UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-16230
STRUCTURAL DYNAMICS RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-0733928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Eastman Drive, Milford, Ohio 45150
(Address of principal executive offices)
(Zip Code)
(513) 576-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 1998, there were 36,369,573 shares of
the Registrant's Common Stock without par value issued and
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
(in thousands, except per share data)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenue:
Software licenses $ 43,886 $40,429 $123,315 $123,824
Software maintenance and
services 57,933 46,309 164,758 132,456
Total revenue 101,819 86,738 288,073 256,280
Cost of revenue:
Cost of licenses 7,819 6,555 23,103 18,726
Cost of maintenance and
services 32,794 24,454 90,940 70,414
Total cost of revenue 40,613 31,009 114,043 89,140
Gross profit 61,206 55,729 174,030 167,140
Operating expenses:
Selling and marketing 29,146 25,355 84,649 75,066
Research and development 16,164 11,586 49,381 38,612
General and administrative 4,503 3,835 13,186 12,899
Purchased in-process
research and development 20,850
Total operating
expenses 49,813 40,776 147,216 147,427
Operating income 11,393 14,953 26,814 19,713
Other income, net 4,144 1,211 10,830 2,871
Income before income taxes 15,537 16,164 37,644 22,584
Income tax expense 5,199 3,412 11,865 9,366
Net income $ 10,338 $12,752 $ 25,779 $ 13,218
Net income per share:
Basic $ .29 $ .36 $ .71 $ .38
Diluted .28 .34 .67 .36
Pro forma net income
Income before income
taxes as reported 16,164 22,584
Pro forma income tax
expense 3,759 10,729
Pro forma net income $12,405 $ 11,855
Pro forma net income
per share:
Basic $ .35 $ .34
Diluted .33 .33
Comprehensive income $ 12,116 $12,071 $ 27,393 $ 10,813
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(in thousands)
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $132,625 $ 81,056
Marketable securities 13,362 13,030
Trade accounts receivable, net 83,748 88,954
Other accounts receivable 8,129 17,815
Prepaid expenses 10,951 9,082
Total current assets 248,815 209,937
Marketable securities 13,046 14,925
Property and equipment, at cost:
Computer and other equipment 59,682 57,364
Office furniture and equipment 19,077 16,983
Leasehold improvements 7,732 6,685
86,491 81,032
Less accumulated depreciation and
amortization 61,452 56,405
Net property and equipment 25,039 24,627
Computer software construction
costs, net 32,118 31,610
Other assets 16,986 12,097
Total assets $336,004 $293,196
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(in thousands, except per share data)
<CAPTION>
September 30, December 31,
1998 1997
Liabilities and Shareholders' Equity (unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 12,064 $ 12,230
Accrued expenses 40,772 39,590
Accrued income taxes 3,855 9,182
Deferred revenues 51,708 46,606
Total current liabilities 108,399 107,608
Other long-term liabilities 7,482 7,751
Shareholders' equity:
Common stock, stated value $.0069 per share
Authorized 100,000 shares;
outstanding shares -
36,291 and 35,654 net of 1,452 and
1,500 shares in treasury 252 248
Capital in excess of stated value 129,021 114,132
Retained earnings 92,914 67,135
Foreign currency translation adjustment (2,231) (3,667)
Unrealized holding gain (loss) on
investments 167 (11)
Total shareholders' equity 220,123 177,837
Total liabilities and
shareholders' equity $336,004 $293,196
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Net cash provided by operating activities $ 63,144 $ 58,616
Cash flows from investing activities:
Sales, (purchases) of marketable
securities, net 1,725 (2,723)
Additions to property and equipment, net (9,246) (9,497)
Additions to computer software
construction costs (12,815) (7,746)
Sale of test business 1,809
Acquisition of Metaphase Technology, Inc. (28,050)
Net cash used in investing activities (18,527) (48,016)
Cash flows from financing activities:
Stock issued under employee benefit
plans 6,410 9,938
Repayment of long term debt (894) (152)
Distributions of S corporation (254)
Net cash provided by financing
activities 5,516 9,532
Effect of exchange rate changes on cash 1,436 (2,426)
Increase in cash and cash equivalents 51,569 17,706
Cash and cash equivalents:
Beginning of period 81,056 72,026
End of period $132,625 $ 89,732
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands except per share data)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. As
permitted by the rules of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, these notes are
condensed and do not contain all disclosures required by
generally accepted accounting principles. In the opinion of
management, these financial statements contain all adjustments
(consisting of only normal recurring adjustments, unless
otherwise noted) necessary to present fairly the Company's
financial position, results of operations and cash flows as of
the dates and for the periods indicated. These financial
statements should be read in conjunction with the Consolidated
Financial Statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
(2) Pro Forma Net Income and Pro Forma Net Income Per Share
In 1997, the Company acquired Computer Aided Systems for
Engineering ("CASE") which was an S corporation for income tax
reporting purposes prior to the acquisition. Pro forma net
income and pro forma net income per share reflect the tax expense
that would have been reported if CASE had been a C corporation.
