in certain Asia
Pacific countries. These and other factors may 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
Autodesk 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 Autodesk has not currently experienced any material problems
with its VAR network, computer software dealers and distributors are typically
not highly capitalized and have experienced difficulties during times of
economic contraction and may do so in the future. While no single customer
accounted for more than 10 percent of Autodesk's consolidated revenues in
fiscal years 1999, 1998, or 1997, the loss of or a significant reduction in
business with any one of Autodesk's major international distributors or large
U.S. resellers could have a material adverse effect on Autodesk's business and
consolidated results of operations in future periods. Autodesk's largest
international distributor is Computer 2000/Datech AG in Germany. Autodesk's
largest resellers in the United States are Avatech, DLT Solutions, Inc., and
Ingram Micro.
Product returns
With the exception of certain European distributors, agreements with Autodesk'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 Autodesk
experienced a decrease in the overall level of product returns in fiscal year
1999 compared to fiscal years 1998 and 1997, 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 Autodesk maintains strict measures to monitor channel
inventories and to provide appropriate reserves, actual product returns may
differ from its reserve estimates, and such differences could have a material
effect on Autodesk's business and consolidated results of operations.
Intellectual property
Autodesk relies on a combination of patents, copyright and trademark laws, trade
secrets, confidentiality procedures, and contractual provisions to protect its
proprietary rights. Despite such efforts to protect its proprietary rights,
unauthorized parties from time to
25
time have copied aspects of Autodesk's software products or have obtained and
used information that Autodesk regards as proprietary. Policing unauthorized use
of Autodesk's software products is time-consuming and costly. While Autodesk has
received some revenues resulting from the unauthorized use of its software
products, it is unable to measure the extent to which piracy of its software
products exists, and software piracy can be expected to be a persistent problem.
Autodesk's means of protecting its proprietary rights may not be adequate, and
its competitors may independently develop similar technology. Autodesk 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 as the functionality of products in different industry segments overlaps.
Infringement or invalidity claims (or claims for indemnification resulting from
infringement claims) may be asserted against Autodesk, and any such assertions
could 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 Autodesk 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 Autodesk's business and
consolidated results of operations.
Autodesk 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. These third-party software
licenses may not continue to be available on commercially reasonable terms, and
the software may not 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 Autodesk's business and consolidated results of operations.
Until fiscal year 1996, substantially all of Discreet's systems were sold
without written license agreements. Autodesk may be involved in litigation
relating to these sales, and the outcome of any such litigation may be more
unfavorable to Autodesk as a result of such omissions. The Discreet business
unit uses both software and hardware keys with respect to its systems and
software but otherwise does not copy-protect its systems and software. It may be
possible for unauthorized third parties to copy the Discreet business unit's
products or to reverse-engineer or obtain and use information that the Discreet
business unit regards as proprietary. Competitors may independently develop
technologies that are substantially equivalent or superior to the Discreet
business unit's technologies.
Attraction and retention of employees
Autodesk's continued growth and success 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. Autodesk'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 7 to the consolidated financial statements.
Autodesk may not be successful in continuing to recruit new personnel and to
retain existing personnel. The loss of one or more key employees or Autodesk's
inability to maintain existing employees or recruit new employees could have a
material adverse impact on Autodesk. In addition, Autodesk may experience
increased compensation costs to attract and retain skilled personnel.
Disclosures about market risk
Foreign currency exchange risk
The Company's earnings and cash flows are subject to fluctuations due to changes
in foreign currency exchange rates. The Company's risk management strategy
utilizes forward foreign exchange contracts to manage its exposures of
underlying assets, liabilities, and other obligations which exist as part of its
ongoing business operations. Contracts are primarily denominated in Swiss francs
and Japanese yen. The Company does not enter into any foreign exchange
derivative instruments for speculative purposes.
A sensitivity analysis was performed on the Company's hedging portfolio as of
January 31, 1999. This analysis indicated that a hypothetical 10 percent
appreciation of the U.S. dollar from January 31, 1999, market rates would
increase the fair value of the Company's forward contracts by $3.0 million.
Conversely, a hypothetical 10 percent depreciation of the dollar from January
31, 1999, market rates would decrease the fair value of the Company's forward
contracts by $3.3 million. The Company does not anticipate any material adverse
effect on its consolidated financial position, results of operations, or cash
flows as a result of these forward foreign exchange contracts.
Interest rate sensitivity
The Company had an investment portfolio of fixed income securities, including
those classified as cash equivalents and security deposits, of $179.8 million at
26
January 31, 1999. These securities are subject to interest rate fluctuations and
will decrease in market value if interest rates increase.
A sensitivity analysis was performed on the Company's investment portfolio as of
January 31, 1999. This sensitivity analysis is based on a modeling technique
that measures the hypothetical market value changes that would result from a
parallel shift in the yield curve of plus 50, plus 100, or plus 150 basis points
over 6-month and 12-month time horizons. The market value changes for a 50, 100,
or 150 basis point increase were not material due to the limited duration of the
Company's portfolio.
The Company does not use derivative financial instruments in its investment
portfolio to manage interest rate risk. The Company places its investments in
instruments that meet high credit quality standards, as specified in its
investment policy guidelines, which limits the amount of credit exposure to any
one issue, issuer, or type of instrument.
Impact of year 2000
Some of the computer programs used by Autodesk 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. Autodesk is currently in the final stages
of the project related to information technology ("IT") systems and will
continue testing applications throughout its fiscal year 2000, which began on
February 1, 1999. Autodesk also continues to complete the remediation of its
internal infrastructure and expects to complete the majority of this work by the
end of the first quarter of fiscal year 2000. The remaining efforts of this
infrastructure remediation in some international offices are partially dependent
on third-party products. These third-party products may not be converted in a
timely manner or at all, and any failure in this regard may cause Autodesk
infrastructure not to function properly.
During fiscal year 1999, Autodesk spent approximately $4 million on the IT year
2000 project. These costs were expensed as incurred in accordance with EITF 96-
14, "Accounting for the Costs Associated with Modifying Computer Software for
the Year 2000." Autodesk expects to spend an additional $2 million to $3 million
to complete this project. All expenditures to date have been captured either in
prior year or current year budgets. Autodesk believes that the key components
of the IT year 2000 project have been either replaced or remediated. Throughout
the remainder of fiscal year 2000, Autodesk will continue to work on business
continuity plans which include the documentation and testing of manual processes
to address any potential future issues related to the year 2000. Further,
Autodesk estimates that if any component of the current systems fail due to
year-2000-related issues, Autodesk would be able to divert people and systems
traffic, causing delays between one and three days in service interruptions and
processing Autodesk information. Autodesk has a contingency plan in place to
prevent the loss of critical data, which includes the backup of all critical
data-processing interactions and a disaster recovery plan. 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 it uses in the
ordinary course of business as described above, Autodesk has also reviewed its
non-IT systems to determine year 2000 compliance of these systems. Autodesk is
in a monitoring program that continually checks the status of all non-IT systems
and does not anticipate an adverse impact on service and business capabilities
with regard to these non-IT systems. Expenditures related to these monitoring
procedures have been minimal and are not expected to be significant in future
periods.
Autodesk has also tested and continues to test all products it currently
produces internally for sale to third parties to determine year 2000 compliance.
During fiscal year 1999, Autodesk spent approximately $600,000 on a year 2000
compliance testing program related to its products and expects to spend an
additional $300,000 to $800,000 to complete this project. Products currently
sold either have been found to be substantially compliant or are currently being
tested for compliance. However, many Autodesk products run on operating systems
or hardware produced and sold by third-party vendors. There can be no assurance
that these operating systems or hardware will be converted in a timely manner or
at all, and any failure in this regard may cause Autodesk products not to
function as designed. Autodesk will continue to evaluate each product in the
currently supported inventory.
Any future costs associated with ensuring that Autodesk's products are compliant
with the year 2000 are not expected to have a material impact on Autodesk's
results of operations or financial position. Furthermore, commentators have
stated that a significant amount of litigation may arise out of year 2000
compliance issues,
27
and Autodesk is aware of a growing number of lawsuits against other software
vendors. Because of the unprecedented nature of such litigation, it is uncertain
whether and to what extent Autodesk may be affected by it.
Single European currency
Effective January 1, 1999, 11 of the 15 member countries of the European Union
have adopted the euro as their legal currency. On that date, the participating
countries established fixed euro conversion rates between their existing
sovereign currencies and the euro. The euro now trades on currency exchanges and
is available for noncash transactions. As of February 1, 1999, Autodesk's
internal systems have the ability to price and invoice customers in the euro.
Autodesk is also engaging in foreign exchange and hedging activities in the
euro. Autodesk will continue to modify the internal systems that will be
affected by this conversion during fiscal year 2000, and it does not expect the
costs of further system modifications to be material. There can be no assurance,
however, that Autodesk will be able to complete such modifications to comply
with euro requirements, which could have a material adverse effect on Autodesk's
operating results. Autodesk will continue to evaluate the impact of the
introduction of the euro on its foreign exchange and hedging activities,
functional currency designations, and pricing strategies in the new economic
environment. In addition, Autodesk faces risks to the extent that banks and
vendors upon whom Autodesk relies and their suppliers are unable to make
appropriate modifications to support Autodesk's operations with respect to euro
transactions. While Autodesk will continue to evaluate the impact of the euro,
management does not believe its introduction will have a material adverse effect
upon Autodesk's results of operations or financial condition.
Risks associated with acquisitions and investments
Autodesk periodically acquires or invests in businesses, software products, and
technologies which are complementary to Autodesk'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 and financial condition.
As further described in Note 11 to the consolidated financial statements, on May
4, 1998, the Company acquired the mechanical applications business of Genius for
approximately $69 million in cash, which includes fees and expenses. On March
16, 1999, the Company acquired Discreet Logic Inc. ("Discreet"), in a business
combination accounted for as a pooling of interests. There can be no assurance
that the anticipated benefits of the Genius acquisition, the Discreet
acquisition, or any future acquisitions will be realized.
Failure to achieve beneficial synergies from Discreet acquisition
Autodesk has acquired Discreet with the expectation that the acquisition will
result in beneficial synergies. These include mutual benefits from complementary
strengths in the 3D modeling and animation tools markets, the competitive
advantages resulting from offering a comprehensive suite of integrated product
offerings, combined industry experience and market knowledge, and shared
distribution channels. Achieving these anticipated synergies will depend on a
number of factors including, without limitation, the successful integration of
Autodesk's and Discreet's operations and general and industry-specific economic
factors. Even if Autodesk and Discreet are able to integrate their operations
and economic conditions remain unchanged, the anticipated synergies may not be
achieved. The failure to achieve such synergies could have a material adverse
effect on Autodesk's business, results of operations, and financial condition.
Integration of Discreet's operations and technologies
Achieving the anticipated benefits of the Discreet acquisition will depend in
part upon whether the integration of the two companies' businesses is
accomplished in an efficient and effective manner, and this may not occur. The
combination of the two companies will require, among other things, integration
of the companies' respective operations, products, technologies, management
information systems, distribution channels, and key personnel and the
coordination of their sales, marketing, and research and development efforts.
In particular, Autodesk will be required to integrate its existing sales
channel, which consists principally of in-
28
dependent resellers, with Discreet's sales force, which typically sells product
directly to customers. As a result of these and other factors, the integration
may not be accomplished smoothly or successfully, if at all. If significant
difficulties are encountered in the integration of the existing operations,
products, or technologies or the development of new products and technologies,
resources could be diverted from new product development, and delays in new
product introductions could occur. Compared to Autodesk's products, Discreet's
products have traditionally experienced longer, more complex sales cycles.
Autodesk may not be able to take full advantage of the combined sales efforts.
