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  • 10-K (Mar 19, 2010)
  • 10-K (Mar 20, 2009)
  • 10-K (Mar 28, 2008)

 
Quarterly Reports

 
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Autodesk 10-K 2007
Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2007

or

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

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)   (Zip Code)

Registrant’s telephone number, including area code: (415) 507-5000

 


Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange

on which registered

Common Stock, $0.01 Par Value  

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

 


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ¨    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”).    Yes ¨    No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x   Accelerated filer   ¨   Non-accelerated filer   ¨

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    

Yes ¨    No x

As of July 31, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, there were approximately 191.1 million shares of the registrant’s common stock outstanding that were held by non-affiliates, and the aggregate market value of such shares held by non-affiliates of the registrant (based on the closing sale price of such shares on the NASDAQ National Market (now known as the NASDAQ Global Select Market) on July 31, 2006) was approximately $6.5 billion. Shares of the registrant’s common stock held by each executive officer and director and by each entity that owns 5% or more of the registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of June 4, 2007, registrant had outstanding approximately 231.2 million shares of common stock.

 



Table of Contents

AUTODESK, INC. FORM 10-K

TABLE OF CONTENTS

 

          Page
PART I      
Item 1.   

Business

   5
Item 1A.   

Risk Factors

   17
Item 1B.   

Unresolved Staff Comments

   24
Item 2.   

Properties

   24
Item 3.   

Legal Proceedings

   25
Item 4.   

Submission of Matters to a Vote of Security Holders

   26
  

Executive Officers of the Registrant

   27
PART II      
Item 5.   

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   29
Item 6.   

Selected Financial Data

   30
Item 7.   

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

   33
Item 7A.   

Quantitative and Qualitative Disclosures About Market Risk

   69
Item 8.   

Financial Statements and Supplementary Data

   70
Item 9.   

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

   128
Item 9A.   

Controls and Procedures

   128
Item 9B.   

Other Information

   129
PART III      
Item 10.   

Directors, Executive Officers and Corporate Governance

   130
Item 11.   

Executive Compensation

   132
Item 12.   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   158
Item 13.   

Certain Relationships and Related Transactions, and Director Independence

   161
Item 14.   

Principal Accounting Fees and Services

   161
PART IV      
Item 15.   

Exhibits and Financial Statement Schedules

   163
  

Signatures

   164

 

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FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K contains forward-looking statements that are subject to assumptions, risks and uncertainties, many of which are discussed throughout this Annual Report, under Item 1A,”Risk Factors,” and elsewhere. Actual results may vary from those projected in the forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. If our assumptions about the future do not materialize or prove to be incorrect, the results could differ materially from those expressed or implied by such forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. A forward-looking statement is any statement that looks to future events, including any statements regarding the markets for our products or the success of our products in these markets, as well as any statements of expectation, plans, strategies and objectives of management for the future and any statement of assumptions underlying any of the foregoing. In some cases, you can identify a forward looking statement by such terms as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of these terms or other comparable terminology. We assume no obligation to update these forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.

EXPLANATORY NOTE

In this Form 10-K, Autodesk, Inc. (“Autodesk”) is restating its consolidated balance sheet as of January 31, 2006, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the fiscal years ended January 31, 2006 and 2005, and each of the quarters in fiscal 2006 as a result of a voluntary review of Autodesk’s historical stock option granting practices and related accounting issues. This restatement is more fully described in “Restatement of Consolidated Financial Statements,” in Note 2 of the Notes to Consolidated Financial Statements and in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

This Form 10-K also reflects the restatement of “Selected Consolidated Financial Data” in Item 6 for the four consecutive fiscal years in the period ended January 31, 2006, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 for the fiscal years ended January 31, 2006 and 2005.

Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q prior to fiscal 2007 have been affected by the restatements, have not been amended and should not be relied on.

In connection with the restatement of our consolidated financial statements, we applied judgment in choosing whether to revise measurement dates for prior option grants. In addition, if we determined that a measurement date needed to be revised, judgment was applied in determining the appropriate measurement date.

During the period of the voluntary stock option review, we determined that we incorrectly recorded certain credits to resellers. As a result, adjustments were made to increase net revenues and decrease deferred revenue in non-material amounts for fiscal years 2006 and 2005.

 

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The increase in net revenues and stock-based compensation expense resulting from the restatement is as follows (in millions):

 

Fiscal Year

   Net Revenues    Stock-based
Compensation
Expense
    Tax Effect(1)     Total
Adjustments,
Net of Tax
 

1992

   $ —      $ (0.1 )   $ —       $ (0.1 )

1993

     —        (2.0 )     0.7       (1.3 )

1994

     —        (1.2 )     0.4       (0.8 )

1995

     —        (1.2 )     0.4       (0.8 )

1996

     —        (0.6 )     0.2       (0.4 )

1997

     —        (0.5 )     0.2       (0.3 )

1998

     —        (0.3 )     0.1       (0.2 )

1999

     —        (0.5 )     0.2       (0.3 )

2000

     —        (1.3 )     0.2       (1.1 )

2001

     —        (1.5 )     0.2       (1.3 )

2002

     —        (3.9 )     1.1       (2.8 )

2003

     —        (5.0 )     0.8       (4.2 )

2004

     —        (4.8 )     (0.3 )     (5.1 )
                               

Total 1992 – 2004 impact

     —        (22.9 )     4.2       (18.7 )

2005

     5.1      (7.3 )     1.8       (0.4 )

2006

     14.0      (4.6 )     (4.7 )     4.7  
                               

Total:

   $ 19.1    $ (34.8 )   $ 1.3     $ (14.4 )
                               

(1)   Includes $2.5 million of payroll tax expenses.

The net of tax impact of the stock-based compensation adjustments in the first quarter of fiscal 2007 was insignificant. However, we restated our Consolidated Balance Sheet as of January 31, 2006 to properly reflect Retained Earnings, Common Stock and Deferred Compensation balances as a result of previous period adjustments. Please refer to Note 2 “Restatement of Consolidated Financial Statements” in the Notes to Consolidated Financial Statements. In addition, we have restated the pro forma expense under Statement of Financial Accounting Standards No. 123 (“SFAS 123”) in Part II, Item 8, Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements to include these adjustments for the years ended January 31, 2006 and January 31, 2005.

 

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PART I

 

ITEM 1. BUSINESS

GENERAL

Autodesk is one of the world’s leading design software and services companies. We offer solutions to customers in the architectural, engineering, construction, manufacturing, infrastructure and digital media markets. Our state of the art 2D and 3D software products enable our customers to experience their ideas before they are real by allowing them to create and document their designs and to visualize, simulate and analyze real-world performance early in the design process by creating digital prototypes. These capabilities give our customers the flexibility to optimize and improve their designs before they actually begin to build anything, helping save time and money, improve quality and foster innovation. Our horizontal design solutions, AutoCAD and AutoCAD LT, are two of the most widely used general design software tools in the world. In addition, we offer a range of discipline-specific design and documentation tools including our AutoCAD-based solutions and our 3D design solutions.

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 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. Our product and software architectures allow for extensibility and integration and most of our solutions are PC-based.

We have created a large global community of resellers, third-party developers and customers, which provides us with a broad reach into volume markets. Our reseller network is extensive and provides our customers with global resources for the purchase and support of our products as well as resources for effective and cost-efficient training services. We have a significant number of registered third-party developers who create products that run on top of our products, and thereby further extend our reach into volume markets. Our installed base of millions of users has made Autodesk’s products a worldwide design software standard. Users trained on Autodesk products are broadly available both from universities and the existing workforce, reducing the cost of training for our customers.

Our strategy is to deliver advanced solutions to create and leverage digital design data, in order to improve our customers’ productivity throughout the design, build, manufacture and management of the customers’ projects. To execute against this strategy we are focused on delivering strong products annually, migrating our customers to more advanced technologies, expanding our desktop offerings in adjacent markets and to adjacent users, as well as growing our business in emerging economies such as China, India, Eastern Europe and Latin America. We attempt to release new product versions on a regular basis and synchronize our major product retirements with those releases. Our most recent major product releases occurred in March 2007.

We are organized into two reportable operating segments: the Design Solutions Segment, which accounted for 87% of net revenue in fiscal 2007, and the Media and Entertainment Segment, which accounted for 13% of net revenue in fiscal 2007. A summary of our condensed net revenues and results of operations for our business segments is found in Note 13, “Segments,” in the Notes to Consolidated Financial Statements.

The Design Solutions Segment derives revenues from the sale of software products and services for professionals and consumers who design, build, manage and own building projects; who design, manufacture and manage manufactured goods; and who design, build, manage and own infrastructure projects for both public and private users. The principal products sold by the Design Solutions Segment include AutoCAD and AutoCAD LT (2D design products), which accounted for 40% of our net revenues in fiscal 2007, and our discipline-specific AutoCAD-based products and 3D model-based design and documentation products (Autodesk Inventor Family of Products, Autodesk Revit Family of Products and Autodesk Civil 3D), which accounted for 22% of our net revenues in fiscal 2007. In addition to software products, the Design Solutions Segment offers a range of services including consulting, support and training.

 

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During fiscal 2007, the Design Solutions Segment consisted of a general design platform division and industry-specific business divisions. These were:

 

   

Platform Technology Division and Other, which includes revenue from Autodesk Collaboration Services and Autodesk Consulting

 

   

Manufacturing Solutions Division

 

   

Building Solutions Division

 

   

Infrastructure Solutions Division

Beginning in fiscal 2008, we reorganized our Design Solutions Segment business divisions to be better aligned with our customers. The newly formed divisions are:

 

   

Platform Solutions and Emerging Business Division and Other, which includes AutoCAD, AutoCAD LT, Geospatial and other emerging businesses

 

   

Architecture, Engineering and Construction Division, which includes the old Building Solutions Division, our civil design solutions, as well as our collaborative project management tools Buzzsaw and Constructware, and

 

   

Manufacturing Solutions Division, which was not impacted by the reorganization.

Because the reorganization was not effective until the beginning of fiscal 2008, we will present divisional information in this Form 10-K as it was organized during fiscal 2007.

The Media and Entertainment Segment derives revenues from the sale of products to post-production facilities, broadcasters and creative professionals for a variety of applications, including feature films, television programs, commercials, music and corporate videos, interactive game production, design visualization, web design and interactive web streaming. The Media and Entertainment Segment is comprised of two business lines: Animation, including visualization, and Advanced Systems. Our animation products provide advanced tools for 3D modeling, animation, rendering solutions, and design visualization and visual effects production. Our Advanced Systems products provide color grading, editing, finishing and visual effects, compositing, media mastering and encoding technology, and increase the productivity of creative professionals. Key markets served by the Media and Entertainment Segment include PC animation, advertising, film, television and console game development, and design visualization.

Corporate Information

We were incorporated in California in April 1982 and were reincorporated in Delaware in May 1994. Our principal executive office is located at 111 McInnis Parkway, San Rafael, California 94903 and the telephone number at that address is (415) 507-5000. Our internet address is www.autodesk.com. The information posted on our website is not incorporated into this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our Investor Relations Web site at www.autodesk.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

PRODUCTS

Design Solutions Segment

The Design Solutions Segment accounted for 87% of overall net revenues in fiscal 2007. The principal product offerings from the different divisions of the Design Solutions Segment are described below:

 

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Platform Technology Division and Other

The Platform Technology Division and Other accounted for 51% of the Design Solutions Segment revenues and 44% of overall net revenues in fiscal 2007. The division’s revenue includes revenue from sales of AutoCAD and AutoCAD LT as well as from Autodesk Collaboration Services and Autodesk Consulting. The division’s principal product offerings include:

AutoCAD

AutoCAD software, which accounted for more revenue than any other product, is a customizable and extendable computer aided design (CAD) application for 2D drafting, detailing, functional design documentation and basic 3D model-based design. AutoCAD provides digital tools that can be used independently and in conjunction with other specific applications in fields ranging from construction to manufacturing to process plant design and mapping. Architects, engineers, drafters and design related professionals use AutoCAD to create, manage and share critical design data.

AutoCAD LT

AutoCAD LT software is used for 2D drafting and detailing by design professionals who require full DWG file format compatibility and document sharing capability without the need for software customization or 3D functionality. Users can securely share all design data with team members who use AutoCAD or Autodesk products built on AutoCAD. AutoCAD LT is our second largest revenue-generating product.

Autodesk Buzzsaw

Autodesk Buzzsaw, offered by Autodesk Collaboration Solutions, is an on-demand collaboration service that allows users to store, manage and share project information from any Internet connection. The Autodesk Buzzsaw online work environment integrates a secure project hosting service with CAD-related software, tools and services to enable increased project visibility, project reporting, project management, and integrated design review and markup. Autodesk Buzzsaw helps users simplify and centralize all project-related documents and information and benefit from the ability to connect with their project team anytime, regardless of organizational or geographical boundaries. The primary markets targeted are the homebuilding, retail hospitality, infrastructure, engineering and construction industries.

Manufacturing Solutions Division

The Manufacturing Solutions Division accounted for 21% of the Design Solutions Segment revenues in fiscal 2007. The division provides the mainstream manufacturing industry with comprehensive design and data management solutions enabling our manufacturing customers to rapidly adopt 3D model-based design, create designs in a simple 2D/3D environment, and manage design data. The division’s principal product offerings include:

Autodesk Inventor Family of Products

Autodesk Inventor Series and Autodesk Inventor Professional products account for a majority of the Manufacturing Solution Division’s revenues. The Autodesk Inventor Family of Products delivers Autodesk Mechanical Desktop, based on AutoCAD software, and Autodesk Inventor software in one solution. Autodesk Inventor software is a 3D mechanical design creation tool that provides users a 3D assembly-centric solid modeling system and 2D drawing production system together with adaptive design functionality. Users benefit from on-demand large assembly segment loading, adaptive design, layout and assembly functionality for solving function before form, built-in collaboration and design management tools and AutoCAD file compatibility. Customers who purchase Autodesk Inventor Professional products have access to a comprehensive, integrated

 

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design solution that combines Autodesk Inventor software for 2D and 3D design and documentation, AutoCAD Mechanical for 2D drawing and detailing and Autodesk Vault for data management.

AutoCAD Mechanical

AutoCAD Mechanical software offers purpose-built 2D mechanical design and engineering tools that are seamlessly compatible with all AutoCAD-based applications. AutoCAD Mechanical accelerates the design process by providing standards-based libraries of parts and tools for automating design tasks.

Building Solutions Division

The Building Solutions Division accounted for 15% of the Design Solutions Segment revenues in fiscal 2007. Supporting information and management needs throughout the building lifecycle, Autodesk building industry solutions enable customers to eliminate inefficiencies in building design, construction and management. The division’s solutions range from the most advanced technology for building information modeling (“BIM”) —a new paradigm for building design, documentation and construction—to the most widely adopted discipline-specific drawing solutions. BIM also enables users to create sustainable or “green” building designs through analysis of materials, quantities, energy use, and lighting in a virtual BIM. The division’s principal product offerings include:

Autodesk Architectural Desktop

Designed for architects and built on the AutoCAD platform, Autodesk Architectural Desktop software supports existing 2D design practices while enabling users to gradually introduce increasingly powerful industry-specific features to save time and improve coordination. It offers flexibility in implementation, the efficiency of real-world building objects and AutoCAD-based design and documentation productivity for architects.

Autodesk Revit Family of Products

Purpose-built for BIM, the Autodesk Revit Family of Products collects information about the building project and coordinates this information across all other representations of the project so that every drawing sheet, 2D and 3D view and schedule is based on internally consistent and complete information from the same underlying building database. The Autodesk Revit Family of Products provides architects, design-build teams and other building industry professionals a state-of-the-art architectural model-based design and documentation system that works the way they think.

Infrastructure Solutions Division

The Infrastructure Solutions Division accounted for 13% of the Design Solutions Segment revenues in fiscal 2007. The division’s family of Civil Engineering and Geospatial Solutions and services enable utilities, governments and civil engineering firms to design, build and manage their critical infrastructure assets more effectively. Autodesk Infrastructure Solutions help customers to streamline processes, ensure service continuity, enhance security, create accountability, and decrease risk by enabling extended teams to use the most up-to-date, accurate spatial information efficiently across the entire organization. The division’s principal product offerings include:

Autodesk Civil 3D

Autodesk Civil 3D model-based design and drafting software provides civil engineers, designers, surveyors and drafters with one comprehensive product for the design, drafting, and management of a wide range of civil engineering project types, including site development, subdivision design, local road rehabilitation, and highway design. Civil 3D software’s dynamic engineering model intelligently links design and production drafting,

 

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greatly reducing the time it takes to implement design changes and enabling customers to evaluate multiple “what-if” scenarios with speed and flexibility.

Autodesk Land Desktop

Autodesk Land Desktop, based on AutoCAD software, provides powerful productivity and drafting tools for civil engineers, designers, surveyors and draftors to create parcel and land plans from large data sets.

Autodesk Map 3D

Autodesk Map 3D software provides practical mapping functionality to engineers and geospatial professionals who need an open, flexible way to integrate CAD and geographic information system (“GIS”) data throughout their organization. It contains the complete AutoCAD toolset to enhance productivity, and also offers specialized functionality for map cleanup, geospatial analysis, and access to GIS data sources.

Media and Entertainment Segment

The Media and Entertainment Segment accounted for 13% of overall net revenues in fiscal 2007. Principal product offerings in the Media and Entertainment Segment’s Animation and Advanced Systems business lines include:

Animation

Autodesk Maya

Autodesk Maya software provides 3D modeling, animation, effects and rendering solutions that enable film and video artists, game developers and design visualization professionals to create engaging, lifelike digital images, realistic animations and extraordinary visual effects.

Autodesk 3ds Max

Autodesk 3ds Max software provides 3D modeling, animation and rendering solutions that enable game developers, design visualization professionals and visual effects artists to create realistic digital images and animations and to communicate abstract or complex mechanical, architectural, engineering and construction concepts.