(3) Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130
("SFAS" No. 130), "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive
income and its components in the consolidated financial
statements. Comprehensive income includes net income as well as
other changes in shareholder equity, except changes resulting
from shareholders' investments in the Company and distributions
to shareholders. SFAS No. 130 is effective for the Company's
reporting periods beginning in 1998 with comparative amounts for
prior years. Comprehensive income, net of tax, is reported on
the consolidated statement of operations.
(4) Earnings Per Share
Basic earnings per common share and dilutive earnings per share
are computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period,
respectively. Dilutive common equivalent shares are calculated
using the treasury stock method and consist of dilutive stock
option grants.
The reconciliations of amounts used for the basic and diluted
earnings per share calculations are as follows:
<PAGE>
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income (numerator) $10,338 $12,752 $25,779 $13,218
Weighted average
outstanding:
Common shares (basic
denominator) 36,270 35,433 36,095 35,138
Dilutive employee stock
options 956 1,752 2,309 1,273
Common stock and dilutive
common stock equivalents
(diluted denominator) 37,226 37,185 38,404 36,411
Earnings per share:
Basic $ .29 $ .36 $ .71 $ .38
Diluted $ .28 $ .34 $ .67 $ .36
</TABLE>
(4) Earnings Per Share - Continued
Options to purchase 1,625 and 560 shares of common stock for the
three and nine month periods ended at September 30, 1998 and
1,084 shares of common stock for the three and nine month periods
ended September 30, 1997, respectively, were not included in the
computation of dilutive earnings per share because the options'
exercise price was greater than the average market price of
common shares for the periods.
(5) Taxes
Based on the Company's historical tax position, as well as 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 over the next four years, a
valuation allowance is provided against deferred tax assets when
the Company believes it is more likely than not that the deferred
tax assets will not be realized. These factors cause the
effective tax rate to differ from the expected statutory rate.
Additionally, in the first quarter of 1998, the Company and the
Internal Revenue Service settled an audit of the Company for the
years 1987 through 1994, and agreed that the Company was due a
refund of $1,751 in tax relating to the (previously disclosed)
restatement of its 1994 and prior financial statements. This
refund was received and recorded as a benefit to tax expense
during the period ending March 31, 1998.
(6) New Accounting Pronouncements
Revenue Recognition
In August 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," which is effective for
transactions occurring in the Company's fiscal year which began
January 1, 1998. In March 1998, the AICPA issued SOP 98-4,
"Deferral of the effective date of a provision of SOP 97-2". SOP
98-4 allows companies to defer adoption of certain provisions of
SOP 97-2 related to vendor-specific objective evidence. The
adoption of SOP 97-2 in the quarter ended March 31, 1998 did not
have a significant impact on the Company's financial condition or
results of operations.
Segments of an Enterprise
In June 1997, FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which
establishes standards for the way that public companies report
selected information about operating segments. It also includes
standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 applies to
the Company's annual reporting for 1998 and quarterly reports
thereafter. The Company is evaluating the effects of this
standard on its reporting of financial information.
