UNITED STATES
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, 1998
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 18, 1999, 35,642,423 shares of Common Stock were
outstanding. The aggregate market value of Common Stock held by
non-affiliates was $424,984,714 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, 1998.
Part I, Part II and Part IV
Registrant's definitive Proxy Statement dated April 1, 1999.
Part II, Part III and Part IV
PART I
Factors That May Affect Future Results
Information in this report may contain forward-looking
statements which are based on the estimates and assumptions of
management at the time such statements are made. Actual results
could differ materially from those disclosed in any forward-
looking statement as a result of risks and uncertainties, some of
which are described in more detail in the "Factors That May Affect
Future Results" section of Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which
is incorporated herein by reference to pages 23 through 31 of the
Company's 1998 Annual Report to Shareholders.
Item 1: Description of Business
General
Structural Dynamics Research Corporation (the "Company" or
"SDRC") is a leading developer and supplier of enterprise-wide, product
development software for mechanical design automation ("MDA") and
product data management ("PDM"). Customers use the Company's software
to develop mechanical products and manage information about their
products. The Company's MDA software is an integrated CAD/CAM/CAE
(computer-aided design, computer-aided manufacturing and computer-aided
engineering) solution which helps manufactures streamline product
development processes while reducing time and cost. The Company's
PDM software collects comprehensive information across product life
stages and readily distributes the information to users, allowing
companies to leverage their knowledge to develop products better and
faster. Complementing its software tools, the Company supports its
customers with training, software implementation and consulting
services through its professional services staff.
The Company's products and services are most valuable to
companies seeking to accelerate their time to market for new
products, in response to increased competition, while designing and
manufacturing mechanical products in accordance with specific quality
and cost criteria. A broad range of customers use the Company's
software tools and services with the highest concentration of
users in the automotive, electronics, industrial machinery and
aerospace industries.
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
CAD/CAM/CAE 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. In 1987, the Company made its initial
public stock offering.
In recent years, the Company has made business acquisitions to
expand its ability to develop and market new products to
customers. In 1992, the Company and Control Data Systems, Inc.
established Metaphase Technology, Inc. ("MTI") as a joint venture
company to develop PDM software. In January 1997, 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 June 1996, the Company completed the acquisition of Camax
Manufacturing Technologies, Inc. ("Camax") and its wholly owned
subsidiaries. Camax provided the Company technology for
computer-aided manufacturing software including computerized
numerical control machining operations. In 1997, the Company acquired
Computer Aided Systems for Engineering, Inc. which had been a third
party author of certain software drafting modules. The acquisition
provided SDRC with full control of its product development for
drafting and the opportunity to facilitate the creation of new
products. The Company acquired Imageware Corporation ("Imageware")
in November 1998. 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 SDRC's MDA
software, while improving its stand-alone capabilities. In 1998,
the Company acquired software from Altris Software, Inc. for the
creation of document management functionality within SDRC's PDM
software tools. Also in 1998, the Company established a relationship
with Engineering Animation, Inc. to create a virtual product
development manager ("VPDM") for customer release in 1999.
Products & Services
I-DEAS Product Suite
The Company's MDA software is registered under the trade name
I-DEAS Master Series (TM) and is utilized by many high profile, global
companies. I-DEAS Master Series is an integrated software
solution which allows developers to design, simulate, test and
manufacture product concepts faster than the time required using
stand-alone or partially integrated software tools. The I-DEAS
software is specifically designed to meet the needs of developers who
design products by using solid modeling technology. Developers
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 allows product development team
members to work concurrently on the same project sharing this common
master model. The master model can be accessed and understood by
representatives from a customer's management, marketing and
manufacturing functions. Using I-DEAS Master Series, the master model
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 evaluate manufacturability.
The I-DEAS Artisan Series (TM) was specifically created to
address the growing mid-price CAD market. It is also based on solid
modeling technology of I-DEAS Master Series. 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 Enterprise
SDRC also develops and markets Metaphase (TM) Enterprise(R) a
PDM software, which helps create, manage and control data associated
with product information as it evolves through the product life cycle.
Metaphase Enterprise software helps customers improve the way they
organize, share and access their product data. Product developers can
achieve fast, reliable access to the application used to create
product designs. Managers can accurately and reliably access
information about work-in-process, as well as, documentation of the
entire product life cycle. Metaphase Enterprise is a web enabled,
modular PDM system designed to provide the depth and breadth of
functionality customers require to meet current and future data
management needs. Metaphase Enterprise is compatible with
client/server environments with distributed design and engineering
departments.
Imageware Product Suite
Through its Imageware division, SDRC develops and markets a
suite of surfacing and design inspection software tools. Surfacer (TM) is
an advanced, three-dimensional, surface modeling software which assists
developers in improving the surface quality of products under design.
Surfacer reduces model development time by creating geometric dimensions
and performing analysis from physical parts, without computerized
descriptions.
Services
The Company provides customers with process automation and
implementation services, as well as, technical software support and
training for the software tools it markets. The Company has a worldwide
professional services staff with extensive knowledge of MDA technology,
engineering applications and development processes. By
incorporating industry-specific, best practices utilizing SDRC software
tools, the Company's service professionals assist customers in optimizing
their product development process and improving their product
design. In addition, advanced training and knowledge transfer can be
provided to customers to enable them to integrate and leverage their
MDA and PDM software investment. Advanced computer simulation methods
and in-depth application expertise are available for traditional or
highly specialized computer technologies, including design audits,
product design, troubleshooting and engineering process design.
Technical application engineers provide telephone "hotline"
support and on-site customer support to customers under
maintenance contracts. Customers under maintenance contract also receive
software enhancement versions released during the term of their
contract.
The Company provides basic training for each major software
package. Further 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 tools are available on the leading
engineering workstations using UNIX and Microsoft NT operating
systems. 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.
Product Development
The Company works closely with its customers to identify
their needs and define software enhancements to be incorporated into
SDRC products. The Company generally develops new functionality
internally, through its product development staff. The Company also
arranges with third party developers to provide specific functionality
through royalty arrangements and software purchase agreements.
Development of CAD/CAM/CAE and PDM technology is competitive
and advances can occur rapidly. There are no assurances that the
Company will be successful in developing new products and that new
products will achieve sufficient market acceptance. Research and
development expense were approximately $64,182,000, $49,415,000 and
$34,018,000 in 1998, 1997, and 1996, respectively.
Sales and Marketing
The Company markets its products and services through a
worldwide direct sales and support force. In addition, the Company
utilizes distributors, value-added resellers and other independent
representatives for its selling and marketing efforts. Telemarketing is
also used to sell maintenance contract renewals. Besides sales account
managers, the Company's sales force includes highly skilled engineers and
technical support personnel, capable of addressing the sophisticated
needs of customers. The Company has a large, diverse base of
customers. The Company has an established relationship with a
distributor in Japan, Information Services International - Dentsu
Ltd., which accounted for approximately 11%, 11% and 12% of the
Company's consolidated revenues in 1998, 1997 and 1996, respectively.
Revenues from the Ford Motor Company represented 13%, 14% and 11% of
consolidated revenue in 1998, 1997 and 1996, respectively.
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 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, or material to operating trends.
Competition
The market for the Company's software products is highly
competitive and the Company expects competitive pressure to increase
in the future. To remain technologically competitive, the Company
must continually enhance its existing software products and
pursue the development and introduction of new products. The
principal competitive factors for the enterprise product development
software and related services market, include product
functionality, product integration, hardware platform support,
ease of use, price, customer support, technical reputation and
size of installed customer base. Additionally, the Company's
employees are an important component of the SDRC's approach in
providing product development solutions to its customers. The
Company's success will depend in part on its ability to attract and
retain a work force whose skills are competitively recruited.
The Company competes against other MDA products including
the CATIA and SolidWorks products marketed by Dassault Systemes, the
Unigraphs and SolidEdge products marketed by Unigraphics Solutions,
Inc., and the Pro/ENGINEER and CADDS products marketed by
Parametric Technology Corporation. The Company also competes against
other PDM products such as, Windchill marketed by Parametric Technology
Corporation; MatrixOne and Sherpa Works marketed by Inso Corporation;
I/MAN, marketed by Unigraphics Solutions, Inc., products marketed by
SAP 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.
Employees
As of December 31, 1998, the Company had 2,366 full-time
employees, of whom 644 were engaged in research and development; 376 in
sales and marketing; 440 in technical support; 456 in services; and
450 in general management and administration.
Other Information
Segment and geographic information is included on pages 48 to 49
of the Company's Annual Report to Shareholders for the year ended
December 31, 1998, and is incorporated herein by reference.
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.
<TABLE>
Item 2: Properties
The following table sets forth certain information, as
of December 31, 1998, with respect to principal properties in which
the Company and its subsidiaries conduct their operations.
<CAPTION>
Space Used
In
Ownership Operations
Location Or Lease (Square
Feet) Principal Activities
<S> <C> <C> <C>
Cincinnati, Lease 221,000 Corporate headquarters, product
Ohio (expires development center, and
2011) administration facilities
Cincinnati, Lease 93,000 Sales, marketing and services
Ohio (expires offices
2007)
Dearborn, Lease 39,000 Product development center,
Michigan (expires customer support and training
2000) facilities
Minneapolis, Lease 37,000 Sales and marketing offices
Minnesota (expires and product development center
2000)
Minneapolis, Lease 27,000 Sales and marketing offices and
Minnesota (expires product development center
1999)
Eugene, Lease 22,000 Product development center
Oregon (expires
1999)
San Diego, Lease 21,000 Sales offices and training
California (expires facility
2004)
Frankfurt, Lease 19,000 Central Europe sales and
Germany (expires customer support office
1999)
Paris, Lease 18,000 Southern Europe sales and
France (expires customer support office
2002)
Tokyo, Lease 16,000 Customer support and services
Japan (expires office
2003)
Hitchin, Lease 15,000 European headquarters facility
England (expires
2017)
Seattle, Lease 12,000 Product development center,
Washington (expires customer support and training
2002) facilities
Ann Arbor, Lease 12,000 Product development center
Michigan (expires
1999)
Seoul, Lease 12,000 Sales and customer support
South Korea (expires office
1999)
Troy, Lease 10,000 Sales office
Michigan (expires
2000)
</TABLE>
Item 3: Legal Proceedings
The Company is not a party to any litigation other than
ordinary routine litigation incidental to its business. While the
outcome of these ordinary, routine legal matters cannot be predicted
with certainty, management does not believe that the outcome of any of
these legal matters will have a material adverse effect on the Company's
consolidated results of operations or consolidated financial position.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders
during the fourth quarter of 1998.
