SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K
__________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file
number 33-16541 December 31, 1996
STRUCTURAL DYNAMICS RESEARCH CORPORATION
An Ohio Corporation I.R.S. Employer
Identification No. 31-0733928
2000 Eastman Drive, Milford, Ohio 45150
Telephone Number (513) 576-2400
__________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock without par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
__________________
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (229.405 of this chapter) 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]
__________________
As of March 11, 1997 the latest practicable date, 32,906,924
shares of Common Stock were outstanding. The aggregate market
value of Common Stock held by non-affiliates was approximately
$721,434,632 at that date.
__________________
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by
reference and the Part of the Form 10-K into which the document is
incorporated:
Registrant's Annual Report to Shareholders for the year ended
December 31, 1996.
Part I, Part II and Part IV
Registrant's definitive Proxy Statement dated March 25, 1997.
Part II, Part III and Part IV
PART I.
Factors That May Affect Future Results
Information provided by the Company or by its spokespersons may
contain forward-looking statements. Such statements, made
pursuant to the safe harbor established by recent securities
legislation, are based on the estimates and assumptions of
management at the time such statements are made. Forward-looking
statements are subject to risks and uncertainties that may cause
the Company's future actual results to differ from those disclosed
in any forward-looking statement. Important information about
the basis for management's estimates and assumptions is contained
in "Factors That May Affect Future Results" included in the
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" section in the SDRC 1996 Annual Report to
Shareholders, which is incorporated by reference.
Item 1. Business.
General
Structural Dynamics Research Corporation (the "Company" or
"SDRC") is a leading international supplier of mechanical design
automation ("MDA") software, product data management ("PDM")
software and related services within the mechanical computer-aided
design, manufacturing and engineering ("CAD/CAM/CAE") industry.
The Company's mission is to provide software tools and services to
significantly enhance SDRC's customers' mechanical product
development and engineering processes.
The Company's software and services provide customers with a
fully integrated solution for a concurrent engineering design to
manufacturing life cycle. The Company's principal MDA software
product, I-DEAS Master Series(TM), is a world-class,
integrated CAD/CAM/CAE solution which allows manufacturers to
optimize product performance and reduce cost while streamlining the
product development process. The Company has recently released
a new product, I-DEAS Artisan Series(TM), that is an MDA product
aimed at the mid-level CAD/CAM/CAE market. SDRC's PDM product,
Metaphase Series 2 software, provides a comprehensive enterprise
approach to the management and control of product information,
configuration, release management and work flow.
Background
The Company was incorporated under the laws of the State of
Ohio in 1967. The Company was founded to provide advanced
engineering consulting services and over time developed some of
the industry's first mechanical engineering software packages to
assist in its consulting efforts. After receiving strong customer
interest in these software packages, the Company began marketing
its software in the early 1970s. Today, SDRC's combination of
software technology and related software services provides a
comprehensive solution to address customer needs.
During the past five years, the Company has restructured
certain aspects of its business. In January 1997 the Company
acquired the remaining stock of Metaphase Technology, Inc.
("Metaphase") and certain assets of Control Data Systems, Inc.'s
global PDM software sales and support business. In 1992 the
Company and Control Data Systems, Inc. established Metaphase as a
joint venture Company to develop product data management software.
In June 1996 the Company completed the acquisition of Camax
Manufacturing Technologies, Inc. ("Camax") and its wholly owned
subsidiaries. Camax provided computer-aided manufacturing software
for computerized numerical control machining operations.
In 1995 the Company purchased the remaining interest of SDRC
Software and Services GmbH ("SDRC GmbH"). In 1994 the Company and
Siemens Nixdorf Informationssysteme AG formed the joint venture,
SDRC GmbH, to supply mechanical CAD/CAM/CAE software and services
in Central Europe. Also in 1995, the Company merged its software
products marketing and engineering services subsidiaries into a
single subsidiary which now provides both software products and
related services.
Strategy
The Company's strategy is to provide world-class software and
engineering process implementation expertise to help customers
improve their mechanical product development and engineering
processes. SDRC's customers tend to be product and process
innovators who develop an effective long-term relationship with
SDRC. In addition to the establishment of these relationships at
the high end, SDRC is also broadening its reach into the less
service-intensive tiers of the CAD/CAM/CAE market.
I-DEAS Product Suite
The Company develops, markets and supports a comprehensive MDA
software product called I-DEAS ("Integrated Design Engineering
Analysis Software") Master Series and a mid priced software
product called I-DEAS Artisan Series. I-DEAS(TM) software
allows engineers to design, simulate, test and manufacture
product concepts in a fraction of the time required using
standalone or partially integrated software tools. As a result,
the software is a tool to assist customers in developing higher
quality products faster, at a lower cost, and delivering to the
market in less time. The I-DEAS software is specifically
designed and optimized to meet the needs of engineers who design
products by using solid modeling technology. With the easy to learn
user interface, users are able to create and view a "master
model," a solid representation of a product that precisely
defines its geometry and material characteristics.
I-DEAS Master Series software allows product development team
members to work concurrently on the same project sharing this
common master model. This master model is easily understood by
everyone concerned with the product, including representatives
from management, marketing and manufacturing. It can be analyzed
to evaluate the mechanical performance and structural integrity of
the design concept, as well as to provide information that can be
used to optimize product performance, study assembly sequences and
assess "manufacturability".
Artisan Series was specifically created to address the growing
mid price CAD market. Artisan provides high level design
functionality to smaller design groups and companies while
ensuring upward data compatibility and user migration to I-DEAS
Master Series.
Metaphase Series 2
SDRC also develops, markets, implements and supports Metaphase
Series 2, product data management software, which helps create,
manage and control data associated with product information as it
evolves through the product life cycle. Metaphase Series 2 is a
modular PDM system designed to provide the depth and breadth of
functionality customers require to meet current and future data
management needs.
Metaphase Series 2 software helps customers improve the way
they create, share, access, define and support their product data.
For product developers, this means fast, reliable access to the
latest drawings, specifications and engineering changes they need
regardless of location or the application used to create them. And
for managers, it means accurate, reliable information about work-
in-process as well as documentation of the entire product life
cycle. Metaphase Series 2 is compatible with client/server
environments with distributed design and engineering departments.
Services
The Company provides customers with process automation and
implementation services as well as technical applications software
support, maintenance and training. Building on its extensive
knowledge of mechanical design automation technology and
engineering applications and processes, the Company offers a
"total solution" by providing process automation and software
implementation services for I-DEAS and PDM software. Engineering
consulting services assist in the optimization of the customers'
product design and in the improvement of the customers'
development process. In addition, advanced training and knowledge
transfer are provided to customers to enable them to integrate and
optimize their MDA and PDM investment. Advanced computer
simulation methods and in-depth application expertise are utilized
for traditional or highly specialized computer technologies
including design audits, product design, troubleshooting and
engineering process design.
Technical applications software support and maintenance service
provides telephone "hotline" support and software maintenance
corrections for licensed products and features. Software
enhancement versions are also released during the term of the
contract with documentation updates. In addition, other services
are provided that enhance and maintain the customer's software
investment.
The Company provides basic training for each major software
package. Advanced training classes are offered for selected
applications to support continued growth of customer skills and to
increase the productivity of those who utilize SDRC software.
Heterogeneous Environment/Platforms
The Company's software is available on the leading engineering
workstations. This hardware platform independence allows the
Company's customers to operate in a heterogeneous environment,
selecting and adding software modules for a broad range of
hardware systems based upon their unique requirements. The
productivity benefits of leading-edge capabilities, such as
unprecedented ease-of-use, team-oriented product development, best-
in-class design, performance simulation and integrated
applications, have increased the number of potential users who can
utilize these tools. The Company believes its products and
services are of great value to companies which must accelerate,
improve and streamline design processes in response to increased
competition while simultaneously designing and manufacturing
mechanical products in accordance with specific quality and cost
criteria. A broad range of industries are potential users of
these tools, with the highest concentration of users in the
automotive, consumer and industrial electronics, industrial
machinery and aerospace industries.
Sales Channels
The Company markets its products and services primarily through
a worldwide direct sales and support force. The Company employs
highly skilled engineers and technically proficient support people
capable of serving the sophisticated needs of the customer. The
Company also has an established relationship with a distributor in
Japan, Information Services International - Dentsu Ltd., which
accounted for approximately 12%, 13% and 10% of the Company's
consolidated revenues in 1996, 1995 and 1994, respectively. In
addition, the Company also utilizes distributors, value-added
resellers and other marketing representatives for its marketing
efforts.
In certain markets where the Company does not maintain a direct
sales force, it licenses its products through independent
representatives. Telemarketing is also used to complement both
the direct and indirect marketing channels.
Seasonality
Historically, the Company has tended to realize a
disproportionate amount of its total revenue in each quarter
during the last month of the quarter, and to realize a
disproportionate amount of its total annual revenue during the
fourth quarter of each year. Future quarterly results could be
impacted by factors such as order deferrals, a slower growth rate
in the market, increased competition or adverse changes in general
economic conditions in any of the countries in which the Company
does business. Any shortfall in revenue or earnings could have an
immediate and significant adverse effect on the trading price of
the Company's stock in any given period. The results of
operations for the three years ending December 31,1996 are not
necessarily indicative of future expectations.
Competition
The market for the Company's software products is highly
competitive and the Company expects competitive pressure to
increase in the future. To maintain its position of technological
leadership, the Company must continually enhance its existing
software products and pursue the development and introduction of
new products.
The Company competes against products in the CAD/CAM/CAE market
including the CATIA products marketed by IBM and Dassault, the
UNIGRAPHICS product marketed by EDS, the CADDS product marketed by
Computervision Corporation, the I/EMS product marketed by
Intergraph Corporation and the Pro/ENGINEER product marketed by
Parametric Technology Corporation. In the PDM market, the Company
competes against such products as the Optegra product marketed by
Computervision Corporation, the Sherpa product marketed by Sherpa
Corporation, the IBM Product Manager marketed by IBM and others.
The Company's future success will depend in a large part on its
ability to further penetrate its installed customer base as well
as the installed customer base of its competitors.
The principal competitive factors in the CAD/CAM/CAE and PDM
market for software and related services are product
functionality, product breadth and integration, product
performance, product quality, hardware platform support, ease of
product use, price, customer support, technical reputation and
size of installed customer base. There can be no assurance that
the Company will be successful in developing or marketing new
products or that any new products will adequately achieve market
acceptance. There can be no assurances that competition will not
have a material adverse effect on the Company's results of
operations.
The Company's employees are an important component of the SDRC
"total solution" approach in providing MDA and PDM software tools
and related engineering consulting services to customers. The
Company's success will depend in part on its ability to attract
and retain employees who are in great demand.
Other Information
Segment and geographic information is included on page 53 of
the Company's Annual Report to Shareholders for the year ended
December 31, 1996, which is incorporated herein by reference.
Revenue from one customer represented 11% of consolidated revenue
in 1996.
