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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 April 30, 2005

 

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

incorporation or organization)

 

(I.R.S. Employer

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 ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

 

Yes x    No ¨

 

As of May 2, 2005, there were approximately 228.6 million shares of the Registrant’s Common Stock outstanding.

 



Table of Contents

AUTODESK, INC.

 

INDEX

 

          Page No.

     PART I. FINANCIAL INFORMATION     

Item 1.

   Financial Statements:     
     Condensed Consolidated Statements of Income
Three months ended April 30, 2005 and 2004
   3
     Condensed Consolidated Balance Sheets
April 30, 2005 and January 31, 2005
   4
     Condensed Consolidated Statements of Cash Flows
Three months ended April 30, 2005 and 2004
   5
     Notes to Condensed Consolidated Financial Statements    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    15

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    38

Item 4.

   Controls and Procedures    38
     PART II. OTHER INFORMATION     

Item 1.

   Legal Proceedings    39

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    39

Item 3.

   Defaults Upon Senior Securities    39

Item 4.

   Submission of Matters to a Vote of Securities Holders    39

Item 5.

   Other Information    39

Item 6.

   Exhibits    39
     Signatures    40

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

AUTODESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

     Three months ended
April 30,


 
     2005

    2004

 

Net revenues:

                

License and other

   $ 296,378     $ 260,509  

Maintenance

     58,741       37,367  
    


 


Total net revenues

     355,119       297,876  
    


 


Costs and expenses:

                

Cost of license and other revenues

     38,693       37,585  

Cost of maintenance revenues

     4,814       4,287  

Marketing and sales

     127,397       109,279  

Research and development

     65,852       57,881  

General and administrative

     27,741       27,073  

Restructuring

     —         8,250  
    


 


Total costs and expenses

     264,497       244,355  
    


 


Income from operations

     90,622       53,521  

Interest and other income, net

     3,012       2,416  
    


 


Income before income taxes

     93,634       55,937  

Provision for income taxes

     (17,556 )     (13,432 )
    


 


Net income

   $ 76,078     $ 42,505  
    


 


Basic net income per share

   $ 0.33     $ 0.19  
    


 


Diluted net income per share

   $ 0.31     $ 0.18  
    


 


Shares used in computing basic net income per share

     227,715       224,104  
    


 


Shares used in computing diluted net income per share

     249,272       238,565  
    


 


 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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AUTODESK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

    

April 30,

2005


   

January 31,

2005


 
     (Unaudited)     (Audited)  
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 518,078     $ 517,654  

Marketable securities

     19,698       15,038  

Accounts receivable, net

     190,216       196,827  

Inventories

     14,724       12,545  

Deferred income taxes

     25,608       14,250  

Prepaid expenses and other current assets

     28,386       25,483  
    


 


Total current assets

     796,710       781,797  

Computer equipment, software, furniture and leasehold improvements, at cost:

                

Computer equipment, software and furniture

     196,413       191,656  

Leasehold improvements

     32,490       32,586  

Less accumulated depreciation

     (163,318 )     (154,676 )
    


 


Net computer equipment, software, furniture and leasehold improvements

     65,585       69,566  

Purchased technologies and capitalized software, net

     10,355       9,319  

Goodwill

     172,370       166,628  

Deferred income taxes, net

     116,793       105,061  

Other assets

     15,792       9,833  
    


 


     $ 1,177,605     $ 1,142,204  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable

   $ 61,191     $ 46,234  

Accrued compensation

     72,942       140,622  

Accrued income taxes

     53,720       41,549  

Deferred revenues

     202,087       178,701  

Other accrued liabilities

     46,960       61,234  
    


 


Total current liabilities

     436,900       468,340  

Deferred revenues

     19,987       15,528  

Other liabilities

     9,927       10,258  

Commitments and contingencies

                

Stockholders’ equity:

                

Preferred stock

     —         —    

Common stock and additional paid-in capital

     664,745       625,225  

Accumulated other comprehensive loss

     (3,311 )     (2,843 )

Deferred compensation

     (138 )     (269 )

Retained earnings

     49,495       25,965  
    


 


Total stockholders’ equity

     710,791       648,078  
    


 


     $ 1,177,605     $ 1,142,204  
    


 


 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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AUTODESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Three months ended
April 30,


 
     2005

    2004

 

Operating activities

                

Net income

   $ 76,078     $ 42,505  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation and amortization

     12,585       12,502  

Stock compensation expense

     131       197  

Net loss on fixed asset disposals

     11       212  

Tax benefits from employee stock plans

     23,905       24,414  

Restructuring related charges, net

     —         4,326  

Changes in operating assets and liabilities, net of business combinations

     (49,393 )     (28,993 )
    


 


Net cash provided by operating activities

     63,317       55,163  
    


 


Investing activities

                

Net (purchases) sales and maturities of available-for-sale marketable securities

     (4,660 )     30,757  

Capital and other expenditures

     (5,534 )     (5,864 )

Business combinations, net of cash acquired

     (14,597 )     (6,500 )

Other investing activities

     7       (843 )
    


 


Net cash (used in) provided by investing activities

     (24,784 )     17,550  
    


 


Financing activities

                

Proceeds from issuance of common stock, net of issuance costs

     40,129       104,934  

Repurchase of common stock

     (73,656 )     (149,033 )

Dividends paid

     (3,406 )     (3,302 )
    


 


Net cash used in financing activities

     (36,933 )     (47,401 )
    


 


Effect of exchange rate changes on cash and cash equivalents

     (1,176 )     (3,414 )
    


 


Net increase in cash and cash equivalents

     424       21,898  

Cash and cash equivalents at beginning of year

     517,654       282,249  
    


 


Cash and cash equivalents at end of period

   $ 518,078     $ 304,147  
    


 


Supplemental cash flow information:

                

Net cash paid during the period for income taxes

   $ 4,248     $ 4,668  
    


 


Supplemental non-cash investing activity:

                

Accounts receivable reduction as partial consideration in business combination

   $ 1,945     $ —    
    


 


 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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AUTODESK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Autodesk, Inc. (“Autodesk”) as of April 30, 2005 and for the three months ended April 30, 2005 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information along with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for annual financial statements. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair presentation of the financial position and operating results for the interim periods presented have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. These estimates are based on information available as of the date of the unaudited condensed consolidated financial statements. Actual results could differ from those estimates. In addition, the results of operations for the three months ended April 30, 2005 are not necessarily indicative of the results for the entire fiscal year ending January 31, 2006 or for any other period. These unaudited condensed financial statements should be read in conjunction with the consolidated financial statements and related notes, together with management’s discussion and analysis of financial position and results of operations, contained in Autodesk’s fiscal 2005 Annual Report on Form 10-K.

 

Reclassifications to properly reflect the long-term portions of certain foreign pension liabilities and restructuring reserves have been made to prior year balances to conform to current year presentation.

 

2. Recently Issued Accounting Standards

 

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 – revised 2004, “Share-Based Payment,” (“SFAS 123R”) which replaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value based method and the recording of such expense in our consolidated statements of income. The compliance date for the revised standard was extended by the SEC in April 2005. SFAS 123R, as extended by the SEC, is effective for fiscal years beginning after June 15, 2005. Autodesk is required to adopt SFAS 123R starting in the first quarter of fiscal 2007. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. See Note 4, “Employee Stock Compensation” for the pro forma net income (loss) and net income (loss) per share amounts for the three months ended April 30, 2005 and 2004, as if the Company had used a fair-value based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock awards. Although the Company has not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, it is evaluating the requirements under SFAS 123R and expects the adoption to have a significant adverse impact on its consolidated statements of income and net income per share.

 

3. Concentration of Credit Risks and Significant Customers

 

In the first quarter of fiscal 2006 and 2005, sales to Tech Data Corporation, including their affiliates (“Tech Data”), a distributor for both reportable segments, accounted for 12% and 13% of Autodesk’s consolidated net revenues. In addition, Tech Data accounted for 12% and 13% of gross accounts receivable at April 30, 2005 and 2004, respectively.

 

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4. Employee Stock Compensation

 

Autodesk accounts for employee stock options using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), as permitted by SFAS 123. As such, no compensation expense is recognized in Autodesk’s Condensed Consolidated Statements of Income, other than for stock awards that have exercise prices less than the fair market value of Autodesk’s common stock at the date of grant.

 

Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”) amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both the annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

 

The following table illustrates the effect on net income and net income per share if Autodesk had applied the fair value recognition provisions of SFAS 123, as amended by SFAS 148, to stock-based employee compensation. For purposes of computing pro forma net income, the estimated fair value of options is amortized to expense on a straight-line basis over the options’ vesting period.

 

     Three months ended
April 30,


 
     2005

    2004

 

Net income – as reported

   $ 76,078     $ 42,505  

Add: Stock-based employee compensation cost, net of related tax effects, included in the determination of net income as reported

     105       150  

Deduct: Total stock-based employee compensation cost determined under the fair value based method for all awards, net of related tax effects

     (19,139 )     (12,521 )
    


 


Pro forma net income

   $ 57,044     $ 30,134  
    


 


Net income per share:

                

Basic – as reported

   $ 0.33     $ 0.19  
    


 


Basic – pro forma

   $ 0.25     $ 0.13  
    


 


Diluted – as reported

   $ 0.31     $ 0.18  
    


 


Diluted – pro forma

   $ 0.23     $ 0.13  
    


 


 

During the fourth quarter of fiscal 2005, Autodesk modified its approach and updated certain assumptions with respect to determining the estimated fair value of shares granted under the employee qualified stock purchase plan to account for modifications to employee withholdings and the two-year offering period of the plan. These changes reduced pro forma net income for the three months ended April 30, 2004 by $0.5 million.

 

5. Income Taxes

 

During the first quarter of fiscal 2006, Autodesk recognized a current income tax benefit of approximately $1.2 million, which reduced accrued income taxes as a result of the Company’s resolution and closure of its Franchise Tax Board (“FTB”) audit for fiscal 2000 as well as the closure and lapse of the statute of limitations with respect to certain foreign tax years. Absent the impact of the one-time income tax benefit of $1.2 million, Autodesk’s effective income tax rate was 20% in the three months ended April 30, 2005 and 24% in the three months ended April 30, 2004. The effective rate for the three months ended April 30, 2005 is lower than the effective rate for the three months ended April 30, 2004 primarily due to the tax benefits associated with the Company’s intention to repatriate certain foreign earnings under the American Jobs Creation Act of 2004 (“DRD legislation”), which was signed into law during the third quarter of fiscal 2005. The DRD legislation allows for the repatriation of foreign dividends at a rate lower than the 35% federal statutory rate through a one-time

 

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election available to Autodesk through January 31, 2006. The effective tax rate for fiscal 2006 is less than the federal statutory rate of 35% due to the extraterritorial income exclusion (“ETI”), deduction for Domestic Production Activities, research credits, and the tax benefits from low taxed foreign earnings and the DRD legislation.

 

Autodesk’s future effective tax rate may be materially impacted by the amount of benefits associated with the Company’s foreign earnings, which are taxed at rates different from the federal statutory rate, ETI, deduction for Domestic Production Activities, research credits, tax-exempt interest, DRD legislation election and changes in the tax law. In addition, Autodesk’s adoption of SFAS 123R, “Share-Based Payment,” in the first quarter of fiscal 2007 may also affect its future effective tax rate.

 

At April 30, 2005, Autodesk had net deferred tax assets of $142.4 million. Realization of these assets is dependent on its ability to generate approximately $447.4 million of future taxable income in appropriate tax jurisdictions. The Company believes that sufficient income will be earned in the future to realize these assets.