Additional Item: Executive Officers of the Registrant (at March 18, 1999)
Name Age Position
William J. 54 Chairman of the Board, President and Chief
Weyand Executive Officer
Robert M. 54 Executive Vice President and Chief
Nierman Operating Officer
John A. 40 Vice President, Secretary and General
Mongelluzzo Counsel
Jeffrey J. 46 Vice President, Chief Financial Officer
Vorholt and Treasurer
Mark C. 42 Vice President, Products Group
Goldstein
William A. 50 Vice President, Marketing
Carrelli
William A. 40 Vice President, Human Resources
Schwartz
Mr. Weyand has served as President and Chief Executive
Officer since he joined the Company in June 1997. He has served as
Chairman of the Board since March 1998. From April 1995 until June
1997, he was Executive Vice President of Measurex Corporation
where he had worldwide responsibility for all sales and customer
service operations. While at Measurex Corporation, Mr. Weyand had been
Senior Vice President of Worldwide Sales and Service from December 1994
to April 1995; President, North and South America from February to
December 1994; Senior Vice President, U.S. and Canada Sales and
Service from 1993 to February 1994; Senior Vice President, U.S. Sales
and Service from 1991 to 1993.
Mr. Nierman has served as Executive Vice President and Chief
Operating Officer since January 1998 and served as Vice
President, of the Company's Metaphase Technology Group from
February 1997 until January 1998. Prior to the acquisition of
Metaphase Technology, Inc. in January 1997 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
Systems, Inc.
Mr. Mongelluzzo has served as Vice President, Secretary and
General Counsel since October 1991. He joined the Company in May 1986
as Assistant Counsel and was elected Assistant Secretary in October 1986
and Secretary in December 1986.
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 to 1994, and by Cincinnati
Bell Information Systems, Inc. as Senior Vice President and Director,
1989 to 1991. Mr. Vorholt is a licensed Certified Public Accountant and
Attorney-at-Law.
Mr. Goldstein has served as Vice President, Products Group
since January 1998. From July 1997 until January 1998, he served as
Vice President, I-DEAS, Product Development. From December 1995 to
July 1997, he served as Vice President, SDRC Ford Program Office. Prior
to assuming that role, Mr. Goldstein was a Vice President in the
Company's Product Development group.
Mr. Carrelli was named an executive in February 1999. He has
served as Vice President, Marketing since April 1997. From 1993 to
April 1997, he served as Director of Major Accounts for the Company.
Mr. Schwartz joined the Company in March 1999 as Vice
President, Human Resources. From 1996 to March 1999, he was Vice
President, Human Resources, Americas Group for SAP Americas, Inc. where
he was responsible for all human resource activities encompassing
the United States, Canada and Latin America. From 1989 to 1996, he was
Director of Human Resources for PECO Energy Company.
PART II
Item 5: Market for Registrant's Common Equity and Related
Shareholder Matters
The Company's common stock trades on the Nasdaq Stock Market
under the symbol SDRC. Additional information, which appears on page 51
of the Company's Annual Report to Shareholders for the year ended
December 31, 1998, is incorporated herein by reference.
Item 6: Selected Financial Data
The selected financial data for the five years ended December
31, 1998, which appears on page 22 of the Company's Annual Report to
Shareholders for the year ended December 31, 1998, is incorporated
herein by reference.
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 23 to 31 of
the Company's Annual Report to Shareholders for the year ended December
31, 1998, is incorporated herein by reference.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Information regarding this item, which appears on pages 28 to 29
of the Company's Annual Report to Shareholders for the year ended
December 31, 1998, is incorporated herein by reference.
Item 8: Financial Statements and Supplementary Data
The Consolidated Financial Statements, Supplementary Data and
Report of Independent Accountants appearing on pages 32 to 51 of the
Company's Annual Report to Shareholders for the year ended December 31,
1998, are incorporated herein by reference and filed as part of
Exhibit 13. (The 1998 Annual Report to Shareholders is not to be deemed
filed as part of this Form 10-K except for portions thereof which are
expressly incorporated by reference.)
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
None.
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 herein by reference to the Company's definitive Proxy
Statement dated April 1, 1999 which relates to its May 6, 1999 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 are included in the Annual Report to Shareholders for the
year ended December 31, 1998, and incorporated herein by reference:
Consolidated Statement of Operations - Years ended December 31, 1998, 1997
and 1996.
Consolidated Balance Sheet - December 31, 1998 and 1997.
Consolidated Statement of Shareholders' Equity - Years ended
December 31, 1998, 1997 and 1996.
Consolidated Statement of Cash Flows - Years ended December
31, 1998, 1997 and 1996.
Report of Independent Accountants.
Notes to Consolidated Financial Statements.
The above information is filed with this Form 10-K as part of
Exhibit 13. (The 1998 Annual Report to Shareholders is not to be deemed
filed as part of this Form 10-K except for portions thereof which
are expressly incorporated by reference.)
a.2. Financial Statement Schedules
The following financial statement schedule of Structural
Dynamics Research Corporation and subsidiaries is filed within this
Form 10-K:
Schedule
II Valuation and qualifying accounts
The Report of Independent Accountants on the financial
statement schedule of Structural Dynamics Research Corporation and
subsidiaries appears immediately prior to Schedule II in this Form 10-K.
Financial statements of Estech Corporation in which the
Company owned an equity interest of 30% as of December 31, 1998, have
been omitted because the registrant's proportionate share of the income
or losses from continuing operations before income taxes, and total
assets of such company is less than 20% of the respective consolidated
amounts, and the investment in and advances to such company is
less than 20% of consolidated total assets.
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.
a.3. List of Exhibits:
3.01 Amended Articles of Incorporation of Registrant;
incorporated by reference to the Company's Registration Statement No.
33-16541, filed August 17, 1987. Amendments incorporated by reference to
the Company's Form 10-K for the year ended December 31, 1993 and
the Company's definitive Proxy Statement dated March 25, 1997.
3.02 Amended Code of Regulations of Registrant; incorporated by
reference to the Company's Registration Statement No. 33-16541, filed
August 17, 1987. Amendments incorporated by reference to the
Company's definitive Proxy Statement dated March 26, 1996.
4 Rights Agreement; incorporated by reference to the
Company's Form 8-K, filed on August 6, 1998.
10.01 Structural Dynamics Research Corporation Tax Deferred
Capital Accumulation Plan dated January 1, 1989; incorporated
by reference to the Company's Form S-8 registration statement No.
33-22136, filed July 10, 1991.
10.02 Structural Dynamics Research Corporation 1991 Employee
Stock Option Plan; incorporated by reference to the Company's
Form S-8 registration statement No. 33-41671, filed July 10, 1991.
Amendment incorporated by reference to the Company's Form S-8
registration statement No. 33-72328, filed April 27, 1993.
10.03 Structural Dynamics Research Corporation Stock Purchase
Plan; incorporated by reference to the Company's Form S-8 registration
statement No. 33-40561, filed May 15, 1991.
10.04 Structural Dynamics Research Corporation 1994 Long-Term
Stock Incentive Plan; incorporated by reference to the Company's
Form S-8 registration statement No. 33-58701, filed April 19, 1995.
Amendment to the plan is incorporated by reference to the
Company's definitive Proxy Statement dated March 26, 1996.
10.05 Structural Dynamics Research Corporation 1996 Directors'
Non-Discretionary Stock Plan; incorporated by reference to the
Company's Form S-8 registration statement No. 33-07365, filed July 1,
1996.
10.06 Acquisition Agreement; incorporated by reference to the
Company's Form 8-K effective January 22, 1997 pertaining to the
acquisition of Metaphase Technology, Inc.
10.07 Agreement of Merger and Plan of Reorganization;
incorporated by reference to the Company's Form 8-K, filed January
14, 1998, pertaining to the acquisition of Lookout Drafting, Inc.
and Computer Aided Systems for Engineering, Inc.
10.08 Incentive Compensation Plan; incorporated by reference to the
Company's Form 10-K for the year ended December 31, 1997.
10.09 Form of Severance Compensation Agreement contracted with
each named Executive of the Company; incorporated by reference
to the Company's Form 10-K for the year ended December 31, 1997.
10.10 Employment Agreement with William J. Weyand dated June 30,
1997; incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1997.
10.11 Non-Qualified Unfunded Deferred Compensation Plan for
outside directors of Structural Dynamics Research
Corporation; incorporated by reference to the Company's Form 10-K for
the year ended December 31, 1997.
10.12 Structural Dynamics Research Corporation Supplemental
Retirement Plan, effective January 1, 1998; incorporated by reference
to the Company's Form 10-Q for the period ended March 31, 1998.
10.13 Agreement of Merger and Plan of Reorganization pertaining to
the acquisition of Imageware Corporation; incorporated by reference to
the Company's Form 8-K filed December 4, 1998.
11 Statement regarding computation of per share earnings;
information regarding computation of per share earnings is included
on page 40 of the Company's Annual Report to Shareholders for the year
ended December 31, 1998.
13 Annual Report to Shareholders for the year ended December 31,
1998; portions of which are expressly incorporated by reference in this
Form 10-K and filed herewith.