The Company owns all the standard software products that it
licenses with the exception of I-DEAS Drafting(TM), I-DEAS
View Markup(TM), I-DEAS Visualization Laboratory(TM), I-DEAS
Assembly Fly Through(TM), I-DEAS Symbols Library(TM), I-DEAS
TMG(TM), I-DEAS Electronic Systems Cooling(TM), portions of
I-DEAS Sound Quality(TM), the mechanism analysis portion of
I-DEAS Assembly Set, and a variety of data translators which it
licenses from third parties. Under these license
agreements, the Company pays a royalty to the third parties.
As is customary throughout the software industry, the Company
relies both on copyrights and trade secrecy for proprietary
protection of its software products. The duration of such
protection is considered to be adequate given the constantly
changing nature of the business. The Company also utilizes a
number of trademarks, both registered and otherwise, with respect
to its software products. The proprietary status of its
trademarks lasts indefinitely, as long as the trademarks remain in
use.
The Company typically ships product within 30 days after
acceptance of a customer purchase order and execution of a license
agreement. A substantial portion of quarterly shipments tend to
be made in the last month of the quarter. The Company does not
believe that backlog is indicative of potential revenue for any
future period.
Research and development expense amounted to approximately
$30,719,000, $24,472,000, and $24,917,000 in 1996, 1995, and
1994, respectively.
As of December 31, 1996, the Company had 1,604 full-time
employees, of whom 371 were engaged in research and development,
1,020 in sales, services support and marketing, and 213 in general
management and administration. In addition, the Company employed
33 part-time employees and cooperative students.
Item 2. Properties.
The following table sets forth certain information, as of
December 31, 1996, with respect to principal properties in which
the Company and its subsidiaries conduct their operations:
Space Used
In
Ownership Operations
Location Or Lease (Square
Feet) Principal Activities
Cincinnati, Lease 221,000 Corporate Headquarters Office
Ohio (expires Facilities, Technical Development
2011) Center, and Administration
Cincinnati, Lease 26,000 Sales and Marketing Office
Ohio (expires Facilities
2007)
Dearborn, Lease 44,000 Technical Development Center
Michigan (expires Support and Training Facilities
1998)
Minneapolis Lease 28,000 Office Facilities and Technical
Minnesota (expires Development Center
2000)
San Diego, Lease 25,000 Office Facilities
California (expires
1999)
Eugene, Lease 22,000 Office Facilities and Technical
Oregon (expires Development Center
1999)
Madison Lease 16,000 Office Facilities and Test Center
Heights, (expires
Michigan 1997)
Hitchin, Lease 15,000 European Headquarters Office
England (expires Facilities
2017)
Frankfurt, Lease 19,000 Central Europe Office Facilities
Germany (expires
1999)
Paris, Lease 18,000 Southern Europe Office Facilities
France (expires
2002)
Munich, Lease 7,000 Central Europe Development
Germany (expires Facilities
2001)
Tokyo, Lease 8,000 Asia-Pacific Office Facilities
Japan (expires
1997)
Management of the Company considers the above properties to be
adequate and suitable for present purposes, but will continue to
evaluate the need for additional facilities to meet the continued
growth of the business.
Item 3. Legal Proceedings.
Securities Litigation and Related Matters
Except for the following matters, SDRC is not a party to any
litigation other than ordinary routine litigation incidental to
its business. The Company was a defendant in a class action suit
alleging violations of certain federal securities laws, captioned
In Re: Structural Dynamics Research Corporation Securities
Litigation, United States District Court, Southern District of
Ohio, Consolidated Master File No. C-1-94-630. In December 1995,
the parties to this matter entered into a Memorandum of
Understanding for settlement, subject to final Court approval. On
March 22, 1996, the Court approved the proposed settlement and a
final order was entered. Pursuant to the order, a settlement fund
of $37.5 million was established, consisting of $17.6 million cash
provided by the Company, $10.0 million in shares of the Company's
common stock (to be valued-based on the market price at the time
of distribution), and $9.9 million cash provided by the Company's
former accountants. The settlement does not constitute an
admission of liability on the part of any defendant. The Company's
Board of Directors determined that the settlement was in the best
interest of the Company and its shareholders in light of the
uncertainty of the outcome, the high cost of continued litigation,
and the high level of management time and attention continued
litigation would have required which could be better spent on the
Company's business.
The Company was a party to shareholders' derivative litigation
captioned In Re: Structural Dynamics Research Corporation
Derivative Litigation, United States District Court, Southern
District of Ohio, Consolidated Master File No. C-1-94-650. The
Company paid the plaintiffs' counsel fees of approximately
$900,000 and $50,000 for their out-of-pocket expenses in full
settlement of the matter. The parties' agreement was approved by
the United States District Court on July 19, 1996.
Based on the same facts which gave rise to the Class Action
Case and the Derivative Case, the Securities and Exchange
Commission commenced a formal, private investigation of SDRC in
September 1994 which remains pending. SDRC is fully cooperating
with this investigation but cannot predict its outcome.
Pursuant to certain contractual obligations, the Company has
agreed to indemnify its directors and officers under certain
circumstances against claims arising from lawsuits. The Company
may be obligated to indemnify certain of its directors and
officers for the costs they may incur as a result of the lawsuits.
During 1995 and 1996 SDRC carried $5 million of primary
directors and officers liability insurance coverage from the
Federal Insurance Company plus "excess liability coverage" from
Agricultural Excess and Surplus Insurance Company ("AESIC"), which
provides $3 million of such coverage, and from Old Republic
Insurance Company ("Old Republic"), which provides an additional
$2 million of such coverage. The directors and officers liability
insurance, both primary and excess, is potentially available with
respect to the Class Action Case and the Derivative Case because
certain of SDRC's directors and former officers were personal
defendants in those matters. Coverage under the excess policies is
dependent upon first exhausting the primary coverage. SDRC has
come to an understanding with the primary insurer with respect to
its coverage, but the excess carriers have to date denied
coverage. On October 11, 1995, SDRC and certain officers and
directors named in the Class Action Case and/or the Derivative
Case filed a declaratory judgment action against the excess
carriers in a case entitled Structural Dynamics Research
Corporation, et al. v. Agricultural Excess and Surplus Insurance
Company, et al., Clermont County Court of Common Pleas, Case No.
95-CV-9697. The action alleges that neither AESIC nor Old
Republic is entitled to rescind its policy or exclude any of the
named plaintiffs from coverage with respect to claims in the Class
Action Case or the Derivative case. AESIC and Old Republic each
responded and have taken the position that they are entitled to
rescission and that all claims are excluded under the terms of the
policy. While SDRC intends to vigorously pursue this case, there
can be no assurance as to its ultimate outcome.
Additional Executive Officers of the Registrant (at March 11,
1997).
Item.
Name Age Position
Albert F. Peter* 54 Chairman and Chief Executive Officer
Phillip R. Bell 41 Vice President, Marketing
John A. Mongelluzzo 38 Vice President, Secretary and General
Counsel
Martin A. Neads 48 Vice President and General Manager, SDRC
Operations
Robert M. Nierman 52 Vice President, Metaphase
Martin D. Schussel 51 Vice President, Product Development
Bryan M. Valentine 49 Vice President, Human Resources
Jeffrey J. Vorhold 44 Vice President, Chief Financial Officer
and Treasurer
* Member of Board of Directors
Mr. Peter has served as Chief Executive Officer since February, 1995
and Chairman since October, 1996. Prior to that time, Mr.
Peter had been serving as SDRC's acting Chief Executive Officer
since November, 1994. Mr. Peter was a founder of the Company who
served in various capacities until his election to the office of
Vice President, a position he held until his retirement in
December, 1991. Mr. Peter continues to serve on the Company's
Board of Directors, a position he has held since July, 1983.
Mr. Bell has served as Vice President, Marketing since May,
1996 and became a board-elected officer of the Company on May 9,
1996. Prior to accepting his position with the Company, he was
employed by NCR for 18 years with the last position as Vice
President of Global Sales Programs.
Mr. Mongelluzzo has served as Vice President, Secretary and
General Counsel since October, 1991. From January 1, 1987 he
served as Secretary and Counsel for the Company. In May, 1986 he
joined the Company as Assistant Counsel, was elected Assistant
Secretary in October, 1986 and Secretary in December, 1986. From
February, 1985 until May, 1986 Mr. Mongelluzzo was employed as
Staff Attorney for the Ohio Department of Commerce.
Mr. Neads has served as Senior Vice President - SDRC Operations
since November, 1994. Mr. Neads joined the Company in 1976 as a
project engineer in our UK Engineering Services Division. In 1981
he transferred to the Software Products Marketing Division as
General Manager, UK Operations and two years later was named
General Manager, European Operations, SPMD. In 1987 he was
promoted to the position of Vice President and General Manager,
European Operations, SPMD.
Mr. Nierman has served as Vice President, Metaphase since
February, 1997. Prior to the acquisition of Metaphase by SDRC,
Mr. Nierman was President and CEO of Metaphase Technology, Inc.
since 1992. Mr. Nierman's previous experience included a variety
of senior executive positions in the sales and marketing
organizations of Control Data Corporation.
Mr. Schussel has served as Vice President, Product Development
since February, 1995 and became a board-elected officer of the
Company in April, 1995. Mr. Schussel joined the Company in 1988
and has served in various positions.
Mr. Valentine has served as Vice President, Human Resources
since October, 1995 and became a board-elected officer of the
Company in December, 1995. Prior to accepting his position with
the Company, he was employed by AM International, Inc. as Vice
President, Human Resources from October, 1986 to June, 1995.
Mr. Vorholt has served as Vice President, Chief Financial
Officer and Treasurer since February, 1995. Prior to that time,
Mr. Vorholt was the Vice President and Controller since December,
1994. Prior to accepting his position with the Company, he was
employed by Cincinnati Bell Telephone Company as Senior Vice
President - Accounting and Information Systems from 1991 - 1994,
and by Cincinnati Bell Information Systems, Inc. as Senior Vice
President and Director, 1989 - 1991. Mr. Vorholt is a licensed
Certified Public Accountant and Attorney-at-Law.
PART II.
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters.
The Company's common stock is listed and traded on the National
Association of Securities Dealers, Inc. Automatic Quotation
(NASDAQ) National Market System. Additional information, which
appears on page 54 of the Company's Annual Report to Shareholders
for the year ended December 31, 1996, is incorporated by reference
in this Form 10-K Annual Report.
Item 6. Selected Financial Data.
The selected financial data for the five years ended December
31, 1996, which appears on page 32 of the Company's Annual Report
to Shareholders for the year ended December 31, 1996, is
incorporated by reference in this Form 10-K Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The Management's Discussion and Analysis of Financial Condition
and Results of Operations, which appears on pages 33 to 37 of the
Company's Annual Report to Shareholders for the year ended
December 31, 1996, is incorporated by reference in this Form 10-K
Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements and Report of Independent
Accountants appearing on pages 38 to 54 of the Company's Annual
Report to Shareholders for the year ended December 31, 1996, are
incorporated by reference in this Form 10-K Annual Report. With
the exception of the aforementioned information and the
information incorporated in Items 6 and 7, the 1996 Annual Report
to Shareholders is not to be deemed filed as part of this Form 10-
K Annual Report.