 

6. Inventories

 

Inventories consisted of the following:

 

     April 30,
2005


  

January 31,

2005


Raw materials and finished goods, net

   $ 11,407    $ 8,256

Demonstration inventory, net

     3,317      4,289
    

  

     $ 14,724    $ 12,545
    

  

 

Inventories are stated at the lower of standard cost (determined on the first-in, first-out method) or market. Autodesk evaluates quantities on hand and estimates excess and obsolete inventory levels in determining the lower of standard cost or market.

 

7. Purchased Technologies and Capitalized Software

 

Purchased technologies, capitalized software and the related accumulated amortization were as follows:

 

    

April 30,

2005


   

January 31,

2005


 

Purchased technologies

   $ 140,808     $ 137,108  

Capitalized software

     21,780       21,780  
    


 


       162,588       158,888  

Less: Accumulated amortization

     (152,233 )     (149,569 )
    


 


Purchased technologies and capitalized software, net

   $ 10,355     $ 9,319  
    


 


 

Expected future amortization expense for purchased technologies and capitalized software for the remainder of fiscal 2006 and for each of the fiscal years thereafter is as follows:

 

Year ending January 31,


    

2006

   $ 3,566

2007

     3,490

2008

     2,410

2009

     889
    

Total

   $ 10,355
    

 

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8. Goodwill

 

The changes in the carrying amount of goodwill during the three months ended April 30, 2005 are as follows:

 

     Design
Solutions


    Media and
Entertainment


   Total

 

Balance as of January 31, 2005

   $ 159,063     $ 7,565    $ 166,628  

Addition arising from acquisition

     5,765       —        5,765  

Other

     (23 )     —        (23 )
    


 

  


Balance as of April 30, 2005

   $ 164,805     $ 7,565    $ 172,370  
    


 

  


 

During the first quarter of fiscal 2006, our goodwill balance increased due to the acquisition of Compass Systems GmbH. See Note 16, “Business Combinations” for a description of this acquisition.

 

9. Restructuring Reserves

 

During the fourth quarter of fiscal 2004, the Board of Directors approved a restructuring plan that involved the elimination of 402 positions and the closure of a number of offices worldwide with a total cost of $27.5 million. This plan, which we refer to as the fiscal 2004 restructuring plan, was designed to improve efficiencies across the organization, reduce operating expense levels to help achieve our targeted operating margins and redirect resources to product development, sales development and other critical areas. Of the $27.5 million, $23.4 million was attributable to one-time termination benefits including severance benefits, medical benefits and outplacement costs. In addition, approximately $4.0 million of the restructuring charges was attributable to office closure costs, which included losses on operating leases and the write-off of leasehold improvements and equipment. The actions approved under the fiscal 2004 restructuring plan were completed during the fourth quarter of fiscal 2005.

 

The following table sets forth the restructuring activities during the three months ended April 30, 2005. The restructuring reserve balance is comprised of reserves remaining under the fiscal 2004 and fiscal 2002 restructuring plans. The current portion of this reserve totaling $4.0 million and $7.5 million as of April 30, 2005 and January 31, 2005, respectively, is included in “Other accrued liabilities.” The non-current portion of this reserve totaling $5.0 million and $5.6 million as of April 30, 2005 and January 31, 2005, respectively, is included in “Other liabilities.”

 

     Balance at
January 31,
2005


   Additions

   Charges
Utilized


    Reversals

   Balance at
April 30,
2005


Office closure costs

   $ 8,704    $ —      $ (861 )   $ —      $ 7,843

Employee termination costs

     4,367      —        (3,249 )     —        1,118
    

  

  


 

  

Total

   $ 13,071    $ —      $ (4,110 )   $ —      $ 8,961
    

  

  


 

  

 

An analysis of the fiscal 2004 restructuring plan charges by reportable segment is included in Note 14, “Segments.”

 

10. Commitments and Contingencies

 

Guarantees and Indemnifications

 

In the normal course of business, Autodesk provides indemnifications of varying scopes, including limited product warranties and indemnification of customers against claims of intellectual property infringement made by third parties arising from the use of its products or services. Autodesk accrues for known warranty and indemnification issues if a loss is probable and can be reasonably estimated. Historically, costs related to these warranties and indemnifications have not been significant, but because potential future costs are highly variable, Autodesk is unable to estimate the maximum potential impact of these indemnities or guarantees on its future results of operations.

 

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In connection with the purchase, sale or license transactions of assets or businesses with third parties, Autodesk has entered into or assumed customary indemnity agreements related to the assets or businesses purchased, sold or licensed. Historically, costs related to these indemnities or guarantees have not been significant, but because potential future costs are highly variable, Autodesk is unable to estimate the maximum potential impact of these indemnities or guarantees on its future results of operations.

 

As permitted under Delaware law, Autodesk has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at Autodesk’s request in such capacity. The maximum potential amount of future payments Autodesk could be required to make under these indemnification agreements is unlimited; however, Autodesk has Directors’ and Officers’ Liability insurance coverage that is intended to reduce its exposure and may enable Autodesk to recover a portion of any future amounts paid. Autodesk believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

 

Legal Proceedings

 

For a summary of current or pending legal proceedings, please refer to Autodesk’s fiscal 2005 Form 10-K on file with the SEC. The following is a summary of pending matters for which there were material developments during the first quarter of fiscal 2006.

 

On May 13, 2004, Nuvo Services, LLC (“Nuvo”) filed suit in United States District Court, District of Arizona against Autodesk seeking to compel arbitration of Nuvo’s claim that Autodesk breached a contract that allegedly existed between Nuvo and a company acquired by Buzzsaw.com in 2000. In March 2005, the parties entered into a settlement agreement resolving all claims and counterclaims among them. The resolution of this matter did not materially affect our results of operations, cash flows or financial position.

 

In addition, Autodesk is involved in legal proceedings from time to time arising from the normal course of business activities including claims of alleged infringement of intellectual property rights, commercial, employment, piracy prosecution and other matters. In our opinion, resolution of pending matters is not expected to have a material adverse impact on our consolidated results of operations, cash flows or our financial position. However, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially affect our future results of operations, cash flows or financial position in a particular period.

 

11. Changes in Stockholders’ Equity

 

During the three months ended April 30, 2005 Autodesk repurchased and retired 2.5 million shares of its common stock at an average repurchase price of $29.49 per share. As a result, common stock and additional paid-in capital and retained earnings were reduced for the three months ended April 30, 2005 by $24.5 million and $49.2 million, respectively.

 

12. Comprehensive Income

 

The changes in the components of other comprehensive income, net of taxes, were as follows:

 

     Three months ended
April 30,


 
     2005

    2004

 

Net income

   $ 76,078     $ 42,505  

Other comprehensive income (loss), net of tax:

                

Change in net unrealized gains and losses on available-for-sale securities

     —         (1,251 )

Net change in cumulative foreign currency translation adjustment

     (468 )     (2,884 )
    


 


Other comprehensive income (loss)

     (468 )     (4,135 )
    


 


Total comprehensive income

   $ 75,610     $ 38,370  
    


 


 

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13. Net Income Per Share

 

The following table sets forth the computation of the numerators and denominators used in the basic and diluted net income per share amounts:

 

     Three months ended
April 30,


     2005

   2004

Numerator:

             

Numerator for basic and diluted net income per share – net income

   $ 76,078    $ 42,505
    

  

Denominator:

             

Denominator for basic net income per share – weighted average shares

     227,715      224,104

Effect of dilutive common stock options

     21,557      14,461
    

  

Denominator for dilutive net income per share

     249,272      238,565
    

  

 

The computation of diluted net income per share does not include 0.3 million options for the first quarter of fiscal 2006 and 0.4 million options for the first quarter of fiscal 2005. Such options were excluded in the computation of basic and diluted net income per share because the options had exercise prices greater than the average market prices of common stock during the respective periods and therefore were not dilutive.

 

14. Segments

 

Autodesk’s operating results are aggregated into two reportable segments: the Design Solutions Segment and the Media and Entertainment Segment (formerly “Discreet”). The Location Services Division, which is not included in either reportable segment, is reflected as Other. Beginning the first quarter of fiscal 2006, Autodesk revisited the way it manages certain aspects of the business resulting in a change in its segments to more closely align them with how the business is currently being managed and evaluated. Prior period segment information has been restated to reflect this recent modification.

 

The Design Solutions Segment derives revenues from the sale of design software products and services for professionals or consumers who design, build, manage and own building projects or manufactured goods and from the sale of mapping and geographic information systems technology to public and private users. The Design Solutions Segment consists primarily of the following business divisions: Manufacturing Solutions Division, Infrastructure Solutions Division, Building Solutions Division and the Platform Technology Division and Other, which includes Autodesk Consulting. Total sales of AutoCAD and AutoCAD LT (2D design products) accounted for 47% and 48% of consolidated net revenues during the three months ended April 30, 2005 and 2004, respectively. Total sales of 3D design products (Autodesk Inventor products, Autodesk Revit Building products and Autodesk Civil 3D) accounted for 16% and 12% of consolidated net revenues during the three months ended April 30, 2005 and 2004, respectively.

 

The Media and Entertainment 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, game production, web design and interactive web streaming.

 

Both reportable segments distribute their respective products primarily through authorized dealers and distributors, and, to a lesser extent, through direct sales to end-users.

 

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Autodesk evaluates each segment’s performance on the basis of income from operations before income taxes. Autodesk currently does not separately accumulate and report asset information by segment, except for certain assets such as goodwill. Information concerning the operations of Autodesk’s reportable segments is as follows:

 

     Three months ended
April 30,


 
     2005

    2004

 

Net revenues:

                

Design Solutions

   $ 313,160     $ 260,148  

Media and Entertainment

     41,217       37,624  

Other

     742       104  
    


 


     $ 355,119     $ 297,876  
    


 


Income (loss) from operations:

                

Design Solutions

   $ 151,104     $ 122,735  

Media and Entertainment

     8,235       3,307  

Unallocated amounts (1)

     (68,717 )     (72,521 )
    


 


     $ 90,622     $ 53,521  
    


 


 

(1) Unallocated amounts primarily relate to corporate expenses and other costs and expenses that are managed outside the reportable segments.

 

Net revenues attributable to the major divisions within the Design Solutions Segment are as follows:

 

     Three months ended
April 30,


     2005

   2004

Net revenues:

             

Manufacturing Solutions Division

   $ 59,041    $ 44,824

Infrastructure Solutions Division

     39,291      35,493

Building Solutions Division

     37,123      27,134

Platform Technology Division and Other

     177,705      152,697
    

  

     $ 313,160    $ 260,148
    

  

 

Information regarding Autodesk’s operations by geographic area is as follow:

 

     Three months ended
April 30,


     2005

   2004

Net revenues:

             

U.S. customers

   $ 110,252    $ 103,988

Other Americas

     20,270      17,557
    

  

Total Americas

     130,522      121,545
    

  

Europe, Middle East and Africa

     134,136      108,767
    

  

Japan

     48,492      37,036

Other Asia/Pacific

     41,969      30,528
    

  

Total Asia/Pacific

     90,461      67,564
    

  

Total net revenues

   $ 355,119    $ 297,876
    

  

 

12


Table of Contents

While Autodesk does not allocate restructuring charges to each reportable segment, the following table sets forth the fiscal 2004 restructuring plan activities that relate to each reportable segment during the three months ended April 30, 2005.