21 Subsidiaries of the Registrant; filed herewith
23 Consent of Independent Accountants; filed herewith
27 Financial Data Schedule; filed electronically
b. Reports on Form 8-K
The Company filed a Form 8-K on December 4, 1998 to report its
acquisition of Imageware Corporation.
c. Exhibits as required by Item 601 of Regulation S-K
The Company hereby files within this Form 10-K, Exhibits in the List
of Exhibits.
d. Financial Schedules
The Company hereby files with this Form 10-K, the financial statement
schedule listed in item 14.a.2.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 5(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 22, 1999 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/William J. Weyand March 25, 1999 /s/John E. McDowell March 26, 1999
William J. Weyand (Date) John E. McDowell (Date)
Chairman of the Board, Director
President and Chief Executive Officer
(Principal Executive Officer)
/s/Jeffrey J. Vorholt March 22, 1999 /s/James W. Nethercott March 26, 1999
Jeffrey J. Vorholt (Date) James W. Nethercott (Date)
Vice President, Director
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/William P. Conlin March 30, 1999 /s/Arthur B. Sims March 26, 1999
William P. Conlin (Date) Arthur B. Sims (Date)
Director Director
/s/Gilbert R. Whitaker, Jr. March 26, 1999
/s/Bannus B. Hudson March 25, 1999 Gilbert R. Whitaker, Jr. (Date)
Bannus B. Hudson (Date) Director
Director
<TABLE>
Exhibit 13
SELECTED FINANCIAL DATA
Structural Dynamics Research Corporation
<CAPTION>
Year ended December 31
<S> <C> <C> <C> <C> <C>
(in thousands, except per share 1998 1997 1996 1995 1994
data)
Operating data:
Total revenue $403,025 $351,322 $285,256 $224,138 $185,358
Operating income (loss) $ 42,435 $ 37,059 $ 44,900 $ 28,355 $ (1,239)
Net income (loss) excluding
non-recurring
Charges (1) $ 38,902 $ 50,880 $ 38,148 $ 21,491 $(12,191)
Net income (loss) before
cumulative effect
of accounting change $ 35,672 $ 30,030 $ 38,148 $ (2,809) $ (8,295)
Net income (loss) $ 35,672 $ 30,030 $ 38,148 $ (2,809) $(12,191)
Common Share data:
Basic net income (loss) per
share $ .99 $ .85 $ 1.11 $ (.09) $ (.39)
Diluted net income (loss) per
share $ .93 $ .81 $ 1.05 $ (.09) $ (.39)
Average common and common
equivalent Shares 38,290 36,947 36,290 32,430 31,352
Balance sheet data:
Net working capital $108,487 $102,329 $ 68,574 $ 42,412 $ 31,322
Total assets $340,754 $293,196 $239,372 $207,673 $152,192
Long-term liabilities $ 7,872 $ 7,751 $ 9,281 $ 9,730 $ 5,640
Total shareholders' equity $215,774 $177,837 $130,547 $ 85,144 $ 76,414
Pro forma data: (2)
Net income (loss) $ 28,096 $ 36,632 $ (4,394) $(13,307)
Basic net income (loss) per share $ .80 $ 1.07 $ (.14) $ (.42)
Diluted net income (loss) per share $ .76 $ 1.01 $ (.14) $ (.42)
<PAGE>
<FN>
(1) Non recurring charges were $24,300 in 1995 for a shareholder,
class action lawsuit settlement, (See Note 8 to the consolidated
financial statements), $20,850 and $3,230 in 1997 and 1998,
respectively, for write-offs of purchased in-process research and
development. (See Note 2 to the consolidated financial
statements).
(2) Pro forma net income and pro forma net income per share
reflect the tax expense that would have been reported if Computer
Aided Systems for Engineering (an S corporation for income tax
reporting purposes prior to a pooling acquisition in December
1997) had been a C corporation. Beginning in 1998, the income on
activity associated with Computer Aided Systems for Engineering was
taxed at the Company's C corporation rates and
included in income tax expense.
</FN>
</TABLE>
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Structural Dynamics Research Corporation
(in thousands)
The following discussion and analysis should be read in conjunction with
Selected Financial Data and the Company's Consolidated Financial
Statements and accompanying notes. Certain statements in this report are
forward-looking statements that involve risks and uncertainties, which
could cause the Company's future results to differ from the
expectations described herein. Forward-looking statements should be
evaluated in the context of risk factors and uncertainties, some of
which are described in more detail in "Factors That May Affect Future
Results."
Overview
Structural Dynamics Research Corporation is a leading supplier of
enterprise product development solutions through its suite of
mechanical design automation ("MDA") software and product data
management ("PDM") software. The Company's software tools and
related services assist manufacturers worldwide in optimizing their
product development cycles by streamlining processes while managing
product information and reducing cost. The Company primarily markets its
MDA software under the brand name I-DEAS(TM) and its PDM software under
the brand name Metaphase(TM). The Company derives its revenue from
licensing software, selling maintenance contracts for license upgrade
rights and customer support services, and supplying fee based
customer services, such as training, consulting and implementation. The
Company devotes substantial internal resources to developing new
technology and expanding the scope of its software tools. The
Company also collaborates with third party developers to integrate
specific functionality into its software, providing development
solutions needed by the Company's customers. Over the past three
years, the Company acquired four other software development companies to
complement its ability to develop and market integrated software tools
for its customers.
Results of Operations
For 1998, the Company's consolidated net revenue increased 15% over 1997
to $403,025. Revenue growth was led by strong sales of Metaphase licenses,
software maintenance and services in all major geographic regions.
During the year, the Company invested substantial resources in key
initiatives to brand its trade names, grow its sales force, expand its
product development staffs and purchase technology. In 1998 and 1997,
the Company recorded non-recurring charges of $3,230 and $20,850 for
purchased in-process research and development associated with the
acquisition of Imageware Corporation and Metaphase Technologies,
Inc., respectively. Net income, excluding non-recurring charges, was
$38,902, $50,880 and $38,148 for 1998, 1997 and 1996,
respectively. The decline in the Company's profitability margins
in 1998 compared to the previous year is a result of its investment
initiatives and a larger proportion of revenue from services, which
are more cost intensive than sales of software licenses.
Revenue
The revenue from software licenses grew 3% in 1998 after growing 12% and
17% in 1997 and 1996, respectively. The smaller growth rate is due to
lower sales in North America of I-DEAS licenses. The procurement
rate of new licenses by a significant U.S. customer leveled in
1998 after major purchases in 1996 and 1997. I-DEAS license growth
in Europe and Asia Pacific virtually offset declines in North America.
Revenues from the sale of Metaphase licenses were strong, growing 27%
in 1998. The Metaphase growth was driven by large orders from automotive
and aerospace industry leaders.
Software maintenance and services revenue was $227,888, $180,595 and
$132,198 in 1998, 1997 and 1996, respectively. Software maintenance and
service revenue accounted for 57%, 51% and 46% of consolidated net revenue
in 1998, 1997 and 1996, respectively. The growth and larger proportion
of total revenue reflect the increased number of software licenses
installed worldwide over the last two years. As the installed
base expanded, contracts for maintenance support and services
increased. Revenue growth was the strongest in Europe due to large
implementation projects for I-DEAS and Metaphase license customers.
Of consolidated net revenue, North America accounted for 45%, 49% and
48%; Europe, 34%, 30% and 28%; and Asia Pacific, 21%, 21% and 24% in
1998, 1997 and 1996, respectively. The Company expects that the
international market will continue to account for a significant
portion of total revenue in future periods. Revenue from the sale of
Metaphase licenses, maintenance and services accounted for 24% of
consolidated net revenue in 1998. In 1999, the Company expects total
Metaphase revenue to become a larger percentage of consolidated net
revenue.
Cost of Revenue
Cost of revenue consists principally of the staff and related costs
associated with the generation and support of software service
revenue, amortization of capitalized software costs, royalty fees paid
to third parties under licensing agreements and the cost of
distributing software products. The total cost of revenue was
$155,936, $120,444 and $80,499 for 1998, 1997 and 1996, respectively.
The cost of licenses represented 18% of license revenue for 1998 and 15%
for 1997 and 1996. The cost increased as a percent of revenue primarily
due to higher fees paid to third party developers. The cost of
services and maintenance represented 55%, 53% and 44% of the associated
revenue for 1998, 1997 and 1996, respectively. Relative to the
associated sales, cost of maintenance and services increased primarily due
to the hiring, training and integration cost associated with expanding
the workforce to meet the growing demand for software implementation,
training and customer support. Europe accounted for the largest
increase, growing services and customer support headcount approximately
40% in 1998. Compared to 1996, the Company allocated more fixed
facility and common overhead expenses to the cost of services and
maintenance in 1998 and 1997 due to the significant growth of the
implementation and customer support workforces.
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 were $119,204, $105,756 and $109,700 in
1998, 1997 and 1996, respectively. These amounts represented 30%, 30%
and 38% of total revenue for 1998, 1997 and 1996, respectively. The
dollar increase in 1998 selling expenses over 1997 was primarily a result
of advertising and an expanded sales force. During 1998, the Company
initiated an advertising campaign to brand its trade names and slogans.
Additionally, the Company increased the number of its sales and sales
support personnel by approximately 25% from September 1997. The 1996
selling expense as a percentage of revenue was comparatively higher due
to non-recurring bad debts, special commission programs and
advertising on a lower base of revenue. While the Company expects
selling and marketing expenses to increase in 1999, the expenses may be
a slightly lower percentage of total revenue.
Research and Development Expenses
Research and development expenses consist primarily of salaries,
benefits, computer equipment costs and facilities associated with the
product development staff. It excludes costs which are capitalized in
accordance with Statement of Financial Accounting Standards No. 86.
Research and development expense increased to $64,182 in 1998 from
$49,415 in 1997 and $34,018 in 1996, representing 16%, 14% and 12% of
total revenue for 1998, 1997 and 1996, respectively. The increases
were primarily due to sequential increases in product development
staff, including the acquisition of Metaphase Technology, Inc.
in 1997. The Company was reimbursed $2,775 and $7,153 of product
development costs by other companies in 1998 and 1997, respectively.