PART III.
The information required by Item 10. "Directors and Executive
Officers of the Registrant," Item 11. "Executive Compensation,"
Item 12. "Security Ownership of Certain Beneficial Owners and
Management," and Item 13. "Certain Relationships and Related
Transactions" is incorporated by reference to the Company's
definitive Proxy Statement dated March 25, 1997 which relates to
its April 29, 1997 Annual Meeting of Shareholders.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
a.1. Financial Statements
The following Consolidated Financial Statements and related
notes of Structural Dynamics Research Corporation and
subsidiaries, included in the Annual Report to Shareholders for
the year ended December 31, 1996, are incorporated by reference in
Item 8. of Part II:
Report of Independent Accountants.
Consolidated Statement of Operations - Years ended December 31,
1996, 1995 and 1994.
Consolidated Balance Sheet - December 31, 1996 and 1995.
Consolidated Statement of Shareholders' Equity - Years ended
December 31, 1996, 1995 and 1994.
Consolidated Statement of Cash Flows - Years ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K. (continued)
a.2. Financial Statement Schedules
The Report of Independent Accountants on the financial
statement schedule of Structural Dynamics Research Corporation and
subsidiaries appears immediately prior to the Schedule II in this
Form 10-K.
The following financial statement schedule of Structural
Dynamics Research Corporation and subsidiaries is included in this
Item 14:
Schedule
II Valuation and qualifying accounts
All other schedules have been omitted because the information
either has been shown in the Consolidated Financial Statements or
notes thereto, or is not applicable or required under the
instructions.
Financial statements of Metaphase Technology, Inc. and Estech
Corporation in which the Company owned equity interests of 50% and
30% as of December 31, 1996, respectively, have been omitted
because the registrant's proportionate share of the income or
losses from continuing operations before income taxes, and total
assets of each such company is less than 20% of the respective
consolidated amounts, and the investment in and advances to each
company is less than 20% of consolidated total assets.
a.3. Exhibits:
Exhibit Reference
3(a) Amended Articles of Incorporation of
Registrant, including subsequent updates Note (f)
3(b) Amended Code of Regulations of Registrant Note (a)
4 Shareholder Rights Plan Note (b)
10(a) Structural Dynamics Research Corporation
Tax Deferred Capital Accumulation Plan
dated January 1, 1989 Note (e)
10(e) Structural Dynamics Research Corporation
1991 Employee Stock Option Plan Note (d)
10(f) Structural Dynamics Research Corporation
1996 Directors' Non-Discretionary Stock
Option Plan Note (i)
10(g) Joint Venture Agreement between Structural
Dynamics Research Corporation and Nissan
Motor Co., Ltd. Note (c)
10(i) Lease agreement (including amendments #1
and #2) between Park 50 Development
Company Limited Partnership and
Structural Dynamics Research Corporation Note (e)
10(l) Structural Dynamics Research Corporation
1994 Long-Term Stock Incentive Plan Note (h)
10(m) Agreement of Merger and Plan of
Reorganization Note (g)
11 Statement regarding computation of per
share earnings
13 Portions of the Annual Report to
Shareholders incorporated herein by
reference
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
NOTE REFERENCE:
(a) Incorporated by reference to the Company's Registration
Statement No. 33-16541, which was originally filed on August
17, 1987 and became effective on September 29, 1987. Amendments
incorporated by reference to the Company's definitive Proxy
Statement dated March 26, 1996.
(b) Incorporated by reference to the Company's report on Form
8-K filed on August 3, 1988.
(c)Incorporated by reference to the Company's report on Form
10-Q dated May 12, 1989.
(d)Incorporated by reference to the Company's definitive Proxy
Statement dated March 11, 1991.
(e) Incorporated by reference to an exhibit filed in the
Company's Annual Report on Form 10-K for the year ended
December 31, 1990.
(f) Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993 as originally
filed on March 11, 1994.
(g) Incorporated by reference to the Company's Registration
Statement on Form S-4 effective on May 28, 1996 pertaining to
the acquisition of Camax Manufacturing Technologies, Inc.
(h) Incorporated by reference to the Company's definitive Proxy
Statement dated March 16, 1994. Amendment to the plan is
incorporated by reference to the Company's definitive Proxy
Statement dated March 26, 1996.
(i) Incorporated by reference to the Company's definitive Proxy
Statement dated March 26, 1996.
b. Reports on Form 8-K
None
c. Exhibits as required by Item 601 of Regulation S-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STRUCTURAL DYNAMICS RESEARCH CORPORATION
March 21, 1997 By /s/Jeffrey J. Vorholt
(Date) Jeffrey J. Vorholt,
Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.
/s/Albert F. Peter /s/John E. McDowell
Albert F. Peter John E. McDowell
Chairman and Chief Executive Director
Officer
(Principal Executive Officer)
March 21, 1997 March 19, 1997
(Date) (Date)
/s/Jeffrey J. Vorholt /s/James W. Nethercott
Jeffrey J. Vorholt James W. Nethercott
Vice President, Director
Chief Financial Officer and
Treasurer March 21, 1997
(Principal Financial and (Date)
Accounting Officer)
March 21, 1997
(Date)
/s/William P. Conlin /s/ Arthur B. Sims
William P. Conlin Arthur B. Sims
Director Director
March 19, 1997 March 24, 1997
(Date)
/s/Bannus B. Hudson /s/Gilbert R. Whitaker, Jr.
Bannus B. Hudson Gilbert R. Whitaker, Jr.
Director Director
March 18, 1997 March 21, 1997
Report of Independent Accountants
To the Board of Directors
of Structural Dynamics Research Corporation
Our audits of the consolidated financial statements referred to in
our report dated January 24, 1997 appearing on page 38 of the 1996
Annual Report to Shareholders of Structural Dynamics Research
Corporation (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Financial Statement Schedule
listed in Item 14 (a) of this Form 10-K. In our opinion, the
Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Cincinnati, Ohio
January 24, 1997
<PAGE>
SCHEDULE II
<TABLE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(in thousands)
<CAPTION>
Balance at Charged Balance
Beginning of (Credited) Deductions/ at End
Description Period to Income (Recoveries) of Period
<S> <C> <C> <C> <C>
Accounts Receivable:
Year ended December
31, 1994 $2,451 520 (129) $3,100
Year ended December
31, 1995 $3,100 (273) 307 $2,520
Year ended December
31, 1996 $2,520 2,689 1,928 $3,281
</TABLE>
EXHIBIT 11
<TABLE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(in thousands, except share data)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
PRIMARY
Average shares outstanding 32,816 30,930 29,853
Net effect of dilutive stock options --
based on the
treasury stock method using average
market price 1,974 -- --
Total 34,790 30,930 29,853
Income (loss) before cumulative effect
of accounting change $33,689 $(7,471) $(11,577)
Cumulative effect of accounting change -- -- (3,896)
Net income (loss) $33,689 $(7,471) $(15,473)
Primary per share amount:
Before cumulative effect of
accounting change $ .97 $ (.24) $ (.39)
Cumulative effect of accounting
change -- -- (.13)
Net income (loss) per share $ .97 $ (.24) $ (.52)
FULLY DILUTED
Average shares outstanding 32,816 30,930 29,853
Net effect of dilutive stock options --
based on the
treasury stock method using the
year-end market price,
if higher than average market price 1,974 -- --
Total 34,790 30,930 29,853
Income (loss) before cumulative effect
of accounting change $33,689 $(7,471) $(11,577)
Cumulative effect of accounting change -- -- (3,896)
Net income (loss) $33,689 $(7,471) $(15,473)
Fully diluted per share amount:
Before cumulative effect of
accounting change $ .97 $ (.24) $ (.39)
Cumulative effect of accounting
change -- -- (.13)
Net income (loss) per share $ .97 $ (.24) $ (.52)
</TABLE>
<PAGE>
This computation is required by Regulation S-K Item 601 and is filed
as an exhibit under Item 14a(3) of Form 10-K.
SEC Release No. 33-5133 requires ". . . when per share earnings are
disclosed, . . . the information with respect to the computation of
per share earnings on both primary and fully diluted bases,
presented by exhibit or otherwise, must be furnished even though the
amounts of per share earnings on the fully diluted basis are not
required to be stated under the provisions of Accounting Principles
Board Opinion No. 15."
EXHIBIT 21
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
State or Other
Jurisdiction
Name of Incorporation
SDRC Operations, Inc. Ohio
Metaphase Technology, Inc. Delaware
SDRC U.K. Limited United Kingdom
SDRC Italia, Srl. Italy
SDRC Korea Limited South Korea
SDRC Svenska AB Sweden
SDRC Singapore Pte. Ltd. Singapore
SDRC Nederland B.V. Netherlands
SDRC AG Switzerland
SDRC Belgium N.V./S.A. Belgium
SDRC France S.A. France
SDRC Espaua, S.A. Spain
SDRC Japan K.K. Japan
SDRC Software and Services, GmbH Germany
Point Control International Sales Virgin Islands
Corporation
Note: All of the above corporations are wholly-owned subsidiaries
of the Registrant directly or indirectly.
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (Nos. 33-20774, 33-22136,
33-40561, 33-41671, 33-58701, 33-72328 and 33-07365) of Structural
Dynamics Research Corporation of our report dated January 24, 1997
appearing on page 38 of the Annual Report to Shareholders which
is incorporated in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report on the
Financial Statement Schedule, which appears on page 13 of such
Annual Report on Form 10-K.
/S/ Price Waterhouse LLP
Price Waterhouse LLP
Cincinnati, Ohio
March 24, 1997
SUMMARY OF SELECTED FINANCIAL DATA
Structural Dynamics Research Corporation
<TABLE>
<CAPTION>
Year ended December 31
(in thousands, except per
share data) 1996 1995 1994 1993 1992
------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Total revenue $285,256 $224,138 $185,358 $165,893 $167,105
Operating income (loss) 40,525 23,809 (4,462) (6,896) 12,904
Income (loss) before income taxes
and cumulative effect of
accounting changes 42,325 (292) (7,696) (7,050) 15,022
Income (loss) before cumulative
effect of accounting changes 33,689 (7,471) (11,577) (11,365) 9,420
Net income (loss) 33,689 (7,471) (15,473) (11,365) 10,987
Income (loss) per share:
Before cumulative effect of
accounting changes .97 (.24) (.39) (.37) .30
Net income (loss) .97 (.24) (.52) (.37) .35
Common and common equivalent shares 34,790 30,930 29,853 30,885 31,179
Balance sheet data:
Working capital $ 66,519 $ 37,688 $ 29,801 $ 30,623 $ 51,437
Total assets 238,079 204,384 151,937 145,258 146,279
Long-term liabilities 8,394 8,675 11,523 1,029 985
Total shareholders' equity 129,299 81,372 74,879 89,902 97,576
</TABLE>
<PAGE>
During 1993 and 1994, the Company's level of expenses increased to
support technological development and to promote revenue growth.
