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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
---------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- ---
Act of 1934
For the quarterly period ended July 31, 1999
OR
__ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-14338
AUTODESK, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2819853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 McInnis Parkway
San Rafael, California 94903
(Address of principal executive offices)
Telephone Number (415) 507-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No __
---
As of September 7, 1999, there were 61,001,105 shares of the Registrant's Common
Stock outstanding.
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AUTODESK, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statement of Operations
Three and six months ended July 31, 1999 and 1998................... 3
Condensed Consolidated Balance Sheet
July 31, 1999 and January 31, 1999.................................. 4
Condensed Consolidated Statement of Cash Flows
Six months ended July 31, 1999 and 1998............................. 6
Notes to Condensed Consolidated Financial Statements................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders.................. 25
Item 6. Exhibits and Reports on Form 8-K..................................... 26
Signatures........................................................... 26
2
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended Six months ended
July 31, July 31,
----------------------------------- -----------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Net revenues $ 202,945 $ 226,811 $ 397,884 $ 449,729
-------------- -------------- -------------- --------------
Costs and expenses:
Cost of revenues 39,614 35,582 72,022 69,604
Marketing and sales 82,469 75,355 163,161 149,178
Research and development 44,704 38,407 83,302 77,687
General and administrative 33,613 27,621 68,038 54,592
Amortization of goodwill and
purchased intangibles 7,793 7,464 15,037 14,002
Nonrecurring charges - 19,694 21,781 19,694
Litigation accrual reversal - (18,200) - (18,605)
-------------- -------------- -------------- --------------
208,193 185,923 423,341 366,152
-------------- -------------- -------------- --------------
Income (loss) from operations (5,248) 40,888 (25,457) 83,577
Interest and other income, net 5,820 8,027 10,316 10,049
-------------- -------------- -------------- --------------
Income (loss) before income taxes 572 48,915 (15,141) 93,626
Provision for income taxes 183 21,385 1,614 37,363
-------------- -------------- -------------- --------------
Net income (loss) $ 389 $ 27,530 $ (16,755) $ 56,263
============== ============== ============== ==============
Basic net income (loss) per share $ 0.01 $ 0.49 $ (0.28) $ 1.00
============== ============== ============== ==============
Diluted net income (loss) per share $ 0.01 $ 0.46 $ (0.28) $ 0.94
============== ============== ============== ==============
Shares used in computing basic net
income (loss) per share 60,845 56,372 59,890 56,176
============== ============== ============== ==============
Shares used in computing diluted net
income (loss) per share 61,535 59,652 59,890 59,882
============== ============== ============== ==============
See accompanying notes.
3
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(In thousands)
July 31, 1999 January 31, 1999
---------------- ----------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 172,539 $ 258,941
Marketable securities 263,758 102,756
Accounts receivable, net 133,070 114,901
Inventories 23,493 23,169
Deferred income taxes 24,721 20,323
Prepaid expenses and other current assets 25,270 24,325
-------------- --------------
Total current assets 642,851 544,415
-------------- --------------
Marketable securities 83,671 66,265
Computer equipment, furniture, and leasehold
improvements, at cost:
Computer equipment and furniture 141,002 140,513
Leasehold improvements 25,650 24,767
Less accumulated depreciation (121,568) (116,625)
-------------- --------------
Net computer equipment, furniture, and leasehold
improvements 45,084 48,655
Purchased technologies and capitalized software, net 37,418 40,630
Goodwill, net 88,568 85,546
Deferred income taxes 14,462 12,147
Other assets 16,269 25,602
-------------- --------------
$ 928,323 $ 823,260
============== ==============
See accompanying notes.
4
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands)
July 31, 1999 January 31, 1999
----------------- -----------------
(Unaudited) (Audited)
Current liabilities:
Accounts payable $ 47,033 $ 49,053
Accrued compensation 44,833 49,592
Accrued income taxes 67,193 96,731
Deferred revenues 49,822 24,833
Other accrued liabilities 71,655 58,905
----------------- -----------------
Total current liabilities 280,536 279,114
----------------- -----------------
Deferred income taxes 1,562 3,333
Other liabilities 1,914 3,486
Stockholders' equity:
Common stock 611,390 470,801
Deferred compensation (371) (551)
Retained earnings 52,420 81,209
Accumulated other comprehensive loss (19,128) (14,132)
----------------- -----------------
Total stockholders' equity 644,311 537,327
----------------- -----------------
$ 928,323 $ 823,260
================= =================
See accompanying notes.