Advanced Systems

Autodesk Flame, Autodesk Inferno and Autodesk Flint

Autodesk Flame, Autodesk Inferno and Autodesk Flint systems are our scalable line of interactive real-time visual effects and graphics design solutions. They offer scalable performance to service a wide range of client workflows from interactive broadcast design to real-time high resolution film work. They offer the ability to interactively create, composite and edit highly challenging sequences that merge live action with computer-generated imagery using 3D graphics and mixed resolutions. Post-production facilities and broadcasters integrate these turnkey systems within their production cues as either dedicated suites or as networked production environments.

Autodesk Smoke and Autodesk Fire

Autodesk Smoke and Autodesk Fire systems are our scalable line of interactive real-time non-linear editing and finishing systems that enable editors to edit, conform and finish television commercials, broadcast programming, film trailers and feature films as well as other high value media content.

 

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Autodesk Subscription Program and Autodesk Upgrade Program

In addition to sales of new software licenses, we offer our customers two ways to migrate to the most recent version of our products: the Autodesk Subscription Program and the Autodesk Upgrade Program. These programs are available for a majority of our products.

Autodesk Subscription Program (Maintenance Services)

Under the Autodesk Subscription Program, customers who own a perpetual use license for the most recent version of the underlying product are able to purchase a subscription that provides them with unspecified upgrades when-and-if-available, download e-Learning courses and obtain optional on-line support over a one year or multi-year subscription period. Revenues from our Subscription Program are reported separately on our Consolidated Statements of Income and are referred to throughout this document as maintenance revenue.

Autodesk Upgrade Program

The Autodesk Upgrade Program allows customers to purchase upgrades, but only to the extent that they are still on a supported version of the product. Typically, the cost to upgrade is based on a multiple of the number of versions the customer is upgrading. An existing customer also has the option to upgrade to a different, more recent discipline-specific or 3D product, which generally has a higher price, for a premium fee; we refer to this as a crossgrade. The cost of a crossgrade is substantially less than the cost of purchasing a new seat and is available to subscription customers as well. Revenues from our upgrade and crossgrade programs are reported on our Consolidated Statements of Income in License and other.

PRODUCT DEVELOPMENT AND INTRODUCTION

We continue to enhance our product offerings and develop new products to meet changing customer demands. Research and development expenditures were $406.3 million or 22% of fiscal 2007 net revenues, $303.2 million or 20% of fiscal 2006 net revenues and $241.5 million or 19% of fiscal 2005 net revenues. Our software is primarily developed internally; however, we do contract services from software development firms, consultants and independent contractors to supplement our development efforts. Additionally, we acquire products or technology developed by others by purchasing some or all of the assets or stock of the entity that owns rights to the technology.

For example, in April 2006, we acquired a 28% ownership in Hanna Strategies Holdings, Inc. (“Hanna Strategies”), a privately-held software development firm with operations in the U.S. and China. Hanna Strategies has been one of our software developers since fiscal 2003. Our relationship with Hanna Strategies is intended to provide more efficient resources for the development of new products and the maintenance and enhancement of existing product offerings, among other things. As of January 31, 2007, Hanna Strategies employed approximately 1,100 software developers primarily in China. Expenditures attributable to development work contracted from Hanna Strategies represented 8%, 9% and 6% of our total research and development expenses for fiscal years 2007, 2006 and 2005, respectively.

The majority of our basic research and product development is performed in the U.S. and Canada, and to a growing extent in China. Our China Application Development Center develops products for the worldwide market as well as products to specifically address the Chinese market. Translation and localization of foreign-market versions, as well as some product development, is performed by development teams or contractors in other local markets, particularly in our Singapore and Switzerland offices. We generally translate and localize our products into French, Italian, German, Spanish, Japanese and various Chinese dialects. We plan to increase our product development operations internationally over the next several years. We believe that 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

 

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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 emerging economies where software piracy is a substantial problem.

The technology industry is characterized by rapid technological change in computer hardware, operating systems and software, as well as changes in customer requirements and preferences. To keep pace with these changes, we maintain an aggressive program of new product development to address demands in the marketplace for our products. We dedicate considerable technical and financial resources to research and development to further enhance our existing products and to create new products and technologies. However, these investments may not result in sufficient revenue generation to justify their costs or our competitors may introduce new products and services that achieve acceptance among our current customers, either of which would likely adversely affect our competitive position.

Our software products are complex and, despite extensive testing and quality control, may contain errors or defects. These defects or errors could result in 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 actively recruit and hire experienced software developers and license and acquire complementary software technologies and businesses. In addition, we actively collaborate with and support third-party software developers who offer products that enhance and complement our products.

Independent firms and contractors perform some of our product development activities. Because talented development personnel are in high demand, these independent firms and contractors may not be able to provide development support to us in the future. In addition, we license some technology from third parties. Use of this licensed technology may be restricted in ways that negatively affect our business in the future. We may not be able to obtain and renew existing license agreements on favorable terms, if at all, and any failure to do so would likely harm our business.

In addition, our business strategy has historically depended in part on our relationships with a network of third-party developers who develop their own products that expand the functionality of our software. Some third-party 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. These disruptions could negatively impact these third-party developers and, in turn, end users, which could harm our business.

MARKETING AND SALES

We sell our products and services in over 160 countries primarily through an indirect channel consisting of distributors and resellers. To a lesser extent we also sell directly to customers who are primarily large corporations. Our indirect channel model includes both a two-tiered distribution structure where distributors sell to resellers and a one-tiered structure where Autodesk sells directly to resellers. We have a network of approximately 1,700 resellers and distributors worldwide. In addition, over 2,900 developers in the Autodesk Developer Network create interoperable products that further enhance the range of integrated solutions available to our customers. For fiscal 2007, approximately 85% of our revenues were derived from indirect channel sales through distributors and resellers and we expect that the majority of our revenues will continue to be derived from indirect channel sales in the future. One distributor, Tech Data Corporation and its affiliates, accounted for 12%, 11% and 12% of our net revenues for fiscal 2007, 2006 and 2005, respectively.

Our customer-related operations are divided into three geographic regions, the Americas, Europe/Middle East/Africa (EMEA) and Asia/Pacific, and are supported by global marketing and sales organizations. These organizations develop and manage overall marketing and sales programs and work closely with a network of domestic and international sales offices.

 

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We also work directly with reseller and distributor sales organizations, computer manufacturers, other software developers and peripheral manufacturers in cooperative advertising, promotions and trade-show presentations. We employ mass-marketing techniques such as web casts, seminars, telemarketing, direct mailings and advertising in business and trade journals. We have a worldwide user group organization and we have created on-line user communities dedicated to the exchange of information related to the use of our products.

Our ability to effectively distribute our products depends in part upon the financial and business condition of our distributor and reseller networks. Computer software resellers 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 selling to them, if their financial condition were to deteriorate they might not be able to make repeat purchases. The loss of, or a significant reduction in, business with any one of our major international distributors or large resellers could harm our business. Our reliance on distributors and resellers subjects us to other risks; see Item 1A, “Risk Factors,” for further discussion.

We intend to continue to make our products available in foreign languages. We believe that international sales will continue to comprise a significant portion of our net revenues. Economic weakness in any of the countries where we generate a significant portion of our net revenues could have an adverse effect on our business in those countries. A summary of our financial information by geographic location is found in Note 13, “Segments” in the Notes to Consolidated Financial Statements.

CUSTOMER AND RESELLER SUPPORT

We provide technical support and training to customers through a leveraged support model, augmented by programs designed to address certain specific needs directly. End users rely primarily on their resellers and distributors for technical support; however, we do provide certain direct support for our high-end Media and Entertainment Segment hardware systems. We support the resellers and distributors through technical product training, sales training classes, the Internet and direct telephone support. We also provide optional online support directly to end users through our Subscription Program and support content is also available on the Product Support portion of our Internet site. There are also a number of user group forums in which customers are able to share information.

EDUCATIONAL PROGRAMS

We offer education programs and specially priced software purchasing options tailored for educational institutions, students, and faculty to train the next generation of users. We also offer classroom support, including standardized curricula developed by educators, instructor development, and a rich assortment of online learning resources. Users trained on Autodesk products are broadly available both from universities and the existing workforce, reducing the cost of training for our customers.

DEVELOPER PROGRAMS

One of our key strategies is to maintain an open-architecture design of our software products to facilitate third-party development of complementary products and industry-specific software solutions. This approach enables customers and third parties to customize our products for a wide variety of highly specific uses. We offer several programs that provide marketing, sales, technical support and programming tools to developers who develop add-on applications for our products.

BACKLOG

We typically ship products shortly after receipt of an order, which is common in the software industry. Our aggregate backlog is primarily comprised of deferred revenue. Deferred revenue consists primarily of deferred

 

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maintenance revenue from our Subscription Program. To a lesser extent, deferred revenue consists of deferred license and other revenue derived from Autodesk Buzzsaw services, consulting services and deferred license sales. Backlog also includes 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 both orders with current ship dates and orders with ship dates beyond the current fiscal period. Aggregate backlog was $395.8 million at January 31, 2007, of which $378.8 million was deferred revenue and $17.0 million related to current software license product orders which had not yet shipped at the end of the fiscal year. Aggregate backlog was $283.5 million at January 31, 2006, of which $266.5 million was deferred revenue and $17.0 million related to current software license product orders which had not yet shipped. Deferred revenue increased over the prior year primarily due to an increase in deferred maintenance revenue resulting from the success of our Subscription Program, and we expect the increase in deferred maintenance revenue to continue to increase in the future. We do not believe that aggregate backlog as of any particular date is necessarily indicative of future results.

COMPETITION

The markets for our products are highly competitive and subject to rapid change. In addition, in each of our markets, we compete with numerous regional and specialized software and services companies.

Our Design Solutions Segment competes with vendors that specialize primarily in one of the three industry segments in which we compete. Our competitors range from large, global, publicly traded software companies to small, geographically focused firms. Our primary global competitors in this segment include Adobe Systems Inc., Dassault Systemes and its subsidiary SolidWorks Corporation, Google Inc., Environmental Systems Research Institute, Inc. (ESRI), Intergraph Corporation, Nemetschek AG, Parametric Technology Corporation, and UGS PLM Software, a global division of the Siemens AG, and Bentley Systems, Inc.

Our Media and Entertainment Segment competes with a wide range of different companies from large publicly-traded corporations to small private entities. Large organizations that produce products that compete in some or all of our markets include Avid Technology, Adobe Systems Inc., Apple Computer Inc., SONY and Thomson. The media and entertainment market is highly fragmented with complex interdependencies between many of the larger corporations. As a result, some of our competitors also own subsidiaries that are our clients or our partners in developing or bringing to market some of our solutions.

The software industry has limited barriers to entry, and the availability of desktop computers with continually expanding performance capacity at progressively lower prices contributes to the ease of market entry. The design software market is characterized by vigorous competition in each of the vertical markets in which we compete, both by entry of competitors with innovative technologies and by consolidation of companies with complementary products and technologies.

Because of these and other factors, competitive conditions in these industries are likely to continue to intensify in the future. Increased competition could result in price reductions, reduced net revenues and profit margins and loss of market share, any of which could harm our business. Furthermore, in certain markets, some of our competitors have greater financial, technical, sales and marketing and other resources.

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

INTELLECTUAL PROPERTY AND LICENSES

We protect our intellectual property through a combination of patents, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions. Nonetheless, our intellectual property rights may

 

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not be successfully asserted in the future or may be invalidated, circumvented or challenged. In addition, the laws of various foreign countries where our products are distributed do not protect our intellectual property rights to the same extent as U.S. laws. Enforcement of intellectual property rights against alleged infringers can sometimes lead to costly litigation and counterclaims. Our inability to protect our proprietary information could harm our business.

From time to time, we receive claims alleging infringement of a third party’s intellectual property rights, including patents. Disputes involving our intellectual property rights or those of another party have in the past and may in the future lead to, among other things, costly litigation or product shipment delays, which could harm our business.

We retain ownership of software we develop. All software is licensed to users and provided in object code pursuant to either shrink-wrap, embedded or on-line licenses, or signed license agreements. These agreements contain restrictions on duplication, disclosure and transfer.

We believe that because of the limitations of laws protecting our intellectual property and the rapid, ongoing technological changes in both the computer hardware and software industries, we must rely principally upon software engineering and marketing skills to maintain and enhance our competitive market position.

While we have recovered some revenues resulting from the unauthorized use of our software products, we are unable to measure the full extent to which piracy of our software products exists. We believe, however, that software piracy is and can be expected to be a persistent problem.

PRODUCTION AND SUPPLIERS

Production of our Design Solutions Segment and certain Media and Entertainment Segment software products involves duplication of the software media and the printing of user manuals. The purchase of media and the transfer of the software programs onto media for distribution to customers are performed by us and by licensed subcontractors. Media for our products include CD-ROMs which are available from multiple sources. User manuals for our products and packaging materials are produced to our specifications by outside sources. Production is either performed in leased facilities operated by us or by independent third-party contractors. To date, we have not experienced any material difficulties or delays in the production of our software and documentation.

In addition, the Advanced Systems business line has historically relied on third-party vendors for the supply of hardware components used in its systems. In the past, many of the Advanced Systems software products ran on workstations manufactured by Silicon Graphics, Inc. (“SGI”). During fiscal 2007, the majority of our Advanced Systems product revenues migrated to standard, open, PC-based Linux platforms and away from the SGI platform. We still generate some revenues from SGI hardware platforms and there is a risk that we may not be able to migrate all customer orders to Linux based systems. See Item 1A, “Risk Factors,” for further discussion of this risk.

EMPLOYEES

As of January 31, 2007, we employed 5,169 people. None of our employees in the United States are represented by a labor union; however, in certain foreign countries, our employees are represented by work councils. We have never experienced any work stoppages and believe our employee relations are good. Reliance upon employees in other countries entails various risks that possible government instability or regulation unfavorable to foreign-owned businesses could negatively impact our business in the future.

Competition in recruiting personnel in the software industry, especially highly skilled engineers, is intense. We believe our continued growth and future success is highly dependent on our continued ability to attract, retain and motivate highly skilled employees.

 

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BUSINESS COMBINATIONS

Over the past three years, we acquired new technology or supplemented our technology by purchasing businesses focused in specific markets or industries. During this time period, we acquired the following businesses:

 

Date of closing

  

Company

  

Details

March 2006

   Emerging Solutions, Inc. (“Constructware”)    The Constructware acquisition provided on-demand communication and collaboration solutions and enabled Autodesk to rapidly expand its Buzzsaw collaborative project management solution with Constructware’s cost, bid and risk management capabilities. The acquisition has been integrated and the goodwill acquired was assigned to the Platform Technology Division of the Design Solutions Segment.

January 2006

  

Alias Systems Holdings, Inc.

(“Alias”)

   The acquisition of Alias provided our customers with enhanced technology and industry talent for their design, animation, data management and visualization needs in the animation, film, and game development markets and in the automotive and consumer products conceptual design markets. The acquisition has been integrated and the goodwill acquired was assigned to the Media and Entertainment Segment and the Manufacturing Solutions Division of our Design Solutions Segment.

December 2005

  

Applied Spatial Technologies

(“AST”)

   The assets acquired from AST served as our entry into the facilities management space market, which enabled our customers to create, manage and share building data throughout the entire building life cycle. The goodwill acquired was assigned to the Building Solutions Division of our Design Solutions Segment.

October 2005

  

Engineering Intent Corporation

(“Engineering Intent”)

   The assets acquired from Engineering Intent provided sales and engineering automation technology designed to help customers ‘engineer-to-order’ during their sales cycle, thereby reducing costs and allowing for efficient development of customized solutions. The goodwill acquired was assigned to the Manufacturing Solutions Division of our Design Solutions Segment.

August 2005

  

Solid Dynamics, SA

(“Solid Dynamics”)

   The acquisition of Solid Dynamics provided kinematics and dynamics physics technology which designers use to simulate the motion of mechanical assemblies without the expense of building physical prototypes, thereby reducing costs and time-to-market. The goodwill acquired was assigned to the Manufacturing Solutions Division of our Design Solutions Segment.

June 2005

  

c-plan AG

(“c-plan”)

   The acquisition of c-plan expanded our geospatial technology product portfolio and strengthened our market position throughout central Europe. The goodwill acquired was assigned to the Infrastructure Solutions Division of our Design Solutions Segment.

 

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Date of closing

  

Company

  

Details

June 2005

  

Colorfront Ltd.

(“Colorfront”)

   The assets acquired from Colorfront provided us with comprehensive new expertise in film laboratory processes, digital post-production, color science, image processing and hardware platform organization. The goodwill acquired was assigned to the Media and Entertainment Segment.

March 2005

  

Compass Systems GmbH

(“Compass”)

   The assets acquired from Compass allowed 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 goodwill acquired was assigned to the Manufacturing Solutions Division of our Design Solutions Segment.

June 2004

  

DESC, Inc.

(“DESC”)

   The assets acquired from DESC provided Autodesk initial entry into the disaster response market with purpose-built applications developed around Autodesk MapGuide. The goodwill acquired was assigned to the Infrastructure Solutions Division of the Design Solutions Segment.

May 2004

   Unreal Pictures    The acquisition of Unreal Pictures gave Autodesk complete access to a comprehensive character design software solution and a proven software development team. Autodesk integrated the Unreal Pictures technology (known as Character Studio) into our 3ds Max product in October 2004. The acquisition has been integrated into the Media and Entertainment Segment. The goodwill acquired was assigned to the Media and Entertainment Segment.

April 2004

  

MechSoft.com, Inc.

(“MechSoft”)

   The assets acquired from MechSoft complemented Autodesk’s solutions with tools that enable users to embed engineering calculations into their designs based on how parts function. Autodesk integrated key components of MechSoft’s technology into Autodesk Inventor Family of Products. The goodwill acquired was assigned to the Manufacturing Solutions Division of the Design Solutions Segment.

For additional information on certain of the acquired businesses described above, see Note 15, “Business Combinations” in the Notes to Consolidated Financial Statements.

 

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ITEM 1A. RISK FACTORS

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.

As a result of our voluntary review of stock option practices and related restatements, the SEC has initiated an informal investigation. This investigation may not be resolved favorably and has required and may continue to require a significant amount of management time and attention and accounting and legal resources, which could adversely affect our business, results of operations, and cash flows.