In addition, the difficulties of integrating Autodesk and Discreet may be
increased by the necessity of coordinating organizations with distinct corporate
cultures and widely dispersed operations in two different countries. The
integration of operations and technologies of these entities is a significant
challenge to Autodesk management and will require substantial effort and
dedication of management and other personnel, which may distract their attention
from the day-to-day business of these entities, the development or acquisition
of new technologies, and the pursuit of other business opportunities. In
addition, certain Discreet(TM) product offerings currently include computer
hardware, which may present business issues as to which Autodesk management has
limited experience. Failure to successfully accomplish the integration of the
two companies' operations, technologies, and personnel would likely have a
material adverse effect on Autodesk's business, financial condition and results
of operations. In addition, during the period of integration, aggressive
competitors may undertake initiatives to attract customers or employees through
various incentives, which could have a material adverse effect on the business,
results of operations, and financial conditions of Autodesk.
Discreet's customers
Discreet's customers may not continue their current buying patterns in light of
the acquisition. Certain customers may defer purchasing decisions as they
evaluate the acquisition, other recent acquisitions and product announcements in
the multimedia and design software industries, Autodesk's post acquisition
product strategy, current and anticipated product offerings of competitors, and
any other outside forces which may affect customer buying patterns. Customers
may ultimately decide to purchase competitors' products in lieu of Discreet
products. Historically, Discreet and Autodesk have had significantly different
types of customers. These different customer types may evaluate post acquisition
Autodesk differently. The decision of customers to defer their purchasing
decisions or to purchase products elsewhere could have a material adverse effect
on Autodesk's business, results of operations, and financial condition.
Integration of operations of a non-U.S. company
Cross-border acquisitions entail certain special risks beyond those normally
encountered in a domestic acquisition. These include the difficulty of
integrating employees from a different corporate culture into the acquiring
organization; the need to understand different incentives that motivate
employees in a non-U.S. company; the greater difficulty of transplanting the
acquiring company's corporate culture to an organization that is physically
distant; and the difficulty and expense of relocating employees from one country
to another in the event of an internal group restructuring following an
acquisition. These factors can reduce the likelihood of the long-term success of
a cross-border acquisition. Although Autodesk derives the majority of its
revenues from non-U.S. sales and has significant operations outside the United
States, it has limited experience integrating the management, sales, product
development, and marketing organizations of a significant non-U.S. business with
its existing operations. Although Discreet has sales and marketing operations in
the United States and derives a significant portion of its revenue from U.S.
sales, its management and product development personnel are predominantly based
in Canada. Autodesk may not be able to successfully integrate the personnel and
operations of Discreet into the existing Autodesk organization.
Single market for Discreet's product offerings; risks associated with expansion
into new markets
To date, Discreet's products have been purchased primarily by creative
professionals for use in production and postproduction in the film and video
industries. In order for Autodesk's Discreet business unit to achieve sustained
growth, the market for Discreet's product offerings must continue to develop,
and Autodesk must expand this market to include additional applications within
the film and video industries and develop new products for use in related
markets. Discreet recently announced its multiplatform software initiative to
develop and market software across Apple Macintosh, Microsoft Windows NT, and
Unix operating systems, in addition to its existing real-time turnkey systems
solutions, targeted at two new market segments: institutional customers and
prosumers (professional consumers). While Autodesk believes that the market
recognition which Discreet achieved through sales of Flame(R), Smoke(R),
effect*, Inferno(R), and Fire(R) systems to creative professionals will
facilitate Autodesk's marketing efforts in new markets, Autodesk's Discreet
business unit may not be able to successfully develop and market systems and
software for other markets, and, even if it does so, such systems and software
may
29
not be accepted at a rate, and in levels, sufficient to maintain growth.
Further, the distribution channels, technical requirements, and levels and bases
of competition in other markets are different than those in the Discreet
business unit's current market, so the Discreet business unit may not be able to
compete favorably in those markets.
30
Supplemental Consolidated Statement of Income
- ------------------------------------- ----------------------------------------------------------
(In thousands, except per share data) Fiscal year ended January 31,
1999 1998 (restated) 1997 (restated)
- -------------------------------------- ------------------ ------------------ ------------------
Net revenues $871,879 $768,684 $598,617
- -------------------------------------- ------------------ ------------------ ------------------
Costs and expenses:
- -------------------------------------- ------------------ ------------------ ------------------
Cost of revenues 134,247 133,371 111,788
------------------------------ ------------------ ------------------ ------------------
Marketing and sales 295,890 271,428 223,145
------------------------------ ------------------ ------------------ ------------------
Research and development 157,080 137,279 103,410
------------------------------ ------------------ ------------------ ------------------
General and administrative 141,486 105,207 80,781
------------------------------ ------------------ ------------------ ------------------
Nonrecurring charges 19,694 26,810 13,501
------------------------------ ------------------ ------------------ ------------------
Litigation accrual reversal (18,605) (405) --
------------------------------ ------------------ ------------------ ------------------
Total costs and expenses 729,792 673,690 532,625
-------------------------- ------------------ ------------------ ------------------
Income from operations 142,087 94,994 65,992
- -------------------------------------- ------------------ ------------------ ------------------
Interest and other income, net 17,134 11,710 7,685
- -------------------------------------- ------------------ ------------------ ------------------
Income before income taxes 159,221 106,704 73,677
- -------------------------------------- ------------------ ------------------ ------------------
Provision for income taxes 62,089 50,489 31,430
- -------------------------------------- ------------------ ------------------ ------------------
Net income $ 97,132 $ 56,215 $ 42,247
- -------------------------------------- ------------------ ------------------ ------------------
Basic net income per share $1.72 $1.00 $0.77
- -------------------------------------- ------------------ ------------------ ------------------
Diluted net income per share $1.64 $0.94 $0.74
- -------------------------------------- ------------------ ------------------ ------------------
Shares used in computing basic net 56,394 56,340 54,763
income per share
- -------------------------------------- ------------------ ------------------ ------------------
Shares used in computing diluted net 59,141 60,022 56,725
income per share
- -------------------------------------- ------------------ ------------------ ------------------
See accompanying notes.
31
Supplemental Consolidated Balance Sheet
- -------------------------------------------------------- -----------------------------------------
(In thousands) January 31,
1999 1998 (restated)
- -------------------------------------------------------- ------------------ ------------------
Assets
- -------------------------------------------------------- ------------------ ------------------
Current assets:
- -------------------------------------------------------- ------------------ ------------------
Cash and cash equivalents $ 258,941 $ 142,548
-------------------------------------------------- ------------------ ------------------
Marketable securities 102,756 100,399
-------------------------------------------------- ------------------ ------------------
Accounts receivable, net of allowance for doubtful 114,901 92,958
accounts of $10,642 ($10,623 in 1998)
-------------------------------------------------- ------------------ ------------------
Inventories 23,169 20,008
-------------------------------------------------- ------------------ ------------------
Deferred income taxes 20,323 27,577
-------------------------------------------------- ------------------ ------------------
Prepaid expenses and other current assets 24,325 20,149
-------------------------------------------------- ------------------ ------------------
Total current assets 544,415 403,639
-------------------------------------------- ------------------ ------------------
Marketable securities, including a restricted balance 66,265 104,831
of $18,000 in 1998
- -------------------------------------------------------- ------------------ ------------------
Computer equipment, furniture, and leasehold
improvements:
- -------------------------------------------------------- ------------------ ------------------
Computer equipment and furniture 140,513 139,713
-------------------------------------------------- ------------------ ------------------
Leasehold improvements 24,767 22,240
-------------------------------------------------- ------------------ ------------------
Accumulated depreciation (116,625) (113,238)
-------------------------------------------------- ------------------ ------------------
Net computer equipment, furniture, and 48,655 48,715
leasehold improvements
--------------------------------------------- ------------------ ------------------
Purchased technologies and capitalized software, net of
accumulated amortization of $48,961 ($31,367 in 1998) 34,880 38,415
- -------------------------------------------------------- ------------------ ------------------
Goodwill 85,546 64,971
- -------------------------------------------------------- ------------------ ------------------
Deferred income taxes 12,147 14,660
- -------------------------------------------------------- ------------------ ------------------
Other assets 31,352 24,670
- -------------------------------------------------------- ------------------ ------------------
$ 823,260 $ 699,901
======================================================== ================== ==================
Liabilities and stockholders' equity
- -------------------------------------------------------- ------------------ ------------------
Current liabilities:
- -------------------------------------------------------- ------------------ ------------------
Accounts payable $ 49,053 $ 49,683
------------------------------------------------- ------------------ ------------------
Accrued compensation 49,592 41,818
------------------------------------------------- ------------------ ------------------
Accrued income taxes 96,731 86,348
------------------------------------------------- ------------------ ------------------
Deferred revenues 24,833 25,479
------------------------------------------------- ------------------ ------------------
Other accrued liabilities 58,905 51,687
------------------------------------------------- ------------------ ------------------
Total current liabilities 279,114 255,015
--------------------------------------------- ------------------ ------------------
Deferred income taxes 3,333 2,710
- -------------------------------------------------------- ------------------ ------------------
Litigation accrual -- 29,328
- -------------------------------------------------------- ------------------ ------------------
Other liabilities 3,486 1,254
- -------------------------------------------------------- ------------------ ------------------
Commitments and contingencies
- -------------------------------------------------------- ------------------ ------------------
Stockholders' equity:
- -------------------------------------------------------- ------------------ ------------------
Common stock, $0.01 par value; 250,000 shares
authorized, 57,221 issued and outstanding (55,239
in 1998) 470,801 407,064
-------------------------------------------------- ------------------ ------------------
Accumulated other comprehensive income (14,132) (20,102)
-------------------------------------------------- ------------------ ------------------
Deferred compensation (551) (907)
-------------------------------------------------- ------------------ ------------------
Retained earnings 81,209 25,539
-------------------------------------------------- ------------------ ------------------
Total stockholders' equity 537,327 411,594
--------------------------------------------- ------------------ ------------------
$ 823,260 $ 699,901
======================================================== ================== ==================
See accompanying notes.