As anticipated revenue growth did not materialize, the
Company's expenses exceeded revenue resulting in operating and net
losses. In 1995, the anticipated cost of the class action lawsuit
settlement, net of estimated insurance proceeds, was included in
the results of the operations.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Structural Dynamics Research Corporation
(in thousands)
The Company operates in a single industry segment providing
mechanical design automation (MDA) software, product data
management (PDM) software and related services. I-DEAS Master
Series(R) is a world-class, integrated CAD/CAM/CAE product
which allows manufacturers to optimize product performance and
reduce cost, while streamlining the product development process
from concept through manufacturing. This total approach to
product and process engineering enables significant
improvements in quality, while reducing overall development
time and cost. Metaphase Series 2(R) software, SDRC's PDM
product, provides a comprehensive approach to the management and
control of product information and configuration, release
management and work flow. CAMAND(R) and Smart CAM(R) are MDA
products used for generating, optimizing, simulating and verifying
NC programs and machine tool motion for all types of CNC
machining processes.
Revenue
Consolidated revenue, including licenses and services, for 1996
rose to $285,256 compared with 1995 revenue of $224,138 and 1994
revenue of $185,358. This represents increases of 27% in 1996 and
21% in 1995. The growth is due to an increase in the Company's
installed software base and the associated increase in
maintenance, software services and training revenue.
Software Licenses Revenue. Software licenses revenue for
1996 increased to $153,058 compared to 1995 revenue of $131,211 and
1994 revenue of $115,051. These amounts represent an increase of
17% in 1996 and 14% in 1995 which is attributed to the
continued market acceptance of the I-DEAS Master Series product
enhancements and significant software license purchases from
a large automotive customer. The Company expects continued growth
in software licenses revenue.
Software Maintenance and Services Revenue. Software maintenance
and services revenue is derived from software maintenance
contracts, software services and training. Combined software
maintenance and services revenue increased to $132,198 in 1996 or
42% over 1995 and to $92,927 in 1995 or 32% over 1994. This
revenue represents 46%, 41% and 38% of consolidated total revenue
in 1996, 1995 and 1994, respectively. Software maintenance
growth is due to increased revenue generated from maintenance
contracts for both new and existing customers. Software
services growth is primarily attributable to the increased
level of I-DEAS and Metaphase Series 2 implementation and
integration projects. In addition, the Company's software
services revenue was impacted favorably by a significant contract
from one of its major automotive customers. The Company expects
that the software maintenance and services revenue will
continue to increase.
Geographic. Total revenue from international operations accounted
for 52%, 54% and 55% of consolidated total revenue in 1996, 1995
and 1994, respectively. In 1996, significant increases in
domestic revenue from a major automotive customer and slower revenue
increases in Asia-Pacific resulted in declining international
revenue as a percentage of total revenue. In July 1995, the
Company purchased the remaining shares in SDRC GmbH. As of the
acquisition date, the revenue generated by SDRC GmbH was
included in the consolidated financial statements. The Company
expects the international market to continue to account for a
significant portion of total revenue.
Cost and Expenses
Cost of Revenue. Cost of revenue consists principally of the
staff and related costs associated with the generation and
support of software services revenue, amortization of
capitalized software construction costs, royalty fees paid to
third parties under licensing agreements and the cost of
distributing software products.
Cost of licenses revenue represents variable costs associated
with the generation of licenses revenue. These costs
increased to $27,719 in 1996 from $24,659 and $20,311 in
1995 and 1994, respectively. As a percent of software
licenses revenue these represent 18%, 19% and 18% in 1996, 1995
and 1994, respectively. In absolute dollars, the Company expects
these costs to increase in direct proportion to licenses revenue
growth.
Cost of maintenance and services revenue increased to $60,454 in
1996 from $40,342 and $31,347 in 1995 and 1994, respectively.
As a percent of software maintenance and services revenue these
represent 46%, 43% and 45% in 1996, 1995 and 1994, respectively.
The increase in 1996 is primarily the result of hiring and start-up
costs for new employees associated with the growth in services
revenue. The decline in 1995 was attributable to the sale of
our low margin European services business. The Company expects
these costs to increase in absolute dollars in proportion to
software services and maintenance growth.
Selling and Marketing Expenses. Selling and marketing
expenses consist of the costs associated with the worldwide
sales and marketing staff, advertising and product
localization. These expenses amounted to $109,700, $97,272 and
$99,744 in 1996, 1995 and 1994, respectively. These amounts
represent 38%, 43% and 54% of total revenue for 1996, 1995 and
1994, respectively. 1996 selling costs as a percentage of
revenue decreased due to lower selling and marketing costs related
to software services and maintenance revenue. The selling and
marketing expense decrease in 1995 from 1994 is due to a reduction
in staff and related staff costs partially offset by an increase
in sales incentives for both the direct and indirect channels.
The Company expects to continue to expand its sales
organization to meet the growing customer demand for its products
and services.
Research and Development Expenses. The Company continues to
invest significant amounts in the technological advancement of its
product line. Research and development expenses amounted to
$30,719, $24,472 and $24,917 in 1996, 1995 and 1994,
respectively. These amounts represent 11%, 11% and 13% of total
revenue for 1996, 1995 and 1994, respectively. In 1995,
research and development expenses as a percent of total revenue
decreased because of a reduction in staff and related staff costs
which occurred in the fourth quarter of 1994 and first quarter of
1995. The Company expects that the research and development costs
will increase in absolute dollars due to the acceleration of
the development of its I-DEAS Master Series software and other
product initiatives.
Research and development expenses consist of expenses for
development of software products which cannot be capitalized in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed." Research and
development expenses exclude internally developed capitalized
software costs of $9,679, $6,928 and $9,312 in 1996, 1995 and
1994, respectively. These capitalized amounts represent 24%,
22% and 27% of research and development expenses in 1996, 1995
and 1994, respectively. The reduction in 1995 software
capitalization was the result of a staff reduction in early 1995.
The staff levels were increased in 1996 to meet development
needs resulting in increased software capitalization.
General and Administrative Expenses. General and
administrative expenses consist of costs associated with the
corporate, finance, human resource and administrative staffs.
General and administrative expenses amounted to $16,139, $13,584
and $13,501 in 1996, 1995 and 1994, respectively. These amounts
represent 6%, 6% and 7% of total consolidated revenue for 1996,
1995 and 1994, respectively. The Company expects general and
administrative costs to remain stable as a percent of revenue.
Equity in Losses of Affiliates
During 1992, the Company and Control Data Systems, Inc. formed
a joint venture known as Metaphase Technology, Inc.
(Metaphase). Metaphase is involved in developing and marketing
product data management software. The Company pays royalty fees
to Metaphase based upon the amount of PDM sales.
During 1994, the Company formed a joint venture with Siemens
Nixdorf Informationssysteme AG (SNI), SDRC Software and Services,
GmbH (SDRC GmbH) to market the Company's software products in
Central Europe. The Company's equity in the losses of affiliates
represents its share of Metaphase and SDRC GmbH joint venture
losses, the majority of which resulted from the SDRC GmbH
joint venture. In 1995, the Company purchased the remaining
shares in SDRC GmbH at its net book value. As of the acquisition
date, 100% of the operating results of SDRC GmbH were included in
the consolidated financial statements.
In 1996, equity in loss of affiliates primarily represents
SDRC's share of the Metaphase joint venture losses.
Acquisition of Metaphase Technology, Inc.
In January 1997, the Company acquired the remaining stock
of Metaphase Technology, Inc. and certain assets from Control
Data Systems, Inc. for approximately $31,000. The purchase price
includes cash and a stock warrant. The Company expects a
significant one-time charge to earnings in 1997 for the write-off
of purchased research and development in process. The
transaction will be accounted for as a purchase.
Acquisition of Camax Manufacturing Technologies, Inc.
On January 16, 1996, the Company entered into a definitive
agreement to acquire Camax Manufacturing Technologies, Inc.
(Camax) and its wholly owned subsidiaries. Camax
provides computer-aided manufacturing (CAM) software for
computerized-numerical-control machining operations, with
products and services designed to simplify, automate and
optimize the machining process to streamline production and
accelerate time-to-market.
During 1996, SDRC issued Common Stock having a market value
of $30,000 in exchange for 100 percent ownership of Camax common
stock. The acquisition was accounted for under the
pooling-of-interests method and all prior periods presented have
been restated to reflect Camax results. In 1996, SDRC recorded
other expense of $1,102 in costs related to the acquisition.
Litigation Settlement
In December 1995, the Company and plaintiffs' counsel in a
class action lawsuit entered into a Memorandum of Understanding
setting forth the terms of a proposed settlement. Pursuant to the
proposed settlement, the Company agreed to establish a settlement
fund of $27,600 consisting of $17,600 cash and $10,000 in the form
of shares of the Company's common stock. The anticipated
cost of the settlement net of estimated insurance proceeds was
recorded as an expense in 1995. The insurance proceeds of $5,000
were received in 1996. In January 1996, $17,600 was transferred to
a settlement fund in accordance with the Memorandum of
Understanding. During 1996, a final settlement between the
Company and the plaintiffs was accepted by the Court and the Company
expects to issue $10,000 in stock to the settlement fund during
1997.
Other Income, Net
Other income, net, consists principally of interest income
and foreign currency losses. For the three-year period ended
December 31, 1996, interest income increased due to interest
for income tax refunds received in 1995, higher investment
balances in 1995 and 1996 and increasing interest rates
throughout the period. 1996 other income is offset by a $950
settlement of the shareholders' derivative litigation. In 1995,
other income, net, is offset by a net loss of $1,878 resulting
from the sale of the United Kingdom test and analysis division.
Income Taxes
The Company recorded tax expense of $8,636, $7,179 and $3,881
in 1996, 1995 and 1994, respectively. In each of these years
(including 1995 and 1994 when the Company incurred losses),
the Company's provision for income taxes consisted primarily
of income taxes currently payable to foreign jurisdictions and
foreign withholding taxes incurred on the Company's software
licensing revenue. These withholding taxes can be credited
against the Company's U.S. income tax liability. The Company is
not currently in a position to utilize all of these foreign tax
credits (FTCs) on its U.S. return. The FTCs and other tax
carryforwards are available to offset future U.S. income tax
liabilities, subject to various restrictions. No benefit was
currently recognized for a substantial portion of the Company's
U.S. deferred tax assets since it is more likely than not that
they will not be realized based upon the Company's current and
anticipated mix of domestic and foreign pre-tax accounting income,
tax credits and deductions from non-qualified stock option
exercises. As of December 31, 1996, $15,353 of the valuation
allowance of $34,837 is attributable to the tax benefits of stock
option exercises and such benefits will be credited to capital
in excess of stated value if realized.
In 1994, the Company received a tax refund of $1,754 for research
and experimentation credits not previously recorded.
Liquidity and Capital Resources
As of December 31, 1996, the Company had $100,289 in cash,
cash equivalents and liquid investments. The Company's working
capital was $66,519 and the Company had no borrowings. The Company
also has an unsecured bank line of credit of $15,000.