We are currently being investigated by the SEC in connection with our historical stock option practices and related accounting. The period of time necessary to resolve the informal SEC investigation is uncertain, and this matter could require significant management and financial resources which could otherwise be devoted to the operation of our business. In addition, considerable legal, tax and accounting expenses related to this matter have been incurred to date and significant expenditures may continue to be incurred in the future. We cannot predict the outcome of the SEC investigation. If we or any of our current or former officers or directors is subject to an adverse finding resulting from the SEC investigation, we could be required to pay damages or penalties or have other remedies imposed upon us which could adversely affect our business, results of operations, financial position, cash flows and the trading price of our securities. In addition, if the informal investigation continues for a prolonged period of time, this could have the same effects, regardless of the outcome of the investigation.

We have been named as a party in lawsuits related to our historical stock option practices and related accounting, and we may be named in additional litigation in the future, all of which could result in an unfavorable outcome and have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price for our securities.

At least three lawsuits have been filed against us and our current directors and officers and certain of our former directors and officers relating to our historical stock option practices and related accounting. See Item 3, “Legal Proceedings” for a more detailed description of these proceedings. These actions are in the preliminary stages, and the ultimate outcomes could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price for our securities. We may become the subject of additional private or government actions regarding these matters in the future, including shareholder or employee litigation. Litigation may be time-consuming, expensive and disruptive to normal business operations, and the outcome of litigation is difficult to predict. The defense of these lawsuits will result in significant expenditures and the continued diversion of our management’s time and attention from the operation of our business, which could impede our business. All or a portion of any amount we may be required to pay to satisfy a judgment or settlement of any or all of these claims may not be covered by insurance.

If we do not maintain compliance with the listing requirements of the NASDAQ Global Select Market, our common stock could be delisted, which could, among other things, reduce the price of our common stock and the levels of liquidity available to our stockholders.

In connection with the voluntary review and the restatement of our financial statements, we were delinquent in filing certain of our periodic filings with the SEC, and consequently we were not in compliance with the listing requirements under the NASDAQ Global Select Market’s Marketplace Rules. As a result, we underwent an extensive review and hearing process with the NASDAQ Global Select Market to determine our listing status. The NASDAQ Global Select Market ultimately permitted our securities to remain listed; however, our securities could be delisted in the future if we do not maintain compliance with applicable listing requirements. If our securities are delisted from the NASDAQ Global Select Market, they would subsequently be transferred to the National Quotation Service Bureau, or “Pink Sheets.” The trading of our common stock on the Pink Sheets may

 

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reduce the price of our common stock and the levels of liquidity available to our stockholders. In addition, the trading of our common stock on the Pink Sheets would materially adversely affect our access to the capital markets and our ability to raise capital through alternative financing sources on terms acceptable to us or at all. Securities that trade on the Pink Sheets are no longer eligible for margin loans, and a company trading on the Pink Sheets cannot avail itself of Federal preemption of state securities or “blue sky” laws, which adds substantial compliance costs to securities issuances, including pursuant to employee option plans, stock purchase plans and private or public offerings of securities. If we are delisted in the future from the NASDAQ Global Select Market and transferred to the Pink Sheets, there may also be other negative implications, including the potential loss of confidence by suppliers, customers and employees and the loss of institutional investor interest in our company.

Because we derive a substantial portion of our net revenues from AutoCAD-based software 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 competition, performance and reliability, reputation, price competition, economic and market conditions and the availability of third-party applications, would likely harm our operating results.

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. In particular, for fiscal 2007, we adopted Statement of Financial Accounting Standards No. 123R (“SFAS 123R”) which requires us to record stock-based compensation charges to earnings for employee stock option grants using a fair-value-based method for determining such charges. We believe that the adoption of SFAS 123R will continue to materially adversely impact our earnings and may impact the manner in which we conduct our business.

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 net revenues and will provide significant support to our overall development efforts. Risks inherent in our international operations include the following: the impact of fluctuating exchange rates between the U.S. dollar and foreign currencies in markets where we do business, 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, possible future limitations upon foreign owned businesses, and greater difficulty in protecting intellectual property.

Our international results will also continue to be impacted by economic and political conditions in foreign markets generally and in specific large foreign markets, especially by changes in foreign exchange rates between the U.S. dollar and foreign currencies. 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

 

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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.

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”), we are required to furnish a report by our management on our internal control over financial reporting. The 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. The report must also contain a statement that our independent registered public accounting firm has 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 this Annual Report on Form 10-K that our internal control over financial reporting was effective as of January 31, 2007, 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 independent registered public accounting firm is 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.

As a result of the voluntary review of Autodesk’s historical stock option grant practices, our management identified a material weakness in our internal controls over financial reporting in periods ending prior to March 2005. For the period between July 2000 and February 2005, Autodesk generally followed an administrative process for monthly broad based employee grants that resulted in the selection of effective grant dates that were prior in time to the final preparation of action by written consent for such grants. Since March 2005, we have implemented a number of changes that will resolve past measurement date errors and deter them from happening in the future.

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 overlaps, we expect that software product developers will be increasingly subject to infringement claims. Infringement or misappropriation claims have in the past been, and may in the future be, asserted against us, and any such assertions could harm our business. Additionally, certain patent holders without products, like z4 Technologies, have become more aggressive in threatening and pursuing litigation in attempts to obtain fees for licensing the right to use patents. Any such claims or threats, whether with or without merit, have been and could in the future 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.

 

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Our business could suffer as a result of risks associated with strategic acquisitions and investments such as the acquisitions of Alias and Constructware and investment in Hanna Strategies.

We periodically acquire or invest in businesses, software products and technologies that are complementary to our business through strategic alliances, equity investments or acquisitions. For example, we recently completed the acquisitions of Alias Systems Holdings, Inc. and Constructware and acquired a 28% ownership in Hanna Strategies. The risks associated with such acquisitions include, among others, the difficulty of assimilating the products, operations and personnel of the companies, the failure to realize anticipated revenue and cost projections, the requirement to test and assimilate the internal control processes of the acquired business in accordance with the requirements of Section 404, and the diversion of management’s time and attention. In addition, such investments and acquisitions may involve significant transaction or integration-related costs. We may not be successful in overcoming such risks, and such investments and acquisitions 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 and investments. These costs or charges, including those relating to the Alias or Constructware acquisitions or investment in Hanna Strategies, could negatively impact results of operations for a given period or cause quarter to quarter variability in our operating results.

If Silicon Graphics, Inc. (SGI), which recently emerged from Chapter 11 bankruptcy protection, fails to deliver products, provide product upgrades or provide product support, the business relating to our Advanced Systems products of our Media and Entertainment Segment will be adversely affected.

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 operating results. In addition, a reducing but significant percentage of the Media and Entertainment Segment’s Advanced Systems products rely primarily on workstations manufactured by SGI. On May 8, 2006, SGI announced that it has filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court, and on October 17, 2006 SGI emerged from Chapter 11 bankruptcy protection. In addition, SGI has changed its management team and is refocusing its business. Significantly, SGI has recently announced its intention to cease development of new products for the media and entertainment industry. Although we have reduced our dependence on SGI workstations for the Advanced Systems products and will continue to do so in the future, the near term failure of SGI to deliver products, product upgrades or product support in a timely manner would likely result in an adverse effect upon our financial results for a given period.

Although we offer a range of Media and Entertainment Segment products for use on standard, open, PC-based Linux platforms, our customers may not choose to adopt our products using these alternative platforms, or may delay purchases while evaluating the new platforms, which could have a material adverse effect on our results of operations in 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 may 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 SFAS 123R, which required us to record compensation expense for shares issued under our stock plans beginning in the first quarter of fiscal 2007 with a negative impact on our results of operations, continued fluctuation in foreign currency exchange rates, 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, failure to convert our 2D customer base to 3D products, delays in product releases, timing of product releases and retirements, failure to continue momentum of annual release cycles or to move a significant number of customers

 

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from prior product versions in connection with our programs to retire major products, unexpected outcomes of matters relating to litigation, failure to achieve continued cost reductions and productivity increases, unanticipated changes in tax rates and tax laws, 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, failure to successfully integrate acquired businesses and technologies, failure to achieve sufficient sell-through in our channels for new or existing products, the financial and business condition of our reseller and distribution channels, renegotiation or termination of royalty or intellectual property arrangements, interruptions or terminations in the business of our consultants or third party developers, failure to grow lifecycle management or collaboration products, unanticipated impact of accounting for technology acquisitions and general economic 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 maintain 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.

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 in certain markets 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; unusual events such as significant 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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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 changes, 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 introducing 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 Family of Products or Autodesk Revit Family of Products. 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.

Product development may also be outsourced to third parties or developed externally and transferred to us through business or technology acquisitions. Such externally developed technologies have certain additional risks, including potential difficulties with effective integration into existing products, adequate transfer of technology know-how and ownership and protection of transferred intellectual property. For example, in April 2006, we acquired a 28% ownership in Hanna Strategies, a privately-held software development firm that has been one of our software developers since 2003. Expenditures attributable to development work contracted from Hanna Strategies represented 8%, 9% and 6% of our total research and development expenses for fiscal years 2007, 2006 and 2005, respectively.

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.

We are investing resources in updating and improving our internal information technology systems. Should our investments not succeed, or if delays or other issues with a new internal technology system disrupt our operations, our business would be harmed.

We rely on our network infrastructure, internal technology systems and our websites for our development, marketing, operational, support and sales activities. We are continually investing resources to update and

 

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improve these systems in order to meet the growing requirements of our business and customers. Unsuccessful implementation of hardware or software updates and improvements could result in disruption in our business operations, loss of revenues or damage to our reputation.

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.

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. In addition, we have acquired an investment interest in one developer, Hanna Strategies. We have historically and plan to continue to contract with Hanna Strategies in order to provide more efficient resources for the development of new products and features in existing products.

However, 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.

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 and cause delays in our recognition of revenues on future sales to these customers. Any of these events would likely harm our business, results of operations and financial condition.

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

 

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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. We rely significantly upon major distributors and resellers in both the U.S. and international regions, including Tech Data Corporation and their affiliates, who accounted for 12% of fiscal 2007 net revenues and 11% of fiscal 2006 net revenues. 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 were unable to meet their obligations with respect to accounts payable to us, we could be forced to write off such accounts and may be required to delay the recognition of revenues on future sales to these customers, 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.

We permit our distributors and resellers to return 2% to 20% of prior quarter purchases and to return a product when new product releases supersede older versions. Consistent with our experience in fiscal 2007, we anticipate that product returns will continue to be driven by product update cycles, new product releases 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.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our 2007 fiscal year that remain unresolved.

 

ITEM 2. PROPERTIES

We lease 1,625,000 square feet of office space in 97 locations in the United States and internationally through our foreign subsidiaries. Our executive offices and corporate headquarters are located in leased office space in San Rafael, California. Our San Rafael facilities consist of 304,000 square feet under leases that have expiration dates ranging from October 2007 to February 2012. We and our foreign subsidiaries lease additional space in various locations throughout the world for local sales, product development and technical support personnel.

All facilities are in good condition and are operating at capacities averaging 79% occupancy worldwide. We believe that our existing facilities and offices are adequate to meet our requirements for the foreseeable future. See Note 8, “Commitments and Contingencies,” in the Notes to the Consolidated Financial Statements for more information about our lease commitments.

 

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ITEM 3. LEGAL PROCEEDINGS

On December 27, 2001, Spatial Corp. (“Spatial”) filed suit in Marin County Superior Court against Autodesk and one of our consultants, D-Cubed Ltd., seeking among other things, termination of a development and license agreement between Spatial and Autodesk and an injunction preventing Autodesk from working with contractors under the agreement. On October 2, 2003, a jury found that Autodesk did not breach the agreement. As the prevailing party in the action, the court awarded Autodesk approximately $2.4 million for reimbursement of attorneys’ fees and the costs of trial, which was paid during the second quarter of fiscal 2005. Spatial filed a notice of appeal on December 2, 2003 appealing the decision of the jury. Spatial claims that certain testimony of a witness should not have been considered by the jury and as a result, Spatial asserts that it is entitled to a new trial. On March 23, 2006, the Court of Appeal denied Spatial’s appeal. The trial court awarded Autodesk approximately $0.2 million on April 1, 2006. As a result, the ultimate resolution of this matter did not have a material effect on Autodesk’s financial position, results of operations or cash flows.

On September 22, 2004, z4 Technologies, Inc. (“z4”) filed suit against Autodesk and Microsoft Corporation in the United States District Court, Eastern District of Texas, alleging infringement of U.S. Patent No. 6,044,471 (“471 patent”), entitled “Method and Apparatus for Securing Software to Reduce Unauthorized Use,” and U.S. Patent No. 6,785,825 (“825 patent”), entitled “Method for Securing Software to Decrease Software Piracy.” z4’s complaint alleged that Autodesk infringed both patents by making, using, selling, and offering for sale the claimed matter of these patents without the plaintiff’s authority. In its complaint, z4 sought compensatory damages amounting to a 1.5% royalty, injunctive relief and fees and costs. On April 19, 2006, a jury returned a verdict finding that certain Autodesk products infringed both patents, awarding z4 $18 million in damages. In light of the jury’s verdict, we accrued the full amount of this verdict, which represented our best estimate of the probable loss, of which $16.8 million was expensed during the first quarter of fiscal 2007. The court entered judgment against Autodesk on August 18, 2006, awarding z4 $18 million in damages, pre-judgment interest and attorneys’ fees. Autodesk filed our notice of appeal of the judgment on September 8, 2006. On December 20, 2006, Autodesk and z4 entered into a settlement agreement which resolved all of the issues between the parties. The final resolution of the z4 litigation did not have a material effect on Autodesk’s financial position, results of operations or cash flows. Following the guidance set forth in Statement on Auditing Standards No. 1 “Codification of Auditing Standards and Procedures” AU Section 560 “Subsequent Events,” we reversed $13.0 million of previously accrued reserves during the second quarter of fiscal 2007.

On August 26, 2005, Telstra Corporation Limited (“Telstra”) filed suit in the Federal Court of Australia, Victoria District Registry against Autodesk Australia Pty Ltd. (“AAPL”) seeking partial indemnification for claims filed against Telstra by SpatialInfo Pty Limited relating to Telstra’s use of certain software in the management of its computer-based cable plant records system. On December 12, 2005, SpatialInfo added AAPL as a defendant to its lawsuit against Telstra. Autodesk is currently investigating the allegations and intends to vigorously defend the case. Although this case is in the early stages and Autodesk cannot determine the final financial impact of this matter, based on the facts known at this time, we believe the ultimate resolution of this matter will not have a material effect on Autodesk’s financial position, results of operations or cash flows. However, it is possible that an unfavorable resolution of this matter could occur and materially affect our future results of operations, cash flows or financial position in a particular period.

On July 12, 2006 New York University (“NYU”) filed suit against Autodesk in the United States District Court, Southern District of New York, alleging infringement of U.S. Patent No. 6,115,053 (“053 patent”), entitled “Computer Animation Method and System for Synthesizing Human-Like Gestures and Actions,” and U.S. Patent No. 6,317,132 (“132 patent”), entitled “Computer Animation Method for Creating Computer Generated Animated Characters.” NYU’s complaint alleged that Autodesk infringed both patents by making, using, selling, and offering for sale the claimed matter of these patents without the plaintiff’s authority. In its complaint, NYU seeks compensatory damages, injunctive relief and fees and costs. Autodesk cannot determine the final financial impact of this matter, based on the facts known at this time, we believe the ultimate resolution of this matter will not have a material effect on Autodesk’s financial position, results of operations or cash flows.

 

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However, it is possible that an unfavorable resolution of this matter could occur and materially affect our future results of operations, cash flows or financial position in a particular period.

In connection with our anti-piracy program, designed to enforce copyright protection of our software and conducted both internally and through the Business Software Alliance (“BSA”), from time to time we undertake litigation against alleged copyright infringers or provide information to criminal justice authorities to conduct actions against alleged copyright infringers. Such lawsuits have led to counter claims alleging improper use of litigation or violation of other local law and have recently increased in frequency, especially in Latin America. On March 1, 2002, Consultores en Computación y Contabilidad, S.C., a Mexican hardware/software reseller and its principals (collectively, “CCC”) filed a lawsuit in the Mexico Court in the First Civil Court of the Federal District against Autodesk, Adobe Systems, Microsoft and Symantec (all members of the BSA and collectively the “Defendants”). Ultimately, a court of appeals held that the Defendants were liable to CCC for “moral” damages, and the court remanded the case to the First Civil Court for a determination of the amount. On December 13, 2005, the First Civil Court awarded CCC $90 million in damages. Both the Defendants and the plaintiffs appealed the verdict. In September 2006, the parties entered into a settlement agreement which did not have a material effect on Autodesk’s financial position, results of operations or cash flows.

During the fourth quarter of fiscal 2007, three shareholder derivative lawsuits were filed against us and our current directors and officers (as well as certain of our former directors and officers) relating to our historical stock option practices and related accounting. On November 20, 2006, Autodesk and current members of our Board were sued in United States Federal District Court for the Northern District of California in a shareholder derivative action, entitled “Giles v. Bartz, et al.”, Case No. C06-8175. On December 29, 2006, Autodesk, current members of our Board, and certain current and past executive officers were sued in United States Federal District Court for the Northern District of California in a shareholder derivative action, entitled “Campion v. Sutton, et al.”, Case No. C06-07967. This lawsuit was consolidated into the previously mentioned Giles case and later voluntarily dismissed by the plaintiff on January 31, 2007. On January 9, 2007, Autodesk, current members of our Board, and current and former executive officers were sued in the Superior Court for the State of California, County of Marin in a shareholder derivative action, entitled “Koerner v. Bartz, et al.”, Case No. CV-070112. These actions are in the preliminary stages and we cannot determine the final financial impact of these matters based on the facts known at this time. However, it is possible that an unfavorable resolution of the matters could occur and have a material effect on our future results of operations, cash flows or financial position in a particular period.

In addition, we are 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.

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

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2007.

 

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Executive Officers of The Registrant

The following sets forth certain information as of May 31, 2007 regarding our executive officers.