Derivatives and Hedging Activities
In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
including forward foreign exchange contracts, and for hedging
activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The
accounting for gain and losses from changes in the fair value of
a particular derivative will depend on the intended use of the
derivative. SFAS No. 133 is effective for the Company's financial
reporting beginning in 2000 and cannot be applied retroactively
to financial statements of prior periods. The Company enters
into forward foreign exchange contracts to hedge certain foreign
currency denominated receivables. The Company has not determined
the impact that SFAS No. 133 will have on the results of its
operations or financial position.
(7) Subsequent Event
In October 1998, the Company announced a definitive agreement to
acquire privately-held Imageware Corporation ("Imageware") of Ann
Arbor, Michigan for approximately $31 million in cash. Imageware
is a developer of free form surface modeling and 3D inspection
software tools for the automotive, aerospace and consumer
products industries. The Company plans to integrate Imageware's
surfacing technologies into I-DEAS software, while improving its
stand-alone capabilities and links to other CAD systems. The
transaction, which will be accounted for as a purchase, is
expected to be completed during the Company's fourth fiscal
quarter, subject to the approval of Imageware's shareholders.
The purchase price will be paid from the Company's present cash
balances. Upon closure, the Company expects to record a one-time
charge against earnings to write off in-process research and
development, which has no alternative future use and has not
reached technological feasibility. The amount of the charge is
not known at this time. The historic operating results of
Imageware are not material to the Company's consolidated
operations.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(in thousands)
Structural Dynamics Research Corporation is a leading supplier of
enterprise product development solutions through its suite of
Mechanical Design Automation ("MDA") software, Product Data
Management ("PDM") software and related services. The Company
provides software tools and related services to manufacturers
worldwide to optimize the entire product development process,
reducing cost while streamlining the development process and
managing product information. The Company markets its MDA
software under the brand name I-DEAS" and its PDM software under
the brand name Metaphase".
Certain statements in this Form 10-Q are forward looking and
involve risks and uncertainties, including the economic stability
of the Asia-Pacific region, the impact of competitive products
and pricing, the management of growth, and the other risks
detailed from time to time in the Company's Securities and
Exchange Commission reports. The Company's results could differ
materially from those results described herein. Forward looking
information should be evaluated in the context of these and other
factors some of which are described in more detail in "Factors
That May Affect Future Results".
Revenue
The Company's consolidated net revenue increased 17% and 12% for
the three and nine months ended September 30, 1998, compared to
the corresponding periods of 1997. Revenue growth was led by
strong sales of software maintenance and services in all major
geographic regions. For the three month period ended September
30, 1998 and 1997, revenue in North America accounted for 45% and
46%, Europe 32% and 34%, and Asia Pacific 23% and 20%,
respectively, of consolidated revenues. For the nine month
period ended September 30, 1998 and 1997, revenue in North
America accounted for 45% and 51%, Europe 33% and 30% and Asia
Pacific 22% and 19%, respectively. The Company expects the
international market to continue to account for a significant
portion of revenue in future periods.
Total software license revenue increased 9% for the three months
ended September 30, 1998 compared to the same period last year.
I-DEAS and Metaphase license revenue grew 8% and 12%,
respectively, for the three month period ended September 30,
1998. The growth was driven by orders from the automotive
industry and a $7 million I-DEAS sale to MTS Systems Corporation.
For the nine months ended September 30, 1998, I-DEAS and
Metaphase license revenue was approximately equal to the previous
year period. License revenue growth in Europe and Asia Pacific
offset declines in North America. The North America decline was
attributed to a few large, automotive orders in 1997 which did
not recur in 1998 to the same magnitude.
Software maintenance and service revenue increased 25% to $57,933
for the three months ended September 30, 1998, and 24% to
$164,758 for the nine months ended September 30, 1998, compared
to the corresponding periods of last year. The growth was due to
more maintenance contracts and implementation engagements being
generated from a larger, worldwide customer base. Services
revenue growth remained the strongest in Europe due to large
implementation projects for I-DEAS and Metaphase license
customers.