During 1996, 1995 and 1994 the Company generated cash flows
from operations of $30,094, $33,793 and $8,181, respectively.
The increased income in 1996 was offset by the $17,600 payout
for the class action litigation settlement. The increase in
net cash provided by operations in 1995 was primarily due to the
increase in operating income and the increase in deferred revenue,
net of the accounts receivable increase.
The Company used $34,238, $8,701 and $21,858 during 1996, 1995
and 1994, respectively, for investing activities. The
reduction in investing activities from 1994 to 1995 was
primarily due to the conversion of marketable securities into
cash. In 1996, the Company added capital equipment of $14,250.
This consisted primarily of furniture and workstations to
accommodate the increase in employee headcount.
Net cash provided by financing activities was $13,276, $12,623
and $747 during 1996, 1995 and 1994, respectively, primarily
representing proceeds from the Company's stock option programs.
The Company's sources of liquidity and funds anticipated to
be generated from operations are expected to be adequate for
the Company's cash requirements in the foreseeable future.
The acquisition of the remaining 50% share of Metaphase
Technology, Inc. will be funded with cash generated from
operations. The Company paid no dividends during the period 1994
through 1996 and intends to continue its policy of retaining
earnings to finance future growth. The Company has no other
current commitments for material capital expenditures. See Note
8 to the consolidated financial statements for additional
commitments and contingencies. The Company does not expect
inflation to have a material impact on its future operations.
Factors That May Affect Future Results
Forward looking statements and the Company's results are subject
to certain risks and uncertainties, including those discussed
below, that could cause actual results to differ from those
disclosed. Any risk and uncertainty posed by competitive,
technological or financial factors could have an immediate and
significant adverse effect on the trading price of the Company's
stock in any given period.
Future results could be impacted by factors such as customer
order delays, a slower growth rate in the market, increased
competition or adverse changes in general economic conditions
in any of the countries in which the Company does business. The
loss of a major customer or a reduction in orders from a major
customer could have a significant impact to the results of
operations in any particular quarter. Historically, a
significant portion of the Company's revenue is generated from
shipments in the last month of a quarter. In addition, higher
volumes of orders have been experienced in the second and fourth
quarter. The concentration of orders makes projections of
quarterly financial results difficult. If customers delay their
orders or a disruption in the Company's distribution occurs,
quarterly results of operations in any particular quarter may be
negatively impacted. A significant portion of the Company's
revenue is from the international market. As a result,
the Company's financial results could be impacted by weakened
general economic conditions, differing technological advances or
preferences, volatile foreign exchange rates and government trade
restrictions in any country in which the Company does business.
The Company relies on distributors, representatives and value
added resellers to market its products. The Company's revenue in
any particular quarter may be negatively impacted by a lower than
anticipated performance of any significant distributor,
representative or value added reseller.
The Company's success is dependent on its ability to continue
to develop, enhance and market new products to meet its
customers' sophisticated needs in a timely manner and which are
consistent with current technological developments. The
Company's success also depends in part on its ability to attract
and retain technical and other key employees who are in great
demand, to protect the intellectual property rights of its
products and to continue key relationships with third party
authors. As development cycles become shorter, product quality,
performance, reliability, ease of use, functionality, breadth
and integration may be impacted. Therefore, customer acceptance
of new products cannot be assured. The CAD/CAE/CAM software
industry is highly competitive. The entire industry may
experience pricing and margin pressure which as a result could
adversely affect the Company's operating results and financial
position.
In addition, the Company's expense levels are based, in part, on
its future revenue expectations. The Company continues to increase
its operating expense levels to meet the growing customer demand for
the Company's products and services. If revenue is below
expectations,
operating results could be adversely and materially affected.
Net income may be disproportionately affected by an unexpected
reduction in revenue because the Company's expense levels are
generally committed in advance and a relatively small portion of
the Company's expenses vary with revenue.
The acquisition and integration of the remaining 50% interest
in Metaphase Technology, Inc. may impact future results.
Future results could also be impacted by the continued integration
of the Company and Camax Manufacturing Technologies, Inc. (see Note
2 to the Consolidated Financial Statements). In addition, the
Company is in the process of upgrading its world-wide
information management system. Such a major undertaking could
cause significant disruption as a result of unexpected delays in
the implementation of this project. There can be no
assurance that the project will be completed within the
projected time frame and budget.
The trading price of the Company's stock, like other software
and technology stocks, is subject to significant volatility
due to factors impacting the overall market which are unrelated
to the Company's performance. The historical results of
operations and financial position of the Company are not
necessarily indicative of future financial performance. If
revenues or earnings fail to meet securities analysts'
expectations, there could be an immediate and significant adverse
impact on the trading price of the Company stock.
The Company has not experienced a material adverse impact of
such risks or uncertainties and does not anticipate such an
impact. However, no assurance can be given that such risks and
uncertainties will not affect the Company's future results of
operations or its financial position.
Report of Independent Accountants
To the Board of Directors
and Shareholders of
Structural Dynamics Research Corporation
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of operations, of cash flows
and of shareholders' equity present fairly, in all material
respects, the financial position of Structural Dynamics Research
Corporation and its subsidiaries at December 31, 1996 and 1995,
and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion
expressed above.
As described in Note 7 to the consolidated financial statements,
in 1994 the Company changed its method of accounting for
postemployment benefits.
Cincinnati, Ohio
January 24, 1997
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
Structural Dynamics Research Corporation
<TABLE>
<CAPTION>
Year ended December 31
(in thousands, except per share data) 1996 1995 1994
------- -------- ---------
<S> <C> <C> <C>
Revenue:
Software licenses $153,058 $131,211 $115,051
Software maintenance and services 132,198 92,927 70,307
------- ------- -------
Total revenue 285,256 224,138 185,358
------- ------- -------
Cost of revenue:
Software licenses 27,719 24,659 20,311
Software maintenance and services 60,454 40,342 31,347
------- ------- -------
Total cost of revenue 88,173 65,001 51,658
------- ------- -------
Gross profit 197,083 159,137 133,700
Operating expenses:
Selling and marketing 109,700 97,272 99,744
Research and development 30,719 24,472 24,917
General and administrative 16,139 13,584 13,501
------- ------- -------
Total operating expenses 156,558 135,328 138,162
-------- ------- -------
Operating income (loss) 40,525 23,809 (4,462)
Equity in losses of affiliates (230) (951) (5,329)
Acquisition costs (1,102) -- --
Litigation settlement -- (24,300) --
Other income, net 3,132 1,150 2,095
-------- ------- -------
Income (loss) before income taxes and
cumulative effect of accounting change 42,325 (292) (7,696)
Income tax expense 8,636 7,179 3,881
-------- ------- -------
Income (loss) before cumulative
effect of accounting change 33,689 (7,471) (11,577)
Cumulative effect of accounting
change -- -- (3,896)
------- -------- ---------
Net income (loss) $ 33,689 $ (7,471) $(15,473)
======= ========= =========
Income (loss) per share:
Before cumulative effect of
accounting change $ .97 $ (.24) $ (.39)
Cumulative effect of accounting
change -- -- (.13)
------- --------- ---------
Net income (loss) per share $ .97 $ (.24) $ (.52)
======= ========= =========
Weighted average common shares
outstanding 34,790 30,930 29,853
======= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
CONSOLIDATED BALANCE SHEET
Structural Dynamics Research Corporation
<TABLE>
<CAPTION>
December 31
(in thousands, except per share data) 1996 1995
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 71,278 $ 61,848
Marketable securities 18,502 15,731
Trade accounts receivable, net of
allowances of $3,281 and $2,520 61,743 57,927
Other accounts receivable 7,464 10,236
Prepaid expenses and other current assets 7,918 6,283
------ --------
Total current assets 166,905 152,025
Marketable securities 10,509 4,465
Net property and equipment 20,945 14,521
Computer software construction costs, net 28,614 30,568
Other assets 11,106 2,805
------- -------
Total assets $238,079 $204,384
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 9,695 $ 10,602
Accrued expenses 14,926 14,728
Accrued compensation 21,119 19,234
Accrued litigation settlement and
related costs 10,104 28,600
Accrued income taxes 8,082 6,396
Deferred revenue 36,460 34,777
------- -------
Total current liabilities 100,386 114,337
------- -------
Other long-term liabilities 8,394 8,675
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, stated value $.0069 per share
Authorized 100,000 shares;
outstanding shares - 32,760 and
31,584 net of 1,542 and 1,510
shares in treasury 228 220
Capital in excess of stated value 87,292 73,512
Retained earnings 41,510 7,821
Foreign currency translation adjustment 298 --
Unrealized holding loss on investments (29) (181)
------- -------
Total shareholders' equity 129,299 81,372
------- -------
Total liabilities and
shareholders' equity $238,079 $204,384
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Structural Dynamics Research Corporation
<CAPTION>
Foreign Unrealized Total
Common stock Capital in currency holding gain share-
outstanding excess of Retained translation (loss) on holders'
(in thousands) Shares Stated value stated value earnings adjustment investments equity
------- ------------ ------------ -------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1993
As previously
reported 28,709 $199 $45,376 $39,625 $(619) $ -- $ 84,581
Pooling-of-
interests (Note 2) 967 7 14,174 (8,860) 5,321
------ ---- ------ ------ ----- ------- -------
December 31, 1993,
as restated 29,676 206 59,550 30,765 (619) -- 89,902
Transactions
involving
employee stock
plans 228 2 1,558 1,560
Purchases of
treasury stock (40) (470) (470)
Net loss (15,473) (15,473)
Foreign currency
translation
adjustment 29 29
Unrealized holding
loss on marketable
securities (669) (669)
------ ---- ------ ------- ----- ------ -------
December 31, 1994,
as restated 29,864 208 60,638 15,292 (590) (669) 74,879
Transactions
involving
employee stock
plans 1,832 13 14,761 14,774
Purchases of
treasury stock (112) (1) (1,887) (1,888)
Net loss (7,471) (7,471)
Foreign currency
translation
adjustment 590 590
Unrealized holding
gain on marketable
securities 488 488
-------- ----- ------- ------- ----- ----- ------
December 31, 1995,
as restated 31,584 220 73,512 7,821 -- (181) 81,372
Transactions
involving
employee stock
plans 1,267 9 17,704 17,713
Purchases of
treasury stock (91) (1) (2,688) (2,689)
Payment for Camax
dissenter's rights (1,236) (1,236)
Net income 33,689 33,689
Foreign currency
translation
adjustment 298 298
Unrealized holding
gain on marketable
securities 152 152
------ ---- ------- -------- ------ ------ --------
December 31, 1996 32,760 $228 $87,292 $41,510 $ 298 $ (29) $129,299
====== ===== ======= ======== ====== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Structural Dynamics Research
Corporation
<TABLE>
<CAPTION>
Year ended December 31
(in thousands) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 33,689 $ (7,471) $(15,473)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 8,073 7,697 8,479
Amortization of computer software
construction costs 11,779 8,475 7,137
Deferred taxes (2,125) 563 4
Equity in losses of affiliates 230 951 5,329
Litigation settlement -- 24,300 --
Loss on sale of UK test and analysis
division -- 1,878 --
Postemployment benefits accounting
change -- -- 3,896
Other (17) (282) 971
Changes in assets and liabilities, net of
SDRC GmbH 1995 acquisition:
Increase in accounts receivable, net (1,044) (10,699) (14,396)
(Increase) decrease in prepaid
expenses (1,635) 696 (790)
(Increase) decrease in other
assets (7,261) 564 (233)
Decrease in current long-term debt -- (19) (5)
(Decrease) increase in accounts
payable and accrued expenses (17,320) (3,793) 5,243
Increase (decrease) in accrued
income taxes 1,686 2,134 (1,109)
Increase in deferred revenue 1,683 10,623 7,010
Increase (decrease) in other long-
term liabilities 2,356 (1,824) 2,118
------ -------- ------
Net cash provided by operating
activities 30,094 33,793 8,181
------ -------- ------
Cash flows from investing activities:
Purchases of marketable securities (25,612) (32,781) (33,835)
Proceeds from sales of marketable
securities 16,949 38,492 29,112
Additions to property and equipment,
net (14,250) (5,706) (5,778)
Proceeds from sale of UK test and
analysis division -- 524 --
Additions to computer software
construction costs (9,825) (8,189) (9,534)
Acquisition of remaining shares of
SDRC GmbH, net of cash received -- 1,152 --
Investment in and advances to joint
ventures (1,500) (2,193) (1,823)
------ ------ ------
Net cash used in investing
activities (34,238) (8,701) (21,858)
------ ------ ------
Cash flows from financing activities:
Issuance of common stock 17,713 14,774 1,560
Purchases of treasury stock (2,689) (1,888) (470)
Payment for Camax dissenter's rights (1,236) -- --
Issuance of long-term debt -- 371 361
Repayment of long-term debt (512) (634) (704)
------- ------- -------
Net cash provided by financing
activities 13,276 12,623 747
------- ------- -------
Effect of exchange rate changes on cash 298 -- 29
------- ------- -------
Increase (decrease) in cash and cash
equivalents 9,430 37,715 (12,901)
Cash and cash equivalents:
Beginning of period 61,848 24,133 37,034
------ ------- -------
End of period $ 71,278 $ 61,848 $ 24,133
====== ======= =======
Cash paid during the year for income
taxes $ 10,462 $ 5,941 $ 3,425
====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Structural Dynamics Research Corporation
(in thousands, except per share data)
(1) Summary of Significant Accounting Policies
Business
Structural Dynamics Research Corporation (the "Company" or "SDRC")
is a leading international supplier of mechanical design
automation (MDA) software, product data management (PDM) software
and related services.