 

Name

   Age   

Position

Carl Bass

   50    Chief Executive Officer and President

Carol A. Bartz

   59    Executive Chairman of the Board

George M. Bado

   53    Executive Vice President, Worldwide Sales and Services

Jan Becker

   54    Senior Vice President, Human Resources and Corporate Real Estate

Alfred J. Castino

   55    Senior Vice President and Chief Financial Officer

Jay Bhatt

   39    Senior Vice President of Autodesk AEC

Chris Bradshaw

   45    Senior Vice President, Worldwide Marketing

Moonhie Chin

   49    Senior Vice President Strategic Planning and Operations

Pascal W. Di Fronzo

   43    Senior Vice President, General Counsel and Secretary

Amar Hanspal

   44    Senior Vice President, Platform Solutions and Emerging Business

Robert Kross

   53    Senior Vice President of the Manufacturing Solutions Division

Marc Petit

   43    Senior Vice President, Media and Entertainment

Carl Bass joined Autodesk in September 1993 and serves as Chief Executive Officer and President. From June 2004 to April 2006, Mr. Bass served as Chief Operating Officer. From February 2002 to June 2004, Mr. Bass served as Senior Executive Vice President, Design Solutions Group. From August 2001 to February 2002, Mr. Bass served as Executive Vice President, Emerging Business and Chief Strategy Officer. From June 1999 to July 2001, he served as President and Chief Executive Officer of Buzzsaw.com, Inc., a spin-off from Autodesk. He has also held other executive positions within Autodesk.

Carol A. Bartz joined Autodesk in April 1992 and serves as Executive Chairman of the Board. Ms. Bartz’ present duties include enhancing relationships with Autodesk’s key customers, partners, governments and investors along with focusing on activities designed to improve the business climate for Autodesk. From April 1992 to April 2006, Ms. Bartz served as Chairman of the Board, Chief Executive Officer and President. Ms. Bartz is also a director of Cisco Systems, Inc. and Network Appliance, Inc. Prior to joining Autodesk, Ms. Bartz held various positions at Sun Microsystems, Inc., including Vice President, Worldwide Field Operations from July 1990 through April 1992.

George M. Bado joined Autodesk in October 2002 and serves as Executive Vice President, Worldwide Sales and Services. From October 2002 to October 2004, Mr. Bado served as Vice President, DSG Worldwide Sales. Prior to joining Autodesk, Mr. Bado served as a consultant to the Board of Directors of ChipData, Inc., a venture backed start up involved in electronic design verification from May 2002 to October 2002. Prior to that, Mr. Bado was Executive Vice President, Sales and Consulting for Innoveda, Inc., an electronic design automation software company, from July 2001 to April 2002 (Innoveda, Inc. was acquired by Mentor Graphics Corporation in April 2002) and from March 2000 to June 2001 was Executive Vice President, Operations for Centric Software, Inc., a product lifecycle management solutions company.

Jan Becker joined Autodesk in September 1992 and has served as Senior Vice President, Human Resources and Corporate Real Estate since June 2000 and previously served in other capacities in the Human Resources Department.

Alfred J. Castino joined Autodesk in August 2002 and serves as Senior Vice President and Chief Financial Officer. Prior to joining Autodesk, Mr. Castino was Chief Financial Officer for Virage, Inc., a video and media communication software company from January 2000 to July 2002. Prior to this, Mr. Castino served as Vice President of Finance and then Senior Vice President and Chief Financial Officer at PeopleSoft, Inc., an enterprise software company, where he worked from September 1997 to August 1999. Mr. Castino holds a CPA certificate from the State of California. Mr. Castino is also a director of Synopsys, Inc.

 

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Jay Bhatt joined Autodesk in August 2001 and serves as Senior Vice President of Autodesk AEC (Architecture, Engineering and Construction) Solutions. From August 2001 to February 2004, Mr. Bhatt served as Vice President, Corporate Development and Strategic Planning. From March 2000 to July 2001, he served as Chief Financial Officer and senior vice president of Business Development of Buzzsaw.com, Inc., a spin-off of Autodesk. Prior to that, Mr. Bhatt worked as an investment banker and as a transactional attorney.

Chris Bradshaw joined Autodesk in September 1991 and has served as Senior Vice President, Worldwide Marketing since March 2007. Prior to this, Mr. Bradshaw served as Vice President of Worldwide Marketing from January 2007 to March 2007, Vice President of Autodesk’s Infrastructure Solutions Division (ISD) from February 2003 to January 2007, and from August 2001 to January 2003, he was Vice President of Autodesk Building Collaboration Services. He served as senior vice president of sales and marketing for Buzzsaw.com, Inc., a spin-off of Autodesk, from September 1999 to August 2001 and as sales development director for Autodesk’s AEC (Architecture, Engineering and Construction) products in the Asia-Pacific region from July 1997 to August 1999. He has also held other executive and non-executive positions at Autodesk.

Moonhie Chin joined Autodesk in February 1989 and has served as Senior Vice President Strategic Planning and Operations since March 2007. From January 2003 to March 2007 she was Vice President Strategic Planning and Operation, and served as Vice President of Business Operations for Location Services from September 2000 to January 2003, and Vice President of Business Administration from June 1999 to September 2000. She has also held other non-executive positions at Autodesk.

Pascal W. Di Fronzo joined Autodesk in June 1998 and has served as Senior Vice President, General Counsel and Secretary since March 2007. From March 2006 to March 2007 Mr. Di Fronzo served as Vice President, General Counsel and Secretary and served as Vice President, Assistant General Counsel and Assistant Secretary from March 2005 through 2006. Previously, Mr. Di Fronzo served in other business and legal capacities in our Legal Department. Prior to joining Autodesk, he advised high technology and emerging growth companies on business and intellectual property transactions and litigation while in private practice.

Amar Hanspal joined Autodesk in June 1987 and serves as Senior Vice President, Platform Solutions and Emerging Business. From January 2003 to January 2007, Mr. Hanspal served as Vice President of Autodesk Collaboration Solutions. He served as Vice President of Marketing of RedSpark, Inc., a spin-off of Autodesk focused on building a collaborative product development system for the discrete manufacturing industry, from April 2000 to December 2001. He has also held other executive and non-executive positions as Autodesk.

Robert Kross has served as Senior Vice President of the Manufacturing Solutions Division since March 2007. Since joining Autodesk in November 1993, Mr. Kross has served as Vice President of the Manufacturing Solutions Division from December 2002 to March 2007 and a director in the Manufacturing Division from February 1998 to December 2002. Prior to that, he was President and co-founder of Woodbourne Inc., a provider of parametric design tools that was acquired by Autodesk in 1993.

Marc Petit joined Autodesk in October 2002 and serves as Senior Vice President, Media and Entertainment. Since joining Autodesk, he as served as Vice President of Product Development and Operations for the Media and Entertainment Division from October 2002 to April 2006. Prior to joining Autodesk, Mr. Petit was Vice President of Operations for Aptilon Health, an online interactive marketing company.

There is no family relationship among any of our directors or executive officers.

 

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PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NASDAQ Global Select Market under the symbol ADSK. The following table lists the high and low sales prices for each quarter in the last two fiscal years.

 

     High    Low

Fiscal 2007

     

First Quarter

   $ 43.62    $ 35.30

Second Quarter

   $ 41.47    $ 30.06

Third Quarter

   $ 37.28    $ 31.48

Fourth Quarter

   $ 44.49    $ 34.68

 

     High    Low

Fiscal 2006

     

First Quarter

   $ 33.97    $ 28.52

Second Quarter

   $ 39.58    $ 32.12

Third Quarter

   $ 46.74    $ 33.83

Fourth Quarter

   $ 47.60    $ 38.74

Dividends

Adjusted for the stock split in December 2004, we paid quarterly dividends of $0.015 per share in fiscal 2005 to Autodesk stockholders. Effective after the dividend for the fourth quarter of fiscal 2005 (paid in April 2006) we discontinued our quarterly cash dividend.

Stockholders

As of January 31, 2007 the number of common stockholders of record was 673. Because many of our shares of common stock are held by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the record holders.

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 January 31, 2007, 16.3 million shares remained available for repurchase under the existing repurchase authorization. See Note 9, “Stockholders’ Equity,” in the Notes to Consolidated Financial Statements for further discussion. Autodesk was not current with its reporting obligations under the Securities and Exchange Act of 1934 during the third and fourth quarters of fiscal 2007 and, as a result, there were no repurchases of Autodesk common stock during those quarters.

 

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ITEM 6.    SELECTED FINANCIAL DATA

The consolidated balance sheet as of January 31, 2006 and the consolidated statements of income for the fiscal years ended January 31, 2006 and January 31, 2005 have been restated as set forth in this Form 10-K. The data for the consolidated balance sheets as of January 31, 2005, 2004, and 2003 and the consolidated statements of income for the fiscal years ended January 31, 2004 and January 31, 2003, derived from our unaudited books and records, have been restated to include the stock-based compensation and net revenues adjustments. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below. The information presented in the following tables has been adjusted to reflect the restatement of our financial results, which is more fully described in the “Explanatory Note” immediately preceding Part I, Item 1 and in Note 2, “Restatement of Consolidated Financial Statements,” in the Notes to Consolidated Financial Statements of this Form 10-K. Autodesk has not amended its previously-filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in such previously-filed reports should no longer be relied upon.

 

     Fiscal year ended January 31,
     2007    2006    2005    2004    2003
          As
Restated(1)(2)
   As
Restated(1)(2)
   As
Restated(2)
   As
Restated(2)
          (In millions, except per share data)
                    Unaudited    Unaudited

For the Fiscal Year

              

Net revenues

   $ 1,839.8    $ 1,537.2    $ 1,238.9    $ 951.6    $ 824.9

Income from operations(3)(4)

     349.7      378.5      231.7      101.2      20.4

Net income(3)(4)(5)

     289.7      333.6      221.1      115.3      27.7

At Year End

              

Total assets

   $ 1,797.5    $ 1,355.8    $ 1,140.6    $ 1,017.2    $ 883.6

Long-term liabilities

     108.3      65.0      27.6      11.3      4.9

Stockholders’ equity

     1,115.0      803.0      649.8      620.8      568.7

Common Stock Data

              

Basic net income per share

   $ 1.26    $ 1.46    $ 0.97    $ 0.52    $ 0.12

Diluted net income per share

     1.19      1.35      0.90      0.50      0.12

Dividends paid per share

     0.00      0.015      0.06      0.06      0.06

(1)   See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of Consolidated Financial Statements,” in the Notes to Consolidated Financial Statements of this Form 10-K.

 

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(2)   The Selected Financial Data for 2006, 2005, 2004 and 2003 has been restated to reflect adjustments related to net revenues, stock-based compensation expense and the associated tax effect as further described in the “Explanatory Note” immediately preceding Part I, Item 1 of this Form 10-K. As a result of these adjustments, net income was increased by $4.7 million for the year ended January 31, 2006 and reduced by $0.4 million, $5.1 million and $4.2 million for the years ended January 31, 2005, 2004 and 2003, respectively, as follows:

 

      Fiscal Year Ended January 31, 2006
     As Reported    Adjustments     As Restated
     (In millions, except per share data)

For the Fiscal Year

       

Net revenues

   $ 1,523.2    $ 14.0     $ 1,537.2

Income from operations

     369.8      8.7       378.5

Net income

     328.9      4.7       333.6

At Year End

       

Total assets

     1,360.8      (5.0 )     1,355.8

Long-term liabilities

     62.6      2.4       65.0

Stockholders’ equity

     791.3      11.7       803.0

Common Stock Data

       

Basic net income per share

   $ 1.44    $ 0.02     $ 1.46

Diluted net income per share

     1.33      0.02       1.35

Dividends paid per share

     0.015      —         0.015
     Fiscal Year Ended January 31, 2005
     As Reported    Adjustments     As Restated

For the Fiscal Year

       

Net revenues

   $ 1,233.8    $ 5.1     $ 1,238.9

Income from operations

     234.9      (3.2 )     231.7

Net income

     221.5      (0.4 )     221.1

At Year End

       

Total assets

     1,142.2      (1.6 )     1,140.6

Long-term liabilities

     25.8      1.8       27.6

Stockholders’ equity

     648.1      1.7       649.8

Common Stock Data

       

Basic net income per share

   $ 0.98    $ (0.01 )   $ 0.97

Diluted net income per share

     0.90      —         0.90

Dividends paid per share

     0.06      —         0.06
     Fiscal Year Ended January 31, 2004
     As Reported    Adjustments     As Restated

For the Fiscal Year

       

Net revenues

   $ 951.6    $ —       $ 951.6

Income from operations

     106.3      (5.1 )     101.2

Net income

     120.4      (5.1 )     115.3

At Year End

       

Total assets

     1,017.2      —         1,017.2

Long-term liabilities

     10.6      0.8       11.4

Stockholders’ equity

     621.6      (0.8 )     620.8

Common Stock Data

       

Basic net income per share

   $ 0.54    $ (0.02 )   $ 0.52

Diluted net income per share

     0.52      (0.02 )     0.50

Dividends paid per share

     0.06      —         0.06

 

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     Fiscal Year Ended January 31, 2003
     As Reported    Adjustments     As Restated

For the Fiscal Year

       

Net revenues

   $ 824.9    $ —       $ 824.9

Income from operations

     25.0      (4.6 )     20.4

Net income

     31.9      (4.2 )     27.7

At Year End

       

Total assets

     883.7      —         883.7

Long-term liabilities

     4.4      0.5       4.9

Stockholders’ equity

     569.2      (0.5 )     568.7

Common Stock Data

       

Basic net income per share

   $ 0.14    $ (0.02 )   $ 0.12

Diluted net income per share

     0.14      (0.02 )     0.12

Dividends paid per share

     0.06      —         0.06
(3)   Under Statement of Financial Accounting Standards No. 123—revised 2004, “Share-Based Payment,” (“SFAS No. 123R”) net income for fiscal 2007 includes stock-based compensation expense of $94.3 million. Results for fiscal 2007 also include amortization of acquisition-related intangibles of $14.4 million. In addition, results for fiscal 2007 also include litigation expenses related to a patent infringement lawsuit of $5.0 million.
(4)   Fiscal 2005, 2004, and 2003 results include restructuring charges of $26.7 million, $3.2 million and $25.9 million, respectively. See Note 6, “Restructuring Reserves,” in the Notes to Consolidated Financial Statements for further discussion.
(5)   Fiscal 2007, 2006, 2005, 2004 and 2003 results include net tax benefits of $15.1 million, $19.4 million, $26.8 million, $26.7 million and $4.2 million, respectively. See Note 4, “Income Taxes,” in the Notes to Consolidated Financial Statements for further discussion.

 

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion in our 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 our strategies and growth initiatives, net revenues, the effect of fluctuations in exchange rates on net revenues and expenses, costs and expenses, planned product retirement and annual release cycles, our expectations regarding product acceptance, the realization of deferred tax benefits, continuation of our share repurchase program, and short-term and long-term cash requirements, as well as statements involving trend analyses and statements including such words as “we expect,” “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 above in Item 1A, “Risk Factors,” and in our other reports filed with the Securities and Exchange Commission. We do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

Restatement of Previously Issued Financial Results

Introduction

On August 17, 2006, Autodesk, Inc. (“Autodesk” or the “Company”) announced that the Audit Committee of the Board of Directors was conducting a voluntary review of Autodesk’s historical stock option granting practices and related accounting issues. On February 27, 2007, Autodesk announced the key results of the voluntary review, which were set forth in the Form 8-K filed on that date.

The Audit Committee engaged independent outside legal counsel, Hogan & Hartson LLP, who, with the assistance of forensic accounting experts, PricewaterhouseCoopers, reviewed the facts and circumstances surrounding approximately 230 separate stock option grant approvals made between January 1988 and August 2006, or the “relevant period.” During the course of the voluntary review, more than 700,000 documents were reviewed and interviews with over 40 current and former employees, directors and advisors were conducted. In February 2007, the Audit Committee completed its review and presented its final report to Autodesk’s Board of Directors.

The following is a summary of the key findings of the Audit Committee:

 

   

Throughout the relevant period, numerous administrative errors were made in the processing of option grants resulting in options being accounted for incorrectly;

 

   

Between July 2000 and February 2005, the Company made monthly broad-based employee grants pursuant to authority delegated by the Board to the CEO, where the grant dates for most of these broad based grants were selected by an administrative process to coincide with low trading prices during the month of the applicable grant;

 

   

During the calendar year 1992:

 

   

a broad-based employee grant that included a grant to the Company’s then-CFO and then-General Counsel were measured on an incorrect date; and

 

   

the new hire grant to the then-incoming CEO was measured on an incorrect date;

 

   

There was no evidence that any officer or director backdated any stock option granted to himself or herself;

 

   

Based on the evidence developed during the review, the Audit Committee concluded that it was unlikely that those involved in the decisions and actions that resulted in measurement date errors understood the accounting impact of their actions or that they intended to misstate our financial statements; and

 

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There was no evidence of any measurement date error involving any stock option grant made to a person serving as a director.

The Company had progressively, substantially and voluntarily improved its employee stock-based compensation grant process prior to 2006, before the intense regulatory and media focus on stock option grant practices began, and no Company employees or officers who may have made discretionary determinations that resulted in measurement date errors in the past has any continuing role relating to the distribution, administration or accounting for stock-based compensation.

As a result of the findings of the voluntary review, the Board of Directors has concluded, upon the recommendation of management and the Audit Committee, that the consolidated balance sheets as of January 31, 2002, 2003, 2004, 2005 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the fiscal years ended January 31, 2003, 2004, 2005 and 2006, should no longer be relied upon. As a result, we are restating our previously-issued financial statements for fiscal years 2003 through 2006, inclusive, to correct errors related to accounting for total stock-based compensation expense.

The pre-tax, non-cash charges to be restated are an aggregate $34.8 million for stock-based compensation expense over the 18-year period of the review through fiscal 2006. Approximately $21.7 million of the restated amounts apply to the income statements for fiscal years 2003 through 2006, inclusive, and the remainder, which is applicable to prior fiscal years, has been recorded as a charge to retained earnings as of January 31, 2002. Such charges have the effect of decreasing net income and, correspondingly, retained earnings as reported in our historical financial statements. The net of tax impact of the stock-based compensation adjustments in the first quarter of fiscal 2007 were insignificant. However, we restated our Consolidated Balance Sheet as of January 31, 2006 to properly reflect Retained Earnings, Common Stock and Deferred Compensation balances as a result of previous period adjustments.