Expenses
The costs of revenue consists principally of the staff and
related costs associated with the generation and support of
software service revenue, amortization of capitalized software
construction costs, royalty fees paid to third parties under
licensing agreements and the cost of distributing software
products. The cost of licenses increased 19% for the three
months ended September 30, 1998, to 18% of license revenue
compared to 16% of license revenue for the corresponding 1997
period. For the nine months ended September 30, 1998, the cost
of licenses increased 23% to 19% of license revenue compared to
15% of license revenue for the corresponding 1997 period. The
relative and absolute increase from the prior year periods was
primarily due to increased royalty fees. The cost of services
and maintenance represented 57% and 55% of the associated revenue
for the three and nine months ended September 30, 1998, compared
to 53% for the corresponding 1997 periods. Cost of services and
maintenance increased, particularly in Europe, due to the hiring,
training, labor and third party consulting expenses associated
with expanding resources to meet the growing demand for software
implementation, training services and post license sales support.
Selling and marketing expenses consist of the costs associated
with the worldwide sales and marketing staff, advertising and
product localization. Selling and marketing expenses increased
15% and 13% for the three and nine months ended September 30,
1998, respectively, from the corresponding 1997 periods. Selling
and marketing expenses represented 29% of revenue for the three
and nine months ended September 30, 1998 and for the
corresponding periods in 1997. The higher expense level was
primarily a result of increased headcount in the direct sales
force and incremental expenditures for new advertising and
marketing campaigns. Selling and marketing expenses during the
remaining months of 1998 are expected to increase because of
continued spending for the new advertising and marketing
campaigns and an increased level of sales staff.
Research and development expenses consist primarily of salaries,
benefits, computer equipment costs and facilities associated with
the product development staff, and exclude costs which are
capitalized in accordance with Statement of Financial Accounting
Standards No. 86. Research and development expenses increased
40% and 28% for the three and nine month periods ended September
30, 1998, respectively, compared to the corresponding periods in
1997. The increase in research and development expense for 1998
as compared to 1997 is primarily a result of increased headcount
of product developers. The expiration of certain customer funded
research and development projects also resulted in higher expense
for 1998 periods. Research and development expense excluded
capitalized internal software costs of $3,896 and $9,565 for the
three and nine months ended September 30, 1998, compared to
$3,239 and $7,697 for the corresponding periods in 1997. The
amount of capitalized software development cost may vary among
periods depending on the stage of development being performed on
future product releases. The Company expects to continue to
devote a substantial level of resources to product development.
Expenses (continued)
General and administrative expenses consist of costs associated
with the corporate, finance, legal, human resource and
administrative staffs. General and administrative expenses
increased to $4,503 for the three months ended September 30,
1998, compared to $3,835 for the three months ended September 30,
1997. These expenses increased to $13,186 for the nine months
ended September 30, 1998, compared to $12,899 for the nine months
ended September 30, 1997. General and administrative expenses
represent 4% of revenue for the three month periods ended
September 30, 1997 and 1998 and 5% of revenue for the nine month
periods then ended.
During the three months ended March 31, 1997, a one-time charge
of $20,850 was recorded to write off in-process research and
development acquired in the purchase of Metaphase Technology,
Inc. ("MTI") that did not have an alternative future use and had
not reached technological feasibility. The Company acquired the
remaining stock of MTI, and certain assets of Control Data
Systems, Inc.'s global PDM software sales and support business in
January 1997. The purchase price of approximately $33,000
included cash and a stock warrant. The acquisition was accounted
for using the purchase method.
Other income, net
Other income included a net gain of $2,745 from the September
1998 sale of certain equipment, customer consulting contracts and
customer support contracts associated with the Company's test
software business to MTS Systems Corporation ("MTS"). Under the
same agreement, the Company also sold a perpetual, exclusive
license to MTS for I-DEAS test software for $7,000. MTS assumed
responsibility for the continued development of test software and
for servicing the consulting and customer support contracts
acquired from the Company. The Company retained the right to
sell test software products and enhancements as provided by MTS.
Net cash inflow to the Company from the agreement was $8,809,
which was net of payments to MTS for pre- billed, customer
support contracts for which MTS assumed responsibility.