Research and development expenses also excluded capitalized internal
software costs of $13,890, $12,957 and $9,679 for 1998, 1997 and
1996, respectively. The increase in capitalized costs reflected the
higher level of development staff and timing differences for the
release of new products among the three years. Capitalized amounts
represented 18%, 21% and 22% of gross research and development cost
in 1998, 1997 and 1996, respectively. The relative amounts of
capitalized software development cost vary among periods depending on
the stage of development being performed on future product
releases. The Company expects research and development costs to
increase in 1999 but remain stable as a percent of total revenue.
General and Administrative Expenses
General and administrative expenses consist of costs associated with the
executive, finance, legal, human resource and administrative staffs.
General and administrative expenses were $18,038, $17,798 and $16,139
in 1998, 1997 and 1996, respectively. The increases were primarily a
result of a larger workforce needed to support the Company's growth.
General and administrative expenses represent 4%, 5% and 6% of total
consolidated revenue for 1998, 1997 and 1996, respectively. The
Company expects general and administrative expenses to increase but
remain stable as a percent of total revenue in 1999.
Acquisitions and purchased in-process research and development
In November 1998, the Company acquired all outstanding stock of
privately-held Imageware Corporation ("Imageware") for approximately
$31,000 in cash, which was paid from the Company's existing cash
balances. 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 was accounted for as a purchase and the Company recorded
goodwill of approximately $27,600. The Company recorded an in-process
research and development charge of $3,230 for incomplete technology
obtained in the acquisition. The value of the incomplete technology was
based on the income approach using projected net cash inflows beginning
in late 1999 and discount rates of 17% to 24%. The incomplete technology
includes a surface-modeling project for possible future releases. At the
time of acquisition, the technology had not reached technological
feasibility within the Company's integrated products and did not have
an alternative future use. The surface-modeling project was estimated
to be approximately 95% complete. Over the next two years, the
Company expects to complete the surface-modeling project and
integrate Imageware technology into I-DEAS. Completing the
surface-modeling project is estimated to cost $3,000 in 1999.
The Company and Control Data Systems, Inc. ("CDSI") formed Metaphase
Technology, Inc. ("MTI") as a joint venture in 1992 to develop PDM
software solutions for manufacturing companies. In January 1997, the
Company acquired the remaining stock of MTI and certain assets of
CDSI's global PDM software sales and support business. The purchase
price of approximately $33,000 included cash and a stock warrant. The
acquisition was accounted for as a purchase. The acquisition included
the purchase of incomplete technology that had not reached technological
feasibility and did not have an alternative future use. Accordingly, the
Company recorded a one-time charge of $20,850 to write off in-process
research and development. The value of the incomplete technology was
based on the income approach using projected net cash inflows
beginning in 1998 and a 19.5% discount rate. The incomplete
technology included projects for web access, document management and
other functionality primarily related to future releases of Metaphase,
after Metaphase Enterprise 2.3. The Company spent approximately
$8,000 in 1997 to complete these and other projects for Metaphase 3.0
which was released in January 1998.
In December 1997, the Company acquired all of the outstanding stock of
two privately held companies doing business together as Computer Aided
Systems for Engineering ("CASE") by issuing one million, five hundred
thousand shares of common stock having an aggregate market value of
approximately $25,000. The acquisition was accounted for as a
pooling-of-interests, and accordingly, all prior periods were
restated to include the results of CASE. CASE had been a third party
developer of drafting software for the Company since 1984.
In June 1996, the Company acquired Camax Manufacturing Technologies, Inc.
("Camax") by issuing nine hundred sixty-seven thousand shares of common
stock having a market value of $30,000 in exchange for 100 percent
ownership of Camax common stock. The acquisition was accounted
for as a pooling-of-interests, and accordingly, all prior periods were
restated to reflect Camax results. Camax provides computer-aided
manufacturing 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.
Interest and other income, net
Interest income was $7,655, $5,201 and $4,593 for 1998, 1997 and
1996, respectively, and increased sequentially over the past three
years due to higher levels of interest bearing cash and securities held
by the Company. Additionally, $670 of interest income received on a
federal income tax refund was recorded in 1998.
In 1998, other income included a net gain of $2,745 from the 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 continual
development of the 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. Cash inflow to the Company from the agreement was net of
payments to MTS for pre-billed, customer support contracts for which MTS
assumed responsibility. Also, in 1998, other income included $2,590
received from insurance settlements related to damages incurred by the
Company in 1995 from a shareholder, class action lawsuit.
Income Taxes
The Company recorded income tax expense of $19,551, $11,509 and
$8,636 in 1998, 1997 and 1996, respectively. In 1997 and 1996, 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 has not been 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. In 1998, the
Company's provision for income taxes also included a significant charge
for deferred income tax expense. While the Company is still in an
alternative minimum tax position, its North American operations are
now sufficiently profitable that it began utilizing a portion of its
deferred tax assets.
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 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 during
future years based on current facts and forecasted circumstances.
The Company will continue to monitor this situation and adjust the
valuation allowance as appropriate. As of December 31, 1998, $14,687 of
the valuation allowance of $27,199 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.
Pro forma income tax expense reflects the income tax expense that
would have been reported if CASE (an S corporation for income tax
reporting purposes prior to the acquisition) had been a C corporation for
the years ended December 31, 1997 and 1996.
Comprehensive Income
Comprehensive income was $37,572, $26,083 and $38,598 in 1998, 1997 and
1996, respectively. The differences between net income and
comprehensive income 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
As of December 31, 1998, the Company had $122,305 in cash, cash
equivalents and liquid investments. The Company's current assets
totalled $225,595 and the Company had no material borrowings. The
Company also has an unsecured bank line of credit of $15,000.
Cash flows generated from operations increased to $80,212 for 1998
compared to $62,981 and $36,593 for 1997 and 1996, respectively. For
1996, net operating cash flow, excluding $17,600 paid for the class
action litigation settlement, was $54,193. Operating cash flows have
increased due to higher net incomes and in 1998, an improved rate of
customer collections relative to the sales level. Operating cash
flows also vary among years due to normal variations in the timing of
operating disbursements and customer receipts.
The Company used $51,831, $55,261 and $34,278 of cash for investing
activities in 1998, 1997 and 1996, respectively. Cash was used
primarily for business acquisitions, software development and
equipment purchases. The Company paid net cash of approximately
$30,682 and $29,689 in the acquisitions of Imageware and MTI in 1998 and
1997, respectively. The Company used cash of $17,140, $13,006 and
$9,825 to construct and acquire software code in 1998, 1997 and 1996,
respectively. Also, the Company added equipment, exclusive of
acquisitions, of $12,125, $13,640 and $14,290, respectively in 1998, 1997
and 1996, primarily for furniture and computers to accommodate the
increase in employee headcount.
Net cash used by financing activities was $10,680 in 1998 and
included $15,954 to purchase the Company's own common stock and
$1,753 to retire bank debt acquired from purchased companies. Net cash
from financing activities was $5,275 and $4,519 during 1997 and 1996,
respectively, and reflects proceeds from the Company's stock option
programs. Financing activities included cash distributions to CASE
shareholders prior to the Company's acquisition of CASE in December
1997.
In September 1998, the Company's Board of Directors approved a stock
repurchase program authorizing the Company to purchase up to 3,000
shares of its own stock in the open market at management's
discretion. Through December 31, 1998, the Company had purchased a
total of 925 shares. The repurchase program is being funded from
available working capital and is intended to offset the issuance of
shares under the existing employee stock plans.
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 Company has
no current commitments for material capital expenditures. The Company
may use portions of its cash and investments to acquire additional
companies or technology that is complementary to its product
offerings. The Company has never paid a cash dividend and intends to
continue its policy of retaining earnings to finance future growth.
Recent 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 was 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" which allows companies to defer adoption of
certain provisions of SOP 97-2 related to vendor-specific objective
evidence. In December 1998, the AICPA issued SOP 98-9 "Modification
of SOP 97-2" to readdress vendor-specific objective evidence. The
Company's adoption of SOP 97-2 in 1998 and the issuance of SOP 98-4
and SOP 98-9 did not have a significant impact on the Company's financial
condition or results of operations.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("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. The Company enters into forward foreign exchange
contracts to hedge certain foreign currency denominated receivables. SFAS
No. 133 will be effective for the Company's financial reporting beginning
in 2000 and cannot be applied retroactively to financial statements of
prior periods. It will require entities to 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. The Company does
not expect the eventual adoption of SFAS No. 133 to have a material
impact on the results of its operations or financial position.
Market Risk
The Company faces financial risk to changes in foreign currency
exchange rates due to foreign denominated balances related to its
Asian and European operations. Historically, using forward foreign
exchange contracts, the Company has hedged currency exposures
associated with intercompany balances denominated in foreign
currencies. The Company's hedging activity is intended to offset the
effect of currency fluctuations on these balances. The Company does not
engage in trading or speculative currency transactions. The Company's
outstanding forward foreign exchange contracts mature within 90
days and did not have a material impact on the Company's operating
results or financial position. Movement of exchange rates is not
expected to have a material impact on the Company's financial results.
Short-term forward contracts to sell foreign currencies at December 31,
1998:
Forward Contract U.S. Contract
Dollar Rate
French franc 3,500 5.60
Korean won 1,800 1,225.04
Japanese yen 1,500 115.00
German mark 1,500 1.67
Swedish krona 1,500 8.10
Italian lira 1,500 1,654.53
Netherland
guilder 1,200 1.88
Swiss franc 1,100 1.38
Spanish peseta 600 141.84
British pound 600 .60
The Company also faces exposure to changes in interest rates. The
Company has a portfolio of marketable securities consisting of U.S.