Basis of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Investments in which
the Company has significant influence, but not control, are
accounted for under the equity method. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates
The financial statements, which are prepared in conformity
with generally accepted accounting principles, require management to
make estimates and assumptions that affect the reported amounts
in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates. Significant
estimates based on the facts and circumstances existing at the
date of the financial statements include the estimated useful
lives of computer software construction costs and the likelihood of
realization of the deferred tax assets.
Revenue Recognition
The use of software programs is licensed through the Company's
direct sales force and by specific arrangements with certain
distributors, value-added resellers and other marketing
representatives. Revenue generated from licenses is recognized
when the following criteria have been met: (a) a written order
for the unconditional license of software and a software license
agreement have been received, (b) the Company has shipped the
products to the customer and performed substantially all services
for which it was committed, (c) the customer is obligated to
pay and (d) collectibility is probable.
Under the terms of a former licensing agreement with an OEM
customer, the Company was unable to determine the amount of
revenue earned until cash was received from the customer. In 1994,
when the Company terminated this licensing agreement, revenue
totaling $5,877 was recorded on the cash basis.
Revenue from maintenance contracts is recognized ratably over
the term of the agreement and the deferred portion represents
the substantial component of deferred revenue. Revenue from
engineering consulting, customer training and other services is
recognized as the service is performed.
Cost of Revenue
The cost of licenses primarily consists of the cost of
distributing the software products and an allocation of the
amortization of capitalized software construction costs and
royalty fees paid to third parties under licensing agreements.
Cost of maintenance and services primarily consists of the staff
and related costs associated with the generation and support of
software service revenue and an allocation of the amortization of
capitalized software construction costs and royalty fees paid
to third parties under licensing agreements. The allocation
between cost of licenses and maintenance and services is based
upon the percentage of the related revenue source to total
revenue. Management believes that the methodology for allocating
the costs is reasonable.
(1) Summary of Significant Accounting Policies - continued
Cash Equivalents and Marketable Securities
Cash equivalents include highly liquid investments in
interest bearing accounts, commercial paper and reverse repurchase
agreements with an original maturity of less than 90 days.
Marketable securities consist of U.S. treasuries and U.S.
government agency obligations. Short-term marketable securities
have a maturity term in excess of 90 days but less than one year.
Long-term marketable securities have a maturity term in excess of
one year. The Company also has an unused unsecured $15,000 bank
line of credit.
All cash equivalents and marketable securities are classified
as available for sale and recorded at market value. Unrealized
gains and losses are included in a separate component of
shareholders' equity. Realized and unrealized gains and losses
are determined based on the specific identification method.
Financial Instruments
The carrying amounts of cash and cash equivalents,
marketable securities, accounts receivable, accounts payable,
accrued expenses and forward foreign exchange contracts approximate
fair value due to the short-term nature of these financial
instruments.
Concentrations of Credit Risk
Cash equivalents, marketable securities and accounts
receivable represent a potential credit risk to the Company.
The Company invests its excess cash with government and
major financial institutions having strong credit ratings.
Company policy sets credit ratings and maturity terms that
limit the risk of credit exposure and maintain necessary
liquidity.
The Company's revenue is generated from a significant customer
base in diversified industries across different geographic
areas. Revenue from a customer represented 11% of consolidated
revenue in 1996 and a distributor represented 12%, 13% and 10% of
consolidated revenue in 1996, 1995 and 1994, respectively. The
Company performs ongoing credit evaluations of its customers and
has not experienced any material losses related to an individual
customer or groups of customers in any particular geographic
area. Management believes allowances for potential credit
losses are adequate in the circumstances.
Foreign Currency Translation
For 1996 the functional currency of the international operations
is the local currency. Foreign currency financial statements
are translated at period-end exchange rates for assets and
liabilities and at weighted average exchange rates for the results
of operations. The translation gains and losses, which were not
material, are accumulated in a separate component of shareholders'
equity. The functional currency changed to the operations' local
currency from the U.S. dollar in 1996 based upon changes in the
Company's operating and economic environment. The Company's
European operations have become more autonomous due to
improved profitability of the subsidiaries and have generated
sufficient cash flows from operations to support their operating
and capital needs. Utilization of local European resources have
been expanded due to the local European customer demand of
implementation, support and customization of the Company's
software products and the establishment of a European product
development staff. Prior to 1996, for operations where the
functional currency was the U.S. dollar, the foreign currency
gains and losses, which were not material, were included in
determining the results of operations.
Foreign Exchange Contracts
The Company enters into forward foreign exchange contracts
denominated in foreign currencies to hedge certain foreign
currency denominated receivables. Any market gains and losses
associated with these financial instruments are recorded currently
in income to offset any gains and losses arising from foreign
currency exchange transactions. The resulting gains and losses
were not material. The interest element of the foreign currency
instruments is recognized over the life of the contract. As
of December 31, 1996, the Company did not have any
forward foreign exchange contracts outstanding.
(1) Summary of Significant Accounting Policies - continued
Property and Equipment
Depreciation for property and equipment is primarily computed
using the straight-line method over the estimated useful life of the
asset. Leasehold improvements are amortized using the straight-line
method over the lesser of the life of the lease or the estimated
useful life of the improvement. The general ranges of years used
in calculating depreciation and amortization are: computer and other
equipment, 2-5 years; office furniture and equipment, 7
years; leasehold improvements, 1-10 years.
Computer Software Construction Costs
The Company designs, develops and markets computer software
products. Costs related to the construction of software that are
incurred after the technological feasibility of the product has
been demonstrated are capitalized and amortized over the useful
lives of such software. Computer software construction costs are
shown net of accumulated amortization of $32,022 and $20,243 at
December 31, 1996 and 1995, respectively. Beginning in 1996, the
Company began amortizing the software construction costs related
to new releases of the I-DEAS Master Series product over a
three year period based upon the estimated future economic
life of the product. Amortization is calculated on a
product-by-product basis and is the greater of the ratio that
current product revenue bears to the total of current and
anticipated future years' revenue or the straight-line method
over the remaining estimated economic lives of the software
products.
Income Taxes
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes," deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their
respective tax bases. As of December 31, 1996, no benefit was
currently recognized for a substantial portion of the Company's
U.S. deferred tax assets since it is more likely than not that
they will not be realized based upon the Company's current and
anticipated mix over the next four years of domestic and foreign
pre-tax accounting income, tax credits, and deductions from
non-qualified stock option exercises.
The Company does not accrue Federal income taxes on
undistributed earnings of its foreign subsidiaries that (1) have
been, or are intended to be, permanently reinvested or (2) if
remitted, would not have material income tax consequences.
Undistributed earnings amounted to approximately $12,396 at
December 31, 1996.
Per Share Data
Income (loss) per common and common equivalent share is
computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period.
Primary and fully diluted income (loss) per share and common
and common equivalent shares are the same for all periods
presented. Dilutive common equivalent shares are calculated
using the treasury method and consist of stock option grants
and an estimated number of shares to be issued in settlement of
litigation (see Note 8).
(2) Business Acquisitions
Metaphase Technology, Inc.
In 1992 the Company and Control Data Systems, Inc. established
a joint venture company, Metaphase Technology, Inc. (Metaphase),
to develop and market product data management software worldwide.
The Company initially owned a 30% interest and increased such
interest to 50% during 1993. The Company's investment in
Metaphase has been accounted for on the equity basis.
In January 1997 the Company acquired the remaining stock of
Metaphase and certain assets of Control Data Systems, Inc.'s
global PDM software sales and support business. The
purchase price of approximately $31,000 includes cash and a stock
warrant. The warrant is exercisable for 750 shares of the
Company's common stock without par value at the exercise price
of $28 per share and expires on December 31, 1998. The
acquisition will be accounted for using the purchase method.
Camax Manufacturing Technologies, Inc.
In June 1996 the Company completed the acquisition of
Camax Manufacturing Technologies, Inc. (Camax) and its wholly
owned subsidiaries. Camax provides computer-aided manufacturing
(CAM) software for computerized-numerical-control machining
operations. The Camax products and services are designed to
simplify, automate and optimize the machining process to
streamline production and accelerate time-to-market.
In exchange for 100 percent ownership of Camax common stock,
SDRC issued approximately 967 shares of SDRC common stock and
paid approximately $1,236 to a Camax shareholder who
exercised dissenter's rights. The market value of the shares and
cash paid was approximately $30,000. Acquisition charges of
$1,102 were recorded in the second quarter of 1996. The
acquisition has been accounted for as a pooling-of-interests.