Other income included $2,590 received from insurance settlements
during the nine month period ended September 30, 1998.
Additionally, $670 of interest income received on a federal
income tax refund was recorded during the period ended March 31,
1998. Other income also increased due to more interest earned on
increased balances in interest-bearing accounts since last year.
Other income included $205 and $80 in 1998 and 1997,
respectively, for equity in earnings of ESTECH, a joint venture.
Taxes
In recent years, a substantial portion of deferred tax benefits
relating to temporary differences was offset by a valuation
allowance because of doubt regarding the ultimate realization of
the benefits. This caused the effective tax rate to differ from
the expected statutory rate. The factors, which necessitated the
establishment of a complete valuation allowance are not expected
to be entirely present in the future. The Company has begun a
process to reduce the valuation allowance over approximately a
two year time frame based on current facts and forecasted
circumstances. The Company will continue to monitor this
situation and adjust the valuation allowance as appropriate.
Comprehensive Income
The differences between net income and comprehensive income
(loss) were primarily due to unrealized gains and losses from the
translation of foreign subsidiaries' balance sheets into U.S.
dollars. Net foreign currency translation losses occurred in
1997 because the U.S. dollar strengthened against the foreign
currencies of the subsidiaries. In 1998, these foreign
currencies gained relative to the U.S. dollar which resulted in
translation gains.
Liquidity and Capital Resources
The Company generated $63,144 of cash from operating activities
during the nine months ended September 30, 1998. At September
30, 1998, the Company had cash and investments of $159,033 as
compared to $109,011 at December 31, 1997. The Company's net
working capital was $140,416 at September 30, 1998. In addition,
the Company has an unused unsecured bank line of credit of
$15,000. During 1998, the Company paid $894 to completely
extinguish a long-term note, which it assumed in the 1997
acquisition of CASE. The Company does not have any long-term
debt or current commitments for material capital expenditures,
other than the acquisition of Imageware Corporation.
In September 1998, the Company's Board of Directors approved a
stock repurchase program. The Company may purchase up to three
million shares of its own stock in the open market at
management's discretion. The purchases will be funded from
available working capital and used to offset the issuance of
shares under existing employee stock plans.
The existing sources of liquidity and funds anticipated to be
generated from operations are expected to provide adequate cash
to fund the Company's projected requirements for the foreseeable
future.
Acquisition of Imageware
In October 1998, the Company announced a definitive agreement to
acquire privately-held Imageware Corporation ("Imageware") of Ann
Arbor, Michigan for approximately $31 million in cash. Imageware
is a developer of free form surface modeling and 3D inspection
software tools for the automotive, aerospace and consumer
products industries. The Company plans to integrate Imageware's
surfacing technologies into I-DEAS software, while improving its
stand-alone capabilities and links to other CAD systems. The
transaction, which will be accounted for as a purchase, is
expected to be completed during the Company's fourth fiscal
quarter, subject to the approval of Imageware's shareholders.
The purchase price will be paid from the Company's present cash
balances. Upon closure, the Company expects to record a one-time
charge against earnings to write off in-process research and
development that has no alternate future use and has not reached
technical feasibility. The amount of the charge is not known at
this time. The historic operating results of Imageware are not
material to the Company's consolidated operations.
Factors That May Affect Future Results
The historical results of operations and financial position of
the Company are not necessarily indicative of future financial
performance. The Company's results and forward-looking
statements are subject to certain risks and uncertainties,
including but not limited to those discussed below that could
cause future results to differ materially from those projected.
Market Growth
The Company derives most of its revenues from selling software
products and services to the high-end users of the product design
markets. Market growth and the Company's ability to match
resource levels with market growth rates will directly impact its
future operating results. In recent months, actual market growth
rates for high-end, MDA license sales within North
Factors That May Affect Future Results (continued)
America deteriorated relative to beginning of the year forecasts.
MDA market growth may have slowed due to preferences among new
users for lower priced, mid-range products and strong capacity
within the installed base of seats already sold. If MDA market
growth rates continue to decline, the Company's license revenue
growth, as well as maintenance and services revenue growth, may
be less than previously expected.