Treasury and U.S. Government agency obligations. These securities are
classified as available for sale, and consequently are recorded at fair
market value with unrealized gains or losses reported as a separate
component of stockholder's equity. Given the short maturities and
investment grade quality of the portfolio, the interest rate
exposure is not considered material. As a result, the Company does not
hedge interest rate exposures.
The following table presents expected cash flows from market risk
sensitive financial instruments over the next five years. These
financial instruments are denominated in U.S. dollars and are not held
for the purpose of trading.
Interest rate sensitive marketable securities at December 31, 1998:
Fair Contractual Maturity
Value 1999 2000 2001 2002 2003 thereafter
Fixed rate
securities 21,724 11,715 9,000 961
Weighted
average
interest rate 6.26 5.66 5.58
The carrying amounts reflected in the consolidated balance sheets for
cash, cash equivalents and accounts receivable approximate fair
market value due to the short maturities of these instruments. The
values represent estimates of expected possible value and are subject to
potential credit risk.
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. For 1998, actual market growth rates for high-end,
MDA license sales within North 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, is
likely to slow as well.
Resource Management
The Company invests resources in product development, selling,
marketing and customer service opportunities with the expectation of
revenue growth and incremental earnings. The Company's operating
expense levels are planned, in part, on expected revenue growth, and the
expense levels are generally committed in advance. In recent months,
the Company has expanded its sales infrastructure and increased
the number of software product developers. Additionally, certain
technologies obtained in the Imageware acquisition will require
substantial investment to meet customer needs. Since expenses are
relatively fixed in the near term, future operating results will be
impacted by the Company's ability to convert invested outlays into
expected revenue growth at profitable margins.
Competition
The product development software industry is highly competitive.
Companies compete based on functionality, integration, scalability,
customer support, market timing, price and other factors. Some
competitors have focused their efforts to develop software native to the
Microsoft Windows platform. While the Company's software products
are available for a variety of vendor platforms, including Windows, they
currently do not provide user interfaces or linking functionality
native to Windows applications. Customer preferences for the Company's
products, including platform choices, cannot be assured. 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. Consequently, the Company relies on highly skilled
technical, sales and other key employees who are competitively
recruited within the software industry. Additionally, the Company
relies, to a lesser degree, on third parties for development.
Failure to attract and retain key personnel and maintain important
third party relationships, could have an adverse impact on future
operating results. Also, the entire industry may experience pricing and
margin pressure which could adversely affect the Company's operating
results. The Company's success also depends, in part, on its ability to
protect the intellectual property rights of its products and brand names.
Product Distribution
Besides its own sales force, the Company relies on distributors,
representatives and value-added resellers to sell 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, or material to operating trends.
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.
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 tools 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, 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 caused by third party reliance, 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 estimated useful lives of the assets.
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 likely worst case scenarios.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the
European Union (the "participating countries") established 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 until 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 euro or the legacy currency as offered by the
payor. A currency translation process known as triangulation
dictates how legacy currencies are 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 five euro participating countries, its
business and operations will be affected 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, to a minor extent, 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 in the near term is uncertain. Additionally,
increased cross-border competition could effect the Company's labor
cost and eventually its allocation of resources within Europe. The
Company has implemented an upgrade to its management information
system which includes the ability to simultaneously record
transactions in euro, 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.
<PAGE>
<PAGE>
Report of Management
Responsibility for the integrity and objectivity of the financial
information presented in this Annual Report rests with Structural
Dynamics Research Corporation's management. The accompanying
financial statements have been prepared in conformity with generally
accepted accounting principles, applying certain estimates and
judgments as required. Financial information contained elsewhere in this
Annual Report is consistent with that in the financial statements.
The management of the Company is responsible for establishing and
maintaining a system of internal accounting control that is designed to
provide reasonable assurance that assets are safeguarded and
transactions are properly recorded. This system is supported by
written policies and procedures, organizational structures that
provide an appropriate division of responsibility, internal reviews, and
the careful selection and training of qualified personnel.
Our independent accountants, PricewaterhouseCoopers LLP, audit the
financial statements in accordance with generally accepted auditing
standards, which includes the consideration of the system of internal
control to the extent they deem necessary to express an opinion on the
financial statements.
The Board of Directors, through its Audit Committee composed of
outside directors, meets regularly with the Company's independent
accountants and management to review the adequacy of internal
accounting controls, financial reporting and the extent and results of
the audit effort.
/s/William J. Weyand
William J. Weyand
Chairman of the Board,
President and Chief Executive Officer
/s/Jeffrey J. Vorholt
Jeffrey J. Vorholt
Vice President,
Chief Financial Officer and Treasurer
<PAGE>
<PAGE>
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1998, 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 audits 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.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
January 25, 1999
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
Structural Dynamics Research Corporation
<CAPTION>
Year ended December 31
(in thousands, except per share 1998 1997 1996
data)
<S> <C> <C> <C>
Revenue:
Software licenses $175,137 $170,727 $153,058
Software maintenance and services 227,888 180,595 132,198
-------- ------- ---------
Total revenue 403,025 351,322 285,256
Cost of revenue:
Software licenses 30,837 25,518 22,578
Software maintenance and services 125,099 94,926 57,921
--------- -------- -------
Total cost of revenue 155,936 120,444 80,499
--------- -------- -------
Gross profit 247,089 230,878 204,757
Operating expenses:
Selling and marketing 119,204 105,756 109,700
Research and development 64,182 49,415 34,018
General and administrative 18,038 17,798 16,139
Purchased in-process research and
development 3,230 20,850
------- ------- --------
Total operating expenses 204,654 193,819 159,857
------- ------- --------
Operating income 42,435 37,059 44,900
Interest and other income, net 12,788 4,480 1,884
------- ------- -------
Income before income taxes 55,223 41,539 46,784
Income tax expense 19,551 11,509 8,636
------- ------- ------
Net income $ 35,672 $ 30,030 $ 38,148
======== ======= ======
Basic net income per share $ .99 $ .85 $ 1.11
Diluted net income per share $ .93 $ .81 $ 1.05
Pro forma net income and per share
data:
Income before income taxes as
reported 41,539 46,784
Pro forma income tax expense 13,443 10,152
Pro forma net income $ 28,096 $ 36,632
======= ======
Pro forma basic net income per
share $ .80 $ 1.07
Pro forma diluted net income per
share $ .76 $ 1.01
Average common and common
equivalent shares 38,290 36,947 36,290
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
Structural Dynamics Research Corporation
<CAPTION>
December 31
(thousands, except per share data) 1998 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $100,581 $ 81,056
Marketable securities 11,787 13,030
Trade accounts receivable, net of
allowances
of $5,563 and $3,529 92,169 88,954
Other accounts receivable 8,956 17,815
Prepaid expenses and other current
assets 12,102 9,082
------- -------
Total current assets 225,595 209,937
Marketable securities 9,937 14,925
Net property and equipment 25,674 24,627
Marketable software costs, net 36,237 31,610
Goodwill and other intangibles 32,886 4,833
Other assets 10,425 7,264
------- -------
Total assets $340,754 $293,196
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 14,840 12,230
Accrued expenses 21,598 17,327
Accrued compensation 27,773 22,263
Accrued income taxes 7,242 9,182
Deferred revenue 45,655 46,606
------- -------
Total current liabilities 117,108 107,608
Other long-term liabilities 7,872 7,751
Shareholders' equity:
Common stock, $.0069 per share
stated value; 100,000 shares
authorized; 35,487 and 35,654
shares outstanding, net of
2,313 and 1,500 shares
in treasury 246 248
Capital in excess of stated value 114,499 114,132
Retained earnings 102,807 67,135
Accumulated other comprehensive
income:
Foreign currency translation
adjustment (1,843) (3,667)
Unrealized gain (loss) on
marketable securities 65 (11)
------- -------
Total accumulated other
comprehensive income (1,778) (3,678)
Total shareholders' equity 215,774 177,837
------- --------
Total liabilities and
shareholders' equity $340,754 $293,196
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Structural Dynamics Research Corporation
Common Stock Comprehensive Income
Capital in
Stated excess of Retained Accumulated Total
(in thousands, except Shares Value Stated value Earnings other Total equity
per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995 33,084 $ 230 $ 73,522 $ 11,573 $ (181) $85,144
Comprehensive income:
Net Income 38,148 $38,148
Other comprehensive
income:
Foreign currency
translation adjustment 298 298
Unrealized gain
on marketable
securities 152 152
-------
Comprehensive
income $38,598 38,598
========
Transactions involving
Employee stock
plans 1,176 8 15,016 15,024
Payment of Camax
dissenter's rights (1,236) (1,236)
Distribution of CASE S
corporation (6,983) (6,983)
- -------------------------------------------------------------------------------------------------------
December 31, 1996 34,260 $ 238 $ 87,302 $ 42,738 $ 269 $130,547
Comprehensive income:
Net Income 30,030 $30,030
Other comprehensive
income:
Foreign currency
translation adjustment (3,965) (3,965)
Unrealized gain
on marketable
securities 18 18
-------
Comprehensive
income $26,083 26,083
=======
Transactions involving
Employee stock plans 1,025 7 13,333 13,340
Stock Warrant (See
Note 2) 3,500 3,500
Distribution for
lawsuit settlement 369 3 9,997 10,000
Distribution of CASE S
corporation (5,633) (5,633)
- ------------------------------------------------------------------------------------------------------
December 31, 1997 35,654 $ 248 $114,132 $ 67,135 $(3,678) $177,837
Comprehensive income:
Net Income 35,672 $35,672
Other comprehensive
income:
Foreign currency
translation
adjustment 1,824 1,824
Unrealized gain
on marketable
securities 76 76
--------
Comprehensive
income $37,572 37,572
========
Transactions involving
Employee stock
plans 758 5 16,314 16,319
Purchase of Treasury
Shares (925) (7) (15,947) (15,954)
- -------------------------------------------------------------------------------------------------------
December 31, 1998 35,487 $246 $114,499 $102,807 $(1,778) $215,774
=======================================================================================================
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Structural Dynamics Research Corporation
<CAPTION>
Year ended December 31
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 35,672 $ 30,030 $ 38,148
Adjustments to reconcile net income to
net cash provided by operating
activities:
Purchased in-process research
and development 3,230 20,850
Amortization of computer software
costs 15,973 15,810 11,779
Depreciation and other amortization 12,419 11,032 8,136
Stock contributions to 401(k) plan 3,120 2,249 1,606
Deferred taxes 2,946 (740) (2,125)
Gain on sale of test business (2,745)
Other (134) 205 213
Changes in assets and liabilities,
from operating activities:
Decrease (increase) in accounts
receivable, net 6,514 (31,439) (1,369)
(Increase) in prepaid expenses (2,826) (1,032) (1,635)
(Increase) decrease in other assets (1,602) 4,379 (7,261)
Increase (decrease) in accounts
payable and accrued expenses 10,413 2,049 (16,624)
(Decrease) increase in accrued
income taxes (1,940) 1,100 1,686
(Decrease) increase in deferred revenue (1,571) 9,835 1,683
Increase (decrease) in other long-
term liabilities 743 (1,347) 2,356
------- -------- --------
Net cash provided by operating
activities 80,212 62,981 36,593
Cash flows from investing activities:
Purchases of marketable securities (10,802) (20,079) (25,612)
Proceeds from sales of marketable
securities 17,109 21,153 16,949
Additions to property and equipment, net (12,125) (13,640) (14,290)
Additions to marketable software costs (17,140) (13,006) (9,825)
Acquisition of Imageware Corporation,
net of cash acquired (30,682)
Sale of test business, net 1,809
Acquisition of Metaphase Technology, Inc. (29,689)
Investment in and advances to joint ventures (1,500)
-------- --------- ---------
Net cash used in investing activities (51,831) (55,261) (34,278)
Cash flows from financing activities:
Purchase of common stock (15,954)
Issuance of common stock 7,027 11,091 13,418
Repayment of debt (1,753) (183) (680)
Distributions of CASE S corporation (5,633) (6,983)
Payment of Camax dissenter's rights (1,236)
--------- --------- --------
Net cash (used) provided by
financing activities (10,680) 5,275 4,519
Effect of exchange rate changes on cash 1,824 (3,965) 298
------- -------- --------
Increase in cash and cash equivalents $ 19,525 $ 9,030 $ 7,132
Cash and cash equivalents:
Beginning of period 81,056 72,026 64,894
--------- ------- -------
End of period $100,581 $ 81,056 $ 72,026
========= ======= =======
Cash paid during the year for income taxes $ 18,659 $ 11,960 $ 10,462
========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<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") is a
leading, worldwide supplier of software development tools to
manufacturers for mechanical design automation and product data
management. In conjunction with software tools, the Company provides
training, consulting and customer support services to its customers.