 

     Design Solutions
Segment


    Media and
Entertainment
Segment


    Unallocated Amounts

       
     Office
Closure
Costs


   

Employee

Termination
Costs


    Office
Closure
Costs


   

Employee

Termination
Costs


    Office
Closure
Costs


   

Employee

Termination
Costs


    Total

 

Balance at January 31, 2005

   $ 942     $ 1,497     $ 803     $ 534     $ 275     $ 2,280     $ 6,331  

Additions

     —         —         —         —         —         —         —    

Charges utilized

     (291 )     (702 )     (88 )     (417 )     (50 )     (2,130 )     (3,678 )
    


 


 


 


 


 


 


Balance at April 30, 2005

   $ 651     $ 795     $ 715     $ 117     $ 225     $ 150     $ 2,653  
    


 


 


 


 


 


 


 

Since the inception of the fiscal 2004 restructuring plan, the Design Solutions Segment and the Media and Entertainment Segment recorded restructuring charges totaling $11.5 million and $7.0 million, respectively.

 

15. Financial Instruments

 

Autodesk uses derivative instruments to manage its earnings and cash flow exposures to fluctuations in foreign currency exchange rates. Under its risk management strategy, Autodesk uses foreign currency forward and option contracts to manage its exposures of underlying assets, liabilities and other obligations, which exist as part of the ongoing business operations. These foreign currency instruments by policy have maturities of less than three months. Autodesk’s general practice is to hedge a majority of its short-term foreign exchange transaction exposures. Contracts are primarily denominated in euros, Swiss francs, Canadian dollars, British pounds and Japanese yen. Autodesk does not enter into any foreign exchange derivative instruments for trading or speculative purposes.

 

Forwards

 

Autodesk’s forward contracts, which are not designated as hedging instruments under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), have average maturities of less than three months. The forward contracts are used to reduce the exchange rate risk associated primarily with receivables and payables. Forward contracts are marked-to-market at the end of each reporting period, with gains and losses recognized as other income or expense to offset the gains or losses resulting from the settlement of the underlying foreign currency denominated receivables and payables.

 

The notional amounts of foreign currency forward contracts were $10.9 million at April 30, 2005 and $36.2 million at January 31, 2005. 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 Autodesk to the counterparties.

 

Options

 

In addition to the forward contracts, Autodesk utilizes foreign currency option collar contracts to reduce the exchange rate impact on the net revenue of certain anticipated transactions. These option contracts, which are designated and documented as cash flow hedges and qualify for hedge accounting treatment under SFAS 133, have maturities of less than three months. For cash flow hedges, derivative gains and losses included in comprehensive income are reclassified into earnings at the time the forecasted revenue is recognized or the option expires. The cost of these foreign currency option collars are recorded as other current assets and other accrued liabilities on our condensed consolidated balance sheets.

 

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Table of Contents

The notional amounts of foreign currency option contracts were $58.3 million at April 30, 2005 and $52.4 million at January 31, 2005 and the critical terms were generally the same as those of the underlying exposure. Gains, if any, from the effective portion of the option contracts, as determinable under SFAS 133, are recognized as net revenues, while the ineffective portion of the option contract is recorded in interest and other income, net. Net settlement losses recorded as net revenues were $0.6 million during the three months ended April 30, 2005 and net settlement gains recorded as net revenues were $0.2 million during the three months ended April 30, 2004. Amounts associated with the cost of the options totaling $0.2 million were recorded in interest and other income, net, during the three months ended April 30, 2005 and April 30, 2004.

 

16. Business Combinations

 

The following acquisition was accounted for under Statement of Financial Accounting Standards No. 141, “Business Combinations.” Accordingly, the results of operations are included in the accompanying condensed consolidated statements of income since the acquisition date, and the related assets and liabilities were recorded based upon their relative fair values at the date of acquisition. Pro forma results of operations have not been presented because the effects of the acquisition were not significant to Autodesk.

 

Compass Systems GmbH (“Compass”)

 

On March 31, 2005, Autodesk acquired certain assets of Compass Systems GmbH (“Compass”), a European-based developer of the Compass family of data management solutions, for $16.5 million. The acquisition is intended to allow Autodesk to more quickly expand its data management solution and deliver on its plans to provide a comprehensive data management solution for small- and medium-size manufacturers. Immediately prior to the acquisition, Compass was owned 50.1% by one of Autodesk’s largest resellers. The results of operations for Compass subsequent to March 31, 2005 have been included in the Company’s condensed consolidated financial statements.

 

Management’s preliminary allocation of the purchase consideration, based on a valuation of acquired assets and liabilities performed in-part by a third party appraiser, is as follows:

 

Developed technology (3 year useful life)

   $ 3,700

Customer relationships (7 year useful life)

     6,550

Backlog

     170

Goodwill

     5,765

Net tangible assets

     357
    

     $ 16,542
    

 

The goodwill balance of $5.8 million was assigned to the Manufacturing Solutions Division of Autodesk’s Design Solutions Segment and is deductible for tax purposes. This asset is attributed to the premium paid for the electronic data management and product data management channel expertise which provides an opportunity for Autodesk to enhance its growth in these markets.

 

17. Pending Business Combinations

 

In April 2005, Autodesk entered into an agreement to acquire substantially all of the assets of Colorfront Ltd., a developer of color correction technology for film studios and digital film laboratories, for approximately $14.3 million. This acquisition, which is expected to close during the second quarter of fiscal 2006, is intended to provide Autodesk with comprehensive new expertise in film laboratory processes, digital post-production, color science, image processing and hardware platform optimization.

 

In May 2005, Autodesk entered into an agreement to acquire all outstanding shares of c-plan AG, a leader in the European geographic information system (GIS) market, for approximately $18.0 million plus net working capital at closing. This acquisition, which is expected to close during the second quarter of fiscal 2006, is intended to allow Autodesk to provide comprehensive industry applications for government and utility agencies.

 

14


Table of Contents
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The discussion in our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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. Forward-looking statements consist of, among other things, statements regarding anticipated future operating margins, net revenues, product backlog, upgrade revenues, costs and expenses, allowance for bad debts, level of product returns, planned annual release cycles and short-term and long-term cash requirements, as well as statements involving trend analyses and statements including such words as “we believe” and “plan” and similar expressions. These forward-looking statements are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below, in “Risk Factors Which May Impact Future Operating Results” and in our other reports filed with the Securities and Exchange Commission (“SEC”).

 

Strategy

 

Our goal is to be the world’s leading design software and services company for the building, manufacturing, infrastructure, media and entertainment, and wireless data services fields. Our focus is to help customers create, manage and share their data and digital assets more effectively and improve efficiencies across the entire lifecycle management processes.

 

We believe that our ability to make technology available to mainstream markets is one of our competitive advantages. By innovating in existing technology categories, we bring powerful design products to volume markets. Our architecture allows for extensibility and integration. Our products are designed to be easy to learn and use, and to provide customers low cost of deployment, low total cost of ownership and a rapid return on investment.

 

We have created a large global community of resellers, third party developers and customers, allowing us broad reach into volume markets. Our reseller network is extensive, and provides our customers with global resources for the purchase, support and training of our products in an effective and cost efficient manner. We have a significant number of registered third party developers, creating products that run on top of our products, further extending our reach into volume markets. Our installed base of millions of users has made Autodesk products a worldwide design software standard. Users trained on Autodesk products are broadly available both from universities and the existing work force, reducing the cost of training for our customers.

 

Our growth strategy derives from these core strengths. We continue to increase the business value of our desktop design tools for our customers in a number of ways. We improve the performance and functionality of existing products with each new release, and we have increased the frequency of our releases. Beyond our base design products, we develop products addressing specific vertical market needs. In addition, we believe that migration from our 2D products to our higher priced 3D products presents a significant growth opportunity. While the rate of migration to 3D varies from industry to industry, adoption of 3D design software should increase the productivity of our customers and result in richer design data. However, this migration also poses various risks to us. In particular, if we do not successfully convert our 2D customer base to our 3D products as expected, and sales of our 2D products decrease without a corresponding increase in customer seats of our 3D products, we would not realize the growth we expect and our business would be adversely affected.

 

We believe the richer design data created by our 3D products requires better design information management tools, also known as lifecycle management. We believe that for each author of design information, there are five to 10 users of that information downstream. As a result, we are developing and introducing products that will allow downstream users, both within and external to our customer enterprises, to manage and share their designs. Our large installed base provides a unique opportunity to sell additional products to design and engineering departments and to expand our customer base from these design and engineering departments to adjacent departments and into the supply chain.

 

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Table of Contents

Expanding our geographic coverage is a key element of our growth strategy. We believe that rapidly growing economies, including those of China, India, Eastern Europe and South America, present significant growth opportunities for the Company. In support of our growth efforts in China, we opened our China Application Development Center (the “Center”) during fiscal 2004. With a level of understanding of local markets that could not be obtained from remote operations, the Center both develops products for the worldwide market and develops products to specifically address the Chinese market. In addition, we believe that our products will have a competitive advantage as a result of being engineered locally. We believe our ability to conduct research and development at various locations throughout the world allows us to optimize product development and lower costs. However, international development, whether conducted by us or independent developers on our behalf, involves significant costs and challenges, including whether we can adequately protect our intellectual property and derive significant revenue in areas, such as China, where software piracy is a substantial problem.

 

Another significant part of our growth strategy is based upon improving the installed base business model. A key element of this change is our ability to release major products on an annual basis. Strong annual release cycles have a number of benefits. In particular, they permit us to deliver key performance and functionality improvements to the customer on a regular and timely basis. Annual releases also drive annual product retirement programs, thereby reducing the volatility of revenues we have experienced in the past, as both the release of the new version and retirement of the oldest supported version are currently planned to happen approximately annually. Volatility may also be reduced through the Autodesk Subscription Program, as revenue is recognized ratably over the subscription contract period.

 

We are continually focused on improving productivity and efficiency in all areas of the Company. Doing so will allow us to increase our investment in growth initiatives and improve our profitability. During fiscal 2004, we conducted a rigorous study of our cost structure. Through the services of a major consulting firm, we benchmarked Autodesk metrics against averages of other companies including other leading software companies. As a result of the study, we undertook a restructuring plan that concluded at the end of fiscal 2005, began implementing certain productivity and efficiency initiatives throughout the Company and committed to continuous improvements in our productivity. Over the last fiscal year, our operating margin increased from 18% for the first quarter of fiscal 2005 to 26% for the first quarter of fiscal 2006, while we continued to invest in growth initiatives. Longer term, we intend to continue to balance investments in revenue growth opportunities with our goal of increasing our operating margins.

 

Autodesk generates significant cash flow. Our uses of cash include share repurchases to offset the dilutive impact of our employee stock plans, as well as investments in acquisitions and investments in growth initiatives. We evaluate merger and acquisition and divestiture opportunities to the extent they support our strategy. Our typical acquisitions are intended to provide adjacency to our current products and services, specific technology or expertise and rapid product integration. Additionally, we continue to invest in growth initiatives including lifecycle management and sales, market and channel development.

 

Critical Accounting Policies and Estimates

 

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, net revenues, costs and expenses and related disclosures. We regularly re-evaluate our estimates and assumptions. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that of our significant accounting policies, the following policies involve a higher degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

 

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Table of Contents

Revenue Recognition. Our accounting policies and practices are in compliance with Statement of Position 97-2, “Software Revenue Recognition,” as amended, and SEC Staff Accounting Bulletin No. 104, “Revenue Recognition.”

 

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collection is probable. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.

 

For multiple element arrangements that include software products, we allocate the sales price among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on their vendor-specific objective evidence (“VSOE”) of fair value. VSOE is the price charged when that element is sold separately or the price as set by management with the relevant authority. If we do not have VSOE of the undelivered element, we defer revenue recognition on the entire sales arrangement until all elements are delivered. We are required to exercise judgment in determining whether VSOE exists for each undelivered element based on whether our pricing for these elements is sufficiently consistent.