Expense Management
The Company's operating expense levels are planned, in part, on
expected revenue growth. The Company's expense levels are
generally committed in advance and, in the near term, relatively
small portions of the Company's expenses vary with revenue.
Accordingly, future operating results will be impacted by the
Company's ability to convert operating outlays into expected
revenue growth at profitable margins. If future revenues are
less than expected, net income may be disproportionately affected
since expenses are relatively fixed. In the recent months, the
Company has taken initiatives to expand, train and reorganize its
sales infrastructure. Future results could be affected by the
ability of the expanded sales infrastructure to generate expected
revenue growth.
Product Distribution
Besides its own sales force, the Company relies on distributors,
representatives and value-added resellers to market a significant
portion of its products. The loss of a major customer or a
reduction in orders from a major customer, distributor,
representative or value-added reseller, could have a significant
impact on 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
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. The Company usually ships software licenses
within one to two weeks after receipt of a customer order.
Typically, orders exist at the end of a quarter which have not
been shipped; however, the value of such orders is not indicative
of revenue results for any future period.
Competition
The software industry is highly competitive. The entire industry
may experience pricing and margin pressure which could adversely
affect the Company's operating results and financial position.
The Company's success is dependent on its ability to continue to
develop, enhance and market new products to meet its customers'
sophisticated needs within competitive pricing structures and in
a timely manner. As product development cycles become shorter,
product quality, performance, reliability, ease of use,
functionality, breadth and integration may be impacted.
Therefore, customer preference for the Company's new products
cannot be assured. 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 product development partners.
International Business
A significant portion of the Company's revenues is from
international markets. 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
has invested sizable resources in the Asia Pacific region,
particularly in Japan and South Korea. Economic instability in
this region could lead to an adverse impact on the Company's
operation results and financial position.
Factors That May Affect Future Results (continued)
Year 2000
The Year 2000 causes uncertainties about whether computer systems
and other equipment with date sensitive hardware or software,
will appropriately recognize and process dates beyond 1999. The
failure of software programs, computer hardware and equipment in
this regard could result in business interruptions and adversely
affect the Company's operating results. The Company has taken
measures to address its exposure to these potential date-related
failures.
The Company's major exposures to date-related failures include
product liability for the software programs which it markets.
The Company's primary software offerings, (I-DEAS Master Series
and Metaphase Enterprise), store dates in a full, four-digit
format. The Company has conducted extensive testing of these
software offerings, including integrated third party
functionality, for Year 2000 compliance ("compliance"). Based on
testing to date, I-DEAS Master Series 5 and Metaphase Enterprise
2.3 and their respective subsequent releases, properly recognize
and process dates beyond 1999 when the underlying operating
system of the host machine provides full date information to the
software. The Company has tested, and will continue to test, its
code for new products and enhancements to ensure compliance in
future software releases. Potential causes of failure will
continue to be rectified in a timely manner. Compliance of
product versions prior to I-DEAS Master Series 5 and Metaphase
Enterprise 2.3 is not completely known; however, if there are
issues of non-compliance, current customers of such products can
upgrade to achieve Year 2000 compliance. While the software
products were developed to be compliant, customizations and
modifications to the products are the responsibilities of the
customer and may not necessarily be compliant. To date, the
Company is not aware of any customer customizations or
modifications which result in significant date-related failures
of otherwise compliant software.
The Company relies on third parties for telecommunications,
electricity, banking, shipping and other essential business
operations. Additionally, its information systems depend on
computer hardware, software, and other equipment also supplied by
third parties. To reduce the uncertainty and mitigate the
consequences of the Year 2000, the Company has adopted a Year
2000 conversion approach with five basic phases: Awareness,
Assessment, Renovation, Validation, and Implementation. The
approach is being applied throughout the Company and is in
differing phases among areas of exposure. The Company is in the
process of identifying the critical suppliers of services and
systems and assessing which, if any, areas pose significant risks
of business interruption. So far, no significant deficiencies
have been identified. The Company's enterprise management
information system, SAP R/3, is Year 2000 compliant based on
representations from its supplier, SAP AG.