32
Supplemental Consolidated Statements of Cash Flows
- ------------------------------------------------------ --------------------------------------------------------------------
(In thousands) Fiscal year ended January 31,
1999 1998 (restated) 1997 (restated)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Operating activities
- ------------------------------------------------------ -------------------- -------------------- ------------------
Net income $ 97,132 $ 56,215 $ 42,247
- ------------------------------------------------------ -------------------- -------------------- ------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
- ------------------------------------------------------ -------------------- -------------------- ------------------
Depreciation and amortization 80,782 66,331 40,820
------------------------------------------------ -------------------- -------------------- ------------------
Charge for acquired in-process research and
development 13,100 29,102 7,001
------------------------------------------------ -------------------- -------------------- ------------------
Litigation and related interest accrual reversal (20,900) -- --
------------------------------------------------ -------------------- -------------------- ------------------
Net gain on disposition of business unit (1,307) -- --
------------------------------------------------ -------------------- -------------------- ------------------
Loss on disposal of long-lived assets 4,032 -- --
------------------------------------------------ -------------------- -------------------- ------------------
Gain on sale of investment -- (2,500) --
------------------------------------------------ -------------------- -------------------- ------------------
Reversal of restructuring reserve, net (1,504) (1,504) --
------------------------------------------------ -------------------- -------------------- ------------------
Write-off of assets for restructuring -- 610 --
------------------------------------------------ -------------------- -------------------- ------------------
Compensation expense related to stock options 633 602 --
------------------------------------------------ -------------------- -------------------- ------------------
Changes in operating assets and liabilities, net
of business combinations:
------------------------------------------------ -------------------- -------------------- ------------------
Settlement of class action litigation -- (10,800) --
------------------------------------------- -------------------- -------------------- ------------------
Insurance proceeds related to class action -- 3,459 --
litigation
------------------------------------------- -------------------- -------------------- ------------------
Accounts receivable (24,486) 4,503 14,545
------------------------------------------- -------------------- -------------------- ------------------
Inventories (872) 3,913 5,331
------------------------------------------- -------------------- -------------------- ------------------
Deferred income taxes 11,940 (7,177) (281)
------------------------------------------- -------------------- -------------------- ------------------
Prepaid expenses and other current assets (4,604) 1,266 3,385
------------------------------------------- -------------------- -------------------- ------------------
Accounts payable and accrued liabilities 6,548 25,286 12,868
------------------------------------------- -------------------- -------------------- ------------------
Accrued income taxes 14,559 6,413 14,278
------------------------------------------- -------------------- -------------------- ------------------
Net cash provided by operating activities 175,053 175,719 140,194
- ------------------------------------------------------ -------------------- -------------------- ------------------
Investing activities
- ------------------------------------------------------ -------------------- -------------------- ------------------
Purchases of available-for-sale marketable securities (838,591) (1,102,015) (683,550)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Maturities of available-for-sale marketable 874,800 1,126,174 604,727
securities
- ------------------------------------------------------ -------------------- -------------------- ------------------
Purchase of computer equipment, furniture, and (38,038) (24,502) (23,674)
leasehold improvements
- ------------------------------------------------------ -------------------- -------------------- ------------------
Business combinations, net of cash acquired (69,279) (16,108) (19,034)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Proceeds from disposition of business unit 5,137 -- --
- ------------------------------------------------------ -------------------- -------------------- ------------------
Proceeds from sale of investment -- 2,500 --
- ------------------------------------------------------ -------------------- -------------------- ------------------
Proceeds from disposition of fixed assets 2,719 818 --
- ------------------------------------------------------ -------------------- -------------------- ------------------
Purchases of software technologies and capitalization
of software development costs (5,979) (19,833) (995)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Acquisition of other assets (7,537) -- (2,481)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Other (4,771) (36) (3,402)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Net cash used by investing activities (81,539) (33,002) (128,409)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Financing activities
- ------------------------------------------------------ -------------------- -------------------- ------------------
Proceeds from issuance of common stock 106,431 95,247 24,786
- ------------------------------------------------------ -------------------- -------------------- ------------------
Proceeds from line of credit 2,643 2,713 --
- ------------------------------------------------------ -------------------- -------------------- ------------------
Proceeds from government loan 1,828 -- --
- ------------------------------------------------------ -------------------- -------------------- ------------------
Repurchase of common stock (48,866) (174,907) (67,269)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Dividends paid (11,722) (11,290) (10,879)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Net cash provided by (used in) financing activities 50,314 (88,237) (53,362)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Effect of exchange rate changes on cash 6,375 (8,414) (12,904)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Adjustment to conform fiscal year of Discreet Logic (33,810) -- --
- ------------------------------------------------------ -------------------- -------------------- ------------------
Net increase (decrease) in cash and cash equivalents 116,393 46,066 (54,481)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Cash and cash equivalents at beginning of year 142,548 96,482 150,963
- ------------------------------------------------------ -------------------- -------------------- ------------------
Cash and cash equivalents at end of year $ 258,941 $ 142,548 $ 96,482
====================================================== ==================== ===================== ==================
33
- ------------------------------------------------------ --------------------------------------------------------------------
(In thousands) Fiscal year ended January 31,
1999 1998 (restated) 1997 (restated)
- ------------------------------------------------------ -------------------- -------------------- ------------------
Supplemental Disclosure of Noncash Investing and
Financing Activities
- ------------------------------------------------------ -------------------- -------------------- ------------------
Common stock received in relation to the equity $ 4,265 $ -- $ --
collar
- ------------------------------------------------------ -------------------- -------------------- ------------------
Common stock issued in connection with the $ -- $ 92,021 $ --
acquisition of Softdesk
- ------------------------------------------------------ -------------------- -------------------- ------------------
See accompanying notes.
Supplemental Consolidated Statement of Stockholders' Equity
34
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands) Three-year period ended January 31, 1999
Accumulated
Common stock other Total
------------------ Comprehensive comprehensive Deferred Retained stockholders'
Shares Amount income Income compensation earnings equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balances, January 31, 1996 55,492 $219,688 $ 10,398 $154,585 $ 384,671
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Common shares issued under stock
option and stock purchase plans 1,112 22,208 22,208
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Tax effect of stock options-- 2,578 2,578
Autodesk, Inc.
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Grant of compensatory stock
options--Discreet Logic 674 (674)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Reclassification of put warrants (9,870) (54,630) (64,500)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Comprehensive income:
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Net income (restated) $ 42,247 42,247 42,247
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Other comprehensive loss, net of tax:
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Unrealized losses on available-for-
sale securities, net of
reclassification adjustments (426) (426)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Foreign currency translation (20,635) (20,635)
adjustment
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Other comprehensive loss (restated) (21,061) (21,061)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Comprehensive income $ 21,186
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Dividends paid (10,879) (10,879)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Repurchase of common shares (2,217) (7,111) (60,158) (67,269)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Balances, January 31, 1997 (restated) 54,387 228,167 (10,663) (674) 71,165 287,995
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Common shares issued under stock
option and stock purchase plans 2,889 65,490 65,490
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Tax effect of stock options--
Autodesk, Inc. 16,230 16,230
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Grant of compensatory stock
options--Discreet Logic 836 (836)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Compensation expense related to
stock options--Discreet Logic 603 603
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Reclassification of put warrants--
Autodesk, Inc. 9,870 54,630 64,500
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Shares issued in connection with
acquisitions 3,083 102,670 102,670
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Shares issued to Intel, net--
Discreet Logic 213 13,527 13,527
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Comprehensive income:
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Net income (restated) 56,215 56,215 56,215
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Other comprehensive loss, net of tax:
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Unrealized gains on available-for-
sale securities, net of
reclassification adjustments 362 362
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Foreign currency translation
adjustment (9,801) (9,801)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Other comprehensive loss (restated) (9,439) (9,439)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Comprehensive income $ 46,776
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Dividends paid (11,290) (11,290)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Repurchase of common shares (5,333) (29,726) (145,181) (174,907)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Balances, January 31, 1998 (restated) 55,239 407,064 (20,102) (907) 25,539 411,594
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Common shares issued under stock
option and stock purchase plans 3,224 76,550 76,550
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Tax effect of stock options--
Autodesk, Inc. 15,469 15,469
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
35
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands) Three-year period ended January 31, 1999
Accumulated
Common stock other Total
------------------ Comprehensive comprehensive Deferred Retained stockholders'
Shares Amount income Income compensation earnings equity
- ---------------------------------------------------------------------------------------------------------------------------------
Cancellation of compensatory stock
options--Discreet Logic (25) 25
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Compensation expense related to
stock options--Discreet Logic 331 331
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Comprehensive income:
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Net income 97,132 97,132 97,132
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Other comprehensive income, net of tax:
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Unrealized gains on available-for-
sale securities, net of
reclassification adjustments 198 198
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Foreign currency translation
adjustment 5,772 5,772
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Other comprehensive income 5,970 5,970
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Comprehensive income $103,102
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Adjustment to conform fiscal year of
Discreet Logic (9,131) (9,131)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Dividends paid (11,722) (11,722)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Repurchase of common shares (1,242) (28,257) (20,609) (48,866)
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
Balances, January 31, 1999 57,221 $470,801 $(14,132) $(551) $ 81,209 $ 537,327
- ------------------------------------ -------- --------- ------------- -------------- ------------- --------- -------------
See accompanying notes.
36
Notes to Supplemental 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 2.1 million seats worldwide.
Business Combination and Basis of Presentation
On March 16, 1999, the Company acquired Discreet Logic Inc. ("Discreet"), in a
business combination accounted for as a pooling of interests. In the
acquisition, Autodesk acquired all of the voting stock of Discreet, a company
that develops, assembles, markets, and supports nonlinear digital systems and
software for creating, editing, and compositing imagery and special effects for
film, video, and HDTV, and issued 0.33 shares of the Company's common stock, or
0.33 exchangeable shares (which can be exchanged, at the holder's election, for
one share of the Company's common stock), for each outstanding share of
Discreet. The transaction resulted in the issuance of an aggregate of
approximately 10 million shares of Autodesk common stock and exchangeable
shares. The supplemental consolidated financial statements will become the
historical financial statements upon issuance of financial statements for the
period that includes the date of the merger.
The consolidated financial statements of Autodesk and Discreet have been
combined and all prior periods have been restated to give effect to the
combination. Information concerning common stock and per share data has been
restated on an equivalent share basis. As a result of differing year-ends of
Autodesk and Discreet, results of operations for dissimilar year-ends will be
combined. Autodesk's historical consolidated statements of income, stockholders'
equity, and cash flows for the fiscal years ended January 31, 1999, 1998, and
1997, have been combined with the condensed consolidated statements of
operations, stockholders' equity, and cash flows of Discreet for the twelve
months ended December 31, 1998, the fiscal year ended June 30, 1998, and the
eleven months ended June 30, 1997. Operating results for the period from January
1, 1998, to June 30, 1998, for Discreet are duplicated in the consolidated
statement of income of the combined operating results for the years ended
January 31, 1999 and 1998. An adjustment in an amount equal to the results of
operations for this six-month period is included in the consolidated statement
of stockholders' equity. Discreet's revenues, net income, basic net income per
share, and diluted net income per share were $75.9 million, $9.1 million, $0.16,
and $0.15, respectively, for the period January 1, 1998 through June 30, 1998.
In order to qualify for pooling of interest treatment in the Discreet
acquisition, prior to the closing of the acquisition, Autodesk completed a
follow-on offering of 3,000,000 shares of common stock at $41 per share.
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 1997 and 1998
consolidated financial statements to conform to the 1999 presentation.
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 asset and liability accounts of foreign subsidiaries are translated from
their respective functional currencies at the rates in effect at the balance
sheet date, and revenue and expense accounts are translated at weighted average
rates during the period. Foreign currency translation adjustments are reflected
as a separate component of stockholders' equity. Gains (losses) resulting from
foreign currency transactions, which are included in interest and other income,
were $1,489,000, $1,015,000, and ($385,000) in fiscal years 1999, 1998, and
1997, respectively.
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 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
37
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 U.S. 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 the Asia Pacific
region. 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. No single customer accounted for more than 10
percent of consolidated net revenues in fiscal years 1999, 1998, or 1997.
Inventories
Inventories, consisting principally of disks, compact disks (CDs), user manuals,
and hardware purchased for resale 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 and
declining balance methods 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 $33,137,000, $29,229,000, and $26,219,000 in
fiscal years 1999, 1998, and 1997, 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, which is included as a
component of cost of revenues, was $19,073,000, $14,438,000, and $9,817,000 in
fiscal years 1999, 1998, and 1997, respectively. The actual lives of the
Company's purchased technologies or capitalized software may differ from
management'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 $60,919,000, $39,623,000, and
$17,418,000 in fiscal years 1999, 1998, and 1997, respectively. The Company
evaluates the realizability and the related periods of amortization of these
assets on a regular basis. Amortization expense, which is included as a
component of general and administrative expenses, was $28,141,000, $22,615,000,
and $4,018,000 in fiscal years 1999, 1998, and 1997, respectively.
Employee stock compensation
The Company accounts for its employee stock plans 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
97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of
Position 98-4 ("SOP 98-4"). Revenue from software licenses and the related
hardware and peripherals is recognized at the time of shipment, provided that no
significant vendor obligations exist and collection of the resulting receivable
is deemed probable. A portion of revenues related to certain customer consulting
and training obligations is deferred. Revenue from post contract customer
support and other related services is recognized ratably as the obligations are
fulfilled, or when the related services are performed.
38
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 revenue and 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 were $13,108,000, $14,364,000, and $11,384,000
during fiscal years 1999, 1998, and 1997, respectively.
Royalties
The Company licenses software used to develop components of certain 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
$6,451,000, $7,640,000, and $8,000,000 in fiscal years 1999, 1998, and 1997,
respectively. Such costs are included as a component of cost of revenues.
Net income per share
The Company computes net income per share in accordance with Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share" ("SFAS 128").