 

Our assessment of likelihood of collection is also a critical element in determining the timing of revenue recognition.

 

Our product sales to distributors and resellers are generally recognized at the time title to our product passes to the distributor or reseller, provided all other criteria for revenue recognition are met. This policy is predicated on our ability to estimate sales returns. We are also required to evaluate whether our distributors and resellers have the ability to honor their commitment to make fixed or determinable payments, regardless of whether they collect cash from their customers. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.

 

In addition to product sales, Autodesk recognizes maintenance revenues from our subscription program and hosted service revenues ratably over the contract periods. Customer consulting and training revenues are recognized as the services are performed.

 

Allowance for Doubtful Accounts. We maintain allowances for bad debts for estimated losses resulting from the inability of our customers to make required payments. Our allowance for doubtful accounts was $6.9 million at April 30, 2005 and $7.2 million at January 31, 2005.

 

Estimated allowances for doubtful accounts are determined based upon historical loss patterns and an evaluation of the potential risk of loss associated with specific problem accounts. The use of different estimates or assumptions could produce different allowance balances. While we believe our existing allowance for doubtful accounts is adequate and appropriate, additional reserves may be required should the financial condition of our customers deteriorate or as unusual circumstances arise.

 

Product Returns Reserves. With the exception of contracts with certain distributors, our sales contracts do not contain specific product-return privileges. However, we permit our distributors and resellers to return product in certain instances, generally when new product releases supercede older versions. Our product returns reserves were $12.4 million at April 30, 2005 and $15.3 million at January 31, 2005. Product returns as a percentage of applicable revenues were 3.5% and 4.8% for the three months ended April 30, 2005 and 2004, respectively.

 

The product returns reserve is based on historical experience of actual product returns, estimated channel inventory levels, the timing of new product introductions, channel sell-in for applicable markets and other factors. During the three months ended April 30, 2005 and April 30, 2004, we recorded additions to our product returns reserve of $7.0 million and $10.5 million, respectively, which reduced our revenue.

 

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Table of Contents

While we believe our accounting practice for establishing and monitoring product returns reserves is adequate and appropriate, any adverse activity or unusual circumstances could result in an increase in reserve levels in the period in which such determinations are made.

 

Realizability of Long-Lived Assets. We assess the realizability of our long-lived assets and related intangible assets, other than goodwill, annually during the fourth fiscal quarter, or sooner should events or changes in circumstances indicate the carrying values of such assets may not be recoverable. We consider the following factors important in determining when to perform an impairment review: significant under-performance of a business or product line relative to budget; shifts in business strategies which impact the continued uses of the assets; significant negative industry or economic trends; and the results of past impairment reviews.

 

In assessing the recoverability of these long-lived assets, we first determine their fair values, which are based on assumptions regarding the estimated future cash flows that could reasonably be generated by these assets. When assessing long-lived assets, we use undiscounted cash flow models which include assumptions regarding projected cash flows. Variances in these assumptions could have a significant impact on our conclusion as to whether an asset is impaired or the amount of the impairment charge. Impairment charges, if any, result in situations where the fair values of these assets are less than their carrying values.

 

In addition to our recoverability assessments, we routinely review the remaining estimated useful lives of our long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the quarter when such determinations are made, as well as in subsequent quarters.

 

We will continue to evaluate the values of our long-lived assets in accordance with applicable accounting rules. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.

 

Goodwill. As required under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we no longer amortize goodwill, but test goodwill for impairment annually in the fourth quarter or sooner should events or changes in circumstances indicate potential impairment. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.

 

Deferred Tax Assets. We currently have $142.4 million of net deferred tax assets, mostly arising from net operating losses, including stock option deductions, as well as tax credits, reserves and timing differences for purchased technologies and capitalized software offset by the establishment of U.S. deferred tax liabilities on unremitted earnings from certain foreign subsidiaries. We perform a quarterly assessment of the recoverability of these net deferred tax assets, which is principally dependent upon our achievement of projected future taxable income of approximately $447.4 million in specific geographies. Our judgments regarding future profitability may change due to future market conditions and other factors. These changes, if any, may require possible material adjustments to these net deferred tax assets, resulting in a reduction in net income in the period when such determinations are made.

 

Autodesk is a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. The Company’s effective tax rate is based on expected geographic income, statutory rates and enacted tax rules, including transfer pricing. Significant judgment is required in determining the Company’s effective tax rate and in evaluating its tax positions on a worldwide basis. The Company believes its tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which it conducts its business. It is possible that these positions may be challenged which may have a significant impact on the Company’s effective tax rate.

 

Restructuring Expenses. During the fourth quarter of fiscal 2004, the Board of Directors approved a restructuring plan involving the elimination of employee positions and the closure of a number of offices worldwide. This plan, which we refer to as the fiscal 2004 restructuring plan, was designed to improve

 

18


Table of Contents

efficiencies across the organization, reduce operating expense levels to help achieve our targeted operating margins and redirect resources to product development, sales development and other critical areas. The actions approved under this plan were completed by the end of fiscal 2005.

 

Office closure costs were based upon the projected rental payments through the remaining terms of the underlying operating leases, offset by projected sublease income. The projected sublease income amounts were calculated by using information provided by third-party real estate brokers as well as management judgments and were based on assumptions for each of the real estate markets where the leased offices were located. If real estate markets worsen and we are not able to sublease the properties as expected, we will record additional expenses in the period when such rental payments are made. This situation occurred during each of fiscal 2005, 2004 and 2003; we therefore recorded additional charges as a result of the inability to sublease abandoned offices. If the real estate markets subsequently improve, and we are able to sublease the properties earlier or at more favorable rates than projected, we will reverse a portion of the underlying restructuring accruals, which will result in increased net income in the period when such sublease becomes effective.

 

Stock Option Accounting. We do not record compensation expense when stock option grants are awarded to employees at exercise prices equal to the fair market value of Autodesk common stock on the date of grant. We disclose in Note 4, “Employee Stock Compensation” in the Notes to Condensed Consolidated Financial Statements the expense consistent with the method of Statement of Financial Accounting Standards No. 123, “Accounting for Stock Issued to Employees” (“SFAS 123”). The alternative fair value accounting provided for under SFAS 123 requires use of option valuation models which require the input of highly subjective assumptions, including the expected life of the option and expected future volatility. Changes in the subjective input assumptions can materially affect the fair value estimate. Had we recorded compensation expense from stock option grants, our net income would have been substantially less. Upon adoption of Statement of Financial Accounting Standards No. 123 – revised 2004, “Share-Based Payment,” which replaces SFAS 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) in the first quarter of fiscal 2007, our operating margins and net income will be adversely affected.

 

Legal Contingencies. As described in Part II, Item 1, “Legal Proceedings” and Note 10, “Commitments and Contingencies”, in the Notes to Condensed Consolidated Financial Statements, we are periodically involved in various legal claims and proceedings. We routinely review the status of each significant matter and assess our potential financial exposure. If the potential loss from any matter is considered probable and the amount can be reasonably estimated, we record a liability for the estimated loss. Because of inherent uncertainties related to these legal matters, we base our loss accruals on the best information available at the time. As additional information becomes available, we reassess our potential liability and may revise our estimates. Such revisions could have a material impact on future quarterly or annual results of operations.

 

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Table of Contents

Overview of First Quarter 2006

 

    

Three Months
Ended

April 30, 2005


   As a % of Net
Revenues


   

Three Months
Ended

April 30, 2004


   As a % of Net
Revenues


 
     (in millions)  

Net Revenues

   $ 355.1    100 %   $ 297.9    100 %

Cost of revenues

     43.5    12 %     41.9    14 %

Operating expenses excluding restructuring charges

     221.0    62 %     194.2    65 %

Restructuring

     —      —         8.3    3 %
    

  

 

  

Income from Operations

   $ 90.6    26 %   $ 53.5    18 %

 

Our net revenues were 19% higher for the three months ended April 30, 2005 as compared to the same period in the prior fiscal year primarily due to strong new seat and subscription revenues, coupled with the positive effects of changes in foreign currencies, principally driven by the strength of the euro. Compared to the three months ended April 30, 2004, new seat revenues increased 22%, and subscription revenues increased 57%, while upgrade revenues decreased by 3%. Revenue growth was driven more by volume growth than price increases due to the strength of our current product releases, particularly the AutoCAD 2006 family of products and Autodesk Inventor products.

 

Product backlog is comprised of deferred revenue and current software license product orders which have not yet shipped. The category of current software license product orders which we have not yet shipped consists of orders from customers with approved credit status for currently available license software products and may include orders with current ship dates and orders with ship dates beyond the current fiscal period. Aggregate backlog at April 30, 2005 was approximately $249.0 million, of which $26.9 million related to current software license product orders which have not yet shipped at the end of the fiscal quarter; we expect this component of product backlog to decline in the second quarter of fiscal 2006. The value of software license product orders that had not yet shipped at January 31, 2005 was $32.0 million and at April 30, 2004 was $12.0 million.

 

We generate a significant amount of our revenue in the United States, Japan, Germany, United Kingdom, Italy, France, China, Korea, Australia and Canada. The weaker value of the U.S. dollar, relative to foreign currencies, had a positive impact of $4.2 million on operating results in the first quarter of fiscal 2006 compared to the prior fiscal year. Had exchange rates from the first quarter of fiscal 2005 been in effect during fiscal 2006, translated international revenue billed in local currencies would have been $6.6 million lower and operating expenses would have been $2.4 million lower. Changes in the value of the U.S. dollar may have a significant impact on net revenues and operating expenses in future periods. Subsequent to April 30, 2005, the value of the euro declined against the U.S. dollar which could unfavorably impact euro denominated revenues and favorably impact euro denominated expenses in the future. To reduce this impact for the current quarter, we utilize foreign currency option collar contracts to reduce the current quarter exchange rate impact on the net revenue of certain anticipated transactions.

 

Our operating expenses, excluding restructuring, increased $26.8 million for the three months ended April 30, 2005 as compared to the same period in the prior fiscal year, but declined as a percentage of revenue. The increase was due primarily to higher marketing costs associated with trade shows, product launches and branding campaigns, higher salary expense due to higher headcount and annual salary increases as well as higher professional fees related to third-party development activities. Our operating margins are very sensitive to changes in revenues, given the relatively fixed nature of most of our operating expenses, which consist primarily of employee-related expenditures, facilities costs and depreciation and amortization expense. During fiscal 2006 we expect operating expenses to continue to increase in absolute dollars but decline as a percentage of revenue, as compared to the same period in the prior fiscal year, as we balance investment in our growth opportunities with our focus on increasing profitability.

 

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Table of Contents

Throughout the three months ended April 30, 2005, we maintained a strong balance sheet and generated $63.3 million of cash from our operating activities as compared to $55.2 million during the same period in the prior fiscal year. We finished the first quarter of fiscal 2006 with $537.8 million in cash and marketable securities, a higher deferred revenue balance, a higher accounts receivable balance, along with a higher, although more typical, days sales outstanding position as compared to the same period in the prior fiscal year. Approximately 75% of the deferred revenues balance at April 30, 2005 consisted of customer subscription contracts which will be recognized as maintenance revenue ratably over the life of the contracts, which is predominantly one year.