At this time, the Company expects the conversion to Year 2000
compliance to be completed in 1999. The total cost of any
modifications necessary to achieve compliance is not expected to
be material to operating results. The Company's policy, in
accordance with Generally Accepted Accounting Procedures, is to
expense as incurred the cost of maintenance and modification to
existing systems, and to capitalize the cost of any new software
or hardware and amortize that cost over the assets estimated
useful lives.
While the Company has taken measures to reduce the risk of date-
related failures, it cannot eliminate the potential for business
interruption or product failure due to third party non-
compliance. Additionally, Year 2000 interruptions in the
Company's customer base could reduce or delay sales. With respect
to contingency plans, the Company has not developed contingency
plans at this time to handle significant failures. The Company
will address contingency planning in 1999 for the most reasonably
likely worst case scenarios.
Factors That May Affect Future Results (continued)
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the
European Union (the "participating countries") are scheduled to
establish fixed conversion rates between their existing sovereign
currencies (the "legacy currencies") and the euro currency,
adopting the euro as their common legal currency on that date.
The legacy currencies are scheduled to remain legal tender in the
participating countries as denominations of the euro between
January 1, 1999 and January 1, 2002. During this transition
period, public and private parties may pay for goods and services
using either the euro or the participating country's legacy
currency on a "no compulsion, no prohibition" basis whereby
recipients must accept euros or the legacy currency as offered by
the payor. A currency translation process known as triangulation
will dictate how legacy currencies will be converted to the euro
and other legacy currencies. Beginning January 1, 2002, the
participating countries will issue new euro-denominated bills and
coins and replace the legacy currencies as legal tender in cash
transactions by July 1, 2002.
Because the Company conducts a significant portion of its
business in Europe, including subsidiaries in six euro
participating countries, its business and operations will be
effected by the euro conversion. Management is addressing the
euro conversion, but its impact on future operating results is
uncertain. Management expects the conversion to increase cross-
border competition for its products within Europe due to easier
price transparency for customers. While management expects the
total unit price of product and taxes charged to European
customers to converge over time, the impact on the total revenues
and the mix of revenues among its European subsidiaries is
uncertain. Additionally, increased cross-border competition
could effect the Company's labor cost and eventually its
allocation of resources within Europe.
The Company is implementing an upgrade to its management
information system which includes the ability to simultaneously
record transactions in euros, perform the prescribed currency
conversion computations and convert legacy currency amounts to
euro. The impact of the conversion on the Company's currency
risk and taxable income is not expected to be significant. In
regard to contracts denominated in legacy currencies, management
has not identified any third party or customer contracts whose
performance might be considered unenforceable due to a currency
substitution. Management will continue to monitor for
significant contracts which may be void due to the conversion.
Stock Market Volatility
The trading price of the Company's stock, like other software and
technology stocks, is subject to significant volatility. 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's stock. In addition,
the Company's stock price may be affected by broader market
factors that may be unrelated to the Company's performance.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4. Rights Agreement between the Company and Harris Trust &
Savings Bank, dated August 10, 1998 (this exhibit is
incorporated herein by reference to the Company's report
on Form 8-K filed August 6, 1998).
27. Financial data schedule for the period ended
September 30, 1998, filed herewith.
(b) The Company filed a Form 8-K on August 6, 1998 to
report the adoption of a Shareholder Rights Plan that
replaced the Company's prior Shareholder Rights Plan which
expired at the conclusion of its ten year term. Like the
expired Plan, the new Plan grants the Company's
shareholders certain rights to purchase additional common
stock in the event of an unsolicited attempt to gain
control of the Company.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
STRUCTURAL DYNAMICS RESEARCH
CORPORATION
Date: November 11, 1998 By: /s/ Jeffrey J. Vorholt
Jeffrey J. Vorholt,
Vice President,
Chief Financial Officer and
Treasurer
* Pursuant to the last
sentence of General Instruction
G to Form 10-Q, Mr. Jeffrey J.
Vorholt has executed this
Quarterly Report on Form 10-Q
both on behalf of the
registrant and
in his capacity as its
principal financial and
accounting officer.
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