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. The
Company owns a 30% interest in ESTECH, a Japanese joint venture, and
accounts for it under the equity method. The impact of its results are
not material to the Company's results of operations.
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 cost and goodwill and the likelihood of realization of the
deferred tax assets.
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.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," which establishes standards or
reporting and display of comprehensive income and its components in the
consolidated financial statements. SFAS No. 130 is effective for the
Company's reporting periods beginning in 1998 with comparative amounts
for prior years. Comprehensive income includes net income as well as
other changes in shareholder equity, except shareholders' contributions
into the Company and distributions to shareholders. The effect of
income taxes on the Company's other comprehensive income is not
material.
Revenue Recognition
The Company's revenue is recognized in accordance with Statement of
Position ("SOP") 97-2, "Software Revenue Recognition." The American
Institute of Certified Public Accountants ("AICPA") issued SOP 97-2 in
1997, and it became effective for transactions occurring in the
Company's fiscal year beginning January 1, 1998. In March 1998, the
AICPA issued SOP 98-4 "Deferral of the effective date of a provision of
SOP 97-2" which allows companies to defer adoption of certain
provisions of SOP 97-2 related to vendor-specific objective evidence. In
December 1998, the AICPA issued SOP 98-9 "Modification of SOP 97-2" to
readdress vendor-specific objective evidence. The adoption of SOP 97-2
in 1998 and the issuance of SOP 98-4 and SOP 98-9 did not have a
significant impact on the Company's financial condition or results of
operations.
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 by licensing software 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 passwords for customer access are available, (c) the fee is fixed or
determinable and (d) collectibility is probable. 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 implementation services, 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, an allocation of the amortization of
capitalized software costs and an allocation of royalty fees payable 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, an allocation of the amortization of capitalized software
costs and an allocation of royalty fees payable to third parties
under licensing agreements. The allocations between cost of license
revenues and maintenance and services revenues are based upon the
percentage of the related revenue to total revenue. Management
believes that the methodology for allocating the costs is reasonable.
Cash Equivalents and Marketable Securities
Cash equivalents include highly liquid investments in interest
bearing accounts and commercial paper with an original maturity of less
than 90 days. Marketable securities consist of U.S. Treasury 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.
Cash equivalents and marketable securities classified as
available-for-sale are recorded at market value, and any related
unrealized gains and losses are included in a separate
component of shareholders' equity. Marketable securities classified as
held-to-maturity are recorded at amortized cost, which approximates
market values. Realized and unrealized gains and losses are
determined based on the specific identification method.
Financial Instruments
The carrying amounts of cash and cash equivalents, 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 large customer base in
diversified industries across different geographic areas. Revenue from
a U.S. based automotive customer represented 13%, 14% and 11% of
consolidated net revenue in 1998, 1997 and 1996, respectively and a
distributor represented 11%, 11% and 12% of consolidated net revenue in
1998, 1997 and 1996, 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.
Foreign Currencies
In accordance with SFAS 52, financial statements of foreign
subsidiaries whose local currency is the functional currency are
translated to U.S. dollars at period-end exchange rates for assets and
liabilities and at weighted average exchange rates for the results
of operations. The resulting translation gains and losses are
accumulated in a separate component of shareholders' equity. Gain and
losses resulting from transactions denominated in foreign, non-functional
currencies are included in other income.
Foreign Exchange Contracts
The Company enters into forward foreign exchange contracts
denominated in foreign currencies to hedge certain foreign currency
denominated receivables. Market valuation gains and losses
associated with these financial instruments are recorded currently in
other income to offset gains and losses arising from foreign currency
transactions. The interest element of the foreign currency
instruments is recognized over the life of the contract and recorded in
other expense.
As of December 31, 1998 and 1997, the Company had approximately
$14,800 and $12,251, respectively, of forward foreign exchange
contracts outstanding. The deferred gains and losses resulting from
these contracts were not material. Substantially, all contracts
mature within 90 days. Should the counterparty to these contracts fail
to meet its obligations, the Company would be exposed to foreign currency
fluctuations, along with the cost, if any, to extinguish the contracts.
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. SFAS No. 133 will be effective for the Company's
financial reporting beginning in 2000 and cannot be applied
retroactively to financial statements of prior periods. It will
require entities to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for gains and losses from
changes in the fair value of a particular derivative will depend on the
intended use of the derivative. The Company does not expect the eventual
adoption of SFAS No. 133 to have a material impact on the results of its
operations or financial position.
Property and Equipment
Property and equipment are stated at original cost less accumulated
depreciation. 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
lives used in calculating depreciation and amortization are computer and
other equipment, 2-5 years; office furniture and equipment, 7 years;
and leasehold improvements, 1-10 years.
Marketable Software Costs
The costs related to the internal development or purchase of software to
be sold, that are incurred after the technological feasibility of the
product has been demonstrated, are capitalized by product.
Amortization begins at the time of product release and is calculated on
a release-by-release basis. It is the greater of the ratio that the
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.
Beginning in 1996, the Company began amortizing the software 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. The costs of marketable software are shown net of
accumulated amortization of $63,786 and $47,813 at December 31, 1998 and
1997, respectively.
Goodwill and Other Intangibles
Goodwill and other intangible assets associated with business
acquisitions are recorded based on estimated fair market values and
amortized using the straight-line method over their estimated useful
lives, which are predominantly seven years from the time of
acquisition. The cost of goodwill and other intangibles are shown net
of accumulated amortization of $2,110 and $938 at December 31, 1998 and
1997, respectively.
Income Taxes
In accordance with 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.
Earnings Per Share
Basic earnings per common share is calculated as net income divided by
the weighted average number of common shares outstanding. Diluted
earnings per share is computed using the weighted average number of
common shares outstanding and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares are
calculated using the treasury stock method and consist of dilutive
stock option grants.
The reconcilations of amounts used for the basic and diluted earnings per
share calculations are as follows:
<TABLE>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
1998
Basic net income per share $35,672 36,088 $ .99
Effect of stock options 2,202
---------------------
Diluted income per share $35,672 38,290 $ .93
1997
Basic net income per
share $30,030 35,265 $ .85
Effect of stock options -- 1,682
----------------------
Diluted net income per
share $30,030 36,947 $ .81
1996
Basic net income per
share $38,148 34,315 $1.11
Effect of stock options -- 1,975
Diluted net income per
share $38,148 36,290 $1.05
</TABLE>
Options to purchase 855 and 1,509 shares of common stock at December 31,
1998 and 1997 respectively, were not included in the computation of
diluted earnings per share because the options' exercise price was greater
than the average market price of common shares.
Reclassifications
Certain amounts reported in previous years have been reclassified to
conform to the 1998 presentation.
(2) Business Acquisitions
Imageware Corporation
In November 1998, the Company acquired privately-held Imageware
Corporation ("Imageware") for approximately $31,000 in cash which was paid
from the Company's existing cash balances. 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 was accounted for as a purchase. Goodwill,
computer software to be marketed and certain other intangibles were
valued at approximately $27,600, $3,460 and $2,025, respectively. All
intangibles associated with the acquisition are being amortized by the
straight-line method over their useful lives, which do not exceed seven
years. In addition, the Company recorded a one-time charge of $3,230
to write off in-process research and development, which had not
reached technological feasibility and had no alternative future
use. The Company's consolidated statement of operations includes
results of Imageware since November 20, 1998. The historic operating
results of Imageware are not material to the Company's consolidated
operations, therefore pro forma results are not presented.