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 common shares outstanding. Diluted net income per share is computed
using the weighted average number of outstanding common shares and dilutive
common stock equivalents outstanding during the period. For calculating basic
and diluted net income per share, the exchangeable shares issued in the Discreet
acquisition are treated as outstanding shares. A reconciliation of the
numerators and denominators used in the basic and diluted net income per share
amounts follows:
- ----------------------------------------------------------------------------
(In thousands) Fiscal year ended January 31,
1999 1998 1997
(restated) (restated)
- ------------------------------------------------ ------- ------- -------
Numerator:
- ------------------------------------------------- ------- ------- -------
Numerator for basic and diluted net income $97,132 $56,215 $42,247
per share--net income
------------------------------------------- ------- ------- -------
Denominator:
- ------------------------------------------------- ------- ------- -------
Denominator for basic net income per 56,394 56,340 54,763
share--weighted average shares
------------------------------------------- ------- ------- -------
Effect of dilutive common stock options 2,747 3,682 1,962
------------------------------------------- ------- ------- -------
Denominator for diluted net income per share 59,141 60,022 56,725
- ------------------------------------------------- ------- ------- -------
See Note 15 for related quarterly financial data amounts.
Stock options to purchase 3.5 million, 2.0 million, and 4.9 million shares of
common stock in fiscal years 1999, 1998, and 1997, respectively, were
outstanding but not included in the computation of diluted net income per share
because the option exercise price was greater than the average market price of
the common shares.
Recently issued accounting standards
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9 ("SOP 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 2001. Autodesk does not expect the adoption of this standard to have
a material effect on its consolidated operating results or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). 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 2002.
39
Autodesk is currently evaluating the impact of SFAS 133 on its financial
statements and related disclosures.
In the first quarter of fiscal year 1999, the Company adopted the provisions of
the AICPA's 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 adoption of this standard did not have a material effect on the Company's
consolidated operating results or financial position in fiscal year 1999.
Restatement
As described in Note 10, Autodesk's acquisition of Softdesk, Inc. ("Softdesk"),
Denim Software LLC ("Denim"), D-Vision Systems, Inc. ("D-Vision"), and
Lightscape Technologies, Inc. ("Lightscape") were accounted for as a business
combinations using the purchase method of accounting. In accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations," the cost of the acquisitions were 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 amounts allocated to in-process
research and development of $91.7 million was expensed in the period in which
the acquisitions were 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"), Autodesk has reevaluated its IPR&D charges
on the acquisitions, revised the purchase price allocation, and restated its
financial statements. As a result, Autodesk made adjustments to decrease the
amounts previously expensed as IPR&D and increase the amounts capitalized as
goodwill and other intangibles relating to the acquisitions by $63.3 million.
The effect of these adjustments on previously reported consolidated financial
statements as of and for the years ended January 31, 1998 and 1997 are as
follows:
- --------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997
As reported As restated As reported As restated
- --------------------------------------- ----------- ----------- ----------- -----------
Nonrecurring charges $ 82,595 $ 26,810 $ 21,038 $ 13,501
- --------------------------------------- ----------- ----------- ----------- -----------
General and administrative 91,364 105,207 80,676 80,781
- --------------------------------------- ----------- ----------- ----------- -----------
Cost of revenues 132,891 133,371 111,788 111,788
- --------------------------------------- ----------- ----------- ----------- -----------
Income from operations 52,424 93,886 57,864 65,296
- --------------------------------------- ----------- ----------- ----------- -----------
Net income 14,753 56,215 34,815 42,247
- --------------------------------------- ----------- ----------- ----------- -----------
Basic net income per share $ 0.26 $ 1.00 $ 0.64 $ 0.77
- --------------------------------------- ----------- ----------- ----------- -----------
Diluted net income per share 0.25 0.94 0.61 0.74
- --------------------------------------- ----------- ----------- ----------- -----------
Purchased technologies and
capitalized software, net 36,595 38,415 18,261 18,261
- --------------------------------------- ----------- ----------- ----------- -----------
Goodwill, net 17,897 64,971 6,785 14,217
- --------------------------------------- ----------- ----------- ----------- -----------
Retained earnings (deficit) (23,356) 25,539 63,733 71,165
- --------------------------------------- ----------- ----------- ----------- -----------
40
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:
- -------------------------------------------------------------------------------
(In thousands) January 31, 1999 January 31, 1998
Carrying Fair Carrying Fair
amount value amount value
- ----------------------------------- -------- -------- -------- --------
Cash and cash equivalents $258,941 $258,941 $142,548 $142,548
- ----------------------------------- -------- -------- -------- --------
Marketable securities 169,021 169,021 205,230 205,230
- ----------------------------------- -------- -------- -------- --------
Forward foreign currency contracts (80) (80) (124) (124)
- ----------------------------------- -------- -------- -------- --------
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 $31.2 million and $38.8 million at January 31, 1999 and 1998,
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.
41
Marketable securities
Marketable securities include the following available-for-sale securities at
January 31, 1999 and 1998:
- --------------------------------------------------------------------------------
(In thousands) January 31, 1999
Gross Gross
unrealized unrealized Estimated
Cost gains losses fair value
- --------------------------- ----------- ---------- ---------- ----------
Short-term:
- --------------------------- ----------- ---------- ---------- ----------
Municipal bonds $ 90,655 $ 157 $ -- $ 90,812
--------------------- ----------- ---------- ---------- ----------
Preferred stock 10,000 -- -- 10,000
--------------------- ----------- ---------- ---------- ----------
Treasury bills 1,944 -- -- 1,944
--------------------- ----------- ---------- ---------- ----------
102,599 157 -- 102,756
- --------------------------- ----------- ---------- ---------- ----------
Long-term:
- --------------------------- ----------- ---------- ---------- ----------
Municipal bonds 65,247 1,018 -- 66,265
--------------------- ----------- ---------- ---------- ----------
65,247 1,018 -- 66,265
- --------------------------- ----------- ---------- ---------- ----------
$167,846 $1,175 $ -- $169,021
=========================== =========== ========== ========== ==========
--------------------------------------------------
January 31, 1998
Gross Gross
unrealized unrealized Estimated
Cost gains losses 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
--------------------- ----------- ---------- ---------- ----------
U.S. Treasury bills 17,987 -- (2) 17,985
--------------------- ----------- ---------- ---------- ----------
103,898 935 (2) 104,831
- --------------------------- ----------- ---------- ---------- ----------
$204,317 $ 937 $(24) $205,230
=========================== =========== ========== ========== ==========
Long-term U.S. Treasury bills included a restricted balance of $18.0 million at
January 31, 1998 (see Note 4). The contractual maturities of Autodesk's short-
term marketable securities at January 31, 1999, were one year or less while the
Company's long-term marketable securities had contractual maturities as follows:
$10.5 million between one and two years; $24.1 million maturing in three years;
$15.7 million maturing in four to five years; and $15.9 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 1999, 1998, and 1997. The
cost of securities sold is based on the specific identification method.
42
Note 3. Income Taxes
The provision for income taxes consists of the following:
- ----------------------------------------------------
(In thousands) Fiscal year ended January 31,
1999 1998 1997
- ---------------- --------- --------- ---------
Federal:
- ---------------- --------- --------- ---------
Current $30,708 $33,361 $ 5,807
- ---------------- --------- --------- ---------
Deferred 7,773 (7,385) 1,578
- ---------------- --------- --------- ---------
State:
- ---------------- --------- --------- ---------
Current 3,627 6,043 4,869
- ---------------- --------- --------- ---------
Deferred 1,229 (1,245) (1,148)
- ---------------- --------- --------- ---------
Foreign:
- ---------------- --------- --------- ---------
Current 17,029 19,106 21,719
- ---------------- --------- --------- ---------
Deferred 1,723 609 (1,395)
- ---------------- --------- --------- ---------
$62,089 $50,489 $31,430
================ ========= ========= =========
The principal reasons that the aggregate income tax provisions differ from the
U.S. statutory rate of 35 percent are as follows:
(In thousands) Fiscal year ended January 31,
1999 1998 1997
- ------------------------------------------------------------------------------ ---------- ---------- ----------
Income tax provision at statutory rate $55,727 $37,346 $25,787
- ------------------------------------------------------------------------------ ---------- ---------- ----------
Foreign income taxed at rates different from the U.S. statutory rate (1,994) 528 (913)
- ------------------------------------------------------------------------------ ---------- ---------- ----------
State income taxes, net of federal benefit 3,041 2,727 2,371
- ------------------------------------------------------------------------------ ---------- ---------- ----------
Tax-exempt interest (2,087) (2,031) (1,348)
- ------------------------------------------------------------------------------ ---------- ---------- ----------
Acquired in-process research and development 3,973 9,348 1,990
- ------------------------------------------------------------------------------ ---------- ---------- ----------
Goodwill amortization 7,478 6,724 695
- ------------------------------------------------------------------------------ ---------- ---------- ----------
Effect of not benefitting tax losses 2,304 1,599 853
- ------------------------------------------------------------------------------ ---------- ---------- ----------
Utilization of tax losses not previously benefitted (3,786) (4,839) (946)
- ------------------------------------------------------------------------------ ---------- ---------- ----------
Other (2,567) (913) 2,941
- ------------------------------------------------------------------------------ ---------- ---------- ----------
$62,089 $50,489 $31,430
============================================================================== ========== ========== ==========
43
Significant sources of the Company's deferred tax assets and liabilities are as
follows:
- -------------------------------------------------------- ----------------------------------------
(In thousands) January 31,
1999 1998
- -------------------------------------------------------- ------------------ ------------------
Purchased technology and capitalized software $13,580 $11,079
- -------------------------------------------------------- ------------------ ------------------
Reserves for product returns and bad debts 6,902 9,728
- -------------------------------------------------------- ------------------ ------------------
Tax loss carryforwards 5,676 5,499
- -------------------------------------------------------- ------------------ ------------------
Accrued compensation and benefits 4,705 3,809
- -------------------------------------------------------- ------------------ ------------------
Fixed assets 3,249 --
- -------------------------------------------------------- ------------------ ------------------
Accrued legal judgment, including accrued interest 1,598 13,863
- -------------------------------------------------------- ------------------ ------------------
Accrued state income taxes 410 5,667
- -------------------------------------------------------- ------------------ ------------------
Other 10,266 6,292
- -------------------------------------------------------- ------------------ ------------------
Total deferred tax assets 46,386 55,937
-------------------------------------------------- ------------------ ------------------
Less: Valuation allowance 11,231 8,448
-------------------------------------------------- ------------------ ------------------
Net deferred tax assets $35,155 $47,489
-------------------------------------------------- ------------------ ------------------
- -------------------------------------------------------- -----------------------------------------
(In thousands) January 31,
1999 1998
- -------------------------------------------------------- ------------------ ------------------
Unremitted earnings of foreign subsidiaries $(6,018) $(6,018)
- -------------------------------------------------------- ------------------ ------------------
Fixed assets -- (1,944)
- -------------------------------------------------------- ------------------ ------------------
Total deferred tax liability (6,018) (7,962)
--------------------------------------------------- ------------------ ------------------
Net deferred tax asset $29,137 $39,527
--------------------------------------------- ------------------ ------------------
The tax benefit associated with dispositions from employee stock plans reduced
taxes currently payable for fiscal years 1999, 1998, and 1997 by $15,469,000,
$16,230,000, and $2,578,000, respectively. No provision has been made for
federal income taxes on unremitted earnings of certain of the Company's foreign
subsidiaries (cumulative $251 million at January 31, 1999) because the Company
plans to reinvest all such earnings for the foreseeable future. At January 31,
1999, the unrecognized deferred tax liability for these earnings was
approximately $72.0 million. Foreign pretax income was $110.1 million, $57.5
million, and $50.7 million in fiscal years 1999, 1998, and 1997, 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 $20,861,000, $35,800,000, and
$14,746,000 for fiscal years 1999, 1998, and 1997, respectively.
The Company has $15,034,000 of cumulative tax loss carryforwards, which may be
available to reduce future income tax liabilities in certain jurisdictions. The
tax loss carryforwards will expire beginning June 30, 2001. The Company has
recorded a valuation allowance against certain deferred tax assets including the
tax benefit of these tax loss carryforwards as the tax benefits do not meet the
recognition criteria set forth in SFAS 109 due to the uncertainty of
realizability.