 

Subsequent to our earnings release on May 19, 2005, we made changes to our previously reported Condensed Consolidated Balance Sheets at April 30, 2005 and January 31, 2005 and Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2005 and 2004. We increased non-current liabilities and decreased current liabilities by $5.0 million at April 30, 2005 and $5.6 million at January 31, 2005 in our Condensed Consolidated Balance Sheets. In addition, our previously reported Condensed Consolidated Statements of Cash Flows were revised to reduce cash used in “Business combinations, net” by $1.9 million and increased cash used in “Changes in operating assets and liabilities, net of business combinations” by the same amount for the three months ended April 30, 2005.

 

Results of Operations

 

Net Revenues

 

    

Three Months

Ended

April 30, 2005


  

Increase

compared to
prior year
period


   

Three Months
Ended

April 30, 2004


          $    

       %    

   
     (in millions)

Net revenues:

                          

License and other

   $ 296.4    $ 35.9    14 %   $ 260.5

Maintenance

     58.7      21.3    57       37.4
    

  

        

     $ 355.1    $ 57.2    19 %   $ 297.9
    

  

        

Net revenues by geographic area:

                          

Americas

   $ 130.5    $ 9.0    7 %   $ 121.5

Europe, Middle East and Africa

     134.1      25.3    23       108.8

Asia/Pacific

     90.5      22.9    34       67.6
    

  

        

     $ 355.1    $ 57.2    19 %   $ 297.9
    

  

        

Net revenues by operating segment:

                          

Design Solutions

   $ 313.2    $ 53.0    20 %   $ 260.2

Media and Entertainment

     41.2      3.6    10       37.6

Other

     0.7      0.6    n/a       0.1
    

  

        

     $ 355.1    $ 57.2    19 %   $ 297.9
    

  

        

Net Design Solutions Revenues:

                          

Manufacturing Solutions Division

   $ 59.1    $ 14.3    32 %   $ 44.8

Infrastructure Solutions Division

     39.3      3.8    11       35.5

Building Solutions Division

     37.1      9.9    36       27.2

Platform Technology Division and Other

     177.7      25.0    16       152.7
    

  

        

     $ 313.2    $ 53.0    20 %   $ 260.2
    

  

        

 

Net revenues increased to $355.1 million in the first quarter of fiscal 2006 from $297.9 million in the first quarter of fiscal 2005. Net revenues increased in all three of our geographic areas, due primarily to strong new seat and subscription revenues, coupled with the positive effects of changes in foreign currencies.

 

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License and other revenues for the first quarter of fiscal 2006 were $296.4 million as compared to $260.5 million in the same period of the prior fiscal year. The increase was primarily due to increased new seat revenues for most major products as a result of our new product releases in the first quarter of fiscal 2006, offset in part by lower upgrade revenues. Also, changes in foreign currencies had a positive impact on revenue. We expect strong upgrade revenues for the remainder of fiscal 2006 as a result of new product releases across our divisions during the first quarter and the anticipated retirement of the AutoCAD 2002-based products. The remaining installed base of the AutoCAD 2002-based products at April 30, 2005 is significantly larger than the installed base of the AutoCAD 2000i-based products at that equivalent time last year; however, the installed base of the AutoCAD 2004-based products is expected to be smaller than AutoCAD 2002 on the equivalent date in 2006. In future fiscal years, we expect upgrade revenue to decline as customers continue to migrate to our subscription program. Revenue from the sales of our services, training and support are immaterial for all periods presented.

 

Maintenance revenues consist of revenues derived from our subscription program. As a percentage of total net revenues, maintenance revenues were 17% and 13% for the first quarter of fiscal 2006 and fiscal 2005, respectively. Our subscription program, available to most customers worldwide, continues to attract new and renewal customers providing them with a cost effective and predictable budgetary option to obtain the productivity benefits of our newest releases and planned annual product release cycle and enhancements. We expect maintenance revenues to continue to increase as a percentage of total net revenues.

 

Net revenues in the Americas increased 7% to $130.5 million in the first quarter of fiscal 2006 as compared to $121.5 million in the same period of the prior fiscal year, largely due to strong new seat and subscription revenue offset in part by lower upgrade revenues.

 

Net revenues in the Europe, Middle East and Africa (“EMEA”) region increased 23% to $134.1 million in the first quarter of fiscal 2006 from $108.8 million in the same period of the prior fiscal year due primarily to strong new seat and subscription sales, as well as favorable exchange rates. Ignoring the effects of changes in foreign currencies during the current quarter, net revenues for EMEA increased approximately 18% in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005.

 

Net revenues in Asia/Pacific increased 34% to $90.5 million in the first quarter of fiscal 2006 from $67.6 million in the same period of the prior fiscal year. The increase in net revenues was due primarily to strong new seat, subscription and upgrade revenues. Exchange rates had very little impact during the first quarter of fiscal 2006; ignoring the effects of changes in foreign currencies during the current quarter, net revenues for Asia/Pacific increased approximately 33% in the first quarter of fiscal 2006 as compared to first quarter of fiscal 2005.

 

For the first quarter of fiscal 2006, net revenues for the Design Solutions Segment were $313.2 million as compared to $260.2 million in the same period in the prior fiscal year. The increase in net revenues in the first quarter of fiscal 2006 for the Design Solutions Segment was due primarily to strong new seat and subscription revenues and to a lesser extent, favorable exchange rates. While upgrade revenue decreased slightly during the first quarter of fiscal 2006 as compared to the same period in the prior fiscal year, revenue from upgrades and subscriptions combined accounted for 37% of Design Solutions Segment revenues for the first quarter of fiscal 2006 as compared to 38% of Design Solutions Segment revenue for the first quarter of fiscal 2005. Maintenance revenue accounted for 18% of Design Solutions Segment revenue for the first quarter of fiscal 2006 and 14% of Design Solutions Segment Revenues for the first quarter of fiscal 2005. Although we have been shifting our focus to more vertically-oriented and 3D product lines, sales of AutoCAD, AutoCAD upgrades and AutoCAD LT continue to comprise a significant portion of our net revenues. Such sales, which are reflected in the net revenues for the Platform Technology Division and Other, accounted for 47% and 48% of our consolidated net revenues for the first quarter of fiscal 2006 and 2005, respectively. Net revenues for our 3D products increased approximately 60% for the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005. A critical component of our growth strategy is to convert our 2D customer base, including customers of AutoCAD and related vertical industry products, to our higher priced 3D products such as the Autodesk Inventor products, Autodesk Revit Building products and Autodesk Civil 3D. However, should sales of 2D products decrease without a corresponding conversion of the customer seats to 3D products, our results of operations will be adversely affected.

 

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Table of Contents

Net revenues for the Media and Entertainment Segment increased 10% to $41.2 million in the first quarter of fiscal 2006 from $37.6 million in the first quarter of fiscal 2005 primarily due to growth in new seat revenues and favorable exchange rates. Net revenues from our advanced systems products were $27.0 million in the first quarter of fiscal 2006 as compared to $24.0 million in the first quarter of fiscal 2005.

 

International sales accounted for 69% of our net revenues in the first quarter of fiscal 2006 as compared to 65% in the same period of the prior fiscal year. Ignoring the effects of changes in foreign currencies during the first quarter of fiscal 2006, international sales would have been 68% of net revenues. We believe that international sales will continue to comprise a significant portion of net revenues. Economic weakness in any of the countries which contribute a significant portion of our net revenues would have a material adverse effect on our business.

 

Cost of Revenues

 

    

Three Months
Ended

April 30, 2005


    Increase
compared to
prior year
period


   

Three Months
Ended

April 30, 2004


 
         $    

       %    

   
     (in millions)  

Cost of revenues:

                             

License and Other

   $ 38.7     $ 1.1    3 %   $ 37.6  

Maintenance

     4.8       0.5    12       4.3  
    


 

        


     $ 43.5     $ 1.6    4 %   $ 41.9  
    


 

        


As a percentage of net revenues

     12 %                  14 %

 

Cost of license and other revenues includes direct material and overhead charges, royalties, amortization of purchased technology and capitalized software, hosting costs and the labor cost of fulfilling service contracts. Direct material and overhead charges include the cost of hardware sold (primarily workstations manufactured by SGI for the Media and Entertainment Segment), costs associated with transferring our software to electronic media, printing of user manuals and packaging materials and shipping and handling costs.

 

Cost of license and other revenues increased 3% or $1.1 million during the three months ended April 30, 2005, as compared to the same period in the prior fiscal year, due primarily to increased volume and changes in product mix and slightly higher royalty expenses for licensed technology embedded in our products.

 

Cost of maintenance revenues includes direct costs of our subscription program, amortization of capitalized software and overhead charges. Cost of maintenance revenues increased 12% during the three months ended April 30, 2005, or $0.5 million, as compared to the same period in the prior fiscal year, due primarily to incremental direct program costs incurred as part of the growth of the subscription program.

 

In the future, cost of revenues as a percentage of net revenues is likely to continue to be impacted by the volume and mix of product sales, changing consulting and hosted service costs, software amortization costs, royalty rates for licensed technology embedded in our products and new customer support offerings.

 

Marketing and Sales

 

    

Three Months
Ended

April 30, 2005


    Increase
compared to
prior year
period


   

Three Months
Ended

April 30, 2004


 
         $    

       %    

   
     (in millions)  

Marketing and sales

   $ 127.4     $ 18.1    17 %   $ 109.3  

As a percentage of net revenues

     36 %                  37 %

 

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Marketing and sales expenses include salaries, dealer and sales commissions, bonus, travel and facility costs for our marketing, sales, order processing, dealer training and support personnel and overhead charges. These expenses also include costs of programs aimed at increasing revenues, such as advertising, trade shows and expositions, and various sales and promotional programs designed for specific sales channels and end users.

 

The increase of $18.1 million when comparing the first quarters of fiscal years 2006 and 2005 was due primarily to approximately $14.6 million of increased marketing and promotion costs related to product launches, trade shows and branding, approximately $2.5 million of higher employee costs as well as costs related to a customer information and customer support software project.

 

We expect to continue to invest in marketing and sales of our products to develop market opportunities, to promote our competitive position and to strengthen our channel support and, as a result, expect marketing and sales expenses to continue to be significant, both in absolute dollars and as a percentage of net revenues.

 

Research and Development

 

    

Three Months
Ended

April 30, 2005


    Increase
compared to
prior year
period


   

Three Months
Ended

April 30, 2004


 
         $    

       %    

   
     (in millions)  

Research and development

   $ 65.9     $ 8.0    14 %   $ 57.9  

As a percentage of net revenues

     19 %                  19 %

 

Research and development expenses consist primarily of salaries, benefits, and bonuses for software engineers, contract development fees, purchased in-process technology, depreciation of computer equipment used in software development and overhead charges.

 

The increase in research and development expenses compared to the prior year was due primarily to efforts to invest additional resources in certain growth initiatives including research and development. Employee-related costs increased approximately $2.2 million in the first quarter of fiscal 2006 as compared to the same period in the prior fiscal year. In addition, we incurred approximately $4.9 million for purchased in-process technology for our Design Solutions Segment, related to technology purchased from one independent software developer. The in-process technology is intended for future releases of various products that have not yet reached technological feasibility and have no alternative future use.

 

We expect that research and development spending will continue to increase in absolute dollars in future periods as we continue to invest in product development and continue to acquire new technology.

 

General and Administrative

 

    

Three Months
Ended

April 30, 2005


    Increase
compared to
prior year
period


   

Three Months
Ended

April 30, 2004


 
         $    

       %    

   
     (in millions)  

General and administrative

   $ 27.7     $ 0.6    2 %   $ 27.1  

As a percentage of net revenues

     8 %                  9 %

 

General and administrative expenses include our finance, human resources, legal costs and overhead charges. Total general and administrative expenses remained relatively consistent during the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005.