5
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
July 31,
------------------------------------
1999 1998
-------------- --------------
Operating activities
Net income (loss) $ (16,755) $ 56,263
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Charge for acquired in-process research and development 3,287 13,100
Depreciation and amortization 43,142 37,507
Litigation and related interest accrual reversal - (20,900)
Reversal of restructuring reserve, net - (1,003)
Net gain on disposition of business unit - (1,307)
Net gain on sale of investment - (2,500)
Write-off of purchased technology - 2,233
Net loss on fixed asset disposals 757 -
Changes in operating assets and liabilities (29,542) (4,362)
-------------- --------------
Net cash provided by operating activities 889 79,031
-------------- --------------
Investing activities
Net purchases of marketable securities (178,408) (44,768)
Business combinations, net of cash acquired (25,642) (69,279)
Capital purchases of computer equipment, furniture, and leasehold
improvements (13,845) (15,010)
Proceeds from disposition of fixed assets 5,587 -
Proceeds from disposition of business unit - 5,137
Proceeds from sale of investment - 2,500
Purchases of software technologies, capitalization of software
costs, and other (2,777) 112
-------------- --------------
Net cash used in investing activities (215,085) (121,308)
-------------- --------------
Financing activities
Proceeds from issuance of common stock, net of issuance costs 140,318 80,637
Repurchase of common stock - (48,866)
Dividends paid (7,088) (5,590)
Decrease in credit line (1,921) -
Change in notes payable and short-term borrowings, net 1,334 2,713
-------------- --------------
Net cash provided by financing activities 132,643 28,894
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents (5,169) (5,494)
Discreet Logic activity for the one month ended January 31, 1999 320 -
-------------- --------------
Net decrease in cash and cash equivalents (86,402) (18,877)
Cash and cash equivalents at beginning of year 258,941 108,738
-------------- --------------
Cash and cash equivalents at end of period $ 172,539 $ 89,861
============== ==============
Supplemental cash flow information:
Cash paid during the period for income taxes $ 34,484 $ 4,746
============== ==============
Supplemental noncash information:
Common stock received in relation to the equity collar $ - $ 4,265
============== ==============
See accompanying notes.
6
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The condensed consolidated financial statements of Autodesk, Inc. ("Autodesk" or
the "Company") at July 31, 1999 and for the three- and six- month periods then
ended are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
interim periods. The condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Annual Report to Stockholders
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1999 and the Company's supplemental consolidated
financial statements (which combine the results of Autodesk and Discreet Logic
Inc. - see Note 2) on Form 8-K/A for the fiscal year ended January 31, 1999.
The results of operations for the three and six months ended July 31, 1999 are
not necessarily indicative of the results for the entire fiscal year ending
January 31, 2000.
2. Business Combinations
---------------------
Discreet Logic Inc.
On March 16, 1999, Autodesk acquired Discreet Logic Inc. ("Discreet") by issuing
approximately 10 million shares of Autodesk common stock in exchange for
Discreet's outstanding common stock. Discreet develops, assembles, markets and
supports nonlinear digital systems and software for creating, editing, and
compositing imagery for film, video, and HDTV.
Autodesk is accounting for this acquisition under the pooling of interests
method of accounting. Accordingly, all prior period consolidated financial
statements presented have been restated to include the combined results of
operations, financial position and cash flows as though it had always been part
of Autodesk.
Prior to the acquisition, Discreet's fiscal year ended June 30. As a result,
the financial statements for the three- and six- month periods ended July 31,
1998 combine Autodesk's historical financial statements with Discreet's
financial statements for the three- and six- month periods ended June 30, 1998,
respectively.
Results of Discreet for the one-month period ended January 31, 1999, have been
excluded from the reported results of the combined entity as a result of
changing Discreet's year-end to January 31, 1999. In January 1999, Discreet
recognized net revenues of $3.8 million and incurred a net loss of $5.0 million.
The loss was recorded as an adjustment to retained earnings. There were no
other significant changes in stockholders' equity for the period excluded from
the reported results of operations.
In connection with the acquisition, the Company recorded nonrecurring charges of
$18.5 million, consisting of transaction costs ($15.1 million), restructuring
costs ($3.0 million), and other one-time costs ($0.4 million). Transaction
costs consisted primarily of fees for investment bankers, attorneys, financial
printing, accountants, and other related costs. Restructuring costs included
severance and exit costs.
7
VISION* Solutions
On April 22, 1999, the Company acquired VISION* Solutions ("VISION"), a vendor
of enterprise automated mapping/facilities management/geographic information
systems (AM/FM/GIS) solutions from MCI Systemhouse Corporation, a subsidiary of
MCI WorldCom Inc., for approximately $26 million in cash. Autodesk is
accounting for this acquisition under the purchase method of accounting.
Approximately $3.3 million of the VISION purchase price represented the value of
in-process research and development that had not yet reached technological
feasibility and had no alternative future use, and as such, was charged to
nonrecurring charges in the first quarter of fiscal year 2000. The remaining
purchase price was allocated, based on the Company's preliminary estimates,
primarily to assets acquired, developed technology, and other intangibles.
Specifically, costs of $17.6 million and $2.1 million have been allocated to
preliminary goodwill and other intangibles and are being amortized on a
straight-line basis over periods ranging from three to seven years. There may
be additional adjustments over the next several months as the Company continues
to evaluate the preliminary purchase price allocation. The operating results of
VISION, which have not been material in relation to those of the Company, have
been included in the accompanying condensed consolidated financial statements
since the date of acquisition.
3. Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This 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. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - an
amendment of FASB Statement No. 133" ("SFAS 137"). SFAS 137 delays the
effective date of SFAS 133 to the beginning of the Company's fiscal year 2002.