Note 4. Litigation and Related Matters
In December 1994, a $25.5 million judgment was entered into against the Company
on a claim of trade-secret misappropriation brought by Vermont Microsystems,
Inc. ("VMI"). The initial judgment and related expenses were accrued in fiscal
year 1995, as well as interest expense in subsequent periods in accordance with
this judgment. The Company appealed the deci-
44
sion, and in May 1998, final judgment was entered in the VMI litigation in the
amount of $7.8 million plus accrued interest. Following entry of judgment, the
Company made a final payment of approximately $8.4 million, including interest
to VMI. During the second quarter of fiscal year 1999, the Company recognized
$18.2 and $2.7 million as operating income and interest income, respectively, to
reflect the remaining unutilized litigation and related interest accruals.
In 1996 and 1997, certain of Discreet's shareholders filed class action lawsuits
alleging violations of federal securities laws and other claims against Discreet
and certain of its officers and directors. In November 1997, the lawsuits were
settled for $10,800,000, of which Discreet contributed approximately $7,400,000,
with the remainder provided by insurance. In the year ended January 31, 1997,
Discreet had provided a $2,506,000 litigation reserve for legal costs associated
with defending the class action lawsuits. During the year ended January 31,
1998, Discreet recorded a provision of $6,500,000 to accrue the additional
estimated settlement costs to be borne by Discreet. In the year ended January
31, 1999, Discreet reversed $405,000 of litigation and related settlement
expenses in order to adjust previously estimated legal costs to the actual
amount of costs incurred.
In August and September 1998, two complaints, which were subsequently
consolidated, were filed in the Marin County, California, Superior Court. The
complaints allege that Discreet and the Discreet directors breached their
fiduciary duties to shareholders in connection with the merger transaction with
Autodesk. The Company believes the claims asserted in the complaints are without
merit and intends to vigorously contest them.
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: $23.7 million in
2000; $18.7 million in 2001; $12.7 million in 2002; $10.3 million in 2003; $6.9
million in 2004; and $22.6 million thereafter.
Rent expense was $25,675,000, $19,714,000, and $18,958,000 in fiscal years 1999,
1998, and 1997, respectively.
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. Borrowing Arrangements
During the year, the Company amended its revolving demand line of credit and
leasing facility with its bank. The new agreement provides for a revolving
demand line of credit under which it can borrow up to Cdn$7,000,000
(approximately $4,569,000 at January 31, 1999). Advances under the line accrue
interest monthly at the Canadian prime rate (6.75% at January 31, 1999) plus
0.25%. Additionally, the agreement provides for a Cdn$600,000 (approximately
$392,000 at January 31, 1999) demand leasing facility, and a Cdn$600,000
(approximately $392,000 at January 31, 1999) demand research and development tax
credit facility. Advances under these facilities accrue interest monthly at the
Canadian prime rate (6.75% at January 31, 1999) plus 1%. The line and facilities
are secured by essentially all of The Company's Discreet business unit's North
American assets. As additional security, the Company assigned to the bank its
insurance on these assets. The Company is required to maintain certain financial
ratios, including minimum levels of working capital, debt service coverage and
equity to asset ratios. As of January 31, 1999, there were no amounts
outstanding under the demand leasing and demand research and development tax
credit facilities, however, the amount available to the Company under the line
of credit was reduced by the letter of guarantee discussed below. During the
year, the Company's Japanese subsidiary entered into a line of credit agreement
with its bank. Under this agreement, the subsidiary can borrow up to $3,000,000.
Advances under this line accrue interest at the prevailing overnight rate for
the period (approximately 2.1% at January 31, 1999) and are secured by a letter
of guarantee, in the amount of $3,000,000, issued by the Company in favor of the
subsidiary's bank. As of January 31, 1999, the subsidiary had borrowed
(Yen)300,372,000 (approximately $2,643,000 at January 31, 1999). The Company has
provided a letter of guarantee in the amount of $3,000,000, $3,000,000, and
$328,753 for fiscal years 1999, 1998, and 1997, 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 under this agreement at January 31, 1999,
which expires in January 2000.
Note 7. 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
45
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. In connection with the
acquisition of Discreet Logic, Inc. on March 16, 1999, the Company assumed all
of the outstanding stock options of Discreet. No further option grants will be
made under any Discreet option plans.
46
Stock option activity is as follows:
- ------------------------------------------------- --------------------------------------------
(Shares in thousands)
Weighted
average
Number of price
shares Price per share per share
- ------------------------------------------------- ---------- ------------------- ---------
Options outstanding at January 31, 1996 9,597 $ 0.05 - $ 49.25 $28.26
- ------------------------------------------------- ---------- ------------------- ---------
Granted 5,829 0.01 - 42.00 28.69
------------------------------------------- ---------- ------------------- ---------
Exercised (757) 0.05 - 38.25 18.39
------------------------------------------- ---------- ------------------- ---------
Canceled (1,128) 16.25 - 49.25 33.31
------------------------------------------- ---------- ------------------- ---------
Options outstanding at January 31, 1997 13,541 $ 0.01 - $ 49.25 $27.44
- ------------------------------------------------- ---------- ------------------- ---------
Granted 3,709 0.01 - 48.38 36.47
------------------------------------------- ---------- ------------------- ---------
Assumed via acquisitions 306 0.34 - 36.40 23.72
------------------------------------------- ---------- ------------------- ---------
Exercised (2,387) 0.01 - 49.25 22.82
------------------------------------------- ---------- ------------------- ---------
Canceled (952) 1.63 - 49.25 33.13
------------------------------------------- ---------- ------------------- ---------
Options outstanding at January 31, 1998 14,217 $ 0.01 - $ 49.25 $30.10
- ------------------------------------------------- ---------- ------------------- ---------
Granted 3,320 0.01 - 47.94 36.49
------------------------------------------- ---------- ------------------- ---------
Exercised (2,595) 0.01 - 49.25 24.74
------------------------------------------- ---------- ------------------- ---------
Canceled (1,020) 1.48 - 49.25 34.96
------------------------------------------- ---------- ------------------- ---------
Options outstanding at January 31, 1999 13,922 $ 0.01 - $ 49.25 $32.27
- ------------------------------------------------- ---------- ------------------- ---------
Options exercisable at January 31, 1999 6,770 $ 0.01 - $ 49.25 $30.13
- ------------------------------------------------- ---------- ------------------- ---------
Options available for grant at January 31, 1999 3,356
- ------------------------------------------------- ---------- ------------------- ---------
The following table summarizes information about options outstanding at January
31, 1999.
- -------------------------------------------------- ------------------------------------------------------------
Outstanding
options weighted
average
Number of shares contractual Weighted average
(in thousands) life (in years) exercise price
- -------------------------------------------------- ------------------- ----------------- ----------------
Range of per share exercise prices:
- -------------------------------------------------- ------------------- ----------------- ----------------
$ 0.01 - $ 24.75 4,716 5.63 $23.55
- -------------------------------------------------- ------------------- ----------------- ----------------
$ 25.38 - $ 36.50 4,838 7.46 $31.73
- -------------------------------------------------- ------------------- ----------------- ----------------
$ 36.75 - $ 49.25 4,368 8.30 $42.29
- -------------------------------------------------- ------------------- ----------------- ----------------
13,922 7.10 $32.27
- ------------------------------------------------------------------------ ----------------- ----------------
The following table summarizes information about options outstanding and
exercisable at January 31, 1999.
- -------------------------------------------------------- -----------------------------------------
Number of shares Weighted average
(in thousands) exercise price
- -------------------------------------------------------- ------------------ ------------------
Range of per share exercise prices:
- -------------------------------------------------------- ------------------ ------------------
$ 0.01 - $ 24.75 2,872 $20.66
-------------------------------------------------------- ------------------ ------------------
$ 25.38 - $ 36.50 2,131 $30.68
-----------------------------------------------------------------------------------------------------
$ 36.75 - $ 49.25 1,767 $44.88
-------------------------------------------------------- ------------------ ------------------
6,770 $30.13
-------------------------------------------------------- ------------------ ------------------
47
These options will expire if not exercised at specific dates ranging from
February 1999 to January 2009. Prices for options exercised during the three-
year period ended January 31, 1999, range from $0.01 to $49.25.
A total of 19.3 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. In March 1999 in
connection with the acquisition of Discreet, the Company assumed Discreet's
obligations with respect to each outstanding option to purchase common shares of
Discreet under the 1995 Employee Stock Purchase Plan. A total of 2,099,000
shares have been reserved for issuance under the plan plus an annual increase as
defined in the plan document. In fiscal years 1999, 1998, and 1997, shares
totaling 635,000, 505,000, and 355,000, respectively, were issued under the plan
at average prices of $23.21, $22.35, and $23.35 per share. At January 31, 1999,
a total of 2,690,000 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 1999, 1998, and 1997 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
1999 1998 1997 1999 1998 1997
- ------------------------- ------------- ------------- ------------- ------------- ------------- --------------
Expected life (in years) 0.4 to 2.8 0.5 to 2.6 0.5 to 2.7 0.5 0.5 0.5
- ------------------------- ------------- ------------- ------------- ------------- ------------- --------------
Risk-free interest rate 5.0% to 6.3% 5.2% to 6.3% 5.2% to 6.3% 5.0% to 6.3% 5.2% to 6.3% 5.2% to 6.3%
- ------------------------- ------------- ------------- ------------- ------------- ------------- --------------
Volatility 0.56 to 1.0 0.52 to 1.0 0.42 to 1.0 0.63 to 1.0 0.50 to 1.0 0.45 to 1.0
- ------------------------- ------------- ------------- ------------- ------------- ------------- --------------
Dividend yield 0% to 0.7% 0% to 0.6% 0% to 0.8% 0% to 0.7% 0% to 0.6% 0% to 0.8%
- ------------------------- ------------- ------------- ------------- ------------- ------------- --------------
The weighted average estimated fair value of employee stock options granted
during fiscal years 1999, 1998, and 1997 was $14.14, $13.53, and $7.91 per
share, respectively. The weighted average estimated fair value of shares granted
under the employee stock purchase plan during fiscal years 1999, 1998, and 1997
was $9.07, $7.27, and $7.55, 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 1999, 1998, and 1997 was $52,207,000, $13,851,000, and
$14,360,000, respectively. Pro forma basic net income per share was $0.93,
$0.25, and $0.26 in fiscal years 1999, 1998, and 1997, respectively. Pro forma
diluted net income per share were $0.88, $0.23, and $0.25, respectively.
These pro forma amounts include amortized fair values attributed to options
granted after January 31, 1995 only, and therefore are not likely to be
representative of future pro forma amounts.
48
Pretax savings plan
The Company has a pretax savings plan covering nearly all U.S. employees that
qualify under Section 401(k) of the Internal Revenue Code. Eligible employees
may contribute up to 20 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 $4,623,000, $4,103,000, and $3,068,000 in fiscal
years 1999, 1998, and 1997, 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 years 1999 and 1998 were
$1,654,000 and $1,376,000, respectively. Company contributions to these plans in
fiscal year 1997 were not significant.
Note 8. Stockholders' Equity
Preferred stock
The Company's Certificate of Incorporation authorizes 2 million shares of
preferred stock, and as of January 31, 1999, none was 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 1999, 1998, and 1997, the Company repurchased and retired a
total of 600,000, 2,332,500, and 1,659,500 shares of its common stock at average
repurchase prices of $42.56, $38.39, and $32.44, 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, Autodesk announced another stock repurchase program for the
purchase of up to 5 million shares of common stock in open market transactions
as market and business conditions warranted--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 could 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. During fiscal years 1999, 1998, and 1997, the Company repurchased and
retired a total of 545,000, 1,000,000, and 557,500 shares of its common stock at
average repurchase prices of $42.81, $34.37, and $24.09, respectively, subject
to the Supplemental Plan.
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 entitled the Company to
buy 1 million shares at $39.88 per share. The premiums received with respect to
the equity options totaled $4.5 million and equaled the premiums paid.