All historical financial data of the Company has been restated to
include the results of Camax for all periods presented.
Revenue and
net income
(loss) of the
separate companies
for the periods
before the Three months Year ended Year ended
acquisition ended March December December
are as follows: 31, 1996 31, 1995 31, 1994
Revenue:
SDRC $60,971 $204,084 $167,547
Camax 4,078 20,054 17,811
------ -------- ---------
Total revenue $65,049 $224,138 $185,358
====== ======== =========
Net income (loss):
SDRC $ 6,860 $ (8,467) $(12,897)
Camax (504) 996 (2,576)
------ -------- -------
Net income (loss) $ 6,356 $ (7,471) $(15,473)
====== ======== =======
Adjustments recorded to adopt the same accounting practices are
not material to the consolidated financial statements.
(2) Business Acquisitions - continued
SDRC Software and Services, GmbH
In 1994 the Company formed a joint venture with Siemens
Nixdorf Informationssysteme AG and in 1995 purchased the remaining
interest of SDRC GmbH. The acquisition was accounted for using
the purchase method. As of the acquisition date, 100% of the
operating results of SDRC GmbH are included in the consolidated
financial statements. Proforma results of the purchase are not
presented as the amounts are not material to the consolidated
financial statements.
ESTECH Corporation
In 1989 the Company and Nissan Motor Co., Ltd. established a
Japanese joint venture company, ESTECH Corporation (ESTECH)
to provide engineering services in Japan and the Asia-Pacific
areas. The Company owns a 30% interest in ESTECH. The impact of
its results are not material to the Company's results of operations.
Joint Venture Data
Financial data for the year ended December 31, 1995 for Metaphase
and for the year ended December 31, 1994 for Metaphase and SDRC
GmbH is presented below:
Year ended and as of December 31
1995 1994
Current assets $ 3,304 $ 5,905
Non-current assets 4,766 4,426
Current liabilities 8,901 8,564
Non-current liabilities 3,470 6,760
Net revenue 11,295 14,379
Loss before income taxes (405) (10,483)
Net loss $ (417) $(10,502
The financial impact of Metaphase for 1996 is not
considered material.
(3) Marketable Securities
December 31, December 31,
1996 1995
Fair Amortized Fair Amortized
Marketable Value Cost Value Cost
securities consist of:
Short-term:
Available-for-sale $18,502 $18,468 $11,231 $11,240
Held-to-maturity
certificates of deposit -- -- 4,500 4,500
-------- ------ ------ ------
Total short-term marketable
securities $18,502 $18,468 $15,731 $15,740
======== ====== ====== ======
Long-term:
Available-for-sale $10,509 $10,572 $ 4,465 $ 4,637
======== ====== ====== ======
Available-for-sale marketable securities have maturities of $18,502
in 1997, $9,620 in 1998 and $889 in 2013.
<PAGE>
(4) Property and Equipment
Property and equipment, December 31
recorded at cost, consist of: 1996 1995
Property and equipment, at cost:
Computer and other equipment $ 49,376 $ 40,164
Office furniture and equipment 14,535 11,762
Leasehold improvements 5,695 4,125
------ ------
69,606 56,051
Less accumulated depreciation and
amortization (48,661) (41,530)
------ ------
Net property and equipment $ 20,945 $ 14,521
====== ======
Future minimum lease payments under noncancelable operating
leases for the five years ending December 31, 2001 approximate
$11,785, $10,290, $6,646, $4,292 and $3,928, respectively, and
$41,523 thereafter. Total rental expenses under operating leases
for the years ended December 31, 1996, 1995 and 1994 were
$16,426, $14,576 and $13,811, respectively.
(5) Income Taxes
Year ended December 31
Pre-tax accounting income (loss)
consists of the following: 1996 1995 1994
Domestic $27,777 $(6,164) $(7,443)
Foreign 14,548 5,872 (253)
------ ------ ------
$42,325 $ (292) $(7,696)
====== ====== ======
Year ended December 31
The provision for income taxes
consists of the following: 1996 1995 1994
Federal:
Current $ 1,234 $ 35 $(1,722)
Deferred (2,125) 563 4
------ ----- ------
(891) 598 (1,718)
State 1,418 282 418
Foreign:
Income taxes 3,125 2,215 1,118
Withholding taxes 4,984 4,084 4,063
------ ------ ------
Income tax expense $ 8,636 $7,179 $ 3,881
====== ====== ======
Deferred state and foreign taxes are not material.
<PAGE>
(5) Income Taxes - continued
<TABLE>
<CAPTION>
The provision for income
taxes differs from the
amounts computed by using the
statutory U.S.
Federal income tax rate.
The reasons for the differences Year ended December 31
are as follows: 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Computed expected income tax
expense (benefit) $14,814 $ (102) $(2,694)
Increase (reduction) resulting
from:
Foreign withholding taxes, without
current benefit -- 4,084 4,063
Foreign income taxed at other than
the U.S.statutory rate (1,966) 160 1,207
U.S. losses without tax benefit -- 2,157 2,605
Utilization of U.S. tax
carryforwards (4,806) -- --
Receipt of research and
experimentation tax credit
refund not previously recorded -- -- (1,754)
Change in net deferred taxes (2,125) 563 4
Alternative minimum taxes 1,125 -- --
State taxes, net of federal
benefit 922 282 418
Other 672 35 32
------ ------ ------
Income tax expense $ 8,636 $7,179 $ 3,881
====== ====== ======
</TABLE>
<PAGE>
The tax effects of temporary
differences that
give rise to the
deferred tax assets and
deferred tax liabilities December 31,
are as follows: 1996 1995
Deferred tax assets:
Revenue recognition and accounts receivable $ 2,580 $ 1,997
Property and equipment 1,114 1,297
Computer software construction costs and
capitalized research expenses,
net of amortization 10,794 229
Accrued lawsuit settlement 3,536 8,260
Other liabilities and reserves 5,006 6,247
Tax credit and net operating loss
carryforwards 12,482 17,103
Other 1,450 1,380
------- -------
Total deferred tax assets 36,962 36,513
Valuation allowance (34,837) (36,513)
------- -------
Net deferred tax assets 2,125 --
------- -------
Deferred tax liabilities -- --
------- -------
Total net deferred taxes $ 2,125 $ --
======= =======
Of the $12,482 in tax carryforwards available at December 31,
1996, $6,908 expire in the years 1997 through 2000 and the remainder
expire thereafter through the year 2011. $2,125 of alternative
minimum taxes never expire.
The net change in the valuation allowance for deferred tax assets
was a decrease of $1,676 in 1996 and an increase of $12,679 in 1995.
Of the $34,837 in valuation allowance at December 31, 1996,
$15,353 is attributable to the tax benefit of stock option
exercises. Such benefits will be credited to capital in excess of
stated value when realized.
(6) Shareholders' Rights Plan
In 1988 the Board of Directors adopted a Shareholders' Rights Plan
to protect shareholders' interests in the event of an
unsolicited attempt to gain control of the Company. Under the
Shareholders' Rights Plan, shareholders are granted certain rights
in the event of a triggering event ("Rights"). The Rights become
exercisable if a person acquires 20% or more of the Company's
outstanding common stock or announces a tender offer which would
result in a person or group acquiring 20% or more of the common
stock (Distribution Date). If, at any time following the
Distribution Date, the Company has not redeemed the Rights, the
Company becomes the surviving corporation in a merger or a person
becomes the beneficial owner of 20% or more of the Company's
common stock (Triggering Date), each holder of a Right will have
the right to purchase shares of the Company's common stock having a
value equal to two times the Right's exercise price of $110. If, at
any time following the Triggering Date, the Company is
acquired in a merger or other business combination transaction
in which the Company is not the surviving corporation, each holder
of a Right shall have the right to purchase shares of common stock
of the acquiring company having a value equal to two times the
exercise price of the Right. The Rights expire on August 10, 1998,
and may be redeemed by the Company for $.0025 per Right.
(7) Common Stock and Employee Benefit Plans
Stock Option Plans
Under the 1991 Employee Stock Option Plan, the Company has
reserved 5,300 shares of previously unissued common stock. Under
the plan, options to purchase shares may be granted to key
employees and executive officers at the fair market value at the
date of grant.
In 1991 the adoption of the Director's Non-Discretionary Stock
Option Plan converted the Amended and Restated 1986 Stock Option
Plan into a non-discretionary plan allowing future grants to outside
directors at the fair market value at the date of grant. Under the
original 1986 plan, the Company had reserved 7,000 shares of
previously unissued common stock. The status of all
outstanding options previously granted to employees remained
unchanged.
In 1994 the shareholders adopted the 1994 Long-Term Stock
Incentive Plan, allowing stock incentives including stock
options, stock appreciation rights, stock awards, and any
combination to be granted to employees. The number of shares
with respect to which stock incentives may be granted in one
calendar year shall not exceed 4% of the Company's issued and
outstanding common stock. No stock incentives other than
non-qualified stock options have been granted under the 1994 plan.
Under the plans, employee options expire ten years from the date
of grant and are exercisable as follows: 33% on the first
anniversary of the grant date; an additional 34% on the second
anniversary; and all or any remaining options on the third
anniversary until expiration. Director options expire five years
from the date of grant and are exercisable 50% upon expiration of
six months from the grant date and all or any remaining options on
the first anniversary of the grant date until expiration.
With the acquisition of Camax on June 30, 1996, the Company
assumed approximately 175 outstanding stock options representing
all of Camax's obligations under five existing stock option
plans and certain out-of-plan options. The assumed stock options
and stock appreciation rights were generally granted to employees
and directors of Camax at 100% of the market value at the date of
grant and expire ten years from date of grant. No additional
stock options will be granted under the Camax plans.
<PAGE>
(7) Common Stock and Employee Benefit Plans - continued
Stock Option Plans - continued
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
----------------- ----------------- -----------------
December 31, 1996 December 31, 1995 December 31,1994
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning
of the year 5,008 $12.09 7,289 $12.58 7,446 $13.19
Granted 1,337 $30.09 1,143 $ 7.54 1,365 $10.93
Exercised (1,169) $11.11 (1,510) $ 7.90 (153) $ 4.92
Cancelled (231) $13.93 (1,914) $14.90 (1,369) $14.96
Outstanding at
end of the year 4,945 $17.10 5,008 $12.09 7,289 $12.58
Options
exercisable
at year end 2,935 $13.71 3,227 $13.36 5,310 $12.45
</TABLE>
The weighted average fair value of options granted in 1996 was $13.76
and in 1995 was $3.69.