Autodesk is currently evaluating the impact of SFAS 133, as amended by SFAS 137,
on its financial statements and related disclosures.
8
4. Net Income Per Share
--------------------
Basic net income (loss) per share is calculated using the weighted average
number of common shares outstanding. Diluted net income (loss) per share is
computed using the weighted average number of common shares outstanding and
dilutive common stock equivalents outstanding during the period. A
reconciliation of the numerators and denominators used in the basic and diluted
net income (loss) per share amounts follows:
Three months ended Six months ended
July 31, July 31,
---------------------- ----------------------
(In thousands) 1999 1998 1999 1998
-------- --------- -------- --------
Numerator:
Numerator for basic
and diluted per share
amounts--net income (loss) $ 389 $ 27,530 $(16,755) $ 56,263
======== ========= ======== ========
Denominator:
Denominator for basic
net income (loss) per share--
weighted average shares 60,845 56,372 59,890 56,176
Effect of dilutive common
stock options 690 3,280 - 3,706
-------- --------- -------- --------
Denominator for
dilutive net income (loss)
per share 61,535 59,652 59,890 59,882
======== ========= ======== ========
In periods that the Company incurs a net loss, all outstanding options are
excluded from the calculation of diluted net loss per share. Had the Company not
been in a loss position for the six months ended July 31, 1999, dilutive options
of 1.3 million would have been added to compute diluted net loss per share.
For the three months ended July 31, 1999 and 1998, options to purchase 10.5
million and 2.5 million shares, respectively, have been excluded from the
computation of diluted net income per share. For the six months ended July 31,
1999 and 1998, options to purchase 6.4 million and 2.2 million shares,
respectively, have been excluded from the computation of diluted net income per
share. Such options were excluded because the options had exercise prices
greater than the average market prices of common stock during the respective
periods.
5. Comprehensive Income
--------------------
Pursuant to Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), unrealized gains or losses on the Company's
available-for-sale marketable securities and foreign currency translation
adjustments are included in other comprehensive income.
Autodesk's total comprehensive income (loss) was as follows:
Three months ended Six months ended
July 31, July 31,
------------------- --------------------
(In thousands) 1999 1998 1999 1998
--------- -------- ---------- --------
Net income (loss) $ 389 $ 27,530 $ (16,755) $ 56,263
Other comprehensive loss (3,603) (3,722) (4,996) (4,304)
-------- -------- --------- --------
Total comprehensive income (loss) $ (3,214) $ 23,808 $ (21,751) $ 51,959
======== ======== ========= ========
9
6. Restructuring Charges
---------------------
In connection with the Company's acquisition of Discreet on March 16, 1999 (see
Note 2), Autodesk's management approved restructuring plans to eliminate
duplicative legal entities and to reduce overhead. These plans resulted in a
charge of approximately $3 million, which includes $1.7 million for the cost of
involuntary employee separation benefits. Employee separation benefits include
severance, medical and other benefits. The remaining charge of $1.3 million
relates to other exit costs, primarily to eliminate duplicate legal entities.
In August 1999, Autodesk announced plans to trim approximately 10 percent of its
workforce and take cost cutting measures to streamline operations. Management
is currently in the process of finalizing the amount of restructuring charges
that will be recorded in the third quarter of the current fiscal year.
7. Common Stock Follow-on Offering
-------------------------------
In order to qualify for pooling of interests treatment in the Discreet
acquisition (see Note 2), on March 16, 1999, Autodesk completed a follow-on
offering of 3,000,000 shares of Autodesk common stock at $41 per share for net
proceeds of $117.5 million.
8. Segments
--------
During the three months ended July 31, 1999, the Company reorganized its
operations into four business divisions with industry-specific charters: the
Design Solutions Division (consisting mostly of the MCAD and AECAD market groups
and most of the Personal Solutions Group), the GIS Solutions Division, the
Discreet Division (consisting of the Kinetix business and recently acquired
Discreet business), and Autodesk Ventures. In accordance with the aggregation
criteria and the minimum threshold levels specified by Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), the Company's operating results have been
aggregated into two reportable segments: The Design Solutions Segment (which
includes the GIS Solutions Division and Autodesk Ventures) and the Discreet
Segment.
The Design Solutions Segment develops and sells design software products for
professionals, occasional users, or consumers who design, draft, and diagram.
The end users of the design software products include architects, engineers,
construction firms, designers, and drafters. The Discreet Segment derives
revenues from the sale of its products to creative professionals for a variety
of applications, including feature films, television programs, commercials,
music and corporate videos, interactive game production, live broadcasting and
Web design. Both segments primarily distribute their respective products
through authorized dealers and distributors, and, in some cases, they also sell
their products directly to end users.