 

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Table of Contents

Restructuring

 

    

Three Months
Ended

April 30, 2005


   Decrease
compared to
prior year
period


  

Three Months
Ended

April 30, 2004


 
          $    

       %    

  
     (in millions)  

Restructuring

   $ —      $ 8.3    n/a    $ 8.3  

As a percentage of net revenues

     —                    3 %

 

During the fourth quarter of fiscal 2004, the Board of Directors approved a restructuring plan involving the elimination of employee positions and the closure of a number of offices worldwide having a total cost of $27.5 million. This plan, which we refer to as the fiscal 2004 restructuring plan, was designed to improve efficiencies across the organization, reduce operating expense levels to help achieve our targeted operating margins and redirect resources to product development, sales development and other critical areas. The actions approved under the fiscal 2004 restructuring plan were completed during the fourth quarter of fiscal 2005; there were no restructuring charges during the first quarter of fiscal 2006. As a result of the fiscal 2004 restructuring plan, we expect to realize pretax savings of approximately $9.3 million per quarter, resulting in an annual savings of approximately $37.0 million to be reflected across each on-going cost and expense line item in the Condensed Consolidated Statements of Income. However, a portion of these savings are being used to fund various growth initiatives in-line with our corporate strategy; consequently, not all of these savings will directly reduce operating expenses but have helped contain cost increases across each expense category described above.

 

During the three months ended April 30, 2004, we recorded net restructuring charges of $8.3 million, of which approximately $6.6 million related to employee termination costs for 316 employees and $1.8 million related to the closure of facilities. Partially offsetting this charge was a reversal of $0.1 million related to a change in estimates underlying office closure costs originally established under the fiscal 2002 restructuring plan. The underlying liabilities were ultimately settled for less than originally estimated.

 

For additional information regarding restructuring reserves, see Note 9, “Restructuring Reserves” and Note 14, “Segments,” in the Notes to Condensed Consolidated Financial Statements.

 

Interest and Other Income, Net

 

The following table sets forth the components of interest and other income, net:

 

     Three Months
Ended April 30,


 
     2005

    2004

 
     (in millions)  

Interest and investment income, net

   $ 2.8     $ 1.8  

Losses on foreign currency transactions

     (0.3 )     (0.5 )

Net realized gains on sales of marketable securities

     —         0.4  

Other income

     0.5       0.7  
    


 


     $ 3.0     $ 2.4  
    


 


 

The investment income portion of the “Interest and investment income, net,” line item fluctuates based on average cash and marketable securities balances, average maturities and interest rates.

 

Provision for Income Taxes

 

During the first quarter of fiscal 2006, we recognized a current income tax benefit of approximately $1.2 million, which reduced accrued income taxes as a result of the Company’s resolution and closure of its Franchise

 

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Table of Contents

Tax Board (“FTB”) audit for fiscal 2000 as well as the closure and lapse of the statute of limitations with respect to certain foreign tax years. Absent the impact of the one-time income tax benefit of $1.2 million, our effective income tax rate was 20% in the three months ended April 30, 2005 and 24% in the three months ended April 30, 2004. The effective rate for the three months ended April 30, 2005 is lower than the effective rate for the three months ended April 30, 2004 primarily due to the tax benefits associated with our intention to repatriate certain foreign earnings under the American Jobs Creation Act of 2004 (“DRD legislation”), which was signed into law during the third quarter of fiscal 2005. The DRD legislation allows for the repatriation of foreign dividends at a rate lower than the 35% federal statutory rate through a one-time election available to Autodesk through January 31, 2006. The effective tax rate for fiscal 2006 is less than the federal statutory rate of 35% due to the extraterritorial income exclusion (“ETI”), deduction for Domestic Production Activities, research credits, and the tax benefits from low taxed foreign earnings and the DRD legislation.

 

Our future effective tax rate may be materially impacted by the amount of benefits associated with our foreign earnings, which are taxed at rates different from the federal statutory rate, ETI, deduction for Domestic Production Activities, research credits, tax-exempt interest, DRD legislation election and changes in the tax law. In addition, our adoption of SFAS 123R, “Share-Based Payment,” in the first quarter of fiscal 2007 may also affect our future effective tax rate.

 

At April 30, 2005, we had net deferred tax assets of $142.4 million. Realization of these assets is dependent on our ability to generate approximately $447.4 million of future taxable income in appropriate tax jurisdictions. We believe that sufficient income will be earned in the future to realize these assets.

 

Business Combinations

 

We acquire new technology or supplement our existing technology by purchasing businesses focused in specific markets or industries. During the three months ended April 30, 2005, we acquired the following business:

 

Date


  

Company


  

Details


March 2005

  

Compass Systems GmbH

(“Compass”)

   The assets acquired from Compass allow us to more quickly expand our data management solution and deliver on our plans to provide a comprehensive data management solution for small and medium-size manufacturers. The assets acquired were assigned to the Manufacturing Solutions Division of the Design Solutions Segment.

 

For additional information on this acquired business, see Note 16, “Business Combinations” in the Notes to Condensed Consolidated Financial Statements.

 

Liquidity and Capital Resources

 

Our primary source of cash is receipts from revenue. The primary uses of cash are employee-related expenses (compensation and related benefits), general operating expenses (marketing, facilities and overhead) and cost of revenues. In addition, we receive cash proceeds from the exercise of employee stock options and the purchase of employee stock purchase plan shares and use cash to repurchase outstanding Autodesk shares under our share repurchase program.

 

At April 30, 2005, our principal sources of liquidity were cash and marketable securities totaling $537.8 million and net accounts receivable of $190.2 million. During the first quarter of fiscal 2006, we generated $63.3 million of cash compared to $55.2 million generated during the same period in fiscal 2005. This increase was primarily driven by higher operating earnings, higher accounts payable and deferred revenue balances as well as a reduction in net accounts receivables, partially offset by higher working capital uses of cash related to larger bonus and other incentive compensation amounts paid during the first quarter of fiscal 2006.

 

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Table of Contents

During the first quarter of fiscal 2006, we used $24.8 million in net cash for investing activities compared to a generation of $17.6 million in net cash during the same period of fiscal 2005. The net use of cash from investing activities during the first quarter of fiscal 2006 was due, in part, to $4.7 million in net purchases of available-for-sale marketable securities in our deferred compensation plan. During the same period in fiscal 2005, we generated $30.8 million in net proceeds from the sale of available-for-sale marketable securities, a portion of which were liquidated to fund the repurchase of our common stock. During the first quarter of fiscal 2006 we also utilized our cash to acquire certain assets of Compass Systems GmbH.

 

We used $36.9 million in net cash for financing activities during the first quarter of fiscal 2006, compared to $47.4 million during the same period last year. The major financing uses of cash in both periods were for the repurchase of our common stock and payment of dividends. We repurchased 2.5 million shares of our common stock for $73.7 million during the first quarter of fiscal 2006 and repurchased 5.2 million of our common stock for $149.0 million during the same period of fiscal 2005. As of April 30, 2005, 29.7 million shares remained available for repurchase under our stock repurchase program. We currently expect to continue making repurchases under this program. During the current quarter we also made dividend payments of $3.4 million, compared to dividend payments of $3.3 million during the first quarter of fiscal 2005. In December 2004, we announced our intent to discontinue payment of cash dividends after the fourth quarter of fiscal 2005. The dividend payment made this quarter related to the dividend declaration made during the fourth quarter of fiscal 2005. These financing uses of cash were partially offset by proceeds received from the issuance of common stock under our stock option and stock purchase plans, which amounted to $40.1 million during the first quarter of fiscal 2006 and $104.9 million during the first quarter of fiscal 2005.

 

Long-term cash requirements, other than normal operating expenses, are anticipated for the development of new software products and incremental product offerings resulting from the enhancement of existing products; financing anticipated growth; the share repurchase program; the acquisition of businesses, software products, or technologies complementary to our business; and capital expenditures, including the purchase and implementation of internal-use software applications.

 

At April 30, 2005 and January 31, 2005, 13% and 10%, respectively, of our consolidated cash, cash equivalents and marketable securities were held with financial institutions in the United States; the remaining balances are held with financial institutions outside the United States. As a result of the passage of the Dividends Received Deduction Legislation in October 2004, we intend to repatriate up to $500 million of accumulated foreign earnings from our foreign operations to the U.S. during fiscal 2006, where we can more effectively manage our cash and invest in our business. For further discussion of the Dividends Received Deduction Legislation, see Provision for Income Taxes under Results of Operations on page 25. In addition, $19.2 million of our marketable securities at April 30, 2005 are reserved for deferred compensation.

 

Our international operations are subject to currency fluctuations. To minimize the impact of these fluctuations, we use foreign currency option contracts to hedge our exposure on anticipated transactions and forward contracts to hedge our exposure on firm commitments, primarily certain receivables and payables denominated in foreign currencies. Our foreign currency instruments, by policy, have maturities of less than three months and settle before the end of each quarterly period. The principal currencies hedged during the three months ended April 30, 2005 were the euro, Swiss franc, Canadian dollar, British pound and Japanese yen. We monitor our foreign exchange exposures to ensure the overall effectiveness of our foreign currency hedge positions.

 

Issuer Purchases of Equity Securities

 

The purpose of Autodesk’s stock repurchase program is to help offset the dilution to net income per share caused by the issuance of stock under our employee stock plans as well as to more effectively utilize excess cash generated from our business. The number of shares acquired and the timing of the purchases are based on several factors, including the level of our cash balances, general business and market conditions, and other investment opportunities. At April 30, 2005, 29.7 million shares remained available for repurchase under the existing repurchase authorization.

 

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Table of Contents

The following table provides information about the repurchase of our common stock during the three months ended April 30, 2005:

 

(Shares in thousands)    Total Number
of Shares
Purchased


    Average
Price Paid
per Share


   Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs


    Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs


 

February 1-February 28

   387     $ 29.86    387     31,798  

March 1-March 31

   2,111       29.42    2,111     29,687  

April 1-April 30

   —         —      —       —    
    

 

  

 

Total

   2,498  (1)   $ 29.49    2,498  (1)   29,687  (2)

 

(1) Represents shares purchased in open-market transactions under the stock repurchase plan approved by the Board of Directors in December 2003, authorizing the repurchase of 32.0 million shares. This plan, announced in December 2003, does not have a fixed expiration date.

 

(2) Of this amount, 5.7 million shares correspond to remaining shares available for repurchase under the plan approved by the Board of Directors in December 2003 and 24.0 million shares correspond to the plan approved by the Board of Directors in December 2004, which authorized the repurchase of an additional 24.0 million shares. This plan, announced in December 2004, does not have a fixed expiration date.

 

Off-Balance Sheet Arrangements

 

Other than operating leases, we do not engage in off-balance sheet financing arrangements or have any variable-interest entities. As of April 30, 2005 we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

Stock Compensation

 

We maintain two active stock option plans for the purpose of granting stock options to employees and members of Autodesk’s Board of Directors: the 1996 Stock Plan (available only to employees) and the 2000 Directors’ Option Plan (available only to non-employee directors). Additionally, there are six expired or terminated plans with options outstanding, including the Nonstatutory Stock Option Plan (available only to non-executive employees and consultants) which was terminated by the Board of Directors in December 2004. In March 2005, the Board of Directors approved a new stock plan, the 2006 Stock Plan, which effectively replaces the 1996 Stock Plan on February 1, 2006, subject to approval by the stockholders of the Company.

 

In addition to stock option plans, our employees are also eligible to participate in Autodesk’s 1998 Employee Qualified Stock Purchase Plan.