Consequently, there was no exchange of cash. The outstanding put warrants at
January 31, 1998 permitted a net share settlement at the Company's option. In
March 1998, the Company exercised the call option, electing the net share
settlement option, and retired approximately 97,000 shares of its common stock.
The put warrants expired unexercised.
In connection with the acquisition of Discreet Logic Inc., in August 1998, the
Autodesk Board of Directors rescinded its authorization and terminated the
Company's repurchase plans.
On March 4, 1998, the Company completed a private placement of 213,000 common
shares to Intel Corporation for proceeds to the Company of approximately
$13,527,000, net of issuance costs.
Under a separate agreement, the Strategic Development Agreement (the
"Agreement") dated as of March 4, 1998 by and between the Company and Intel
Corporation ("Intel") provides for the mutual collaboration of Intel and
the Company regarding the possible development of real-time effects software
designed specifically to run on certain Intel products and to allow the free
flow of certain developmental information between the parties to facilitate
similar development efforts. The nature of the Agreement is preliminary and, as
such, the Agreement does not provide for extensive obligations or liability on
49
behalf of either party. Under the Agreement, the Company agrees to provide a
perpetual, non-transferable, non-assignable, non-exclusive, world-wide, royalty-
free license, without the right to sublicense, to internally use, copy and
modify certain proprietary software and related material solely for the
purposes of performance analysis, optimization and design and sale of certain
Intel products.
The Company retains sole ownership on all such software, even if such software
is modified by Intel. There are no "purchase rights" under the Agreement. Under
the Agreement, each party will bear its own costs associated with performance
of the agreement, which will generally entail training, travel and related
meeting expenses. The Company believes that the agreement is not material to
the Company's operations.
Note 9. Segments
During the fiscal year ended January 31, 1999, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for reporting information about a company's operating segments. Prior year
amounts have been restated to conform to the current year's presentation.
Management identified the Company's reportable segments based on differences in
customer type and distribution method. The Company operates in three segments--
the Design Solutions segment (consisting of the MCAD, AECAD, and GIS market
groups), the Personal Solutions Group ("PSG"), and Discreet (consisting of the
Discreet and Kinetix market groups). The Design Solutions segment derives
revenues from the sales of design software products whose end users include
architects, engineers, construction firms, designers, and drafters. The Personal
Solutions Group develops and sells design software products for professionals,
occasional users, or consumers who design, draft, and diagram. Finally, Discreet
derives revenues from the sale of multimedia products to animation
professionals. All segments primarily distribute their respective products
through authorized dealers and distributors. The PSG segment also sells its
products directly through telemarketing and the Internet.
Autodesk evaluates each segment's performance on the basis of income from
operations before income taxes. The Company currently does not separately
accumulate and report asset information by market group. Information concerning
the operations of the Company's reportable segments is as follows:
- -------------------------------------- ----------------------------------------------------------------
(In millions) Fiscal year ended January 31,
1999 1998 1997
- -------------------------------------- ------------------ ------------------ ------------------
Net revenues:
- -------------------------------------- ------------------ ------------------ ------------------
Design Solutions $ 575.2 $ 494.3 $ 388.0
-------------------------------- ------------------ ------------------ ------------------
Personal Solutions Group 122.9 89.7 79.2
-------------------------------- ------------------ ------------------ ------------------
Discreet 173.8 184.7 131.4
-------------------------------- ------------------ ------------------ ------------------
$ 871.9 $ 768.7 $ 598.6
- -------------------------------------- ------------------ ------------------ ------------------
- -------------------------------------- ----------------------------------------------------------------
(In millions) Fiscal year ended January 31,
1999 1998 1997
- -------------------------------------- ------------------ ------------------ ------------------
Income (loss) from operations:
- -------------------------------------- ------------------ ------------------ ------------------
Design Solutions $ 310.3 $ 267.6 $ 241.0
-------------------------------- ------------------ ------------------ ------------------
Personal Solutions Group 84.1 53.3 50.5
-------------------------------- ------------------ ------------------ ------------------
Discreet 19.5 17.4 5.6
-------------------------------- ------------------ ------------------ ------------------
Unallocated amounts/1/ (271.8) (243.3) (231.1)
-------------------------------- ------------------ ------------------ ------------------
$ 142.1 $ 95.0 $ 66.0
- -------------------------------------- ------------------ ------------------ ------------------
Depreciation and amortization:
- -------------------------------------- ------------------ ------------------ ------------------
Design Solutions $ 37.2 $ 22.6 $ 19.2
-------------------------------- ------------------ ------------------ ------------------
Personal Solutions Group 2.2 0.3 --
-------------------------------- ------------------ ------------------ ------------------
Discreet 22.1 23.7 7.2
-------------------------------- ------------------ ------------------ ------------------
Unallocated amounts 19.3 19.7 14.4
-------------------------------- ------------------ ------------------ ------------------
$ 80.8 $ 66.3 $ 40.8
- -------------------------------------- ------------------ ------------------ ------------------
/1/ Unallocated amounts in fiscal year 1999 are attributed primarily to
corporate expenses of $110.3 million, other geographic costs and expenses
which are managed outside the reportable segments of $174.2 million, and
nonrecurring income of $12.7 million. Fiscal year 1998 unallocated amounts
are primarily related to corporate expenses of $76.6 million and other
geographic costs and expenses not allocated to specific segments of $166.7
million. Fiscal year 1997 amounts pertain to corporate expenses of $78.7
million and other geographic costs and expenses of $152.4 million.
50
Information regarding the Company's operations by geographic area is as follows:
- -------------------------------------------------------- ----------------------------------------------------------------
(In millions) Fiscal year ended January 31,
1999 1998 1997
- -------------------------------------------------------- ----------------------------------------------------------------
Net revenues:
- -------------------------------------------------------- ------------------ ------------------ ------------------
United States customers $356.5 $317.2 $205.4
-------------------------------------------------- ------------------ ------------------ ------------------
Other Americas 57.2 46.9 30.0
-------------------------------------------------- ------------------ ------------------ ------------------
Total Americas 413.7 364.1 235.4
-------------------------------------------------- ------------------ ------------------ ------------------
Europe 329.6 257.5 228.4
-------------------------------------------------- ------------------ ------------------ ------------------
Asia Pacific 128.6 147.1 134.8
-------------------------------------------------- ------------------ ------------------ ------------------
Total net revenues $871.9 $768.7 $598.6
-------------------------------------------- ------------------ ------------------ ------------------
- -------------------------------------------------------- -----------------------------------------
(In millions) January 31,
1999 1998
- -------------------------------------------------------- ------------------ ------------------
Long-lived assets:/1/
- -------------------------------------------------------- ------------------ ------------------
United States operations $146.3 $173.5
-------------------------------------------------- ------------------ ------------------
Other Americas 95.1 94.8
-------------------------------------------------- ------------------ ------------------
Total Americas 241.4 268.3
-------------------------------------------------- ------------------ ------------------
Neuchatel, Switzerland 37.7 3.4
-------------------------------------------------- ------------------ ------------------
Other Europe 21.4 17.6
-------------------------------------------------- ------------------ ------------------
Total Europe 59.1 21.0
-------------------------------------------------- ------------------ ------------------
Asia Pacific 26.2 28.1
-------------------------------------------------- ------------------ ------------------
Consolidating eliminations (126.3) (140.6)
-------------------------------------------------- ------------------ ------------------
Total long-lived assets $200.4 $176.8
-------------------------------------------- ------------------ ------------------
/1/ Per SFAS 131, long-lived assets exclude financial instruments and deferred
tax assets. As such, marketable securities and deferred taxes have been
excluded above.
Note 10. Comprehensive Income
As of February 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"), 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. SFAS 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 SFAS 130.
The components of total accumulated other comprehensive income in the balance
sheet are as follows:
51
- ---------------------------------------------------------------- -----------------------------------------
(In thousands) January 31,
1999 1998
- ---------------------------------------------------------------- ------------------ ------------------
Unrealized gains on available-for-sale securities, net of tax $ 775 $ 577
- ---------------------------------------------------------------- ------------------ ------------------
Foreign currency translation adjustment (14,907) (20,679)
- ---------------------------------------------------------------- ------------------ ------------------
Total accumulated other comprehensive income $(14,132) $(20,102)
---------------------------------------------------------- ------------------ ------------------
The related income tax effects allocated to each component of other
comprehensive income are as follows:
- ---------------------------------------------------------- -------------------------------------------------------------------
(In thousands)
Amount Income tax Amount
before taxes (expense) benefit net of taxes
- ---------------------------------------------------------- ------------------- ------------------- -------------------
Fiscal year 1999
- ---------------------------------------------------------- ------------------- ------------------- -------------------
Unrealized gains on securities
---------------------------------------------------- ------------------- ------------------- -------------------
Unrealized gains on available-for-sale securities $ 18 $ (6) $ 12
---------------------------------------------------- ------------------- ------------------- -------------------
Less: reclassification adjustment for losses (269) 83 (186)
realized in net income
---------------------------------------------------- ------------------- ------------------- -------------------
Net unrealized gains $ 287 $ (89) $ 198
---------------------------------------------------- ------------------- ------------------- -------------------
Foreign currency translation adjustments 5,772 -- 5,772
---------------------------------------------------- ------------------- ------------------- -------------------
Total other comprehensive income $ 6,059 $ (89) $ 5,970
----------------------------------------------- ------------------- ------------------- -------------------
Fiscal year 1998
- ---------------------------------------------------------- ------------------- ------------------- -------------------
Net unrealized gains on available-for-sale
securities $ 565 $(203) $ 362
---------------------------------------------------- ------------------- ------------------- -------------------
Foreign currency translation adjustments (9,801) -- (9,801)
---------------------------------------------------- ------------------- ------------------- -------------------
Total other comprehensive loss $ (9,236) $(203) $ (9,439)
---------------------------------------------- ------------------- ------------------- -------------------
Fiscal year 1997
- ---------------------------------------------------------- ------------------- ------------------- -------------------
Net unrealized losses on available-for-sale
securities $ (660) $ 234 $ (426)
----------------------------------------------------- ------------------- ------------------- -------------------
Foreign currency translation adjustments (20,635) -- (20,635)
----------------------------------------------------- ------------------- ------------------- -------------------
Total other comprehensive loss $(21,295) $ 234 $(21,061)
---------------------------------------------- ------------------- ------------------- -------------------
Note 11. Nonrecurring Charges
Acquisition
On May 4, 1998, the Company entered into an agreement with Genius CAD Software
GmbH ("Genius"), a German limited liability company, to purchase various
mechanical CAD software applications and technologies (the "acquisition"). In
consideration for this acquisition, the Company paid Genius approximately $69
million in cash. The acquisition has been accounted for using the purchase
method of accounting with the purchase price being allocated as follows:
- -------------------------------------------------------------------- --------------
(In thousands)
- -------------------------------------------------------------------- --------------
Inventory $ 200
- -------------------------------------------------------------------- --------------
Net fixed assets 200
- -------------------------------------------------------------------- --------------
Purchased in-process research and development charged to operations 13,100
in the quarter ended July 31, 1998
- -------------------------------------------------------------------- --------------
Purchased technology 12,700
- -------------------------------------------------------------------- --------------
Assembled work force 1,100
- -------------------------------------------------------------------- --------------
Goodwill 41,600
- -------------------------------------------------------------------- --------------
Total purchase consideration $68,900
-------------------------------------------------------------- --------------
52
Amortization of these purchased intangibles is provided on the straight-line
basis over the respective useful lives of the assets, ranging from three to
seven years. The operating results of Genius, which have not been material in
relation to those of the Company, have been included in Autodesk's consolidated
financial statements from the acquisition date.
In-process research and development
Management estimates that $13.1 million of the purchase price represents
purchased in-process technology that has not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
expensed in the second quarter of fiscal year 1999 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 calculations of value were adjusted to
reflect the value creation efforts of Genius prior to the close of the
acquisition. The value was determined by estimating the costs remaining 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 ($12.7 million), the expected
future cash flows of the existing developed technologies were discounted taking
into account the characteristics and applications of the product, the size of
existing markets, growth rates of existing and future markets, as well as an
evaluation of past and anticipated product-life cycles.