10
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 was as follows:
Three months ended Six months ended
July 31, July 31,
----------------------- -----------------------
(In millions) 1999 1998 1999 1998
--------- --------- --------- ----------
Net revenues:
Design Solutions $ 156.1 $ 176.5 $ 317.2 $ 354.0
Discreet 46.8 50.3 80.7 95.7
-------- -------- --------- ---------
$ 202.9 $ 226.8 $ 397.9 $ 449.7
======== ======== ========= =========
Income (loss) from operations:
Design Solutions $ 69.0 $ 77.9 $ 145.9 $ 175.4
Discreet 4.3 9.3 (20.5) 14.9
Unallocated amounts/1/ (78.5) (46.3) (150.9) (106.7)
-------- -------- --------- ---------
$ (5.2) $ 40.9 $ (25.5) $ 83.6
======== ======== ========= =========
/1/ Unallocated amounts in the three- and six- month periods ended July 31, 1999
and 1998 are attributed primarily to other geographic costs and expenses which
are managed outside the reportable segments.
11
ITEM 2. 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 below relating to markets for
Autodesk's products and trends in revenue, 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 below, including
"Certain Risk Factors Which May Impact Future Operating Results," page 16, as
well as factors set forth in Autodesk's Annual Report on Form 10-K and in
Autodesk's Form 8-K/A filed on May 28, 1999.
On March 16, 1999, Autodesk, Inc. ("Autodesk" or the "Company") acquired
Discreet Logic Inc. ("Discreet"), in a business combination accounted for as a
pooling of interests. Accordingly, all prior period consolidated financial
statements presented have been restated to include the combined results of
operations, financial position, and cash flows of Discreet as though it had
always been a part of Autodesk. The transaction resulted in the issuance of an
aggregate of approximately 10 million shares of Autodesk common stock in
exchange for Discreet's outstanding common stock. Discreet develops, assembles,
markets, and supports nonlinear digital systems and software for creating,
editing, and compositing imagery for film, video, and HDTV.
Prior to the acquisition, Discreet's fiscal year ended on June 30. As a result,
the financial statements for the three- and six- month periods ended July 31,
1998 combine Autodesk's historical financial statements with Discreet's
financial statements for the three- and six- month periods ended June 30, 1998,
respectively.
On April 22, 1999, the Company acquired VISION* Solutions ("VISION"), a vendor
of enterprise automated mapping/facilities management/geographic information
systems (AM/FM/GIS) solutions. Autodesk is accounting for this acquisition
under the purchase method of accounting. Accordingly, VISION's operating
results, which are not material in relation to those of Autodesk, have been
included in Autodesk's consolidated financial statements since the date of the
acquisition.
Results of Operations
Three Months Ended July 31, 1999 and 1998
- -----------------------------------------
Net revenues. The Company's second quarter net revenues of $202.9 million
decreased from $226.8 million recognized in the second quarter of the prior
fiscal year. Increases in Asia Pacific's net revenues of 45 percent were more
than offset by decreases of 22 percent and 16 percent in net revenues in the
Americas and Europe, respectively, as compared to the same period in the prior
fiscal year. In addition, net revenues for the Discreet Segment, which includes
the Discreet business and the Kinetix business, decreased 7 percent compared to
the same period in the prior fiscal year, partially offset by the incremental
net revenues of VISION. The overall decrease in net revenues was primarily due
to a decline in the sales of AutoCAD, AutoCAD LT, and Discreet products. Sales
of AutoCAD and AutoCAD upgrades accounted for approximately 44 percent and 55
percent of Autodesk's consolidated net revenues in the second quarter of fiscal
years 2000 and 1999, respectively. On a stand-alone basis, AutoCAD and AutoCAD
upgrades were 39 percent and 44 percent of consolidated revenues in the second
quarter of fiscal years 2000 and 1999, respectively. The value of the US dollar,
relative to international currencies, had an insignificant impact on net
revenues in the second quarter of the current fiscal year compared to the same
period in the prior fiscal year. International sales, including exports from the
U.S., accounted for approximately 65 percent of Autodesk's net revenues in the
second quarter of fiscal year 2000 as compared to 58 percent in the same period
of the prior fiscal year.
12
Autodesk derives a substantial portion of its revenues from sales of AutoCAD
software, AutoCAD upgrades, and vertical products that are interoperable with
AutoCAD, and expects this trend to continue. 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 Autodesk's business and
consolidated results of operations. Additionally, slowdowns in any of Autodesk's
geographical markets could also have a material adverse impact on Autodesk's
business and consolidated results of operations.
Product returns, consisting principally of stock rotation, are recorded as a
reduction of revenues and represented approximately 4 percent and 3 percent of
consolidated net revenues in the second quarter of fiscal years 2000 and 1999,
respectively. Management anticipates that the level of product returns in
future periods will continue to be impacted by the timing of new product
releases, as well as the quality and market acceptance of new products.
Cost of revenues. When expressed as a percentage of net revenues, cost of
revenues increased from 16 percent of net revenues in the second quarter of the
prior fiscal year to 20 percent of net revenues in the second quarter of the
current fiscal year. This increase is primarily due to increases in royalties,
amortization of capitalized software for AutoCAD 2000, and due to the
acquisition of VISION, which has relatively higher cost of revenues as a
percentage of net revenues than other Autodesk or Discreet products. Cost of
revenues as a percentage of net revenues has been and may continue to be
impacted by the mix of product sales, software amortization costs, royalty rates
for licensed technology embedded in Autodesk's products, and the geographic
distribution of sales.