 

Our stock option program is broad-based and designed to promote long-term retention. Essentially all of our employees participate. Approximately 80% of the options we granted during the three months ended April 30, 2005 were awarded to employees other than our CEO and the four other most highly compensated officers for fiscal 2005, which we refer to as our Named Executive Officers. Options granted under our equity plans during fiscal 2006 vest over periods ranging from one to four years and expire within seven to ten years of the date of grant. Options granted prior to fiscal 2006 expire within ten years of the date of grant. The exercise price of the stock options is equal to the closing price of our Common Stock on the Nasdaq National Market on the grant date.

 

All stock option grants to executive officers are made by the Compensation and Human Resources Committee of the Board of Directors. All members of the Compensation and Human Resources Committee are independent directors, as defined by the listing standards of the Nasdaq National Market. See the “Report of the Compensation and Human Resources Committee of the Board of Directors” in our most recently filed Proxy

 

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Table of Contents

Statement for further information concerning Autodesk’s policies and procedures regarding the use of stock options. Grants to our non-employee directors are non-discretionary and are pre-determined by the terms of the 2000 Directors’ Option Plan.

 

Distribution and Dilutive Effect of Options

 

The following table provides information about the distribution and dilutive effect of our stock options for the named periods:

 

    

Three months
ended

April 30,

2005


    Fiscal year
ended
January 31,


 
       2005

    2004

 

Net grants during the period as % of outstanding shares

   2.0 %   3.9 %   3.1 %

Grants to Named Executive Officers during the period as % of total options granted

   20.3 %(1)   15.9 %   11.7 %

Grants to Named Executive Officers during the period as % of outstanding shares

   0.5 %   0.8 %   0.7 %

Cumulative options held by Named Executive Officers as % of total options outstanding

   23.9 %   25.2 %   20.9 %

 

(1) The executive staff, which includes the Named Executive Officers, received option grants during the first quarter of fiscal 2006. Employee grants are made throughout the year.

 

We expect to grant options totaling not more than three percent of our outstanding shares during fiscal 2006.

 

General Option Information

 

Our stock option activity for the named periods is summarized as follows:

 

           Options Outstanding

(Shares in thousands)    Shares
Available
for Options


   

Number of

Shares


    Weighted
Average
Price
Per Share


Options outstanding at January 31, 2004

   19,894     52,936     $ 8.40

Granted

   (11,550 )   11,550       17.52

Exercised

   —       (25,445 )     8.46

Canceled

   2,607     (2,635 )     9.46

Additional shares reserved

   8,455     —         —  

Reduction to shares available for future issuance approved by the Board of Directors in March 2005

   (10,000 )   —         —  
    

 

 

Options outstanding at January 31, 2005

   9,406     36,406     $ 11.17

Granted

   (5,032 )   5,032       29.61

Exercised

   —       (2,500 )     9.21

Canceled

   321     (409 )     13.63
    

 

 

Options outstanding at April 30, 2005

   4,695     38,529     $ 13.68

 

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Table of Contents

In-the-Money and Out-of-the-Money Option Information

 

The following table compares the number of shares subject to option grants with exercise prices at or below the closing price of our Common Stock at April 30, 2005 (“in-the-money”) with the number of shares subject to option grants with exercise prices greater than the closing price of our Common Stock at the same date (“out-of-the-money”). The closing price of our Common Stock on April 30, 2005 was $31.83 per share.

 

     Exercisable

   Unexercisable

   Total

(Shares in thousands)    Number of
Shares


   Weighted
Average
Exercise
Price


   Number of
Shares


   Weighted
Average
Exercise
Price


   Number of
Shares


   Weighted
Average
Exercise
Price


In-the-Money

   13,319    $ 8.76    24,971    $ 16.13    38,290    $ 13.56

Out-of-the-Money

   —        —      239      32.71    239      32.71
    
  

  
  

  
  

Total Options Outstanding

   13,319    $ 8.76    25,210    $ 16.28    38,529    $ 13.68

 

Option Grants in Last Fiscal Quarter

 

The following table sets forth, as to the Named Executive Officers, information concerning stock options granted during the three months ended April 30, 2005:

 

     Individual Grants

    

Name


   Number of
Securities
Underlying
Options
Granted (1)


   Percent of Total
Options
Granted to
Employees (2)


    Exercise
Price


   Expiration
Date (3)


   Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Option Term ($) (4)


              5%

   10%

Carol A. Bartz

   500,000    9.9 %   $ 30.15    3/10/12    $ 6,137,039    $ 14,301,910

Carl Bass

   250,000    5.0 %   $ 30.15    3/10/12    $ 3,068,519    $ 7,150,955

George M. Bado

   90,000    1.8 %   $ 30.15    3/10/12    $ 1,104,667    $ 2,574,344

Alfred J. Castino

   90,000    1.8 %   $ 30.15    3/10/12    $ 1,104,667    $ 2,574,344

Marcia K. Sterling

   90,000    1.8 %   $ 30.15    3/10/12    $ 1,104,667    $ 2,574,344

 

(1) The options in this table are incentive stock options or nonstatutory stock options granted under the 1996 Stock Plan, and have exercise prices equal to the fair market value of the Company’s Common Stock on the date of grant. The above options have seven year terms and vest over four years. The shares subject to each option will immediately vest in full in the event the Company is acquired by merger or asset sale, unless the option is to be assumed by the acquiring entity. In addition, under the Change in Control Program, in the event that the Company terminates any of the Named Executive Officers within 12 months following a change in control, the shares subject to that person’s option will vest as to the number of shares that would have vested within the 12 months following such termination.

 

(2) The Company granted options to purchase 5.0 million shares of Common Stock during the three months ended April 30, 2005 to 2,374 employees.

 

(3) The options in this table may terminate before their expiration upon the termination of the optionee’s status as an employee or consultant or upon the optionee’s disability or death.

 

(4) Under rules promulgated by the SEC, the amounts in these two columns represent the hypothetical gain or “option spread” that would exist for the options in this table based on assumed stock price appreciation from the date of grant until the end of such options’ seven-year term at assumed annual rates of 5% and 10%. Annual compounding results in total appreciation of 41% (at 5% per year) and 95% (at 10% per year). The 5% and 10% assumed annual rates of appreciation are specified in SEC rules and do not represent the Company’s estimate or projection of future stock price growth. The Company does not necessarily agree that this method can properly determine the value of an option, and there can be no assurance that the potential realizable values shown in this table will be achieved.

 

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Equity Compensation Plan Information

 

The following table summarizes the number of outstanding options granted to employees and directors, as well as the number of securities remaining available for future issuance, under these plans at April 30, 2005 (number of securities in thousands):

 

     (a)

   (b)

   (c)

 

Plan category


  

Number of securities
to be issued upon
exercise of outstanding
options, warrants

and rights


   Weighted-average
exercise price of
outstanding
options, warrants
and rights


   Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))


 

Equity compensation plans approved by security holders (1)

   32,973    $ 14.41    19,701  (2)

Equity compensation plans not approved by security holders (3)

   5,556    $ 9.38    —    
    
  

  

Total

   38,529    $ 13.68    19,701  

 

(1) Included in these amounts are 0.1 million securities available to be issued upon exercise of outstanding options with a weighted-average exercise price of $6.79 related to equity compensation plans assumed in connection with previous business mergers and acquisitions.

 

(2) This amount includes 15.0 million securities available for future issuance under Autodesk’s 1998 Employee Qualified Stock Purchase Plan and reflects the reduction of 10.0 million shares available for future issuance approved by the Board of Directors in March 2005. In addition this amount excludes 25.0 million shares reserved under the 2006 Stock Plan, subject to approval by the Autodesk stockholders.

 

(3) Amounts correspond to Autodesk’s Nonstatutory Stock Option Plan, which was terminated by the Board of Directors in December 2004.

 

Descriptions of each of our compensation plans may be found in our 2005 Proxy Statement.

 

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Risk Factors Which May Impact Future Operating Results

 

We operate in a rapidly changing environment that involves a number of risks, many of which are beyond our control. The following discussion highlights some of these risks and the possible impact of these factors on future results of operations. If any of the following risks actually occur, our business, financial condition or results of operations may be adversely impacted, causing the trading price of our common stock to decline.

 

Because we derive a substantial portion of our net revenues from a limited number of products, if these products are not successful, our net revenues will be adversely affected.

 

We derive a substantial portion of our net revenues from sales of AutoCAD software, including products based on AutoCAD that serve specific vertical markets, upgrades to those products and products that are interoperable with AutoCAD. As such, any factor adversely affecting sales of these products, including the product release cycle, market acceptance, product performance and reliability, reputation, price competition, economic and market conditions and the availability of third-party applications, would likely harm our operating results.

 

In the Media and Entertainment Segment, our customers’ buying patterns are heavily influenced by advertising and entertainment industry cycles, which have resulted in and could have a negative impact on our future operating results. In addition, a number of the Media and Entertainment Segment’s Advanced Systems products rely primarily on workstations manufactured by Silicon Graphics, Inc. (“SGI”). Failure of SGI to deliver products or product upgrades in a timely manner would likely result in an adverse effect upon our financial results for a given period.

 

Our operating results fluctuate within each quarter and from quarter to quarter making our future revenues and operating results difficult to predict.

 

Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to change significantly or experience declines. Some of the factors that could cause our operating results to fluctuate include the timing of the introduction of new products by us or our competitors, slowing of momentum in upgrade or maintenance revenue, the adoption of the new accounting pronouncement, SFAS 123R, that will require us to record compensation expense for shares issued under our stock plans beginning in the first quarter of fiscal 2007 with a material impact on our results of operations, failure to achieve anticipated levels of customer acceptance of key new applications, unexpected costs or changes in marketing or other operating expenses, changes in product pricing or product mix, platform changes, delays in product releases, failure to continue momentum of annual release cycles or to move a significant number of customers from prior product versions in connection with our retirement programs, failure to convert our 2D customer base to 3D products, distribution channel management, changes in sales compensation practices, the timing of large systems sales, failure to effectively implement our copyright legalization programs, especially in developing countries, and general economic or political conditions, particularly in countries where we derive a significant portion of our net revenues.

 

We have also experienced fluctuations in operating results in interim periods in certain geographic regions due to seasonality or regional economic conditions. In particular, our operating results in Europe during the third quarter are usually affected by a slow summer period, and the Asia/Pacific operations typically experience seasonal slowing in the third and fourth quarters.

 

Our operating expenses are based in part on our 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 our profitability. Failure to continue to increase operating margins through rigorous cost controls would negatively affect future profitability. Further, gross margins may be adversely affected if our sales of AutoCAD LT, upgrades and advanced systems products, which historically have had lower margins, grow at a faster rate than sales of our higher-margin products.

 

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While we believe we currently have adequate internal control over financial reporting, we are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), beginning with the Annual Report on Form 10-K for the fiscal year ended January 31, 2005, we are required to furnish a report by our management on our internal control over financial reporting. Such report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Such report must also contain a statement that our auditors have issued an attestation report on management’s assessment of such internal controls.

 

While we have determined in our Management Report on Internal Control over Financial Reporting included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2005, that our internal control over financial reporting was effective as of January 31, 2005, we must continue to monitor and assess our internal control over financial reporting. If our management identifies one or more material weaknesses in our internal control over financial reporting and such weakness remains uncorrected at fiscal year end, we will be unable to assert such internal control is effective at fiscal year end. If we are unable to assert that our internal control over financial reporting is effective at fiscal year end (or if our auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would likely have an adverse effect on our business and stock price.

 

Existing and increased competition may reduce our net revenues and profits.