Assembled work force
To determine the value of the assembled work force ($1.1 million), the Company
evaluated the work force in place at the acquisition date and utilized the cost
approach to estimate the value of replacing the work force. Costs considered in
replacing the workforce included costs to recruit and interview candidates, as
well as the cost to train new employees.
Other nonrecurring charges
During the second quarter of fiscal year 1999, Autodesk recorded charges of
approximately $8.9 million relating primarily to restructuring charges
associated with the consolidation of certain development centers ($1.5 million),
the write-off of purchased technologies associated with these operations ($2.2
million), staff reductions in Asia Pacific in response to current economic
conditions in the region ($1.7 million), costs in relation to potential legal
settlements ($2.5 million), and the write-down to fair market value of older
computer equipment that the Company planned to dispose of ($1.0 million).
During the quarter ended April 30, 1996, the Company recorded a write-down of
its investment in the preferred shares of Essential Communications Corporation
("Essential"), in the amount of $2.5 million to reflect the uncertainty
regarding the realizability of this investment. The Company made the investment
in Essential in anticipation of realizing benefits from the networking
technology that Essential was developing. When it became doubtful that Essential
would be able to realize its development efforts, due to financial constraints,
and that the technological benefits may not be achieved on time to meet market
demand, the investment was written down to reflect the other than temporary
impairment in its value.
In May 1998, Essential was sold. As a result of this sale, The Company received
proceeds of $2.5 million in exchange for its preferred shares. Upon receipt of
the proceeds, the Company realized a gain of approximately $2.5 million.
In June 1998, the Company announced a mutual termination of its Arrangement
Agreement entered into on March 9, 1998 with MGI Software Corp. ("MGI"). Both
the Company and MGI determined that, in light of current conditions which could
result in significant delays in the realization of previously discussed
anticipated benefits and synergies of the merger, it was in the best interests
of both companies to terminate the agreement and remain independent companies.
The Company incurred approximately $1.7 million of costs, expensed in the
twelve-month period ended January 31, 1999, related to this terminated
agreement.
During the fiscal year ended January 31, 1999, the Company reversed
approximately $2.3 million of excess restructuring reserves, related primarily
to the estimated cost of terminating leases and accrued an additional $.8
million for the closure of its U.K. research and development facility (see Note
12.)
Prior year transactions
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
53
transactions 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 first quarter of fiscal year 1998 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.
On June 12, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Denim Software L.L.C., a Delaware limited
liability company ("Denim"), pursuant to the terms of an Asset Purchase
Agreement dated as of June 12, 1997. The purchased assets consist primarily of
Denim software products, including ILLUMINAIRE Paint, ILLUMINAIRE Composition
and ILLUMINAIRE Studio and related know-how and goodwill. The aggregate purchase
price for these assets was comprised of the following:
- -------------------------------------- ----------
(In thousands)
- -------------------------------------- ----------
Cash consideration $ 9,126
- -------------------------------------- ----------
Transaction costs 850
- -------------------------------------- ----------
Liabilities assumed 2,209
- -------------------------------------- ----------
Total purchase consideration $12,185
-------------------------------- ----------
At closing, cash considerations, of approximately $9,126,000 and certain
liabilities, of approximately $655,000, were paid. The cash used by the Company
to fund the acquisition was derived primarily from operations. The transaction
has been accounted for using the purchase method. The Company incurred a one-
time charge of $2,263,000, or $0.08 per share, as restated, for in-process
research and development that had not yet
54
reached technological feasibility and had no alternative use, in the year ended
January 31, 1998. The terms of the transaction were the result of arms-length
negotiations between the representatives of the Company and Denim. Allocation of
the aggregate purchase price was as follows, as restated:
- --------------------------------------------------- --------
(In thousands)
- --------------------------------------------------- --------
In-process research and development $ 2,263
- --------------------------------------------------- --------
Acquired technology 1,464
- --------------------------------------------------- --------
Goodwill 7,852
- --------------------------------------------------- --------
Fair value of tangible assets acquired 606
- --------------------------------------------------- --------
$12,185
- --------------------------------------------------- --------
On July 15, 1997, the Company acquired all of the outstanding shares of capital
stock of D-Vision Systems, Inc. ("D-Vision"), an Illinois corporation, pursuant
to a Stock Purchase Agreement dated as of July 10, 1997. As a result of the D-
Vision acquisition, the Company acquired the D-Vision OnLINE and PRO software
products for non-linear video and digital media editing solutions including
related know-how and goodwill. The purchase price was paid in a combination of
182,000 newly issued common shares and approximately $10,750,000 in cash. In
addition, approximately $4,000,000 of the cash consideration is being held in
escrow until September 30, 1999, subject to (i) earlier release from escrow of
up to $1,900,000 on September 30, 1998 and (ii) the resolution of any
indemnification claims made by the Company pursuant to the Stock Purchase
Agreement. The cash used by the Company to fund the acquisition was derived
primarily from cash flows from operations. The D-Vision acquisition was
accounted for as a purchase and accordingly, the purchase price and acquisition
costs were allocated to the net assets acquired, consisting of approximately
$5,269,000 of in-process research and development and was charged to operations
in the second quarter of fiscal year 1998. Approximately $19,747,000 was
allocated to intangible assets, which includes goodwill and acquired technology,
and is being amortized on a straight-line basis over 3 and 5 years,
respectively. A portion of the purchase price, net liabilities of D-Vision and
transaction costs was allocated to purchased in-process research and development
that had not yet reached technological feasibility and had no alternative use
for which the Company incurred a one-time charge against earnings in the amount
of $5,269,000 ($0.18 per share, as restated), in the quarter ended July 31,
1997. The terms of the transaction and the consideration received by the D-
Vision stockholders were the result of arms-length negotiations between the
representative of the Company and D-Vision. D-Vision develops Microsoft Windows
NT-based non-linear, digital editing solutions. The aggregate purchase price for
D-Vision was as follows:
- -------------------------------------- ------------------
(In thousands)
- -------------------------------------- ------------------
Cash consideration $10,750
- -------------------------------------- ------------------
Common shares issued 10,649
- -------------------------------------- ------------------
Transaction costs 1,500
- -------------------------------------- ------------------
Liabilities assumed 4,311
- -------------------------------------- ------------------
Total purchase consideration $27,210
- -------------------------------------- ------------------
55
Allocation of the aggregate purchase price was as follows, as restated:
- ------------------------------------------------------- ------------------
(In thousands)
In-process research and development $ 5,269
- ------------------------------------------------------- ------------------
Acquired technology 3,100
- ------------------------------------------------------- ------------------
Goodwill 16,648
- ------------------------------------------------------- ------------------
Fair value of tangible assets acquired 2,193
- ------------------------------------------------------- ------------------
$27,210
- ------------------------------------------------------- ------------------
On December 2, 1997, the Company entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") with Lightscape Technologies,
Inc., a Delaware corporation ("Lightscape"). The merger closed on December 30,
1997. As a result of the merger, the Company acquired, among other products, the
Lightscape product, a software application which integrates radiosity and
raytracing with physically based lighting, including related know-how and
goodwill. The aggregate purchase price for Lightscape includes the assumption of
approximately $5,700,000 of net liabilities (of which approximately $3,400,000
was paid at the closing), not including costs associated with the transaction,
and up to $6,800,000 in contingent consideration to be paid only if certain
revenue objectives are achieved by Lightscape in calendar 1999. The acquisition
has been accounted for as a purchase. A portion of the purchase price and
transaction costs was allocated to purchased in-process research and development
that had not yet reached technological feasibility and had no alternative use
for which the Company incurred a one-time charge against earnings in the amount
of $1,646,000 ($0.06 per share), as restated, in the quarter ended January 31,
1998. The terms of the transaction were the result of arm's-length negotiations
between the representatives of the Company and Lightscape. The aggregate
purchase price for Lightscape was as follows:
- -------------------------------------------------- ------------------
(In thousands)
Transaction costs $1,200
- -------------------------------------------------- ------------------
Liabilities assumed 6,414
- -------------------------------------------------- ------------------
Total purchase consideration $7,614
- -------------------------------------------------- ------------------
Allocation of the aggregate purchase price was as follows, as restated:
- ------------------------------------------------------- ------------------
(In thousands)
In-process research and development $1,646
- ------------------------------------------------------- ------------------
Acquired technology 990
- ------------------------------------------------------- ------------------
Goodwill 4,251
- ------------------------------------------------------- ------------------
Fair value of tangible assets acquired 727
- ------------------------------------------------------- ------------------
Total purchase consideration $7,614
------------------------------------------------- ------------------
Fiscal year 1997 transactions
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 liabilities based on fair values as follows:
- ------------------------------------------------------------------------------------------------ ------------------
(In thousands)
- ------------------------------------------------------------------------------------------------ ------------------
Accounts receivables 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)
- ------------------------------------------------------------------------------------------------ ------------------
Total purchase consideration $ 9,907
- ------------------------------------------------------------------------------------------------ ------------------
56
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.
Note 12. Restructuring Charges
During the second quarter of fiscal year 1999, the Company's management approved
restructuring plans, which include initiatives to address current economic
conditions in the Asia Pacific region, consolidate duplicative facilities, and
reduce overhead. These plans resulted in a charge of $5.4 million, which is
included in nonrecurring charges in the fiscal year 1999 Consolidated Statement
of Income (see Note 11). This includes $2.3 million for the cost of involuntary
employee separation benefits relating to approximately 87 employees. Employee
separation benefits include severance, medical, and other benefits. Employee
separation will affect certain engineers and sales and marketing employees. The
remaining charge of $3.1 million relates to other exit costs, namely the write-
off of purchased technologies, lease termination buyout costs, the disposal of
fixed assets in these regions, and professional fees. As of January 31, 1999,
the number of employee separations due to restructuring actions was 80 and
actual employee termination benefit payments of approximately $1.8 million have
been made. During the fourth quarter, Autodesk reduced the restructuring accrual
by approximately $0.3 million to reflect higher than expected attrition rates.
Most of the restructuring actions were completed as of January 31, 1999.
During the fiscal year ended January 31, 1996, the Company recorded a pre-tax
restructuring charge of $15 million to cover the direct costs of restructuring
the Company's operations and to bring operating expenses in line with the
Company's current revenue level. The focus of the Company's restructuring plan
was to solidify its senior management team, reduce operating expenses through
workforce reductions and office closings, consolidate certain research and
development activities in its Montreal, Canada offices, discontinue certain
product lines, and restructure its sales force to emphasize indirect sales
channels. The Company began implementation of its restructuring plan in the
second fiscal quarter of 1996 and had substantially completed the implementation
of the plan by the end of fiscal 1997.
The restructuring entailed the closing and moving of several offices in North
America and Europe. It also included the termination of approximately 110
positions across all departments and around the world. The restructuring charge
includes $5.6 million for asset write down, $5.2 million for lease terminations
and leasehold improvements reserve, $2.8 million for severance, and $1.4 million
for professional fees and other costs. The primary component of the asset write
down is an amount of $2.2 million for goodwill and acquired technology. The
other components of the write down are primarily fixed assets which have no
future use.
In the second quarter of fiscal 1998, the Company reversed approximately $2.3
million of excess reserves, related primarily to the estimated cost of
terminating leases, no longer considered necessary to complete the restructuring
plan. As of January 31, 1999, the closure was substantially complete.
During the year ended January 31, 1999, the Company accrued an additional $.8
million for the closure of a U.K. research and development facility and the
related termination of 17 employees. As of January 31, 1999, the closure was
substantially complete.
Note 13. Government Assistance
SDI loan
The Company entered into a loan agreement with the Societe de Developpement
Industriel du Quebec dated as of May 7, 1998 whereby an interest free loan was
granted to the Company by the Quebec government in the amount of Cdn$2,800,000
(approximately $1,828,000 at January 31, 1999) in relation with the Lightscape
acquisition. The loan is conditional to the Company meeting certain criteria:
57
1. During the five-year period following the disbursement of the loan by
the Quebec government, the Company is required to create 200 jobs and maintain
each of these jobs for a five-year period after their creation.