Marketing and sales. Marketing and sales expenses were 41 percent and 33
percent of net revenues in the second quarter of fiscal years 2000 and 1999,
respectively. Spending increased primarily as a result of the launch of AutoCAD
2000, higher employee costs, and the incremental costs associated with the
acquisition of VISION late in the first quarter of fiscal year 2000. Autodesk
expects to continue to make significant investments in marketing and sales, both
in absolute dollars and as a percentage of net revenues.
Research and development. Research and development expenses represented 22
percent and 17 percent of net revenues in the second quarter of fiscal years
2000 and 1999, respectively. Spending increased largely due to higher employee-
related expenses and professional fees related primarily to the Design 2000
family of products. Autodesk anticipates that research and development expenses
will increase in future periods as a result of product development efforts by
Autodesk's market groups and incremental personnel costs.
General and administrative. General and administrative expenses were 17 percent
of net revenues in the second quarter of fiscal year 2000 as compared to 12
percent of net revenues in the second quarter of the prior fiscal year. Spending
increased due to higher employee-related expenses and professional fees
primarily related to Autodesk's information technology infrastructure. The
Company currently expects that general and administrative expenses will continue
to be significant in future periods to support spending on infrastructure,
including continued investment in Autodesk's worldwide information systems.
Amortization of goodwill and purchased intangibles. Amortization of goodwill
and purchased intangibles for the three months ended July 31, 1999, remained
relatively flat as compared with the same period in the prior fiscal year.
Nonrecurring charges - -
Genius acquisition. On May 4, 1998, Autodesk entered into an agreement with
Genius CAD Software GmbH ("Genius"), a German limited liability company, to
purchase various mechanical computer-aided design software applications and
technologies. The acquisition was accounted for using the purchase method of
accounting and resulted in 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.
13
Of the five acquired Genius in-process technologies, two were completed and
introduced in fiscal year 1999. The remaining three technologies are
expected to be completed and introduced during the third quarter of fiscal
year 2000.
Failure to complete the development of these projects in their entirety, or
in a timely manner, could have an adverse impact on Autodesk's financial
condition and results of operations. Additionally, the value of other
intangible assets acquired from Genius may become impaired.
Other. During the three months ended July 31, 1998, the Company 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 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). The $8.9 million charge was offset by $2.3
million of excess restructuring reserves that Discreet reversed during the
quarter.
In August 1999, Autodesk announced plans to trim approximately 10 percent
of its workforce and take cost cutting measures to streamline operations.
Management is currently in the process of finalizing the amount of
restructuring charges that will be recorded in the third quarter.
Litigation accrual reversal. During the quarter ended July 31, 1998, the Company
recognized $18.2 million and $2.7 million as operating income and interest
income, respectively, to reflect the remaining unutilized litigation and related
interest accruals related to final adjudication of a claim of trade-secret
misappropriation brought by Vermont Microsystems, Inc. ("VMI").
Interest and other income. Interest and other income was $5.8 million in the
second quarter of fiscal year 2000 compared to $8.0 million in the corresponding
period of the prior year. The prior year amount included $2.7 million
representing the interest portion of the VMI settlement and a $1.3 million gain
realized upon the sale of technical programs and related documentation, certain
tangible fixed assets, copyrights, tradenames, and other intangible assets
associated with Autodesk's Picture This Home!(R) software programs. These
decreases were offset by increases to interest income related to higher cash,
cash equivalents, and marketable securities balances.
Provision for income taxes. Excluding the impact of nonrecurring charges, the
Company's effective income tax rate was 32 percent in the second quarter of
fiscal year 2000 compared to 36 percent in the same quarter of the prior fiscal
year. The decrease in the effective income tax rate was due primarily to
incremental tax benefits associated with the Company's foreign earnings that are
taxed at rates different than the U.S. statutory rate.
The Company's United States income tax returns for fiscal years ended January
31, 1992 through 1996, have been examined by the Internal Revenue Service
("IRS"). On August 27, 1997, the IRS issued a Notice for Deficiency proposing
increases to the amount of the Company's federal 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. In July 1999,
the Company made tax payments with respect to all issues addressed as part of
the IRS audit. As a result, the Company has either resolved all matters or made
prepayments with respect to remaining outstanding issues for the tax years ended
January 31, 1992 through 1996. The resolution of any remaining 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.
Six Months Ended July 31, 1999 and 1998
- ---------------------------------------
Net revenues. Autodesk's net revenues for the six months ended July 31, 1999 of
$397.9 million decreased from $449.7 million in the same period of the prior
fiscal year. The decrease in net revenues was primarily due to a decline in the
sales of AutoCAD and Discreet products.
14
Cost of revenues. Cost of revenues as a percentage of net revenues for the six
months ended July 31, 1999 was 18 percent, compared to 15 percent in the same
period in the prior fiscal year. This increase is primarily due to increases in
royalties, amortization of capitalized software for AutoCAD 2000, and due to the
acquisition of VISION, which has relatively higher cost of revenues as a
percentage of net revenues. Cost of revenues as a percentage of net revenues has
been and may continue to be impacted by the mix of product sales, software
amortization costs, royalty rates for licensed technology embedded in Autodesk's
products, and the geographic distribution of sales.