During the period of the voluntary stock option review, we determined that we incorrectly recorded certain credits to resellers. As a result, adjustments were made to increase net revenues and decrease deferred revenue by $14.0 million in fiscal 2006 and $5.1 million in fiscal 2005. These adjustments, which have the effect of increasing net income and, correspondingly, retained earnings, are described in more detail below.

This Form 10-K reflects the restatement of our consolidated balance sheet as of January 31, 2006, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the fiscal years ended January 31, 2006 and 2005, and each of the quarters in fiscal 2006.

This Form 10-K also reflects the restatement of “Selected Consolidated Financial Data” in Item 6 for the fiscal years ended January 31, 2006, 2005, 2004 and 2003, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 for the fiscal years ended January 31, 2006 and 2005.

Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q prior to fiscal 2007 have been affected by the restatements, have not been amended, and should not be relied on.

In connection with the restatement of our consolidated financial statements, we applied judgment in determining whether to revise measurement dates for prior option grants. In addition, if we determined that a measurement date needed to be revised, judgment was applied in determining the appropriate measurement date.

In addition, we have restated the pro forma expense under Statement of Financial Accounting Standards No. 123 (“SFAS 123”) in Part II, Item 8, Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements to include these adjustments for the years ended January 31, 2006 and 2005.

All references to the number of option shares, option exercise prices, and share prices in this section have been adjusted for any subsequent stock splits.

 

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Stock Option Grant Process

Pursuant to our non-director stock plans, our Board of Directors has the authority to grant options or delegate this authority to a committee. For portions of the relevant period, the right to grant options under our stock plans to all employees other than non-employee directors was delegated to the Compensation Committee of the Board of Directors or to the chief executive officer, or CEO, as a committee of one. Executive officer option grants were generally approved by the Compensation Committee during regularly scheduled Compensation Committee meetings, although a small number were approved by unanimous written consent. Option grants by the CEO to all other employees were generally done on a monthly basis by written consent during the period between December 1995 and August 2006.

Accounting Adjustments

Consistent with the applicable accounting literature and recent guidance from the SEC staff, we organized the 230 separate stock option grant approvals, totaling approximately 46,300 individual grants, made during the relevant period into categories based on grant type and the processes by which the grant approval was finalized. We analyzed the evidence from the Audit Committee’s review related to each category including, but not limited to, physical documents, electronic documents, underlying electronic data about documents, and witness interviews. Based on the relevant facts and circumstances, we applied the then appropriate accounting standards to determine, for every grant within each category, the proper measurement date. If the measurement date was not the originally assigned grant date, accounting adjustments were made as required, resulting in stock-based compensation expense and related tax effects. After accounting for forfeitures, we recognized stock-based compensation expense of $34.8 million on a pre-tax basis over the vesting terms for the affected grants. No adjustments were required for the remaining grants. The adjustments were determined by category as follows:

Monthly Date Selection Process Grants—For the period between July 2000 and February 2005, we generally followed an administrative process for monthly broad based employee grants that resulted in the selection of effective grant dates that were prior in time to the final preparation of action by written consent for such grants (the “Monthly Date Selection Process Grants”). Usually, the grant dates selected by this process were chosen later in the same calendar month in which the applicable actions by written consent were signed and were dates prior in time to the final preparation of such written consents to coincide with low trading prices during the month of the applicable grant. Based on the voluntary review, the Company determined that the measurement dates for approximately 12,000 individual grants of the approximate total 18,500 individual grants made to broad based employees pursuant to delegated authority must be revised because the grant dates selected by the administrative process were prior in time to the final approval of such grants. For these grants, based upon the available evidence we chose as the measurement date the date upon which the terms of the specific monthly broad based employee grant was determined to be fixed and unchangeable. Accordingly, we recognized a pre-tax stock-based compensation expense of $23.1 million for such grant approvals using the intrinsic value method of accounting under Accounting Principles Board Opinion No. 25 (“APB 25”).

1992 New-Hire Grant to Incoming CEO—In May 1992, the Compensation Committee approved a grant to the Company’s then-incoming CEO that was measured on an incorrect date. The measurement date used was April 7, 1992, the date the Company and the incoming CEO had reached a business agreement on most of the terms of her employment agreement, including the number of stock options to be granted. However, discussions thereafter continued regarding other important matters, including the structure of, and exercise price for, her stock option grant. The essential terms of the option grant, the grant price, number of options and date of grant, were presented to the Board on April 27, 1992, and approved by the Compensation Committee on May 4, 1992. In connection with the grant to the then-incoming CEO, both parties were represented by counsel. We recognized pre-tax stock-based compensation expense of $3.3 million from this grant based on a revised measurement date of May 4, 1992 using the intrinsic value method of accounting under APB 25.

Anomalous Add Grants—Based on the voluntary review, the Audit Committee found that in certain instances, additions or error corrections were made to the details of grants that had already been approved by the

 

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CEO without obtaining additional approval (the “Anomalous Add Grants”). For the period between December 1995 through August 2006 when the CEO had delegated authority to grant options, 420 of approximately 37,100 individual option grants were considered to be Anomalous Add Grants, for a total error rate of 1.1%, with 98% of Anomalous Add Grants occurring prior to fiscal 2003. Based on the voluntary review, management determined that the measurement dates for the related individual option grants must be revised. Accordingly, we recognized pre-tax stock-based compensation expense of $3.1 million from such grants using the intrinsic value method of accounting under APB 25.

Termination Issues—During the relevant period, two former executives and 34 employees were permitted to vest in (and subsequently exercise) stock options to purchase an aggregate of approximately 1.4 million shares of common stock for a period of time beyond what they were otherwise entitled to exercise under their original stock option agreement. In most cases, vesting was extended for a period of time after the termination date and, thus, should have resulted in accounting consequences. For the 34 employees, it appears that these cases were most likely due to administrative error. Based on the voluntary review, management determined that the accounting for the related option grants must be revised and we recognized pre-tax stock-based compensation expense of $2.3 million from such grants using the intrinsic value method of accounting under APB 25.

Board-Authorized Grant—In 1992, the Board approved a broad-based employee grant, which included a grant to the Company’s then-CFO and then General Counsel, that involved a measurement date error. The error was caused by the Company’s use of the date on which the Board approved the general scope and nature of a special one-time grant to certain employees as the measurement date, rather than the date on which the specific grantees and grant amounts were finalized and approved by the Board. In addition, in 1991, the Board approved a broad-based employee grant with an exercise price less than the fair market value on the date of grant. Accordingly, we recognized pre-tax stock-based compensation expense of $2.4 million from these grants.

Compensation Committee Grants—From 1997 through 2000: (i) two individual option grants do not appear to have any evidence of Compensation Committee approval or authorization; (ii) four additional individual option grants appear to have been ratified at a date subsequent to the original grant date; and (iii) the original measurement date of one additional option grant approved by a Unanimous Written Consent of the Compensation Committee appears to have been made more than a reasonable period of time prior to final approval of the grant for accounting purposes. Based on the voluntary review, management determined that the measurement dates for the related option grants must be revised. Accordingly, we recognized pre-tax stock-based compensation expense of $0.6 million from seven grants.

Judgment

In light of the judgment used in establishing revised measurement dates, alternate approaches to those used by us could have resulted in different compensation expense charges than those recorded by us in the restatement. We considered various alternative approaches.

For Monthly Date Selection Process Grants, where for certain of the grants, there was no evidence to suggest a particular single date was the appropriate measurement date, Company management narrowed the possible measurement date to a range of dates or a grant window. The grant window was approximately four days on average and ranged from one day to sixteen days. The Company’s management considered which date to use in this range and chose to use the last day of the grant window since the grants appeared to be fixed and unchangeable. We believe the grant was fixed and unchangeable on the last day in the grant window because this was the day the award was communicated. Changing the measurement dates from the last day of the grant window to the highest price during the grant window would cause the pre-tax compensation charges discussed above to increase by approximately $2.0 million. Changing the measurement dates from the last day of the grant window to the lowest price during the grant window would cause the pre-tax compensation charges discussed above to decrease by approximately $11.9 million.

 

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For the Anomalous Add Grants, Company management determined that the measurement date was the date the individual grant was fixed and unchangeable. This was the date by which the award was likely communicated to the employee. Alternatively, we considered the date on which the employee and relevant grant information were added to the grant list. However, because that date did not necessarily represent a date that the award was either approved or communicated to the employee, we rejected that alternative. We believe the grant was fixed and unchangeable on the last day in the grant window because this was the day the award was communicated. Changing the measurement dates for the Anomalous Add Grants from the date upon which the terms of the grant were likely communicated to the employee to the date when the grant information was likely added to the grant list would cause the pre-tax compensation charges discussed above to decrease by approximately $1.3 million. Changing the measurement dates for the Anomalous Add Grants from the date upon which the terms of the award were likely communicated to the employee to the highest price in the grant window would cause the pre-tax compensation charges to increase by approximately $2.3 million.

We believe that the approaches we used for each of the categories were the most appropriate under the circumstances.

Financial Impact of the Restatement

The increase in net revenues and stock-based compensation expense resulting from the restatement is as follows (in millions):

 

Fiscal Year

   Net Revenues    Stock-based
Compensation
Expense
    Tax
Effect(1)
    Total
Adjustments,
Net of Tax
 

1992

   $ —      $ (0.1 )   $ —       $ (0.1 )

1993

     —        (2.0 )     0.7       (1.3 )

1994

     —        (1.2 )     0.4       (0.8 )

1995

     —        (1.2 )     0.4       (0.8 )

1996

     —        (0.6 )     0.2       (0.4 )

1997

     —        (0.5 )     0.2       (0.3 )

1998

     —        (0.3 )     0.1       (0.2 )

1999

     —        (0.5 )     0.2       (0.3 )

2000

     —        (1.3 )     0.2       (1.1 )

2001

     —        (1.5 )     0.2       (1.3 )

2002

     —        (3.9 )     1.1       (2.8 )

2003

     —        (5.0 )     0.8       (4.2 )

2004

     —        (4.8 )     (0.3 )     (5.1 )
                               

Total 1992 – 2004 impact

     —        (22.9 )     4.2       (18.7 )

2005

     5.1      (7.3 )     1.8       (0.4 )

2006

     14.0      (4.6 )     (4.7 )     4.7  
                               

Total:

   $ 19.1    $ (34.8 )   $ 1.3     $ (14.4 )
                               

(1)   Includes $2.5 million of payroll tax expenses.

The net of tax impact of the stock-based compensation adjustments in the first quarter of fiscal 2007 was insignificant. However, we restated our Consolidated Balance Sheet as of January 31, 2006 to properly reflect Retained Earnings, Common Stock and Deferred Compensation balances as a result of previous period adjustments. Please refer to Note 2, “Restatement of Consolidated Financial Statements,” in the Notes to Consolidated Financial Statements. We also restated the pro forma expense under SFAS 123 in Note 1 “Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements of this Form 10-K to reflect the impact of these adjustments for the years ended January 31, 2006 and 2005.

 

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As mentioned above, while performing the voluntary stock option review, we identified that we incorrectly recorded certain credits to resellers. Certain credits to resellers for sales of new and renewal maintenance were recognized as a reduction of license and other revenues and maintenance revenues in the period the transaction was billed. These credits should have been recorded as a reduction of deferred maintenance revenue when the transaction was billed which would have resulted in a reduction to maintenance revenues over the maintenance period. The impact of this restatement resulted in adjustments to increase net revenues and decrease deferred revenues of $14.0 million in fiscal 2006 and $5.1 million in fiscal 2005.

For more information regarding our restated financial statements, see “Financial Statements and Supplementary Data” in Item 8 and “Restatement of Consolidated Financial Statements” in Note 2 of the Notes to Consolidated Financial Statements, as well as “Selected Consolidated Financial Data” in Item 6 and “Quarterly Financial Information (Unaudited)” in Note 17 of the Notes to Consolidated Financial Statements.

Strategy

Our goal is to be the world’s leading design software and services company for the building, manufacturing, infrastructure, and media and entertainment industries. Our focus is to offer our customers the ability to create and manage great designs and simulate reality through our software and to help them experience their ideas before they become real.

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 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. Our architecture allows for extensibility and integration.

We have created a large global community of resellers, third-party developers and customers, which provides us with a broad reach into volume markets. Our reseller network is extensive and provides our customers with global resources for the purchase and support of our products as well as resources for effective and cost-efficient training services. 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’s products a worldwide design software standard.

Users trained on Autodesk products are broadly available both from universities and the existing workforce, reducing the cost of training for our customers. We offer education programs and specially priced software-purchasing options tailored for educational institutions, students, and faculty to train the next generation of users. We also offer classroom support, including standardized curricula developed by educators, instructor development, and a rich assortment of online learning resources.

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 most of our releases. Our most recent major product releases occurred in March 2007. Beyond our horizontal design products, we develop products addressing specific vertical market needs. In addition, we believe that migration of our customers from our 2D products to our 3D model-based products, which generally have higher prices, 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 in all industries 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 model-based products as expected, and sales of our 2D products decrease without a corresponding increase in customer seats of our 3D model-based products, we would not realize the growth we expect and our business would be adversely affected.

 

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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 Latin America, present significant growth opportunities for us. However, conducting business in these rapidly growing economies presents significant challenges, including intellectual property protection and software piracy which remains a substantial problem.

Another significant part of our growth strategy is to improve upon our installed base business model. A key element of this strategy 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 customers on a regular and timely basis. Annual releases also help us to increase product maintenance revenues and significantly reduce our reliance on product upgrade revenues, thereby reducing the volatility of revenues.

We are continually focused on improving productivity and efficiency in all areas of Autodesk in order to allow us to increase our investment in growth initiatives and improve our profitability. However, our operating margin declined to 19% during fiscal 2007 compared with 25% during fiscal 2006. This decline in our operating margin was driven primarily by our adoption of Statement of Financial Accounting Standards No. 123—revised 2004, “Share-Based Payment” (“SFAS 123R”) in the first quarter of fiscal 2007. As a result of this new accounting pronouncement, we recorded stock-based compensation expense in fiscal 2007 of $94.3 million which decreased operating margins by 5%. In addition, we experienced increased amortization expense during fiscal 2007 primarily from our acquisition of Alias in the fourth fiscal quarter of 2006. Amortization expense of acquisition-related intangibles, primarily related to our acquisition of Alias, of $14.4 million in fiscal 2007 compared to $0.7 million in fiscal 2006, decreased our operating margin by 1%. Finally, costs incurred as a result of our stock option review, including a bonus payment to participants of our Employee Stock Purchase Plan (“ESPP”), reduced our operating margin by 1%. See further discussion of this ESPP bonus payment at “Stock Compensation” within this Item. These decreases in operating margin were offset by productivity initiatives across our organization. We continue to invest in growth initiatives and, over the longer term, we intend to continue to balance investments in revenue growth opportunities with our goal of increasing our operating margins.

We generate significant cash flows. Our uses of cash include share repurchases to offset the dilutive effect of our employee stock plans as well as investments in acquisitions and investments in growth initiatives, such as our recent acquisition of Constructware, and our equity investment in Hanna Strategies during the first quarter of fiscal 2007. See Note 15, “Business Combinations”and Note 16, “Related Parties,” in the Notes to Consolidated Financial Statements for further discussion. We evaluate merger and acquisition and divestiture opportunities to the extent they support our strategy. Our typical acquisitions, which are an integral part of our growth initiatives, are intended to provide specific technology or expertise, adjacency to our current products and services and rapid product integration. Additionally, we continue to invest in other growth initiatives including product development and sales, market and channel development.

Design Solutions Segment

During fiscal 2007, the Design Solutions Segment consisted of the following divisions: Platform Technology Division and Other, which included our horizontal design products, AutoCAD and AutoCAD LT, and Autodesk Consulting and Autodesk Collaboration Services; Manufacturing Solutions Division; Building Solutions Division; and Infrastructure Solutions Division.

For the Platform Technology Division , our focus during fiscal 2007 was on providing CAD design tools and technologies that allow our customers in multiple markets to create, manage, and share design data. Our primary product offerings were AutoCAD and AutoCAD LT software and our Autodesk Buzzsaw service. AutoCAD software is a customizable and extendable computer aided design (CAD) application for 2D drafting, detailing, functional design documentation and basic 3D model-based design. AutoCAD LT software is used for

 

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2D drafting and detailing by design professionals who require full DWG file format compatibility and document sharing capability without the need for software customization or 3D functionality. Autodesk Buzzsaw is an on-demand collaboration service that allows users to store, manage and share project information from any internet connection.

For the Manufacturing Solutions Division, our focus during fiscal 2007 was to provide comprehensive design and data management solutions that enable our manufacturing customers to rapidly adopt 3D design, create designs in a simple 2D/3D environment and manage design data. Our primary solution offering was the Autodesk Inventor Family of Products, which delivers Autodesk Mechanical Desktop, based on AutoCAD software, and Autodesk Inventor in one solution, and Autodesk AutoCAD Mechanical, which offers 2D mechanical design and engineering tools that are compatible with all AutoCAD-based products.

For the Building Solutions Division, our focus during fiscal 2007 was to enable our customers to create high quality building designs and documentation, accurately estimate project costs and manage project workflows, and provide comprehensive solutions that enable them to rapidly adopt 3D designs. Our primary product offerings were: Autodesk Architectural Desktop for architects and Autodesk Building Systems for Mechanical, Electrical, Planning (“MEP”) engineering firms, both based on AutoCAD software; and a complete suite of design software built on the Autodesk Revit platform for building information modeling (“BIM”). These include Autodesk Revit Building for architects, Autodesk Revit Structure for structural engineers, and Autodesk Revit Systems for the engineering of building mechanical and electrical systems.

For the Infrastructure Solutions Division, our focus during fiscal 2007 was to enable our customers to compile, analyze and maintain digital design information, design and manage physical infrastructure projects, distribute geospatial information on the web, and provide them with comprehensive solutions that enable them to rapidly adopt 3D designs. Our primary product offerings were Autodesk Map 3D for precision mapping and geographic information system analysis in the AutoCAD environment, Autodesk Civil 3D and Autodesk Land Desktop. We believe customers in the web mapping market are demanding more frequent software releases, faster support for new standards, faster access to new data sources, and lower cost of ownership for their web mapping solutions.