 

The software industry has limited barriers to entry, and the availability of desktop computers with continually expanding performance at progressively lower prices contributes to the ease of market entry. The markets in which we compete are characterized by vigorous competition, both by entry of competitors with innovative technologies and by consolidation of companies with complementary products and technologies. In addition, some of our competitors have greater financial, technical, sales and marketing and other resources. Furthermore, a reduction in the number and availability of compatible third-party applications may adversely affect the sale of our products. Because of these and other factors, competitive conditions in the industry are likely to intensify in the future. Increased competition could result in continued price reductions, reduced net revenues and profit margins and loss of market share, any of which would likely harm our business.

 

We believe that our future results depend largely upon our ability to offer products that compete favorably with respect to reliability, performance, ease of use, range of useful features, continuing product enhancements, reputation and price.

 

Net revenues or earnings shortfalls or the volatility of the market generally may cause the market price of our stock to decline.

 

The market price for our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price for our common stock may be affected by a number of factors, including the following: net revenues or earnings shortfalls, unexpected deviations in results of key performance metrics, and changes in estimates or recommendations by securities analysts; the announcement of new products or product enhancements by us or our competitors; quarterly variations in our or our competitors’ results of operations; developments in our industry; one-time events such as acquisitions, divestitures and litigation; and general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

 

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In addition, stock prices for many companies in the technology sector have experienced wide fluctuations that have often been unrelated to the operating performance of such companies. Historically, after periods of volatility in the market price of a company’s securities, a company becomes more susceptible to securities class action litigation. This type of litigation is often expensive and diverts management’s attention and resources.

 

Our efforts to develop and introduce new products and service offerings expose us to risks such as limited customer acceptance, costs related to product defects and large expenditures that may not result in additional net revenues.

 

Rapid technological change, as well as changes in customer requirements and preferences, characterize the software industry. We are devoting significant resources to the development of technologies, like our lifecycle management initiatives, and service offerings to address demands in the marketplace for increased connectivity and use of digital data created by computer-aided design software. As a result, we are transitioning to new business models, requiring a considerable investment of technical and financial resources. Such investments may not result in sufficient revenue generation to justify their costs, or competitors may introduce new products and services that achieve acceptance among our current customers, adversely affecting our competitive position. In particular, a critical component of our growth strategy is to convert our 2D customer base, including customers of AutoCAD, AutoCAD LT, and related vertical industry products, to our 3D products such as Autodesk Inventor Series or Autodesk Revit. However, should sales of AutoCAD, AutoCAD upgrades and AutoCAD LT products decrease without a corresponding conversion of customer seats to 3D products, our results of operations will be adversely affected.

 

Additionally, the software products we offer are complex, and despite extensive testing and quality control, may contain errors or defects. These defects or errors could result in the need for corrective releases to our software products, damage to our reputation, loss of revenues, an increase in product returns or lack of market acceptance of our products, any of which would likely harm our business.

 

We rely on third party technologies and if we are unable to use or integrate these technologies, our product and service development may be delayed.

 

We rely on certain software that we license from third parties, including software that is integrated with internally developed software and used in our 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 would likely harm our business.

 

In addition, for certain of our products and services, we rely on third party hardware and services, like the workstations supplied by SGI. Financial difficulties, product line changes, or even failure of these third parties, like SGI, may impact our ability to deliver such products and services and, as a result, may adversely impact our business.

 

Disruptions with licensing relationships and third party developers could adversely impact our business.

 

We license certain key technologies from third parties. Licenses may be restricted in the term or the use of such technology in ways that negatively affect our business. Similarly, we may not be able to obtain or renew license agreements for key technology on favorable terms, if at all, and any failure to do so could harm our business.

 

Our business strategy has historically depended in part on our relationships with third-party developers, who provide products that expand the functionality of our design software. Some developers may elect to support other products or may experience disruption in product development and delivery cycles or financial pressure during periods of economic downturn. In particular markets, this disruption would likely negatively impact these third-party developers and end users, which could harm our business.

 

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As a result of our strategy of partnering with other companies for product development our product delivery schedules could be adversely affected if we experience difficulties with our product development partners.

 

We partner with certain independent firms and contractors to perform some of our product development activities. We believe our partnering strategy allows us to, among other things, achieve efficiencies in developing new products and maintaining and enhancing existing product offerings.

 

Accordingly, our partnering strategy creates a dependency on such independent developers. Independent developers, including those who currently develop products for us in the United States and throughout the world, may not be able or willing to provide development support to us in the future. In addition, use of development resources through consulting relationships, particularly in non-US jurisdictions with developing legal systems, may be adversely impacted by, and expose us to risks relating to, evolving employment, export and intellectual property laws. These risks could, among other things, expose our intellectual property to misappropriation and result in disruptions to product delivery schedules.

 

Our international operations expose us to significant regulatory, intellectual property, collections, exchange fluctuations, taxation and other risks, which could adversely impact our future net revenues and increase our net expenses.

 

We anticipate that international operations will continue to account for a significant portion of our consolidated net revenues and will provide significant support to our overall development efforts. Risks inherent in our international operations include the following: unexpected changes in regulatory practices and tariffs, difficulties in staffing and managing foreign sales and development operations, longer collection cycles for accounts receivable, potential changes in tax laws, tax arrangements with foreign governments and laws regarding the management of data, greater difficulty in protecting intellectual property, possible future limitations upon foreign owned business, and the impact of fluctuating exchange rates between the U.S. dollar and foreign currencies in markets where we do business.

 

Our international results will also continue to be impacted by economic and political conditions in foreign markets generally or in specific large foreign markets. These factors may adversely impact our future international operations and consequently our business as a whole.

 

Our risk management strategy uses derivative financial instruments in the form of foreign currency forward and option contracts, for the purpose of hedging foreign currency market exposures, during each quarter, which exist as a part of our ongoing business operations. These instruments provide us some protection against currency exposures for only the current quarter. Significant fluctuations in exchange rates between the U.S. dollar and foreign currency markets may adversely impact our future net revenues.

 

General economic conditions may affect our net revenues and harm our business.

 

As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. If economic growth in the United States and other countries’ economies is slowed, many customers may delay or reduce technology purchases. This could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, weakness in the end-user market could negatively affect the cash flow of our distributors and resellers who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure. Any of these events would likely harm our business, results of operations and financial condition.

 

Our business could suffer as a result of risks associated with strategic acquisitions, divestitures and investments.

 

We periodically acquire or invest in businesses, software products and technologies that are complementary to our business through strategic alliances, equity investments and the like. For example, in March 2005 we acquired certain assets of Compass Systems GmbH. The risks associated with such acquisitions or investments

 

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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, as well as business divestitures, may involve significant transaction-related costs. We may not be successful in overcoming such risks, and such investments, acquisitions and divestitures may negatively impact our business. In addition, such investments and acquisitions have in the past and may in the future contribute to potential fluctuations in quarterly results of operations. The fluctuations could arise from transaction-related costs and charges associated with eliminating redundant expenses or write-offs of impaired assets recorded in connection with acquisitions. These costs or charges could negatively impact results of operations for a given period or cause quarter to quarter variability in our operating results.

 

If we do not maintain our relationships with the members of our distribution channel, or achieve anticipated levels of sell-through, our ability to generate net revenues will be adversely affected.

 

We sell our software products both directly to customers and through a network of distributors and resellers. Our ability to effectively distribute our products depends in part upon the financial and business condition of our reseller network. Computer software dealers and distributors are typically not highly capitalized and have previously experienced difficulties during times of economic contraction and may do so in the future. While we have processes to ensure that we assess the creditworthiness of dealers and distributors prior to our sales to them, if their financial condition were to deteriorate, they might not be able to make repeat purchases. In addition, the changing distribution models resulting from increased focus on direct sales to strategic accounts or from two-tiered distribution may impact our reseller network in the future. We rely significantly upon major distributors and resellers in both the U.S. and international regions, including Tech Data Corporation, who accounted for 12% of fiscal 2005 and first quarter of fiscal 2006 consolidated net revenue. The loss of or a significant reduction in business with those distributors or resellers or the failure to achieve anticipated levels of sell-through with any one of our major international distributors or large resellers could harm our business. In particular, if one or more of such resellers should be unable to meet their obligations with respect to accounts payable to us, we could be forced to write off such accounts, which could have a material adverse effect on our results of operations in a given period.

 

Product returns could exceed our estimates and harm our net revenues.

 

With the exception of contracts with some distributors, our sales contracts do not contain specific product-return privileges. However, we permit our distributors and resellers to return products in certain instances. For example, we generally allow our distributors and resellers to return older versions of products which have been superceded by new product releases. We anticipate that product returns will continue to be impacted by product update cycles, new product releases such as AutoCAD 2006 and software quality.

 

We establish reserves for stock balancing and product rotation. These reserves are based on historical experience, estimated channel inventory levels and the timing of new product introductions and other factors. While we maintain strict measures to monitor these reserves, actual product returns may exceed our reserve estimates, and such differences could harm our business.

 

If we are not able to adequately protect our proprietary rights, our business could be harmed.

 

We rely on a combination of patents, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. Despite such efforts to protect our proprietary rights, unauthorized parties from time to time have copied aspects of our software products or have obtained and used information that we regard as proprietary. Policing unauthorized use of our software products is time-consuming and costly. While we have recovered some revenues resulting from the unauthorized use of our software products, we are unable to measure the extent to which piracy of our software products exists, and software piracy can be expected to be a persistent problem. Furthermore, our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop similar technology.

 

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We may face intellectual property infringement claims that could be costly to defend and result in our loss of significant rights.

 

As more and more software patents are granted worldwide, as the number of products and competitors in our industry segments grows and as the functionality of products in different industry segments overlap, we expect that software product developers will be increasingly subject to infringement claims. Infringement, invalidity claims or misappropriation claims may be asserted against us, and any such assertions could harm our business. Litigation often becomes more likely in times of economic downturn. Additionally, certain patent holders have become more aggressive in threatening litigation in attempts to obtain fees for licensing the right to use patents. Any such claims or threats, whether with or without merit, could be time-consuming to defend, result in costly litigation and diversion of resources, or could cause product shipment delays or require us 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 would likely harm our business.

 

Changes in existing financial accounting standards or practices or taxation rules or practices may adversely affect our results of operations.

 

Changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have a significant adverse effect on our results of operations or the manner in which we conduct our business. Further, such changes could potentially affect our reporting of transactions completed before such changes are effective. For example, we currently are not required to record stock-based compensation charges to earnings in connection with stock option grants to our employees. However, the FASB issued SFAS 123R which will require us to record stock-based compensation charges to earnings for employee stock option grants commencing in the first quarter of fiscal 2007. Such charges will negatively impact our earnings.

 

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have no material changes to the disclosure on this matter made in Item 7A of our report on Form 10-K for the fiscal year ended January 31, 2005.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to Autodesk’s management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended April 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1.   LEGAL PROCEEDINGS

 

Information with respect to this Item may be found in Note 10 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, which information is incorporated into this Item by reference.

 

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no sales of unregistered securities during the three months ended April 30, 2005.

 

The information concerning issuer purchases of equity securities required by this Item is incorporated by reference herein to the section of this Report entitled “Issuer Purchases of Equity Securities” in Part I, Item 2 above.

 

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5.   OTHER INFORMATION

 

None.

 

ITEM 6.   EXHIBITS

 

Exhibits

 

The Exhibits listed below are filed as part of this Form 10-Q.

 

Exhibit 31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
Exhibit 31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
Exhibit 32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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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: June 7, 2005

 

AUTODESK, INC.

(Registrant)

/s/    ANDREW D. MILLER        


Andrew D. Miller

Vice President, Chief Accounting Officer and

Corporate Controller

(Principal Accounting Officer and Duly Authorized Officer)

 

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