Marketing and sales. As a percentage of net revenues, marketing and sales
expenses for the six months ended July 31, 1999 was 41 percent compared to 33
percent in the same period in the prior fiscal year. Spending increased
primarily as a result of higher advertising and promotion costs related to the
launch of AutoCAD 2000 in March 1999, increased employee costs, and the
acquisition of VISION.
Research and development. Research and development expenses as a percentage of
net revenues for the six months ended July 31, 1999 increased to 21 percent from
17 percent for the same period in the prior fiscal year. Spending (including
capitalized software costs of $4.7 million recorded during the six months ended
July 31, 1999) increased due primarily to the addition of employee-related
expenses, rent and occupancy expenses, and professional fees related primarily
to the Design 2000 family of products.
General and administrative. General and administrative expenses were 17 percent
of net revenues for the six months ended July 31, 1999, and 12 percent of net
revenues in the same period of the prior fiscal year. The increase was primarily
due to increased employee-related expenses and professional fees primarily
related to Autodesk's information technology infrastructure.
Amortization of goodwill and purchased intangibles. Amortization of goodwill and
purchased intangibles was $15.0 million for the six months ended July 31, 1999
compared to $14.0 million for the six months ended July 31, 1998. The increase
was largely due to incremental amortization associated with the May 1998
acquisition of Genius and the April 1999 acquisition of VISION.
Nonrecurring charges - -
Discreet acquisition. In connection with the Discreet acquisition, the
Company recorded nonrecurring charges of $18.5 million, consisting of
transaction costs ($15.1 million), restructuring costs ($3.0 million), and
other one-time costs ($0.4 million). Transaction costs consisted primarily
of fees for investment bankers, attorneys, financial printing, accountants,
and other related costs. Restructuring costs included severance and exit
costs (see Note 6 to the condensed consolidated financial statements for
further information).
VISION acquisition. In connection with the VISION acquisition, the Company
expensed $3.3 million as nonrecurring charges. This amount represented part
of the purchase price that was allocated to in-process research and
development that had not yet reached technological feasibility and had no
alternative future use.
The research and development projects in-process at the acquisition date
consisted of the development of two products, VISION* 5.3 (formerly Vision
6.x) and VISION* Electric 2.3 (formerly Electric 3.x), both of which are
expected to be introduced during fiscal year 2001. At July 31, 1999, the
estimated costs to complete VISION* 5.3 and VISION* Electric 2.3 were $1.2
million and $0.6 million, respectively.
The projected financial results used in the valuation were based on
expectations for VISION on a stand-alone basis that any third party
acquirer may expect excluding the specific synergistic benefits that
Autodesk expects to achieve after the acquisition.
15
The rate used to discount the net cash flows back to their present values
is based on the weighted average costs of capital, or "WACC". A discount
rate of 25% was used for valuing the in-process research and development.
In utilizing a discount rate greater than Autodesk's WACC, management has
reflected the risk premium associated with achieving the forecasted cash
flows with these projects.
Genius acquisition. In the six months ended July 31, 1998, Autodesk
acquired Genius. The acquisition resulted in a $13.1 million charge to
operations, representing in-process research and development that had not
yet reached technological feasibility and had no alternative future use.
Other. During the six months ended July 31, 1998, the Company 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 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). The $8.9 million charge was offset by $2.3
million of excess restructuring reserves that Discreet reversed during the
quarter ended July 31, 1998.
Litigation accrual reversal. During the six months ended July 31, 1998, the
Company recognized $18.2 million and $2.7 million as operating income and
interest income, respectively, to reflect the remaining unutilized litigation
and related interest accruals related to final adjudication of a claim of trade-
secret misappropriation brought by VMI.
Interest and other income. Interest and other income was $10.3 million for the
six months ended July 31, 1999, as compared to $10.0 million for the same period
in the prior fiscal year. The prior fiscal year amount included $2.7 million
representing the interest portion of the VMI settlement and a $1.3 million gain
realized upon the sale of technical programs and related documentation, certain
tangible fixed assets, copyrights, tradenames, and other intangible assets
associated with Autodesk's Picture This Home!(R) software programs. These
decreases were offset by increases to interest income related to higher cash,
cash equivalents, and marketable securities balances resulting from common stock
issuances.
Provision for income taxes. Excluding the impact of nonrecurring charges, the
Company's effective income tax rate was 32 percent in the first half of fiscal
year 2000 compared to 36 percent in the same period in the prior fiscal year.
The decrease in the effective income tax rate was due primarily to incremental
tax benefits associated with the Company's foreign earnings that are taxed at
rates different than the U.S. statutory rate. No tax benefit has been recorded
with respect to the nonrecurring charges incurred in connection with the
Discreet and VISION acquisitions in the first quarter of fiscal year 2000.
Certain Risk Factors Which May Impact Future Operating Results
Autodesk operates in a rapidly changing environment that involves a number of
risks, many 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.