<PAGE>
Information regarding options outstanding
as of December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Stock Remaining Average Stock Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.38 - $ 5.50 367 2.54 $ 4.59 351 $ 4.56
$ 5.63 - $ 6.31 630 8.01 $ 6.26 180 $ 6.27
$ 7.13 - $ 9.88 182 3.76 $ 9.63 168 $ 9.71
$10.17 - $11.13 606 6.70 $11.07 411 $11.05
$11.25 - $15.06 203 5.74 $12.94 164 $12.96
$15.50 - $15.50 579 5.92 $15.50 579 $15.50
$15.94 - $16.75 583 4.79 $16.37 578 $16.36
$17.19 - $20.13 518 5.38 $19.94 424 $20.06
$20.19 - $20.44 175 8.03 $26.00 52 $27.22
$29.44
$31.25 1,102 9.08 $31.25 28 $31.25
- --------------- ----- ---- ------ ----- ------
$1.38 - $31.25 4,945 6.53 $17.10 2,935 $13.71
=============== ===== ==== ====== ===== ======
</TABLE>
<PAGE>
Stock Purchase Plan
Under the Stock Purchase Plan, all domestic full-time employees
who are non-executive officers are entitled to purchase the
Company's common stock at 90% of fair market value. Employees
electing to participate must contribute at least 1% with a maximum
of 10% of the participant's base salary and commissions each month.
All incidental expenses related to the issuance of these shares
including the 10% discount have been charged to income. The
plan has no fixed expiration date, may be terminated by the
Company at any time and has no limitation on the number of shares
that may be issued.
(7) Common Stock and Employee Benefit Plans - continued
Tax Deferred Capital Accumulation Plan
The Structural Dynamics Research Corporation Tax Deferred
Capital Accumulation Plan (401(k) Plan) is a defined
contribution plan covering all salaried employees of the domestic
divisions of the Company. Employees may make contributions to
the 401(k) Plan by authorizing a reduction of their compensation
of at least 1% up to a maximum of 15%. The Company may provide a
matching contribution in the form of Company stock or cash
equal to 50% of the employee contribution, up to a maximum of
6% of the employee compensation. Participants are immediately
vested in their voluntary contributions and are vested in the
Company contributions after three years of continuous service.
Other Employee Benefit Plans
The Company provides retirement benefits to substantially
all employees through defined contribution plans. The
Company's contributions are primarily based on employee compensation
and years of service. Expenses related to the 401(k) Plan and
other defined contribution plans were approximately $3,225, $3,044
and $2,122 in 1996, 1995 and 1994, respectively.
Postemployment Benefits Plans
The Company provides severance benefits for involuntarily
terminated employees attributable to employees' prior service. In
the first quarter of 1994, the cumulative effect of adopting
SFAS No. 112 "Employers' Accounting for Postemployment Benefits"
reduced income by $3,896, net of zero tax benefit.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized in the
results of operations for the stock option grants. Had
compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards
in 1996 and 1995 consistent with the provisions of SFAS No.
123, the Company's net income (loss) and income (loss) per
share would have been reduced to the pro forma amounts as
follows:
1996 1995
Net income (loss) - as reported $33,689 $(7,471)
Net income (loss) - pro forma 28,268 (8,547)
Income (loss) per share - as reported .97 (.24)
Income (loss) per share - pro forma $ .81 $ (.28)
The pro forma effect on the Company's net income (loss) and
income (loss) per share for 1996 and 1995 is not representative of
the pro forma effect in future years. The pro forma effect does
not take into consideration compensation expense related to grants
made prior to 1995 or additional grants in future years which are
anticipated. The fair value of each option is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1996 and
1995: dividend yield of 0%; expected volatility of 62.8%; risk-free
interest rate of 5.6%; and expected terms of 1.86 years,
adjusted for vesting requirements.
(8) Commitments and Contingencies
Except for the following matters, SDRC is not a party to
any litigation other than ordinary routine litigation incidental to
its business. The Company was a defendant in a class action
suit alleging violations of certain federal securities laws,
captioned In Re: Structural Dynamics Research Corporation
Securities Litigation, United States District Court, Southern
District of Ohio, Consolidated Master File No. C-1-94-630. In
December 1995, the parties to this matter entered into a
Memorandum of Understanding for settlement, subject to final
Court approval. On March 22, 1996, the Court approved the
proposed settlement and a final order was entered. Pursuant to
the order, a settlement fund of $37.5 million was established,
consisting of $17.6 million cash provided by the Company,
$10.0 million in shares of the Company's common stock (to be
valued-based on the market price at the time of distribution),
and $9.9 million cash provided by the Company's former accountants.
The settlement does not constitute an admission of liability on the
part of any defendant. The Company's Board of Directors
determined that the settlement was in the best interest of the
Company and its shareholders in light of the uncertainty of the
outcome, the high cost of continued litigation, and the high
level of management time and attention continued litigation would
have required which could be better spent on the Company's business.
The Company was a party to shareholders' derivative
litigation captioned In Re: Structural Dynamics Research
Corporation Derivative Litigation, United States District Court,
Southern District of Ohio, Consolidated Master File No.
C-1-94-650. The Company paid the plaintiffs' counsel fees of
approximately $900 and $50 for their out-of-pocket expenses in full
settlement of the matter. The parties' agreement was approved by
the United States District Court on July 19, 1996.
Based on the same facts which gave rise to the Class Action Case
and the Derivative Case, the Securities and Exchange Commission
commenced a formal, private investigation of SDRC in September
1994 which remains pending. SDRC is fully cooperating with this
investigation but cannot predict its outcome.
Pursuant to certain contractual obligations, the Company has
agreed to indemnify its directors and officers under certain
circumstances against claims arising from lawsuits. The Company
may be obligated to indemnify certain of its directors and officers
for the costs they may incur as a result of the lawsuits.
(9) Other Income, Net
Year ended December 31
Other income, net consists of: 1996 1995 1994
Interest income $ 4,535 $ 3,651 $ 2,349
Loss on sale of UK test and
analysis division -- (1,878) --
Other (1,403) (623) (254)
Other income, net $ 3,132 $ 1,150 $ 2,095
In July 1995, SDRC sold its test and analysis division located in
the United Kingdom to MascoTech Engineering Europe Limited for
net proceeds of $524 and realized a loss on the sale of $1,878. The
loss includes foreign currency losses and estimated costs pertaining
to a lease commitment.
Other consists of net foreign currency exchange gains and losses
and, in 1996, the derivative litigation settlement.
(10) Segment and Geographic Information
The Company operates in a single industry segment
providing mechanical design automation software and related
services to manufacturers for the design, analysis, testing and
manufacturing of mechanical products. SDRC also supplies
product data management systems providing a comprehensive
approach to the management and control of engineering
information.
<TABLE>
<CAPTION>
Financial data
by geographic area Operating Identifiable
is as follows: Revenue Income(Loss) Assets
------- ------------ ------------
<S> <C> <C> <C>
Year ended December 31, 1996
North America $136,532 $ 19,889 $ 81,140
Europe 80,275 16,014 47,470
Asia-Pacific 68,449 16,581 18,737
Corporate -- (11,959) 90,732
------- ------- -------
Consolidated $285,256 $ 40,525 $238,079
======= ======= =======
Year ended December 31, 1995
North America $102,271 $ 12,369 $ 67,774
Europe 61,420 7,949 39,024
Asia-Pacific 60,447 14,929 14,637
Corporate -- (11,438) 82,949
------- ------- -------
Consolidated $224,138 $ 23,809 $204,384
======= ======= =======
Year ended December 31, 1994
North America $ 83,750 $ 5,777 $ 60,698
Europe 48,960 (248) 26,620
Asia-Pacific 52,648 1,308 6,421
Corporate -- (11,299) 58,198
------- ------- --------
Consolidated $185,358 $ (4,462) $151,937
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Depreciation
and
Financial data by industry segment Operating Identifiable Amortization Capital
for 1994 is as follows: Revenue Income (Loss) Assets Expense Expenditures
--------- ------------ ------------ ------------ ------------
Year ended December 31, 1994
<S> <C> <C> <C> <C> <C>
Software products and
services $166,261 $(4,757) $ 91,674 $6,304 $5,062
Engineering services 19,097 295 9,030 1,061 391
Corporate -- -- 51,233 1,114 325
------- ------ ------- ------ -----
Consolidated $185,358 $(4,462) $151,937 $8,479 $5,778
======= ====== ======= ====== =====
</TABLE>
Disclosure of industry segment data for 1995 and 1996 is not
considered material.
(11) Quarterly Results of Operations (Unaudited)
The following table sets forth selected unaudited quarterly financial
information for 1996 and 1995. The Company believes that all
necessary adjustments have been included to present fairly the
selected quarterly information.
<TABLE>
<CAPTION>
Three months ended Year ended
March 31, June 30, September 30, December 31, December 31,
1996 1996 1996 1996 1996
-------- ------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $65,049 $66,669 $71,777 $81,761 $285,256
Gross profit $45,912 $45,566 $49,402 $56,203 $197,083
Net income $ 6,356 $ 6,607 $ 8,379 $12,347 $ 33,689
Earnings per
share $ .18 $ .19 $ .24 $ .36 $ .97
</TABLE>
<TABLE>
<CAPTION>
Three months ended Year ended
March 31, June 30, September 30, December 31, December 31,
1995 1995 1995 1995 1995
-------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $48,430 $51,382 $55,747 $ 68,579 $224,138
Gross profit $34,958 $35,958 $37,929 $ 50,292 $159,137
Net income (loss) $ 480 $ 3,036 $ 5,889 $(16,876) $ (7,471)
Earnings (loss) per
share $ .02 $ .09 $ .18 $ (.54) (.24)*
* Per share amounts are not additive.
</TABLE>
<PAGE>
(12) Common Stock Information (Unaudited)
The Company's common stock is listed and traded on the
National Association of Securities Dealers, Inc. Automatic
Quotation (NASDAQ) National Market System.
The high and low bid prices per share for the Company's common
stock as reported on the NASDAQ National Market System are contained
in the table below. Such quotations reflect inter-dealer prices
without retail mark-up, mark-down or commission. The Company
paid no dividends in 1996 or 1995 and intends to continue its
policy of retaining earnings to finance future growth. There were
approximately 1,300 shareholders of record as of December 31, 1996.
Three months ended
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
High 35 1/2 37 3/8 27 1/4 24 1/4
Low 22 1/4 19 1/2 15 17 1/8
Three months ended
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
High 9 5/8 15 20 1/4 30 1/2
Low 5 1/8 8 3/8 10 3/8 16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 71,278
<SECURITIES> 18,502
<RECEIVABLES> 65,024
<ALLOWANCES> (3,281)
<INVENTORY> 0
<CURRENT-ASSETS> 166,905
<PP&E> 69,606
<DEPRECIATION> (48,661)
<TOTAL-ASSETS> 238,079
<CURRENT-LIABILITIES> 100,386
<BONDS> 0
0
0
<COMMON> 228
<OTHER-SE> 129,071
<TOTAL-LIABILITY-AND-EQUITY> 238,079
<SALES> 285,256
<TOTAL-REVENUES> 285,256
<CGS> 88,173
<TOTAL-COSTS> 156,558
<OTHER-EXPENSES> (1,800)
<LOSS-PROVISION> 2,689
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 42,325
<INCOME-TAX> 8,636
<INCOME-CONTINUING> 33,689
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,689
<EPS-PRIMARY> .97
<EPS-DILUTED> .97
</TABLE>