Media and Entertainment Segment

The Media and Entertainment Segment serves the digital media sector and during fiscal 2007 was divided into two business lines: (1) Animation and (2) Advanced Systems. Principal product offerings in our Animation business line were: Autodesk 3ds Max and Autodesk Maya. Autodesk 3ds Max is modeling, animation, and rendering software that enables game developers, design visualization professionals, and visual effects artists to communicate abstract or complex mechanical, architectural, engineering, and construction concepts. Autodesk Maya is a 3D modeling, animation, effects, and rendering solution that enables film and video artists, game developers, and design visualization professionals to create engaging, lifelike digital images, realistic animation, and extraordinary visual effects. A key component of our strategy is the realization of a complete and comprehensive 3D animation portfolio and workflow. Principal product offerings in our Advanced Systems business line include Autodesk Flame, Autodesk Inferno and Autodesk Flint, our scalable line of interactive real-time visual effects and graphics design solutions; and Autodesk Smoke and Autodesk Fire, our scalable line of interactive real-time non-linear editing and finishing systems. In the film, commercial, and broadcast markets, our focus remains on visual effects design, editing and finishing tools, where we plan to continue to expand our software feature sets and improve data interoperability, while continuing to transition these products to lower cost standard, open, PC-based Linux platforms.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles. In preparing our consolidated financial statements, we make assumptions, judgments and estimates

 

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that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates. We believe that of our significant accounting policies, which are described in Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements, 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.

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 an element is sold separately or a price 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. If we do not believe that collection is probable, the revenue will be deferred until the earlier of when collection is deemed probable or cash is received.

Our product license revenues from 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 among other criteria. 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. Our policy also presumes that we have no significant performance obligations in connection with the sale of our product licenses by our distributors and resellers to 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.

Product Returns Reserves.    We permit our distributors and resellers to return products up to a percentage of prior quarter purchases and to return product when new product releases supersede older versions. The product returns reserve is based on historical experience of actual product returns, estimated channel inventory levels, the timing of new product introductions and promotions, channel sell-in for applicable markets and other factors.

Our product returns reserves were $18.2 million at January 31, 2007 and $14.2 million at January 31, 2006. Product returns as a percentage of applicable revenues were 3.9% in fiscal 2007, 3.7% in fiscal 2006 and 4.1% in fiscal 2005. During fiscal year 2007, we recorded additions to our product returns reserves of $57.1 million, which reduced our revenue.

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.

 

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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 affect 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. Because expected lives are relatively short, discounting the projected cash flows would not lead to a significantly different result. 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. When assessing goodwill for impairment, we use discounted 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 goodwill assets are impaired or the amount of the impairment charge. Impairment charges, if any, result from instances where the fair values of net assets associated with goodwill are less than their carrying values. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.

Deferred Tax Assets.    We currently have $137.9 million of net deferred tax assets, mostly arising from net operating losses, including stock option deductions taken in fiscal years prior to fiscal 2007, as well as tax credits and reserves offset by the establishment of U.S. deferred tax liabilities on unremitted earnings from certain foreign subsidiaries and taxable temporary differences for purchased technologies and capitalized software. 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 $519 million across a specific mix of 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. Our effective tax rate is based on expected geographic mix of earnings, statutory rates, transfer pricing, and enacted tax rules. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions on a worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. It is possible that these positions may be challenged which may have a significant impact on our effective tax rate.

Stock Option Accounting.    In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123—revised 2004, “Share-Based Payment” (“SFAS 123R”), which replaces Statement of

 

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Financial Accounting Standards No. 123 (“SFAS 123”) and supersedes APB 25. SFAS 123R requires the measurement of all 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. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), which provides interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements.

We adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of February 1, 2006, the first day of our fiscal year 2007. Our consolidated financial statements for fiscal 2007 reflect our adoption of SFAS 123R. In accordance with the modified prospective transition method, our consolidated financial statements for prior periods have not been restated for, and do not include the impact of, compensation expense calculated under SFAS 123R.

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Income. Prior to the adoption of SFAS 123R, we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25, as permitted by SFAS 123. Under the intrinsic value method, compensation expense resulted primarily from stock option grants to non-executive employees at exercise prices below fair market value on the option measurement date. The majority of these grants were made between August 2000 and February 2005.

We use the Black-Scholes-Merton option-pricing model as the most appropriate method for determining the estimated fair value for employee stock awards. This is the same option-pricing model used in prior years to calculate the pro forma compensation expense under our SFAS 123 footnote disclosures. This model requires the input of assumptions, including expected stock price volatility, expected life, expected dividend yield and risk-free interest rate of each award. The parameters used in the model are reviewed on a quarterly basis and adjusted, as needed. Compensation expense for employee stock awards is recognized on a straight-line basis over the vesting period of the award. The adoption of SFAS 123R also requires certain changes to the accounting for income taxes, the method used in determining diluted shares, the application of a pre-vesting forfeiture rate against both pre- and post-adoption grants, as well as additional disclosure related to the cash flow effects resulting from share-based compensation. The relevant interpretive guidance of SAB 107 was applied in connection with the implementation and adoption of SFAS 123R. See Note 3, “Employee and Director Benefit Plans,” for more information on this new standard.

We are restating our consolidated balance sheet as of January 31, 2006, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the fiscal years ended January 31, 2006 and January 31, 2005, and each of the quarters in fiscal 2006 to include net revenues and stock-based compensation adjustments. Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected by the restatements have not been amended and should not be relied on.

In connection with the restatement of our consolidated financial statements, we applied judgment and sensitivity analysis in choosing whether to revise measurement dates for prior option grants. In addition, if we determined that a measurement date needed to be revised, judgment and sensitivity analysis was applied in determining the appropriate measurement date.

 

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The increase in net revenues and stock-based compensation expense resulting from the restatement is as follows (in millions):

 

Fiscal Year

   Net
Revenues
   Stock-based
Compensation
Expense
    Tax
Effect(1)
    Total
Adjustments,
Net of Tax
 

1992

   $ —      $ (0.1 )   $ —       $ (0.1 )

1993

     —        (2.0 )     0.7       (1.3 )

1994

     —        (1.2 )     0.4       (0.8 )

1995

     —        (1.2 )     0.4       (0.8 )

1996

     —        (0.6 )     0.2       (0.4 )

1997

     —        (0.5 )     0.2       (0.3 )

1998

     —        (0.3 )     0.1       (0.2 )

1999

     —        (0.5 )     0.2       (0.3 )

2000

     —        (1.3 )     0.2       (1.1 )

2001

     —        (1.5 )     0.2       (1.3 )

2002

     —        (3.9 )     1.1       (2.8 )

2003

     —        (5.0 )     0.8       (4.2 )

2004

     —        (4.8 )     (0.3 )     (5.1 )
                               

Total 1992 – 2004 impact

     —        (22.9 )     4.2       (18.7 )

2005

     5.1      (7.3 )     1.8       (0.4 )

2006

     14.0      (4.6 )     (4.7 )     4.7  
                               

Total:

   $ 19.1    $ (34.8 )   $ 1.3     $ (14.4 )
                               

(1)   Includes $2.5 million of payroll tax expenses.

In addition, we have restated the pro forma expense under SFAS 123 in Part II, Item 8, Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements to include these adjustments for the years ended January 31, 2006 and January 31, 2005.

 

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The following table presents the effects of the net revenue, stock-based compensation and related tax adjustments made to our previously reported consolidated statements of income (in millions, except per share data):

 

     Fiscal year ended January 31, 2006     Fiscal year ended January 31, 2005  
    

As

Reported

    Adjustments    

As

Restated

   

As

Reported

    Adjustments    

As

Restated

 

Net revenues:

            

License and other

   $ 1,246.7     $ 15.1     $ 1,261.8     $ 1,057.1     $ 8.2     $ 1,065.3  

Maintenance

     276.5       (1.1 )     275.4       176.7       (3.1 )     173.6  
                                                

Total net revenues

     1,523.2       14.0       1,537.2       1,233.8       5.1       1,238.9  
                                                

Costs and expenses:

            

Cost of license and other revenues

     157.8       0.2       158.0       152.5       0.2       152.7  

Cost of maintenance revenues

     13.1       —         13.1       17.0       —         17.0  

Marketing and sales

     553.8       2.2       556.0       461.9       2.8       464.7  

Research and development

     301.6       1.6       303.2       239.4       2.1       241.5  

General and administrative

     127.1       1.3       128.4       101.4       3.2       104.6  

Restructuring

     —         —         —         26.7       —         26.7  
                                                

Total costs and expenses

     1,153.4       5.3       1,158.7       998.9       8.3       1,007.2  
                                                

Income from operations

     369.8       8.7       378.5       234.9       (3.2 )     231.7  

Interest and other income, net

     13.2       —         13.2       11.4       —         11.4  
                                                

Income before income taxes

     383.0       8.7       391.7       246.3       (3.2 )     243.1  

Income tax (provision) benefit

     (54.1 )     (4.0 )     (58.1 )     (24.8 )     2.8       (22.0 )
                                                

Net income

   $ 328.9     $ 4.7     $ 333.6     $ 221.5     $ (0.4 )   $ 221.1  
                                                

Basic net income per share

   $ 1.44     $ 0.02     $ 1.46     $ 0.98     $ (0.01 )   $ 0.97  
                                                

Diluted net income per share

   $ 1.33     $ 0.02     $ 1.35     $ 0.90     $ (0.00 )   $ 0.90  
                                                

Shares used in computing basic net income per share

     229.0       —         229.0       227.0       —         227.0  
                                                

Shares used in computing diluted net income per share

     247.5       —         247.5       247.0       —         247.0  
                                                

 

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The following table presents the effects of the net revenue, stock-based compensation and related tax adjustments made to our previously reported consolidated balance sheet as of January 31, 2006 (in millions, except per share data):

 

    January 31, 2006  
    As Reported     Adjustments     As Restated  
ASSETS      

Current assets:

     

Cash and cash equivalents

  $ 287.2     $ —       $ 287.2  

Marketable securities

    90.3       —         90.3  

Accounts receivable, net

    261.4       —         261.4  

Inventories

    14.2       —         14.2  

Deferred income taxes

    64.4       —         64.4  

Prepaid expenses and other current assets

    29.3       —         29.3  
                       

Total current assets

    746.8       —         746.8  

Computer equipment, software, furniture and leasehold improvements,
net

    61.4       —         61.4  

Purchased technologies, net

    49.8       —         49.8  

Goodwill

    318.2       —         318.2  

Deferred income taxes, net

    129.2       (5.0 )     124.2  

Other assets

    55.4       —         55.4  
                       
  $ 1,360.8     $ (5.0 )   $ 1,355.8  
                       
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable

  $ 56.4     $ —       $ 56.4  

Accrued compensation

    121.3       —         121.3  

Accrued income taxes

    10.8       —         10.8  

Deferred revenues

    249.8       (19.1 )     230.7  

Other accrued liabilities

    68.6       —         68.6  
                       

Total current liabilities

    506.9       (19.1 )     487.8  

Deferred revenues

    35.8       —         35.8  

Other liabilities

    26.8       2.4       29.2  

Commitments and contingencies (Note 8)

    —         —         —    

Stockholders’ equity:

     

Preferred stock, $0.01 par value; 2.0 shares authorized; none issued or outstanding at January 31, 2006

    —         —         —    

Common stock and additional paid-in capital, $0.01 par value; 750.0 shares authorized; 229.6 shares outstanding at January 31, 2006

    773.7       30.1       803.8  

Accumulated other comprehensive loss

    (7.4 )     —         (7.4 )

Deferred compensation

    (6.1 )     (4.0 )     (10.1 )

Retained earnings

    31.1       (14.4 )     16.7  
                       

Total stockholders’ equity

    791.3       11.7       803.0  
                       
  $ 1,360.8     $ (5.0 )   $ 1,355.8  
                       

The following table presents the cumulative adjustments to each component of stockholders’ equity at the end of each fiscal year (in millions):

 

As of January 31,

   Common Stock and
Additional Paid-in Capital
   Deferred
Compensation
    Retained
Earnings
    Net Impact to
Stockholders' Equity
 

2002

   $ 19.2    $ (11.1 )   $ (9.4 )   $ (1.3 )

2003

     22.0      (8.9 )     (13.6 )     (0.5 )

2004

     27.1      (9.2 )     (18.7 )     (0.8 )

2005

     31.0      (10.2 )     (19.1 )     1.7  

2006

     30.1      (4.0 )     (14.4 )     11.7  

 

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The following table presents the effects of the net revenue, stock-based compensation and related tax adjustments made to the Company’s previously reported consolidated statements of cash flows (in millions):

 

    Fiscal year ended January 31, 2006     Fiscal year ended January 31, 2005  
    As
Reported
    Adjustments     As
Restated
    As
Reported
    Adjustments     As
Restated
 

Operating Activities

           

Net income

  $ 328.9     $ 4.7     $ 333.6     $ 221.5     $ (0.4 )   $ 221.1  

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

           

Charge for acquired in-process research and development

    9.1       —         9.1       —         —         —    

Depreciation and amortization

    43.7       —         43.7       51.9       —         51.9  

Stock-based compensation expense

    0.4       4.2       4.6       3.9       8.0       11.9  

Net loss on fixed asset disposals

    0.1       —         0.1       0.6       —         0.6  

Tax benefits from employee stock plans

    124.0       0.6       124.6       116.9       (4.4 )     112.5  

Restructuring related charges, net

    —         —         —         9.2       —         9.2  

Changes in operating assets and liabilities, net of business combinations:

           

Accounts receivable

    (45.8 )     —         (45.8 )     (30.0 )     —         (30.0 )

Inventories

    (1.0 )     —         (1.0 )     4.8       —         4.8  

Deferred income taxes

    (87.8 )     3.8       (84.0 )     (101.7 )     0.9       (100.8 )

Prepaid expenses and other current assets

    0.3       —         0.3       (1.3 )     —         (1.3 )

Accounts payable and accrued liabilities

    (15.1 )     0.7       (14.4 )     39.6       1.0       40.6  

Deferred revenues

    85.7       (14.0 )     71.7       67.0       (5.1 )     61.9  

Accrued income taxes

    (27.3 )     —         (27.3 )     (9.1 )     —         (9.1 )
                                               

Net cash provided by operating activities

    415.2       —         415.2       373.3       —         373.3  
                                               

Investing Activities

           

Purchases of available-for-sale marketable securities

    (279.3 )     —         (279.3 )     (259.6 )     —         (259.6 )

Sales and maturities of available-for-sale marketable securities

    204.0       —         204.0       490.3       —         490.3  

Business combinations, net of cash

acquired

    (242.1 )     —         (242.1 )     (11.8 )     —         (11.8 )

Capital and other expenditures

    (20.5 )     —         (20.5 )     (40.8 )     —         (40.8 )

Purchases of software technologies and capitalization of software development costs

    —         —         —         (1.6 )     —         (1.6 )

Other investing activities

    (0.1 )     —         (0.1 )     (0.9 )     —         (0.9 )
                                               

Net cash provided by (used in) investing activities

    (338.0 )     —         (338.0 )     175.6       —         175.6  
                                               

Financing Activities

           

Proceeds from issuance of common stock, net of issuance costs

    144.6       —         144.6       242.2       —         242.2  

Repurchases of common stock

    (446.6 )     —         (446.6 )     (546.3 )     —         (546.3 )

Dividends paid

    (3.4 )     —         (3.4 )     (13.5 )     —         (13.5 )

Other financing activities

    (0.2 )     —         (0.2 )     (0.2 )     —         (0.2 )
                                               

Net cash used in financing activities

    (305.6 )     —         (305.6 )     (317.8 )     —         (317.8 )
                                               

Effect of exchange rate changes on cash and cash equivalents

    (2.1 )     —         (2.1 )     4.4       —         4.4  
                                               
           

Net increase (decrease) in cash and cash equivalents

    (230.5 )     —         (230.5 )     235.5       —         235.5  

Cash and cash equivalents at beginning of year

    517.7       —         517.7       282.2       —         282.2  
                                               

Cash and cash equivalents at end of period

  $ 287.2     $ —       $ 287.2     $ 517.7     $ —       $ 517.7  
                                               

 

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Legal Contingencies.    As described in Part I, Item 3, “Legal Proceedings” and Part II, Item 8, Note 8, “Commitments and Contingencies,” in the Notes to 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.

Recently Issued Accounting Standards

In September 2006, the SEC staff released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”) which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. We applied the provisions of SAB 108 using the cumulative effect transition method in connection with the preparation of our annual financial statements for the year ended January 31, 2007. The adoption of SAB 108 did not have a material effect on our consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). This Statement requires recognition of the funded status of a benefit plan in the statement of financial position. The Standard also requires recognition in other comprehensive income of certain gains and losses that arise during the period but are deferred under pension accounting rules, as well as modifies the timing of reporting and adds certain disclosures. SFAS 158 provides recognition and disclosure elements to be effective as of the end of the fiscal year after December 15, 2006 and measurement elements to be effective for fiscal years ending after December 15, 2008. We have adopted the recognition and disclosure elements of the Statement which have not had a material effect on our consolidated financial position, results of operations or cash flows. In addition, we adopted the measurement elements of the Standard as of February 1, 2007, the beginning of our fiscal year 2008. The adoption of the measurement elements of SFAS 158 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In September 2006, the FASB also issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but instead is intended to eliminate inconsistencies with respect to this topic found in various other accounting pronouncements. This Statement is effective for our 2009 fiscal year, including interim periods within our 2009 fiscal year. We do not believe the adoption of SFAS 157 will have a material effect on our consolidated financial position, results of operations or cash flows.

In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in tax positions. Under FIN 48, companies are required to recognize the benefit from a tax position only if it is “more likely than not” that the tax position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarified how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the derecognition of previously recognized tax benefits and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. The provisions of FIN 48 are effective as of the beginning of our 2008 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Based on our assessment, we recorded an increase to opening retained earnings during the first quarter of fiscal 2008 for tax benefits not previously recognized of approximately $26 million as a result of adopting FIN 48.