Fluctuations in quarterly operating results. From time to time, Autodesk
experiences fluctuations in its quarterly operations as a result of periodic
release cycles, competitive factors and general economic conditions among other
things. Recently Autodesk has experienced reduced sales which Autodesk believes
may be attributable to a slowdown of customer purchases in response to product
transition issues relating to the introduction of AutoCAD 2000 before
introduction of corresponding associated products such as Mechanical Desktop 4.0
and AutoCAD LT 2000, and to general concerns about Year 2000 problems, in
particular diversion of software budgets to Year 2000 testing.
In addition, Autodesk has in the past experienced fluctuations in operating
results in interim periods in certain geographic regions due to seasonality. In
particular, 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.
16
The technology industry is particularly susceptible to fluctuations in operating
results within a 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 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.
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 that 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 Autodesk's business and consolidated 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 innovative technologies and by consolidation of companies with
complementary products and technologies.
The Design Solution family of products competes with products 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.; Visio Corporation ("Visio"); Visionary Design Systems;
Hewlett-Packard Corporation; Parametric Technology Corporation; Structural
Dynamics Research Corporation; Unigraphics; Dassault Systemes ("Dassault");
Solidworks Corporation (a subsidiary of Dassault); Baystate Technologies, Inc.;
think3; MapInfo Corporation; Environmental Systems Research Institute ("ESRI");
Smallworldwide plc.; The Learning Company, a division of Mattel, Inc.;
Micrografx Inc.; and others. The Discreet Segment (see Note 8) product offerings
compete with products offered by Quantel Limited ("Quantel"), Avid Technology,
Inc., Sony Corporation, Adobe Systems Inc., Macromedia, Inc., and Media 100 Inc.
Certain of the competitors of Autodesk have greater financial, technical, sales
and marketing, and other resources than Autodesk.
17
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.
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. These 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.
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 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.
18
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 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. This 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 the first six months of fiscal year 2000, changes in exchange rates from
the same period of the prior fiscal year had an insignificant impact on net
revenues. Autodesk'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.
Autodesk does not enter into derivative contracts for the purpose of trading or
speculative transactions. Autodesk's international results may also be impacted
by general economic and political conditions in these foreign markets. These and
other factors may have a material adverse effect on Autodesk's future
international operations and consequently on Autodesk'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
recently 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 distributors are Mensch und Maschine
Software AG and Computer 2000, both in Germany. Autodesk's largest resellers in
the United States are Avatech Solutions, Inc., Ingram Micro, DLT Solutions,
Inc., and Synergis Technologies, Inc.
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. Although
Autodesk's returns as a percentage of net revenues remained relatively constant
comparing the first six months of fiscal year 2000 to the same period in the
prior year, management anticipates that product returns in future periods will
continue to be impacted by product update cycles, new product releases, and
software quality.
19
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
adverse 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 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
of the Company depends significantly on the continued service of highly skilled
employees. Competition for these employees in today's marketplace, especially in
the technology industries, is intense. Autodesk's ability to attract and retain
employees is dependent on a number of factors including its continued ability to
grant stock incentive awards. 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 any 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.
20
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 remediation phase with the
exception of new applications and systems being brought on line through
acquisition and expects to complete required upgrades by the end of the third
quarter of fiscal year 2000. The testing phase of a six-phase year 2000
compliance program related to information technology ("IT") systems will
continue through the middle of November 1999 with all current milestones being
met. The business continuity planning or final phase is expected to be complete
by the end of the third quarter of fiscal year 2000. During the current quarter
of fiscal year 2000, Autodesk spent approximately $0.5 million on the IT year
2000 project. Autodesk expects to spend an additional $1 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 either been replaced or remediated. 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 of between one to three days in service interruptions and
processing Autodesk information. Autodesk has a contingency plan in place in
order to prevent the loss of critical data, which includes the back up of all
critical data processing interactions and a disaster recovery plan. However,
there may be a delay in the completion of these procedures and the cost of such
procedures may exceed original estimates, either of which could have a material
adverse effect on future results of operations.
In addition to correcting the business and operating systems used by Autodesk 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.
Autodesk is currently in the third phase of a three-phase year 2000 compliance
testing and documentation program that is related to its products. During the
second quarter of fiscal year 2000, Autodesk spent approximately $0.3 million on
the product year 2000 project. Autodesk expects to spend an additional $0.2
million to $0.3 million to complete this project. All expenditures to date have
been captured either in prior year or current year budgets. Currently-sold
products 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. These operating
systems or hardware may not 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 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, 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.
21
Single European Currency. Autodesk is in the process of addressing the issues
raised by the introduction of the Single European Currency ("Euro") as of
January 1, 1999 and during the transition period ending January 1, 2002.
Autodesk will continue to modify the internal systems that will be affected by
this conversion during fiscal year 2000, and does not expect the costs of
further system modifications to be material. Autodesk may not be able to
complete such modifications to comply with Euro requirements, which could have a
material adverse effect on Autodesk's operating results. Autodesk is currently
evaluating 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 may 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, 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.
Autodesk may not be successful in overcoming such risks and such investments and
acquisitions may have a material adverse impact on Autodesk'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 Autodesk's
operating results and financial condition.
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
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.