Metaphase Technology, Inc.
In 1992, the Company and Control Data Systems, Inc. ("CDSI")
established a joint venture company, Metaphase Technology, Inc.,
("MTI"), to develop and market PDM software worldwide. The Company
initially owned a 35% interest and increased such interest to 50%
during 1993. The Company's investment in MTI was accounted for on the
equity basis.
In January 1997, the Company acquired the remaining stock of MTI and
certain assets of CDSI's global PDM software sales and support
business. The purchase price of approximately $33,000 included cash and
a stock warrant. The warrant was exercisable for 750 shares of the
Company's common stock without par value at the exercise price of $28 per
share and expired on December 31, 1998. A value of $3,500 was assigned
to the warrant and recorded in Shareholders' equity. The acquisition
was accounted for using the purchase method. The Company's consolidated
statement of operations includes the operating results of MTI and the
CDSI assets acquired, beginning January 1, 1997. The excess of
purchase price over the fair values of the net assets acquired of
approximately $2,816 was recorded as goodwill. Certain other
intangibles, including computer software construction costs, totalled
approximately $8,555. All intangibles associated with the acquisition
are being amortized using the straight-line method over their useful
lives, which do not exceed seven years. Also in connection with the
acquisition, the Company recorded a one-time charge to operations of
$20,850 for the write off of in-process research and development
acquired in the transaction that had not reached technological
feasibility and did not have an alternative future use. Pro forma
results of the purchase are not presented, as the amounts are not
material to the consolidated financial statements.
Computer Aided Systems for Engineering
In December 1997, the Company acquired all the outstanding stock of two
privately held companies doing business together as Computer Aided
Systems for Engineering, ("CASE"), by issuing 1,500 shares of common
stock having an aggregate market value of approximately $25,000.
The acquisition was accounted for as a pooling-of-interests, and
accordingly, all prior periods were restated to include CASE
results. CASE, an S corporation prior to acquisition, had been a third
party developer of drafting software for the Company since 1984.
<TABLE>
Revenue and net income of the separate companies for the years before the
acquisition are as follows:
<CAPTION>
1997 1996
<S> <C> <C>
Revenue:
SDRC $351,322 $285,256
CASE 8,749 7,674
Less intercompany sales (8,749) (7,674)
-------- --------
Total revenue $351,322 $285,256
Net income:
SDRC $ 24,342 $ 33,689
CASE 5,688 4,459
--------- ----------
Net income $ 30,030 $ 38,148
========== ==========
</TABLE>
Adjustments recorded to adopt the same accounting practices were not
material to the consolidated financial statements. Acquisition costs were
not material.
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 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, the
Company issued approximately 967 shares of its 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 was accounted for as a
pooling-of-interests. All historical financial data of the Company was
restated to include the results of Camax for all periods
presented. Adjustments recorded to adopt the same accounting
practices were not material to the consolidated financial statements.
(3) Marketable securities
<TABLE>
Marketable securities consist of the following:
<CAPTION>
December 31, 1998
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair
Value
<S> <C> <C> <C> <C>
Current:
Available-for-sale $11,009 $ 55 $11,064
Held to maturity 723 723
--------------------------------------
$11,732 $ 55 $11,787
Non Current:
Available-for-sale $ 9,935 $ 48 $(46) $ 9,937
======================================
</TABLE>
<TABLE>
December 31, 1997
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair
Value
<S> <C> <C> <C> <C>
Current:
Available-for-sale $12,916 $ 9 $ (2) $12,923
Held to maturity 107 107
------- ------- ------ -------
$13,023 $ 9 $ (2) $13,030
Non Current:
Available-for-sale $14,943 $ 42 $(60) $14,925
</TABLE>
Non current, available-for-sale marketable securities at December 31,
1998, have maturities of $9,000 in 2000 and $961 in 2013. Realized
gains and losses on the sale of marketable securities were
immaterial.
(4) Property and Equipment
Property and equipment, recorded at cost, December 31
consists of the following:
1998 1997
Property and equipment, at cost:
Computer and other equipment $ 63,943 $ 57,364
Office furniture and equipment 18,929 16,983
Leasehold improvements 7,819 6,685
------ ------
90,691 81,032
Less accumulated depreciation and
amortization (65,017) (56,405)
-------- --------
Net property and equipment $ 25,674 $ 24,627
======== ========
Future minimum lease payments under noncancelable operating leases for
the five years ending December 31, 2003 approximate $20,403, $13,237,
$9,697, $7,578 and $5,994, respectively, and $38,021 thereafter.
Total rental expenses under operating leases for the years ended
December 31, 1998, 1997 and 1996 were $22,681, $19,604 and $16,426,
respectively.
(5) Income Taxes
<TABLE>
Pre-tax accounting income consists of the
following:
<CAPTION>
Year ended December 31
1998 1997 1996
<S> <C> <C> <C>
Domestic $38,506 $25,741 $32,236
Foreign 16,717 15,798 14,548
------- ------- ------
$55,223 $41,539 $46,784
======= ======= ======
</TABLE>
<TABLE>
The provision for income taxes consists
of the following:
<CAPTION>
Year ended December 31
1998 1997 1996
<S> <C> <C> <C>
Federal:
Current $ 109 $ 740 $ 1,234
Deferred 2,946 (740) (2,125)
----- ----- --------
3,055 (891)
State: 2,250 1,200 1,418
Foreign:
Income taxes 7,449 5,520 3,125
Withholding taxes 6,797 4,789 4,984
------ ------- ------
Actual income tax expense $19,551 $11,509 $ 8,636
====== ======= ======
Deferred state and foreign taxes are not material.
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 are as follows:
<PAGE>
</TABLE>
<TABLE>
Year ended December 31
1998 1997 1996
<S> <C> <C> <C>
Computed expected income tax expense $19,328 $14,539 $16,374
Increase (reduction) resulting from:
State taxes, net of federal benefit 1,463 780 922
Foreign income taxed at other than the
U.S. statutory rate 878 9 (1,966)
Purchased in-process research and
development 1,130 7,297
Research and experimentation credit (1,400)
IRS audit settlement (1,751)
Release of valuation allowance (1,059)
Utilization of U.S. tax carryforwards (9,721) (4,806)
S corporation benefit (1,934) (1,516)
Change in net deferred taxes (828) (2,125)
Alternative minimum taxes 740 1,125
Other 962 627 628
--------- --------- --------
Actual Income tax expense $19,551 $11,509 $ 8,636
========= ========= ========
</TABLE>
<PAGE>
<TABLE>
The tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities are as follows:
<CAPTION>
December 31
1998 1997
<S> <C> <C>
Deferred tax assets:
Computer software construction costs and
capitalized Research expenses, net
of amortization $ 11,656 $ 15,624
Tax credit and net operating loss
carryforwards 10,136 9,291
Other liabilities and reserves 5,321 4,526
Revenue recognition and accounts receivable 3,334 2,753
Property and equipment 2,474 1,663
Other 296 608
------------------
Total deferred tax assets 33,217 34,465
Valuation allowance (27,199) (31,538)
------------------
Net deferred tax assets 6,018 2,927
Deferred tax liabilities:
Purchase accounting intangibles (1,890)
-------------------
Total net deferred taxes $ 4,128 $ 2,927
===================
</TABLE>
Of the $10,136 in tax carryforwards available at December 31, 1998, none
expire before 2003. Alternative minimum tax carryforwards of $3,835
never expire.
The net change in the valuation allowance for deferred tax assets was a
decrease of $4,339 and $3,294 in 1998 and 1997, respectively. Of the
$27,199 in valuation allowance at December 31, 1998, $14,687 is
attributable to the tax benefit of stock option exercises. Such
benefits will be credited to capital in excess of stated value if
realized.
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 of foreign
subsidiaries amounted to approximately $18,327 and $17,111 at December 31,
1998 and 1997, respectively.
(6) Shareholders' Rights Plan
In August 1998, 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. This plan replaced a plan
which had been adopted in 1988 and expired in 1998. 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, 2008,
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 reserved 5,300
shares of previously unissued common stock. There are 8 shares
remaining available to grant under this Plan. 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. Only stock options have been granted under
the 1994 plan. In 1996, the shareholders approved a Director's
Non-Discretionary Stock Option Plan allowing for grants to outside
directors at the fair market value at the date of grant. Under this
1996 plan, the Company had reserved 1,000 shares of previously
unissued common stock and 880 remain available for grant.
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.
In September 1998, the Company's Board of Directors approved a stock
option exchange program allowing employees to exchange any
outstanding options granted after January 1, 1996 for new options at the
market price of $11.06. The new options vest over three years and
expire in ten years from September 25, 1998. The Company cancelled
and reissued 3,658 options under this exchange program.
<PAGE>
<TABLE>
The following table reflects option activity
over the last three years.
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
Weighted Weighted Weighted
Stock Average Stock Average Stock Average
Options Exercise Price Options Exercise Price Options Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of the year 5,797 19.54 4,945 $17.10 5,008 $12.09
Granted 5,263 14.11 2,190 $22.33 1,337 $30.09
Exercised (567) 11.87 (931) $11.74 (1,169) $11.11
Cancelled (4,044) 23.71 (407) $22.81 (231) $13.93
--------------------------------------------------------------------------
Outstanding at
end of the year 6,449 13.18 5,797 $19.54 4,945 $17.10
==========================================================================
Options exercisable
at end of the year 2,374 15.05 2,891 $15.89 2,935 $13.71
===========================================================================
</TABLE>
<PAGE>
<PAGE>
<TABLE>
(7) Common Stock and Employee Benefit Plans
Information regarding options outstanding as of
December 31, 1998 is as follows:
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ 4.56 - $10.56 650 3.72 6.94 632 6.88
$10.88 - $11.06 3,662 9.70 11.06 18 10.99
$11.12 - $15.50 762 4.55 13.26 730 13.24
$15.53 - $20.13 807 4.45 18.02 623 18.19
$20.46 - $24 218 3.52 21.85 121 21.60
$24.18 4 8.64 24.19 1 24.19
$25.06 6 7.06 25.06 4 25.06
$26.19 60 4.35 26.19 30 26.19
$28.75 15 3.04 28.75 15 28.75
$31.25 265 1.84 31.25 200 31.25
---------------------------------------------------------------------------------------------------------
$ 4.56 - $31.25 6,449 7.23 13.18 2,374 15.05
=========================================================================================================
/TABLE
<PAGE>
Stock Purchase Plan
Under the Stock Purchase Plan, all U.S. full-time employees 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.