2. The loan should not exceed Cdn$2,800,000 or 20% of the costs incurred by
the Company for the Lightscape acquisition.
The loan is payable in four annual installments of Cdn$600,000 (approximately
$392,000 at January 31, 1999) commencing in July 2004 and a final installment of
Cdn$400,000 (approximately $261,000 at January 31, 1999) in July 2008. The loan
is interest free until July 2004, after which it will bear interest at the
Canadian prime rate (approximately 6.75% at January 31, 1999) plus 1.5%. In the
situation where the criteria mentioned above are not met, a portion of the loan
may have to be repaid at an earlier date. The loan was disbursed to the Company
in July 1998.
PACST Subsidy Program
The Company entered into a financial assistance contract with the Quebec
Government dated as of March 27, 1998 under a subsidy program designed to
improve competencies in science and technology. The contract provides that the
Company is eligible to receive up to Cdn$3,012,000 (approximately $1,967,000 at
January 31, 1999) in the form of reimbursement of expenses incurred by the
Company for new employee training (mainly reimbursement of salary). The
Company's job creation estimate provided to the Quebec Government at the time of
signature of the contract was 251 science and technology related jobs to be
created over a three-year period. As of January 31, 1999, an advance of
Cdn$350,000 (approximately $229,000 at January 31, 1999) was received which
covers 40% of the first year estimated subsidy. The program requires the Company
to meet certain criteria in order to earn the subsidies. Since the criteria have
not yet been met by the Company, the advance has been classified as a liability
in accrued expenses at January 31, 1999.
Note 14. Dependence on Key Suppliers
The Company is dependent on Silicon Graphics, Inc. to manufacture and supply a
large proportion of the workstations and certain peripherals used in certain of
its high-end multimedia systems. The Company purchases electronic tablets
manufactured by Wacom Technology Corporation ("Wacom") and believes that while
alternative suppliers are available, there can be no assurance that alternative
electronic tablets would be functionally equivalent or be available on a timely
manner or on similar terms.
Note 15. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for fiscal years 1999, 1998, and 1997
includes the combined amounts of Autodesk and Discreet in a manner such that the
quarterly periods are consistent with the combined year ends discussed in Note
1:
- ----------------------- ------------------------------------------------------------------------------------------------------
(In thousands, except
per share data)
1st quarter 2nd quarter 3rd quarter 4th quarter Fiscal year
- --------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Fiscal year 1999
- --------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net revenues $222,918 $226,811 $204,609 $217,541 $871,879
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Gross margin 188,896 191,229 173,600 183,907 737,632
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Income from operations 42,689 40,888 25,193 33,317 142,087
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net income 28,733 27,530 17,624 23,245 97,132
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Basic net income per 0.51 0.49 0.31 0.41 1.72
share
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Diluted net income per 0.48 0.46 0.31 0.39 1.64
share
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Fiscal year 1998 (restated)
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net revenues $157,389 $191,364 $197,907 $222,024 $768,684
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Gross margin 124,020 158,947 166,061 186,285 635,313
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Income (loss) from (17,182) 29,438 33,160 49,578 94,994
operations
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net income (loss) (18,529) 18,995 22,046 33,703 56,215
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Basic net income (0.33) 0.33 0.39 0.61 1.00
(loss) per share
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Diluted net income (0.33) 0.31 0.36 0.57 0.94
(loss) per share
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Fiscal year 1997 (restated)
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net revenues $159,544 $145,578 $143,691 $149,804 $598,617
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Gross margin 129,965 120,953 117,216 118,695 486,829
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Income from operations 28,890 18,579 12,169 6,354 65,992
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net income 18,248 12,610 8,912 2,477 42,247
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Basic net income per 0.33 0.23 0.16 0.05 0.77
share
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Diluted net income per 0.31 0.22 0.16 0.04 0.74
share
----------------------- ---------------- ---------------- ---------------- ---------------- ----------------
58
Results for the second quarter of fiscal year 1999 included nonrecurring charges
of approximately $19.7 million primarily representing the value of in-process
research and development that had not yet reached technological feasibility and
had no alternative future use ("IPR&D") acquired in the Genius acquisition and
other nonrecurring charges. (See Note 11 for further information.). Results for
the first quarter of fiscal year 1998 included nonrecurring charges of
approximately $19.2 million, $5.2 million and $3.0 million, respectively,
representing the value of IPR&D acquired in the Softdesk, D-Vision, and 3D/Eye
transactions. Results for the second quarter of fiscal year 1998 included
nonrecurring charges of approximately $1.6 million related to IPR&D acquired in
the Lightscape acquisition. Results for the fourth quarter of fiscal year 1998
included nonrecurring charges of $2.3 million primarily related to a gain on
sale of an investment. Results for the second and third fiscal quarters of
fiscal year 1997 included nonrecurring charges of $3.2 million and $1.5 million,
respectively, related to IPR&D acquired in the Teleos and Argus acquisitions
that had not yet reached technological feasibility and had no alternative future
use. Results for the fourth quarter of fiscal year 1997 included nonrecurring
charges of approximately $2.3 million representing the value of IPR&D acquired
in the Denim acquisition and $6.5 million related to a class action lawsuit
accrual.
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders Autodesk, Inc.
We have audited the supplemental consolidated balance sheets of Autodesk, Inc.,
(formed as a result of the consolidation of Autodesk Inc. and Discreet Logic,
Inc.) as of January 31, 1999 and 1998 and the related supplemental consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended January 31, 1999. The supplemental consolidated
financial statements give retroactive effect to the merger of Autodesk, Inc. and
Discreet Logic, Inc. on March 16, 1999, which has been accounted for using the
pooling of interests method as described in the notes to the supplemental
consolidated financial statements. These supplemental financial statements are
the responsibility of the management of Autodesk, Inc. Our responsibility is to
express an opinion on these supplemental financial statements based on our
audits. We did not audit the financial statements of Discreet Logic, Inc. which
statements reflect total assets constituting 16% for 1999 and 19% for 1998 of
the related supplemental consolidated financial statement totals, and which
reflect net income constituting approximately 9% of the related supplemental
consolidated financial statement totals for the three year period ended January
31, 1999. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
Discreet Logic, Inc., is based solely on the report of the other auditors.
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 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Autodesk, Inc. at
January 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended January 31, 1999,
after giving retroactive effect to the merger of Discreet Logic, Inc., as
described in the notes to the supplemental consolidated financial statements, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
May 26, 1999
59
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements:
--------------------
Supplemental Consolidated Statement of Income-Fiscal Years Ended January 31,
1999, 1998, and 1997
Supplemental Consolidated Balance Sheet-January 31, 1999 and 1998
Supplemental Consolidated Statement of Cash Flows-Fiscal Years Ended January
31, 1999, 1998, and 1997
Supplemental Consolidated Statement of Stockholders' Equity-Three-Year
Period Ended January 31, 1999
Notes to Supplemental Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
2. Financial Statement Schedule: The following financial statement schedule of
----------------------------
Autodesk, Inc., for the fiscal years ended January 31, 1999, 1998, and 1997,
is filed as part of this Report and should be read in conjunction with the
Consolidated Financial Statements of Autodesk, Inc.
Schedule II Valuation and Qualifying Accounts..................... S-1
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
--------
immediately following the financial statement schedules are filed as part of,
or incorporated by reference into, this Report.
Exhibit
No. Description
-- -----------
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Report of Independent Chartered Accountants for the twelve
months ended December 31, 1998
23.3 Report of Independent Chartered Accountants for the year
ended June 30, 1998 and the eleven month period ended June
30, 1997
27.1 Financial Data Schedule
Schedule II
AUTODESK, INC.
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance
Beginning Costs and Deductions at End
Description of Year Expenses Write-Offs of Year
- ---------------------------------------- ----------- ----------- ----------- -----------
Fiscal year ended January 31, 1999
Allowance for doubtful accounts $10,830,000 $ 1,930,000 $ 2,118,000 $10,642,000
Allowance for stock balancing and
product rotation $20,219,000 $25,484,000 $30,926,000 $14,777,000
Fiscal year ended January 31, 1998
Allowance for doubtful accounts $10,122,000 $ 4,010,000 $ 3,302,000 $10,830,000
Allowance for stock balancing and
product rotation $17,175,000 $38,419,000 $35,375,000 $20,219,000
Fiscal year ended January 31, 1997
Allowance for doubtful accounts $10,380,000 $ 1,735,000 $ 1,993,000 $10,122,000
Allowance for stock balancing and
product rotation $14,607,000 $46,884,000 $44,316,000 $17,175,000
S-1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this current report on Form
8-K/A of Autodesk, Inc. of our report dated May 26, 1999.
Our audits also included the financial statement schedule of Autodesk, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic supplemental consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-15675, No. 33-22656, No. 33-39458, No. 33-41265, No. 33-51110,
No. 33-54683, No. 33-61015, No. 333-08693, No. 333-15037, No. 333-24469, and
No. 333-62655) pertaining to the 1987 Stock Option Plan, 1990 Directors' Option
Plan, 1996 Stock Plan, Employee Qualified Stock Purchase Plan and the 1998
Employee Qualified Stock Purchase Plan of Autodesk, Inc., the Teleos Research
1996 Stock Plan and the Softdesk, Inc. 1992 Stock Option Plan, Softdesk, Inc.
1993 Director Stock Option Plan, and the Softdesk, Inc. 1993 Equity Incentive
Plan, of our report dated May 26, 1999, with respect to the supplemental
consolidated financial statements included herein, and our report included in
the preceding paragraph with respect to the financial statement schedule in this
current report on Form 8-K/A of Autodesk, Inc.
/s/ ERNST & YOUNG LLP
San Jose, California
May 26, 1999
EXHIBIT 23.2
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Discreet Logic Inc.:
We have audited the accompanying consolidated balance sheet of Discreet Logic
Inc. (a Quebec corporation) and subsidiaries, at December 31, 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the twelve months ended December 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 audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada, which are in substantial agreement with those in the United States of
America. 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 audit provides 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
Discreet Logic Inc. and subsidiaries as at December 31, 1998, and the results of
their operations and their cash flows for the twelve months ended December 31,
1998, in accordance with generally accepted accounting principles in the United
States of America.
Arthur Andersen & Cie
Chartered Accountants
General Partnership
March 10, 1999
(except with respect to the matters discussed
in Note 20, as to which the date is March 16, 1999.)
EXHIBIT 23.3
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To Discreet Logic Inc.:
We have audited the accompanying consolidated balance sheets of Discreet
Logic Inc. (a Quebec corporation) and subsidiaries, as restated--See Note 2(a),
at June 30, 1997 and 1998 and the related consolidated statements of operations,
shareholders' equity and cash flows, as restated--See Note 2(a) for the year
ended July 31, 1996, the eleven-month period ended June 30, 1997, and the year
ended June 30, 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 in Canada, which are in substantial agreement with those in the United
States of America. 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
Discreet Logic Inc. and subsidiaries as at June 30, 1997 and 1998, and the
results of their operations and their cash flows for the year ended July 31,
1996, the eleven-month period ended June 30, 1997, and the year ended June 30,
1998, in accordance with generally accepted accounting principles in the United
States of America.
Arthur Andersen & Cie
Chartered Accountants
General Partnership
Montreal, Canada
July 31, 1998
(except with respect to the matter discussed in Note 22, as to which the date
is January 18, 1999 and Note 2(a) as to which the date is February 3, 1999.)
5
1,000
12-MOS
JAN-31-1999
FEB-01-1998
JAN-31-1999
258,941
102,756
125,543
10,642
23,169
544,415
165,280
116,625
823,260
279,114
0
0
0
470,801
66,526
823,260
871,879
871,879
134,247
593,615
0
1,930
489
159,221
62,089
97,132
0
0
0
97,132
1.72
1.64
For purposes of this exhibit, primary means basic.