The future financial performance of Autodesk's recently acquired 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.
22
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 independent
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 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 postacquisition 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 postacquisition 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.
23
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 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.
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 $520.0 million at July 31, 1999, compared to $428.0
million at January 31, 1999. The $92.0 million increase in cash, cash
equivalents, and marketable securities was due primarily to $140.3 million of
net proceeds from the issuance of common stock, largely related to a 3 million
share issuance in March 1999, and proceeds from the disposition of fixed assets
($5.6 million). These increases were partially offset by the acquisition of
VISION ($26 million), purchases of computer equipment, furniture, leasehold
improvements, software technologies and capitalization of software ($16.6
million) and dividends paid ($7.1 million).
Autodesk's Discreet business unit has a revolving demand line of credit with a
bank, under which it may borrow up to Cdn$7,000,000 (approximately $4,635,000 at
July 31, 1999). Additionally, the agreement provides for a Cdn$600,000
(approximately $397,000 at July 31, 1999) demand leasing facility, and a
Cdn$600,000 (approximately $397,000 at July 31, 1999) demand research and
development tax credit facility. As of July 31, 1999, there were no amounts
outstanding under the demand leasing and demand research and development tax
credit facilities. The amount available under the revolving demand line of
credit was reduced by letters of guarantee totaling Cdn$6,548,000 (approximately
$4,336,000 at July 31, 1999).
Additionally, the Discreet business unit's Japanese subsidiary has a $3,000,000
line of credit with a bank. As of July 31, 1999, there were no borrowings
outstanding under the Japanese subsidiary's credit agreement.
In March 1998, Discreet issued 645,000 Common Shares (which on a converted basis
represent 213,000 Autodesk Common Shares - see Note 2) 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, Discreet
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 $1,854,000 at July 31,
1999). The funds were received in July 1998 and are repayable in four annual
installments of Cdn$600,000 (approximately $397,000 at July 31, 1999) commencing
in July 2004, and a final installment of Cdn$400,000 (approximately $265,000 at
July 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.
In addition to Discreet's line of credit, Autodesk 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 July 31, 1999, there were no
borrowings outstanding under this credit agreement, which expires in January
2000.
24
Autodesk's principal commitments at July 31, 1999, consisted of obligations
under operating leases for facilities. 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 the next twelve months.
Longer-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products including the incremental
product offerings resulting from the acquisitions of Discreet, Genius, and
VISION and enhancement of existing products; financing anticipated growth;
dividend payments; and the acquisition of businesses, software products, or
technologies complementary to Autodesk's business. 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 longer-term cash requirements.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
Autodesk is a party to various legal proceedings arising from the normal course
of business activities. While the outcome of these matters cannot be predicted
with certainty, in management's opinion, resolution of these matters is not
expected to have a material adverse impact on Autodesk'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 Autodesk's
future results of operations or cash flows in a particular period.
On September 1, 1999, attorneys for all parties to the purported class action
lawsuit against Discreet and its directors executed and filed, in the Superior
Court in Marin County, California, a Stipulation to Dismiss the Entire Action
With Prejudice (the "Dismissal Stipulation"). The Dismissal Stipulation, which
is subject to approval by the Court, would dismiss the case with prejudice as to
all defendants named in the Amended Complaint, with each side bearing their own
expenses, costs and fees. Under the Dismissal Stipulation, no consideration is
to be paid to plaintiffs or the proposed class.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 24, 1999, the
following individuals were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
Carol A. Bartz 48,214,767 306,964
Mark A. Bertelsen 47,255,843 1,265,888
Crawford W. Beveridge 48,237,136 284,595
J. Hallam Dawson 48,231,468 290,263
Paul S. Otellini 48,243,068 278,663
Mary Alice Taylor 48,241,168 280,563
Morton Topfer 48,243,068 278,663
The following proposal was approved at the Company's Annual Meeting:
Affirmative Negative Votes
Votes Votes Withheld
----------- -------- --------
1. Ratify the appointment of Ernst & Young 48,452,625 45,695 23,411
LLP as independent auditors for the fiscal
year ending January 31, 2000.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
27.0 Financial Data Schedule for the quarterly period ended July 31,
1999
Reports on Form 8-K
-------------------
On May 28, 1999, the Company filed a report on Form 8-K/A that involved an
amendment to the Company's report on Form 8-K, dated March 31, 1999. In the
Form 8-K/A, the Company provided the required pro forma financial
information related to its acquisition of Discreet Logic Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 13, 1999
AUTODESK, INC.
(Registrant)
/s/ CAROL A. BARTZ
-------------------
Carol A. Bartz
Chairman, President and Chief Executive Officer
/s/ STEVE CAKEBREAD
--------------------
Steve Cakebread
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
26
5
1,000
6-MOS
JAN-01-2000
FEB-01-1999
JUL-31-1999
172,539
263,758
145,463
12,393
23,493
642,851
166,652
121,568
928,323
280,536
0
0
0
611,390
32,921
928,323
397,884
397,884
72,022
348,814
0
2,505
199
(15,141)
1,614
(16,755)
0
0
0
(16,755)
(0.28)
(0.28)