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 U.S. 401(k) plan and other defined
contribution plans were approximately $5,427, $3,967, $3,225 in 1998,
1997 and 1996, respectively.
Employees of U.S. divisions of the Company 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.
The Company provides severance benefits for involuntarily terminated
employees based on employees' prior years of service. The Company's
obligation for these post employment benefits is recorded in other
long-term liabilities.
Stock-Based Compensation
The Company accounts for stock options in accordance with Accounting
Principles Board opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost has been recognized in
results of operations for stock option grants. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant
date for awards since January 1, 1995, and allocated over the options'
vesting period consistent with the provisions of SFAS No. 123, the
Company's net income and income per share would have been reduced to the
pro forma amounts as follows:
<TABLE>
Year ended December 31
1998 1997 1996
<S> <C> <C> <C>
Net income - as reported $35,672 $30,030 $ 38,148
Net income - pro forma 26,268 19,758 32,727
Diluted income per share - as
reported $ .93 $ .81 $ 1.05
Diluted income per share - pro
forma $ .69 $ .53 $ .90
</TABLE>
The pro forma effect on the Company's net income and income per share for
1998, 1997 and 1996 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: dividend yield of 0%; expected terms of 3
years; expected volatility of 60% for 1998, 57% for 1997 and 63% for
1996; and risk-free interest rate of 4.7% for 1998, 5.7% for 1997 and
5.6% for 1996. The weighted average fair value of options granted
was $6.26, $10.07 and $13.76, for 1998, 1997 and 1996, respectively.
(8) Contingencies and Litigation
The Company is currently not a party to any litigation other than
ordinary routine litigation incidental to its business.
The Company was a defendant in a shareholder, class action lawsuit
which originated in 1994 and alleged violations of certain federal
securities laws. In December 1995, the parties to this matter
entered into a memorandum of understanding for settlement, which was
subsequently approved by the Court. Pursuant to the memorandum, a
settlement fund of $37,500 was established, consisting of $17,600 of cash
provided by the Company, $10,000 in shares of the Company's common
stock, and $9,900 of cash provided by the Company's former accountants.
The Company's contribution to the settlement fund, and other litigation
cost, net of estimated insurance proceeds were recorded as an expense
in 1995. The Company contributed $17,600 of cash and $10,000 of common
stock to the settlement fund in 1996 and 1997 respectively, to finalize
its obligation to the settlement fund.
(9) Interest and Other Income, Net
Interest and other income, net consists of:
<TABLE>
Year ended December 31
1998 1997 1996
<S> <C> <C> <C>
Interest income $ 7,655 $5,201 $4,593
Gain on sale of test software
business 2,745
Insurance and litigation
settlements 2,590 (950)
Equity in earnings (losses) of
affiliates 211 (39) (230)
Acquisition expense (1,102)
Other (413) (682) (427)
-----------------------------
Interest and other income, net $12,788 $4,480 $1,884
=============================
(10) Product and Geographic Information
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which sets
standards for disclosing information about the operating results of
internal segments. SFAS No. 131 establishes requirements to report
selected segment information quarterly, and to report annually,
entity-wide disclosures about products and services, major customers and
the material countries in which the Company operates.
The Company measures operating results as a single reportable segment
which provides multiple products and services for customers to manage
product development processes. The Company classifies revenue in the
geography of the customer at the time of sale. However, the customer has
the right to redeploy licenses anywhere in the world. As a result,
revenue comparisons by geography and among years, may not necessarily
represent where licenses are used.
</TABLE>
<TABLE>
Revenue by products and services are as follows for each year ended
December 31,
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Software licenses
I-DEAS $135,362 $139,332 $135,822
Metaphase 39,775 31,395 17,236
------------------------------------
Total software licenses 175,137 170,727 153,058
Software maintenance and
services
I-DEAS 171,377 138,363 111,170
Metaphase 56,511 42,232 21,028
------------------------------------
Total software
maintenance and
services 227,888 180,595 132,198
------------------------------------
Consolidated net
revenue $403,025 $351,322 $285,256
=====================================
</TABLE>
<TABLE>
Revenues by geographic area are as follows:
<CAPTION>
Year ended December 31
1998 1997 1996
<S> <C> <C> <C>
United States $176,169 $171,003 $136,532
Europe 138,091 107,153 80,275
Asia-Pacific 85,955 73,166 68,449
Other 2,810
----------------------------------
Consolidated net revenue $403,025 $351,322 $285,256
===================================
</TABLE>
<TABLE>
Long lived assets by geographic area are as follows:
<CAPTION>
December 31
1998 1997 1996
<S> <C> <C> <C>
United States $85,758 $55,160 $51,883
Europe 6,244 5,627 4,790
Asia-Pacific 3,595 652 295
Other 1,817
---------------------------------
Consolidated $97,414 $61,439 $56,968
=================================
</TABLE>
(11) Quarterly Results of Operations (Unaudited)
The following table sets forth selected unaudited quarterly financial
information for 1998 and 1997. The Company believes that all
necessary adjustments have been included to present fairly the
selected quarterly information.
<PAGE>
<TABLE>
Three months ended Year ended
March 31, June 30, September 30, December 31, December 31,
1998 1998 1998 1998 1998 1998
<S> <C> <C> <C> <C> <C>
Revenue $91,112 $95,142 $101,819 $114,952 $403,025
Gross profit 56,625 56,199 61,206 73,059 247,089
Net income 10,328 5,113 10,338 9,893 35,672
Basic earnings per share .29 .14 .29 .27 .99*
Dilutive earnings per share .28 .14 .28 .26 .93*
Three months ended Year ended
March 31, June 30, September 30, December 31, December 31,
1997 1997 1997 1997 1997 1997
Revenue $80,864 $88,678 $ 86,738 $ 95,042 $351,322
Gross profit 52,904 58,507 55,729 63,738 230,878
Net income (loss) (11,167) 11,633 12,752 16,812 30,030
Basic earnings (loss)
per share (.32) .33 .36 .47 .85*
Dilutive earnings
(loss) per share (.32) .32 .34 .46 .81*
<FN>
* Per share amounts are not additive.
</FN>
</TABLE>
<PAGE>
(12) Common Stock Information (Unaudited)
The Company paid no dividends in 1998 or 1997 and intends to continue its
policy of retaining earnings to finance future growth. There were
approximately 1,875 shareholders of record as of December 31, 1998. The
Company's common stock is listed and traded on The Nasdaq Stock Market
("Nasdaq"). The high and low trade prices per share for the Company's
common stock as reported on the Nasdaq are contained in the table below.
Prices reflect inter-dealer prices without retail mark-up, mark-down or
commission.
<TABLE>
Three months ended
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
<S> <C> <C> <C> <C>
High 28 15/16 29 23 7/8 19 7/8
Low 20 1/2 21 8 3/4 7 1/2
Three months ended
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
High 26 27 5/8 30 25 7/8
Low 29 1/8 18 7/16 23 3/4 15 1/4
</TABLE>
Exhibit 21
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
State or Other
Jurisdiction
Name of Incorporation
SDRC CASE/Inc. Ohio
SDRC Brasil Limitada Brazil
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 Espana, S.A. Spain
SDRC Japan K.K. Japan
SDRC Software and Services, GmbH Germany
SDRC India Private Limited India
Imageware Corporation Michigan
Imageware U.K. Limited United Kingdom
Imageware GmbH Germany
Imageware France S.A. France
Note: All of the above corporations are wholly owned subsidiaries
of the Registrant either directly or indirectly.
</TEXT
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 25, 1999
appearing on page 32 of the 1998 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 in this Form 10-K.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 26, 1999
<PAGE>
<PAGE>
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 25, 1999 appearing on page 32 of the 1998 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/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
January 25, 1999
Schedule II
<TABLE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(in thousands)
<CAPTION>
Balance at Additions Balance
Beginning of Charged to Deductions/ at End
Description of Period Expense (Recoveries) of Period
<S> <C> <C> <C> <C>
Accounts Receivable:
Year ended
December 31, 1996 $2,520 2,689 1,928 $3,281
====== ====== ====== =======
Year ended
December 31, 1997 $3,281 1,005 757 $3,529
====== ====== ====== =======
Year ended
December 31, 1998 $3,529 4,496 2,462 $5,563
====== ====== ====== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 100,581
<SECURITIES> 21,724
<RECEIVABLES> 101,125
<ALLOWANCES> (5,563)
<INVENTORY> 0
<CURRENT-ASSETS> 225,595
<PP&E> 90,691
<DEPRECIATION> 65,017
<TOTAL-ASSETS> 340,754
<CURRENT-LIABILITIES> 117,108
<BONDS> 0
0
0
<COMMON> 246
<OTHER-SE> 215,528
<TOTAL-LIABILITY-AND-EQUITY> 340,754
<SALES> 403,025
<TOTAL-REVENUES> 403,025
<CGS> 155,936
<TOTAL-COSTS> 204,654
<OTHER-EXPENSES> (12,788)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 55,223
<INCOME-TAX> 19,551
<INCOME-CONTINUING> 35,672
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,672
<EPS-PRIMARY> .99
<EPS-DILUTED> .93
</TABLE>