 

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In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”). This Statement amends Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. The adoption of SFAS 155 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

Overview of Fiscal 2007 Results of Operations

 

      For the year ended
January 31, 2007
   As a % of Net
Revenues
    For the year ended
January 31, 2006
   As a % of Net
Revenues
 
                As Restated(1)       
     (in millions)  

Net Revenues

   $ 1,839.8    100 %   $ 1,537.2    100 %

Cost of revenues

     216.6    12 %     171.1    11 %

Operating expenses

     1,273.5    69 %     987.6    64 %
                  

Income from operations

   $ 349.7    19 %   $ 378.5    25 %
                  

(1)   See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of Consolidated Financial Statements,” in the Notes to Consolidated Financial Statements of this Form 10-K.

The primary goals for fiscal 2007 were to continue our delivery of market-leading products and solutions to our customers in order to drive revenue growth, market share gains and increases in operating cash flow. We achieved these goals as demonstrated by our 20% net revenue increase and our 38% increase in cash from operations from fiscal 2006 to fiscal 2007. The strength of our products and their market acceptance and our acquisition of Alias and Constructware led to strong growth in net revenue and increased market share.

During fiscal 2007 we released our 2007 family of products, grew maintenance revenues by 54%, our maintenance-installed base to over 1.2 million users, 3D revenues by 41%, AutoCAD and AutoCAD LT revenues by 11%, revenues from emerging economies by 39% and Animation revenues by 97%. The growth numbers include acquisition related revenue, primarily from our acquisition of Alias in January 2006. During the second quarter of fiscal 2007, we successfully completed the integration of Alias.

Our net revenues were higher in fiscal 2007 as compared to fiscal 2006 due primarily to growth in sales of new seats and maintenance revenues, partially offset by a decrease in revenues from upgrades. Increase in revenues of 19% from the sales of new seats was driven by volume growth and higher average sales prices in AutoCAD, AutoCAD LT, and our 3D products, as well as revenues from our Maya, StudioTools, and other animation products resulting from our January 2006 acquisition of Alias. Maintenance revenues from our Subscription Program increased 54%, reflecting strength in subscription attachment and renewal rates during fiscal 2007. Revenues from upgrades decreased by 7% driven primarily by the relatively smaller size of the upgradeable base of the AutoCAD-based products as of the beginning of fiscal 2007 compared to the upgradeable base of the AutoCAD-based products in fiscal 2006 and the success of our Subscription Program. In addition, our aggregate backlog, primarily comprised of deferred revenue and current software license product orders which we have not yet shipped, increased from $283.5 million at January 31, 2006 to $395.8 million at January 31, 2007.

We generate a significant amount of our revenue in the United States, Japan, Germany, United Kingdom, Italy, France, Canada, China, South Korea and Australia. Foreign currencies had a minimal effect on financial results for fiscal 2007. The weaker value of the U.S. dollar relative to foreign currencies had a negative effect of

 

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$0.6 million on operating results in fiscal 2007 compared to fiscal 2006. If exchange rates from fiscal 2006 would have been in effect during fiscal 2007, translated international revenue billed in local currencies would have been $1.0 million lower and operating expenses would have been $1.6 million lower. Changes in the value of the U.S. dollar may have a significant effect on net revenues in future periods. We use foreign currency option collar contracts to reduce the current quarter exchange rate effect on the net revenue of certain anticipated transactions.

The percentage of total costs and expenses increased to 81% of net revenues in fiscal 2007 from 75% of net revenues in fiscal 2006. This increase is primarily due to our adoption of SFAS 123R commencing from the first quarter of fiscal 2007. Total stock-based compensation expense of $94.3 million was recorded in fiscal 2007, resulting in a 5% increase in total costs and expenses as a percent of net revenues. In addition, we experienced increased operating costs due to the acquisition and integration of Alias. Amortization of acquisition-related intangibles, primarily from the Alias acquisition, of $14.4 million in fiscal 2007, compared to $0.7 million in fiscal 2006, increased total costs and expenses as a percent of net revenues by 1%. Finally, costs of $15.0 million incurred as a result of our stock option review, including a bonus payment to participants in our ESPP, increased our total costs and expenses as a percent of net revenues by 1%. These increases in total costs and expenses were offset by productivity initiatives across our organization. Our operating margins are very sensitive to changes in revenues, given the relatively fixed nature of most of our expenses, which consist primarily of employee-related expenditures, facilities costs, and depreciation and amortization expense. During fiscal 2008, we expect total costs and expenses to increase in absolute dollars but decline as a percentage of net revenues as we balance investments in revenue growth opportunities with our focus on increasing profitability.

Throughout fiscal 2007, we maintained a strong balance sheet and generated $576.6 million of cash from operating activities as compared to $415.2 million in the previous year. We finished the year with $777.9 million in cash and marketable securities, up from $377.5 million at January 31, 2006. This increase resulted primarily from the temporary cessation of share repurchases during the second half of fiscal 2007. Our voluntary stock option review and our inability to meet our filing requirements with the SEC prohibited share repurchases during the second half of fiscal 2007. We increased our cash and marketable securities while continuing to invest in our business through the acquisition of Constructware, investment in Hanna Strategies and repurchase of 4.2 million shares of our common stock during the first half of fiscal 2007. We completed fiscal 2007 with a higher deferred revenue balance as compared to the previous year. Our deferred revenue balance at January 31, 2007 included $328.2 million of customer subscription contracts which will be recognized as maintenance revenue ratably over the life of the contracts, which is predominantly one year.

 

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Results of Operations

Net Revenues

 

        Increase (decrease)
compared to prior
fiscal year
        Increase (decrease)
compared to prior
fiscal year
     
     Fiscal 2007   $     percent     Fiscal 2006   $   percent     Fiscal 2005
                    As Restated(1)             As Restated(1)
    (in millions)

Net Revenues:

             

License and other

  $ 1,415.9   $ 154.1     12 %   $ 1,261.8   $ 196.5   18 %   $ 1,065.3

Maintenance

    423.9     148.5     54 %     275.4     101.8   59 %     173.6
                                   
  $ 1,839.8   $ 302.6     20 %   $ 1,537.2   $ 298.3   24 %   $ 1,238.9
                                   

Net Revenues by Geographic Area:

             

Americas

  $ 734.5   $ 111.3     18 %   $ 623.2   $ 107.2   21 %   $ 516.0

Europe, Middle East and Africa

    687.5     129.3     23 %     558.2     114.5   26 %     443.7

Asia/Pacific

    417.8     62.0     17 %     355.8     76.6   27 %     279.2
                                   
  $ 1,839.8   $ 302.6     20 %   $ 1,537.2   $ 298.3   24 %   $ 1,238.9
                                   

Net Revenues by Operating Segment:

             

Design Solutions

  $ 1,594.6   $ 250.1     19 %   $ 1,344.5   $ 273.2   26 %   $ 1,071.3

Media and Entertainment

    234.6     62.3     36 %     172.3     12.3   8 %     160.0

Other

    10.6     (9.8 )   (48 )%     20.4     12.8   168 %     7.6
                                   
  $ 1,839.8   $ 302.6     20 %   $ 1,537.2   $ 298.3   24 %   $ 1,238.9
                                   

Net Revenues—Design Solutions Segment:

             

Platform Technology Division and Other

  $ 806.1   $ 74.5     10 %   $ 731.6   $ 132.1   22 %   $ 599.5

Manufacturing Solutions Division

    333.1     76.2     30 %     256.9     57.2   29 %     199.7

Building Solutions Division

    241.9     64.3     36 %     177.6     53.3   43 %     124.3

Infrastructure Solutions Division

    213.5     35.1     20 %     178.4     30.6   21 %     147.8
                                   
  $ 1,594.6   $ 250.1     19 %   $ 1,344.5   $ 273.2   26 %   $ 1,071.3
                                   

(1)   See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of Consolidated Financial Statements,” in the Notes to Consolidated Financial Statements of this Form 10-K.

Fiscal 2007 Net Revenues Compared to Fiscal 2006 Net Revenues

License and other revenues are comprised of two components: all forms of product license revenues and other revenues. Product license revenues include revenues from the sale of new seats, revenues from the Autodesk Upgrade Program and revenues from the Autodesk Crossgrade Program. Other revenues consist of revenue from consulting and training services as well as revenue from the Autodesk Developers Network. Maintenance revenues consist of revenue from our Subscription Program.

The increase in net revenues during fiscal 2007, as compared to fiscal 2006, was due to an increase in sales of new seats, an increase in the sales of subscription contracts which are recognized as maintenance revenues and an increase in crossgrade revenues. Revenue from the sale of new seats increased due to volume growth and higher average sales prices in our AutoCAD, AutoCAD LT, and our 3D products. In addition, the introduction of our Maya and StudioTools products resulting from the January 2006 acquisition of Alias contributed to the growth in revenues during fiscal 2007. We experienced strong growth in all three of our geographic regions and strong growth rates in the emerging economies of Asia/Pacific, Eastern Europe and the Middle East, and Latin

 

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America from fiscal 2006 to fiscal 2007. These increases were partially offset by a decline in revenue from upgrades resulting primarily from the relatively smaller size of the upgradeable base of our AutoCAD-based products during fiscal 2007 compared to the upgradeable base of our AutoCAD-based products as of the same period in the prior fiscal year.

Growth in license and other revenues during fiscal 2007, as compared to fiscal 2006, was primarily due to an increase in the sale of commercial new seats for most major products driven by our new product releases during fiscal 2007. Increases in revenue from the sale of new seats were driven by volume growth in AutoCAD, AutoCAD LT and most major products, as well as growing sales of our 3D products. These increases were partially offset by a 7% decrease in revenues from upgrades driven by the relatively smaller size of the upgradeable base of our AutoCAD-based products in fiscal 2007 compared to the size of our AutoCAD-based products and the success of our Subscription Program in fiscal 2006. Revenue from the sales of services, training and support are immaterial for all periods presented.

We attempt to release new product versions on a regular basis and synchronize our major product retirements with those releases. Our AutoCAD 2004-based products were retired in the first quarter of fiscal 2008. The upgradeable installed base of the AutoCAD-based products not on subscription during fiscal 2007 was smaller than the upgradeable installed base of AutoCAD-based products not on subscription during fiscal 2006. As a result, overall maintenance revenue from subscriptions exceeded revenue from upgrades in fiscal 2007. We expect revenue from upgrades to continue to decline in fiscal 2008 compared to fiscal 2007.

Maintenance revenues consist of revenues derived from the Subscription Program. As a percentage of total net revenues, maintenance revenues were 23% for fiscal 2007, 18% for fiscal 2006, and 14% for fiscal 2005. Our Subscription Program, available to most customers worldwide, continues to attract new and renewal customers by providing them with a cost effective and predictable budgetary option to obtain the productivity benefits of our periodic product release cycle and enhancements. We expect maintenance revenues to continue to increase both in absolute dollars and as a percentage of total net revenues as a result of increased Subscription Program enrollment.

Deferred revenue consists primarily of deferred maintenance revenue from our Subscription Program. To a lesser extent, deferred revenue consists of deferred license and other revenue derived from Autodesk Buzzsaw services, consulting services and deferred license sales. Backlog from current software license product orders which we have not yet shipped consists of orders for currently available license software products from customers with approved credit status and may include orders with current ship dates and orders with ship dates beyond the current fiscal period. Aggregate backlog at January 31, 2007 and January 31, 2006 was $395.8 million and $283.5 million, respectively, of which $17.0 million for both fiscal years related to current software license product orders which have not yet shipped at the end of each respective fiscal year.

We rely significantly upon major distributors and resellers in both the U.S. and international regions, including Tech Data Corporation and their affiliates, who accounted for 12% of fiscal 2007 net revenues and 11% of fiscal 2006 net revenues.

Net Revenues by Geographic Area

Net revenues in the Americas region increased during fiscal 2007, as compared to fiscal 2006, primarily due to strong maintenance revenues, as well as revenues from products acquired in our acquisition of Alias in January 2006 and from growth in revenues from sales of new seats driven by new product releases during fiscal 2007. Revenue from upgrades in the Americas declined by 4% during fiscal 2007 compared to the same period in the prior fiscal year. Had exchange rates during fiscal 2006 been in effect during the same period of fiscal 2007, translated net revenues would have been lower by $0.3 million in fiscal 2007.

 

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Net revenues in the Europe, Middle East and Africa (“EMEA”) region increased during fiscal 2007, as compared to fiscal 2006, primarily due to an increase in the sale of new seats resulting from new product releases, combined with a strong increase in maintenance revenues and revenue from new products acquired from Alias. Revenues from upgrades in EMEA experienced a 2% decline from fiscal 2006 to fiscal 2007. EMEA’s strong growth during fiscal 2007 was primarily due to growth in Germany, the United Kingdom, France, Italy, and the local emerging economies. Had exchange rates during fiscal 2006 been in effect during the same period of fiscal 2007, translated net revenues would have been lower by $10.3 million in fiscal 2007.

Net revenues in the Asia/Pacific (“APAC”) region increased during fiscal 2007, as compared to fiscal 2006, primarily due to strong growth in revenues from sales of new seats resulting from new product releases, followed by strong growth in maintenance revenues. Revenue from upgrades in APAC declined by 29% during fiscal 2007 compared to fiscal 2006. Net revenue growth in APAC during fiscal 2007 primarily occurred in China, South Korea, Australia and India. The increase in APAC net revenue during fiscal 2007 compared to the same period in the prior fiscal year was also due to revenues from new products acquired from Alias. This revenue growth was offset by significant declines in the net revenue growth in Japan for 2D and 3D products. Had exchange rates for fiscal 2006 been in effect during the same period of fiscal 2007, translated net revenues in the APAC region would have been higher by $9.7 million in fiscal 2007.

We believe that international net revenues will continue to comprise a significant portion of our total net revenues. Economic weakness in any of the countries that contribute a significant portion of our net revenues could have an adverse effect on our business in those countries. Strengthening of the U.S. dollar relative to foreign currencies could significantly and adversely impact our future financial results for a given period. International net revenues represented 66% of our net revenues in both fiscal 2007 and fiscal 2006. Net revenues in emerging economies of China, India, Eastern Europe and Latin America grew by 39% from fiscal 2006 to fiscal 2007. This growth was a significant factor in our international sales growth during fiscal 2007. Had exchange rates during fiscal 2006 been in effect during the same period of fiscal 2007, translated international revenues would have been $1.0 million lower in fiscal 2007.

Net Revenues by Operating Segment

Design Solutions Segment net revenues increased during fiscal 2007, as compared to fiscal 2006, primarily due to both strong sales of new seats and maintenance revenues. These increases were partially offset by a 6% decline in revenues from upgrades in fiscal 2007. Maintenance revenues increased to 24% of Design Solutions Segment revenue during fiscal 2007 compared to 20% in fiscal 2006. Sales of AutoCAD and AutoCAD LT continue to comprise a significant portion of our net revenues. Such sales, reflected in the net revenues for the Platform Technology Division and Other, represented 40% of net revenues in fiscal 2007 and 43% of consolidated net revenues in the same period of the prior fiscal year, increasing 11% in absolute dollars between the periods. Net revenues for our 3D model-based design products (Autodesk Inventor Family of Products, Autodesk Revit Family of Products and Autodesk Civil 3D) increased 41% during fiscal 2007 compared to fiscal 2006. Total sales of 3D design products represented 22% of consolidated net revenues in fiscal 2007 compared to 18% in fiscal 2006. A critical component of our growth strategy is to continue to add new 2D users while migrating our customers, including customers of AutoCAD and related vertical industry products, to our 3D products, which generally have higher prices, particularly for annual subscription contracts. However, should sales of 2D products decrease without a corresponding increase in sales of our 3D model-based products, our results of operations could be adversely affected.

Net revenues for the Media and Entertainment Segment (“M&E”) increased during fiscal 2007, as compared to fiscal 2006, primarily from revenue increases in our Animation business line and from both our January 2006 acquisition of Alias and the introduction of new versions of 3ds Max and Maya products during the second quarter of fiscal 2007. Although net revenues from Advanced Systems sales did not increase significantly during fiscal 2007 compared to the same period in the prior fiscal year, such sales progressively improved during each quarter of fiscal 2007 as a result of substantial progress made in the transition of our Advanced Systems product

 

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portfolio from SGI platforms to Linux platforms. We do not expect the transition of our Advanced Systems customers from proprietary SGI platforms to open PC-based platforms to continue to adversely impact Advanced Systems revenue in fiscal 2008.

Fiscal 2006 Net Revenues Compared to Fiscal 2005 Net Revenues

The increase in net revenues during fiscal 2006 was due primarily to strong increase in maintenance revenues and an increase in the sale of new seats, continued growth in AutoCAD and AutoCAD LT revenues, along with a favorable product mix shift towards 3D products which generally have higher sales prices. In addition, we experienced strong growth in all three of our geographic regions and we experienced especially strong growth rates in the emerging economies of China, Eastern Europe, Latin America and India.

Growth in license and other revenues during fiscal 2006, as compared to fiscal 2005, was primarily due to an increase in the sale of new seats for most major products and, to a lesser extent, to a modest increase in revenues from upgrades. The increases in revenues from new seats were driven by volume growth in AutoCAD, AutoCAD LT, and most major products, and growing sales of our 3D products which generally have higher sales prices. Revenues from upgrades increased in fiscal 2006, but at a lower rate than in fiscal 2005 as customers increasingly migrated to our Subscription Program and as we moved the retirement date of the AutoCAD 2002-based products to the first quarter of fiscal 2007. Revenue from the sales of our services, training and support are immaterial for all periods presented.

Maintenance revenues consist of revenues derived from the Subscription Program. As a percentage of total net revenues, maintenance revenues were 18% and 14% for fiscal 2006 and fiscal 2005, respectively.

Net Revenues by Geographic Area

Net revenues in the Americas region increased during fiscal 2006, as compared to fiscal 2005, primarily due to strong maintenance revenues and new seat revenues, offset in part by lower revenues from upgrades. Had exchange rates during fiscal 2005 been in effect during the same period of 2006, translated net revenues would have been lower by $1.7 million in fiscal 2006.

Net revenues in the Europe, Middle East and Africa region increased during fiscal 2006 as compared to fiscal 2005, primarily due to strong maintenance revenues, increased sales of new seats, increased revenues from upgrades and growth in the EMEA emerging markets of Russia, Poland, Czech Republic and the Middle East. Had exchange rates during fiscal 2005 been in effect during the same period of 2006, translated net revenues would have been higher by $7.4 million in fiscal 2006.

Net revenues in the Asia/Pacific region increased during fiscal 2006, as compared to fiscal 2005, primarily due to an increase in the sale of commercial new seats, and to a lesser extent from maintenance revenues and revenues from upgrades as our Subscription Program was introduced in the APAC region after successful introductions first in the Americas and then in EMEA. We experienced strong growth during fiscal 2006 in Japan, China, Australia and South Korea. Had exchange rates during fiscal 2005 been in effect during the same period of 2006, translated net revenues would have been higher by $3.4 million in fiscal 2006. International sales accounted for 66% of our net revenues in fiscal 2006 as compared to 65% in the prior fiscal year. Had exchange rates from fiscal 2005 been in effect during fiscal 2006, translated international revenues would have been $9.1 million higher for fiscal 2006. Net revenues in the emerging economies of China, India, Eastern Europe and Latin America grew by 61% between fiscal 2005 and fiscal 2006. This growth was a significant factor in our international sales growth during fiscal 2006.

Net Revenues by Operating Segment

Design Solutions Segment net revenues increased during fiscal 2006, as compared to fiscal 2005, primarily due to strong growth in new seat sales and in maintenance revenues as well as a more modest increase in net

 

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revenues from upgrades. Maintenance revenues from our Subscription Program increased to 20% of Design Solutions Segment revenue in fiscal 2006, as compared to 16% in fiscal 2005. During fiscal 2006 and 2005, sales of AutoCAD 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 43% of our consolidated net revenues in fiscal 2006 and and 44% in fiscal 2005, growing 23% in absolute dollars between the periods. Net revenues for our 3D model-based design products (Autodesk Inventor Family of Products, Autodesk Revit Family of Products and Autodesk Civil 3D) increased 60% during fiscal 2006 as compared to fiscal 2005. Total sales of 3D model-based design products accounted for 18% of consolidated net revenues in fiscal 2006 compared to 14% in fiscal 2005.

Net revenues for the Media and Entertainment Segment increased during fiscal 2006, as compared to fiscal 2005, primarily from revenue increases in our Animation business line due to new seats and maintenance revenues derived from 3ds Max. Net revenues from our Advanced Systems business line increased from $110.4 million during fiscal 2005 to $112.3 million during fiscal 2006. This increase resulted from growth in the sales of our Linux-based Advanced Systems Products, which were offset in part by recent declines in Advanced Systems sales on the SGI platform.

Cost of Revenues

 

           Increase (decrease)
compared to prior
fiscal year
          Increase (decrease)
compared to prior
fiscal year
       
      Fiscal 2007     $     %     Fiscal 2006     $     %     Fiscal 2005  
                       As Restated(1)                 As Restated(1)  
     (in millions)  

Cost of revenues:

              

License and other

   $ 207.9     $ 49.9     32 %   $ 158.0     $ 5.3     3 %   $ 152.7  

Maintenance

     8.7       (4.4 )   (34 )%     13.1       (3.9 )   (23 )%     17.0  
                                            
   $ 216.6     $ 45.5     27 %   $ 171.1     $ 1.4     1 %   $ 169.7  
                                            

As a percentage of net revenues

     12 %         11 %         14 %

(1)   See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of Consolidated Financial Statements,” in the Notes to Consolidated Financial Statements of this Form 10-K.

Cost of license and other revenues includes direct material and overhead charges, royalties, amortization of purchased technology, hosting costs, labor costs of fulfilling service contracts and order processing and, beginning at the start of fiscal 2007, stock-based compensation expense under SFAS 123R. Direct material and overhead charges include the cost of hardware sold (mainly workstations manufactured by IBM and 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 during fiscal 2007, as compared to fiscal 2006, due to higher amortization of purchased technology resulting from recent acquisitions, stock-based compensation expense under SFAS 123R, and an increase in our allowance for excess and obsolete inventory, which together represented 1% of revenues. The increase in cost of license and other revenues during fiscal 2006, as compared to fiscal 2005, was primarily due to higher direct material, overhead and royalty expenses for licensed technology embedded in our products, all of which resulted from increased volumes, partially offset by a reduction in amortization of purchased technology and capitalized software.

Cost of maintenance revenues includes direct costs of fulfilling our subscription contracts as well as indirect overhead charges. The decrease in cost of maintenance revenues during fiscal 2007, as compared to fiscal 2006, was due primarily to the cessation of amortization for an information technology system supporting our

 

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Subscription Program, which became fully amortized during the second quarter of fiscal 2006. The amortization reduction was partially offset by incremental direct program costs incurred as part of the growth of our Subscription Program. The decrease in cost of maintenance revenues during fiscal 2006, as compared to fiscal 2005, was due primarily to the cessation of amortization for our information technology system supporting our Subscription Program. The amortization reduction was partially offset by incremental direct program costs incurred as part of the growth of the Subscription Program.

Cost of revenues, at least over the near term, are affected 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, new customer support offerings and the impact of expensing employee stock-based compensation as required under SFAS 123R. Absent stock-based compensation expense, we expect cost of revenues as a percentage of net revenues to remain relatively consistent with fiscal 2007.

Marketing and Sales

 

          

Increase

compared to prior
fiscal year

          Increase
compared to prior
fiscal year
       
     Fiscal 2007     $    %     Fiscal 2006     $    %     Fiscal 2005  
                      As Restated(1)                As Restated(1)  
     (in millions)  

Marketing and sales

   $ 696.1     $ 140.1    25 %   $ 556.0     $ 91.3    20 %   $ 464.7  

As a percentage of net revenues

     38 %          36 %          38 %

(1)   See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of Consolidated Financial Statements,” in the Notes to Consolidated Financial Statements of this Form 10-K.

Marketing and sales expenses include salaries, dealer and sales commissions, bonus, travel and facility costs for our marketing, sales, 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. Marketing and sales expense from the beginning of fiscal 2007 also includes stock-based compensation expense for stock awards granted to marketing and sales employees.

The increase of marketing and sales expenses during fiscal 2007, as compared to fiscal 2006, was due primarily to a $55.8 million increase in employee-related costs driven by increased marketing and sales headcount, $41.9 million of stock-based compensation expense under SFAS 123R, and $29.6 million of increased marketing and promotion costs related to product launches, trade shows, branding, and demand generation. Marketing and sales expense for fiscal 2007 also included $3.8 million in one-time ESPP bonus payments incurred in connection with our voluntary stock option review. Marketing and sales headcount increased as a result of organic growth as well as the acquisition of Alias.

The increase of marketing and sales expenses during fiscal 2006, as compared to fiscal 2005, was due primarily to $56.5 million of increased marketing and promotion costs related to product launches, trade shows and branding and $14.3 million of higher employee-related costs reflecting increased headcount, which were partially offset by a reduction in commissions and bonus accruals, and an increase in information technology costs.

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. As a result, we expect marketing and sales expenses to continue to be significant, both in absolute dollars and as a percentage of net revenues.

 

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Research and Development

 

           Increase
compared to prior
fiscal year
          Increase
compared to prior
fiscal year
       
     Fiscal 2007     $    %     Fiscal 2006     $    %     Fiscal 2005  
                      As Restated(1)                As Restated(1)  
                      (in millions)                   

Research and development

   $ 406.3     $ 103.1    34 %   $ 303.2     $ 61.7    26 %   $ 241.5  

As a percentage of net revenues

     22 %          20 %          19 %

(1)   See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of Consolidated Financial Statements,” in the Notes to Consolidated Financial Statements of this Form 10-K.

Research and development expenses consist primarily of salaries, benefits, and bonuses for software engineers, fees paid to software development firms and independent contractors, purchased in-process technology, depreciation of computer equipment used in software development and overhead charges. Research and development expense from the beginning of fiscal 2007 also includes stock-based compensation expense under SFAS 123R for stock awards granted to research and development employees.

The increase in research and development expenses during fiscal 2007, as compared to fiscal 2006, resulted primarily from an increase in wages and salaries driven by an increase in headcount of $55.4 million, the recognition of $30.1 million of stock-based compensation expense under SFAS 123R and a $7.3 million increase in consulting services and in-process technology purchases from Hanna Strategies. During fiscal 2007, we incurred a total of approximately $34.3 for consulting services and in-process technology purchases from Hanna Strategies compared to $27.0 million in the prior year. The cost of the in-process technology acquired from Hanna Strategies was immediately recognized as an expense because the technology had not yet reached technological feasibility and had no alternative future use. During the first quarter of fiscal 2007, we also acquired a 28% ownership interest in Hanna Strategies for cash consideration of $12.5 million. See Note 16, “Related Parties,” in Notes to Consolidated Financial Statements for further discussion of this investment. Research and development expenses for fiscal 2007 also included $3.5 million in one-time ESPP bonus payments incurred in connection with our voluntary stock option review.

The increase in research and development expenses during fiscal 2006, as compared to fiscal 2005, resulted primarily from efforts to invest additional resources in certain research and development-related growth initiatives. Employee-related costs increased approximately $19.4 million, reflecting increased headcount, and professional fees increased approximately $18.3 million in fiscal 2006 as compared to the prior fiscal year. During fiscal 2006, we incurred approximately $27.0 million for consulting services and purchased in-process technology from Hanna Strategies for our Design Solutions Segment compared to $13.5 million in the prior year. In addition, we recognized $7.9 million of in-process research and development costs in connection with our acquisition of Alias and $1.2 million related to our acquisition of Colorfront Ltd.

We expect 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

 

           Increase
compared to prior
fiscal year
          Increase
compared to prior
fiscal year
       
     Fiscal 2007     $    %     Fiscal 2006     $    %     Fiscal 2005  
                      As Restated(1)                As Restated(1)  
     (in millions)  

General and administrative

   $ 171.1     $ 42.7    33 %   $ 128.4     $ 23.8    23 %   $ 104.6  

As a percentage of net revenues

     9 %          8 %          8 %

 

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(1)

 

See the “Explanatory Note” immediately preceding Part I, Item 1 and Note 2, “Restatement of Consolidated Financial Statements,” in the Notes to Consolidated Financial Statements of this Form 10-K.

General and administrative expenses include salaries, benefits, and bonuses for our finance, human resources and legal personnel as well as amortization expense of customer relationships and trademarks acquired from Alias and Constructware, professional fees for legal and accounting services, litigation costs, and overhead costs. General and administrative expense from the beginning of fiscal 2007 also includes stock-based compensation expense under SFAS 123R for stock awards granted to general and administrative employees.

The increase in general and administrative expenses from fiscal 2006 to fiscal 2007 was primarily due to the recognition of $16.9 million of stock-based compensation expense and an increase of $7.9 million in employee-related costs, due primarily to an increase in general and administrative headcount. General and administrative headcount increased as a result of organic growth.

The increase in general and administrative expenses from fiscal 2005 to fiscal 2006 was primarily due to an increase of $12.6 million in information technology project costs, $8.1 million in employee-related costs, largely resulting from increased headcount, and $2.9 million increase in litigation expenses.

During fiscal 2007, 2006 and 2005, we incurred significant incremental costs related to our assessment of internal control over financial reporting as required by the Sarbanes-Oxley Act of 2002 (“SOX”). We estimate that we incurred approximately $2.1 million during 2007, $2.3 million during fiscal 2006, and $6.4 million during fiscal 2005, which included significant project start-up costs. These cost estimates include external consulting and auditing fees and internal employee costs.

We expect that general and administrative expenses will modestly decline as a percentage of net revenues in the future yet increase in absolute dollars due to salary increases and continued information technology projects.

Restructuring

 

          Increase (decrease)
compared to prior
    fiscal year    
        Increase (decrease)
compared to prior
    fiscal year    
     
     Fiscal 2007    $    %    Fiscal 2006    $     %     Fiscal 2005
     (in millions)

Restructuring

   $ —      $ —      —      $ —      $ (26.7 )   (100 )%   $ 26.7

During the fourth quarter of fiscal 2004, we implemented a restructuring plan involving the elimination of employee positions and the closure of a number of offices worldwide at a total cost of $27.5 million (“Fiscal 2004 Plan”). This 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 Plan were completed during the fourth quarter of fiscal 2005.

During the second quarter of fiscal 2002, the Board of Directors approved a formal restructuring plan that included employee terminations and the closure of certain facilities worldwide (“Fiscal 2002 Plan”). The remaining outstanding liabilities under this plan relate to ongoing lease termination costs for outstanding operating lease agreements which began expiring in fiscal 2007 and will continue to expire through fiscal 2015.

During fiscal 2005, we recorded net restructuring charges of $26.7 million, of which $23.7 million related to the Fiscal 2004 Plan. Of this amount, $19.8 million related to employee termination costs for 316 employees worldwide (186 in the United States and 130 outside the United States) and $3.9 million related to the closure of

 

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facilities. Also, we recorded net restructuring charges of approximately $3.0 million for additional office closure costs originally established under the fiscal 2002 restructuring plan. Since the office closures in fiscal 2002, there has been a significant downturn in the commercial real estate market, particularly in areas of the United Kingdom where some of the offices are located. As such, Autodesk is unable to either buy out the remaining lease obligations at favorable amounts or sub-lease the space at amounts previously estimated.

For additional information regarding restructuring reserves, see Note 6, “Restructuring Reserves,” in the Notes to Consolidated Financial Statements.

Interest and Other Income, Net

The following table sets forth the components of interest and other income, net (in millions):

 

     2007     2006     2005  
     (in millions)  

Interest and investment income, net

   $ 20.7     $ 13.2     $ 7.2  

Interest expense

     (2.1 )     —         —    

Foreign-based stamp taxes

     —         —         (2.8 )

Loss from unconsolidated subsidiary

     (4.3 )     —         —    

Recovery of acquisition-related escrow

     2.2       —         —    

Gains (losses) on foreign currency transactions

     (0.3 )     (0.7 )     0.8  

Legal proceeding settlement

     —         —         2.4  

Net realized gains on sales of marketable securities

     —         —         0.5  

Other income

     0.6       0.7       3.3  
                        
   $ 16.8     $ 13.2     $ 11.4  
                        

Investment income fluctuates based on average cash and marketable securities balances, average maturities and interest rates. The increase in interest and investment income, net, during fiscal 2007 as compared to fiscal 2006 reflects proportionately higher interest rate yields and cash balances during the current fiscal year. The increase in interest and investment income, net, during fiscal 2006 as compared to fiscal 2005 reflects proportionately higher interest rate yields during 2006 when compared with 2005.

During fiscal 2007 we also received a $2.1 million recovery of funds from an escrow account established for a prior acquisition. In addition, our 28% ownership interest in Hanna Strategies is accounted for under Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” and FASB Interpretation No. 35, “Criteria for Applying the Equity Method of Accounting for Investments in Common Stock.” Accordingly, the loss from unconsolidated subsidiary represents our 28% ownership interest in Hanna’s results of operations.

During the second quarter of fiscal 2005, we determined that certain money market fund investments were subject to $2.8 million of Swiss transfer stamp taxes from the third quarter of fiscal 2001 through the second quarter of fiscal 2005. We determined that this adjustment was not material to previously reported periods.

During the second quarter of 2005, we received a legal proceeding settlement of $2.4 million as part of a court settlement related to legal proceedings with Spatial Corp. During October 2003, Spatial was ordered to reimburse Autodesk for attorneys’ fees and trial costs.

Provision for income taxes

Autodesk accounts for income taxes and the related accounts under the liability method in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of

 

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assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse.

Our effective tax rate increased by six percentage points from fiscal 2006 to fiscal 2007. The increase was primarily the result of non-deductible SFAS 123R expense and a reduction in tax benefits, as a percentage of pre-tax earnings, from the repatriation of certain foreign dividends at a rate lower than the 35% Federal statutory rate under the American Jobs Creation Act of 2004 (“DRD Legislation”). The DRD Legislation was not available during fiscal 2007.

Our effective tax rate increased by six percentage points from fiscal 2005 to fiscal 2006. The increase was primarily the result of a reduction in tax benefits, as a percentage of pre-tax earnings, from (1) the lapse of the statute of limitations, which resulted in the release of tax reserves with respect to prior tax years, and (2) the repatriation of certain foreign dividends at a rate lower than the 35% Federal statutory rate under the DRD Legislation. The increase to the effective tax rate was also partially offset by an increase in tax benefits from international profits taxed at rates less than the U.S. Federal statutory rate.

In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in tax positions. Under FIN 48, companies are required to recognize the benefit from a tax position only if it is “more likely than not” that the tax position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarified how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits, and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. The provisions of FIN 48 are effective as of the beginning of our 2008 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Based on our assessment, we recorded an increase to opening retained earnings during the first quarter of fiscal 2008 for tax benefits not previously recognized of approximately $26 million as a result of adopting FIN 48.

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, research credits, phase out of extraterritorial income exclusion, SFAS 123R, FIN 48, closure of statute of limitations or settlement of tax audits, and changes in tax law.

At January 31, 2007, we had net deferred tax assets of $137.9 million. Realization of these assets is dependent on our ability to generate approximately $519 million of future taxable income in appropriate tax jurisdictions. We believe that sufficient income will be earned in the future to realize these assets.

For additional information regarding our income tax provision, see Note 4, “Income Taxes,” in the Notes to Consolidated Financial Statements.

 

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Quarterly Financial Information

The following tables set forth a summary of Autodesk’s quarterly financial information for each of the four quarters in fiscal 2007 and 2006 (in millions, except per share data):

 

2007

  1st quarter     2nd quarter     3rd quarter     4th quarter     Fiscal year  

Net revenues:

         

License and other

  $ 349.4     $ 345.5     $ 346.3     $ 374.7     $ 1,415.9  

Maintenance

    86.6       104.1       110.5       122.7       423.9  
                                       

Total net revenues

    436.0       449.6       456.8       497.4       1,839.8  
                                       

Costs and expenses:

         

Cost of license and other revenues

    47.5       53.6       54.5