UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-16230
STRUCTURAL DYNAMICS RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-0733928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Eastman Drive, Milford, Ohio 45150
(Address of principal executive offices)
(Zip Code)
(513) 576-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 1999 there were 35,725,954 shares of the
Registrant's Common Stock without par value issued and
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
(in thousands, except per share data)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue:
Software licenses $ 42,416 $ 43,886 $135,208 $123,315
Software maintenance and
services 66,491 57,933 192,881 164,758
Total revenue 108,907 101,819 328,089 288,073
Cost of revenue:
Cost of licenses 12,913 7,819 30,277 23,103
Cost of maintenance and
services 38,626 32,794 108,445 90,940
Total cost of
revenue 51,539 40,613 138,722 114,043 9
Gross profit 57,368 61,206 189,367 174,030
Operating expenses:
Selling and marketing 30,505 29,146 91,203 84,649
Research and development 16,965 16,164 49,370 49,380
General and
administrative 4,424 4,503 13,730 13,186
Purchased in-process
research and development 2,350 -- 2,350 --
Total operating
expenses 54,244 49,813 156,653 147,215
Operating income 3,124 11,393 32,714 26,815
Other income, net 1,464 4,144 4,899 10,829
Income before income taxes 4,588 15,537 37,613 37,644
Income tax expense 2,051 5,199 14,271 11,865
Net income $ 2,537 $ 10,338 $ 23,342 $ 25,779
Net income per share:
Basic $ .07 $ .29 $ .65 $ .71
Diluted .07 .28 .62 .67
Comprehensive income $ 3,538 $ 12,116 $ 21,762 $ 27,393
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(in thousands)
<CAPTION>
September 30, December 31,
1999 1998
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $123,296 $100,581
Marketable securities 11,453 11,787
Trade accounts receivable, net 87,693 92,169
Other accounts receivable 6,888 8,956
Prepaid expenses and other current
assets 8,562 12,102
237,892 225,595
Marketable securities 16,220 9,937
Property and equipment, at cost:
Computer and other equipment 67,428 63,943
Office furniture and equipment 19,256 18,929
Leasehold improvements 8,176 7,819
94,860 90,691
Less accumulated depreciation and
amortization 70,669 65,017
Net property and equipment 24,191 25,674
Marketable software costs, net 58,536 36,237
Goodwill and other intangibles 43,843 32,886
Other assets 8,895 10,425
Total assets $389,577 $340,754
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(in thousands, except per share data)
<CAPTION>
September 30, December 31,
1999 1998
Liabilities and Shareholders' Equity (unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 13,816 $ 14,840
Accrued expenses 49,503 49,371
Accrued income taxes 6,982 7,242
Deferred revenue 58,726 45,655
Total current liabilities 129,027 117,108
Other long-term liabilities 8,341 7,872
Shareholders' equity:
Common stock, stated value $.0069
per share Authorized 100,000 shares;
outstanding shares-36,194 and 35,487
net of 2,028 and 2,313 shares
in treasury 251 246
Capital in excess of stated value 129,167 114,499
Retained earnings 126,149 102,807
Accumulated other comprehensive
income (loss):
Foreign currency translation
adjustment (3,184) (1,843)
Unrealized holding results of
investments (174) 65
Accumulated other
comprehensive loss (3,358) (1,778)
Total shareholders' equity 252,209 215,774
Total liabilities and shareholders'
equity $389,577 $340,754
</TABLE>
<PAGE>
<TABLE>
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(in thousands)
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net Income 23,342 25,779
Adjustments to reconcile net income
to net cash flows
from operating activities:
Amortization of computer
software cost 10,704 12,307
Depreciation 8,875 8,621
Amortization of acquired intangibles 3,844 610
Purchased in-process research
and development 2,350 --
Gain on sale of test business -- (2,745)
Other 64 (220)
Changes in assets and liabilities
from operating activities:
Accounts receivable 7,775 14,892
Prepaid expenses and other assets 5,151 (825)
Accounts payable and accrued expenses(1,843) 3,324
Deferred revenue 11,793 6,293
Income taxes payable (260) (5,327)
Other long-term liabilities 409 435
Net cash provided by operating
activities 72,204 63,144
Cash flows from investing activities:
Sales (purchases) of marketable
securities, net (6,188) 1,725
Additions to property and equipment, net (7,333) (9,246)
Additions to marketable software costs (18,553) (12,815)
Acquisition of Enterprise Software
Products, Inc., net of
cash acquired (15,228) --
Acquisition of TD Technologies,
Inc., net of cash acquired (320) --
Sale of test business -- 1,809
Net cash used in investing
activities (47,622) (18,527)
Cash flows from financing activities:
Stock issued under employee benefit
plans 4,236 6,410
Purchase of common stock (4,762) --
Repayment of long term debt -- (894)
Net cash provided by (used in)
financing activities (526) 5,516
Effect of exchange rate changes on cash (1,341) 1,436
Increase in cash and cash equivalents 22,715 51,569
Cash and cash equivalents:
Beginning of period 100,581 81,056
End of period $123,296 $132,625
</TABLE>
See accompanying notes to consolidated financial statements.
STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands except per share data)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. As
permitted by the rules of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, these notes are
condensed and do not contain all disclosures required by
generally accepted accounting principles. In the opinion of
management, these financial statements contain all adjustments
(consisting of only normal recurring adjustments, unless
otherwise noted) necessary to present fairly the Company's
financial position, results of operations and cash flows as of
the dates and for the periods indicated. These financial
statements should be read in conjunction with the Consolidated
Financial Statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
(2) Earnings Per Share
Basic earnings per common share and dilutive earnings per share
are computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period,
respectively. Dilutive common equivalent shares are calculated
using the treasury stock method and consist of dilutive stock
option grants.
The reconciliations of amounts used for the basic and diluted
earnings per share calculations are as follows:
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income (numerator) $ 2,537 $10,338 $23,342 $25,779
======= ======= ====== =======
Weighted average
outstanding:
Common shares (basic
denominator) 35,875 36,270 35,736 36,095
Dilutive employee stock
options 1,594 956 1,842 2,309
------ ------ ------ -------
Common stock and dilutive
common stock equivalents
(diluted denominator) 37,469 37,226 37,578 38,404
Earnings per share:
Basic $ .07 $ .29 $ .65 $ .71
Diluted $ .07 $ .28 $ .62 $ .67
</TABLE>
Options to purchase 1,976 and 1,916 shares of common stock for
the three and nine month periods ended September 30, 1999 and
1,625 and 561 shares of common stock for the three and nine month
periods ended September 30, 1998 respectively, were not included
in the computation of dilutive earnings per share because the
options' exercise price was greater than the average market price
of common shares.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(in thousands)
Structural Dynamics Research Corporation is a leading supplier of
enterprise product development solutions. Its mechanical design
automation ("MDA") software, product data management ("PDM")
software and related services are employed by manufacturers
worldwide to streamline their entire product development process,
reduce cost and manage product information. The Company markets
MDA software primarily under the brand name I-DEAS(TM) and PDM
software under the brand name Metaphase(TM).
Certain statements in this Form 10-Q are forward looking
statements that involve risks and uncertainties, including the
timely availability and acceptance of new products, the impact of
competitive products and pricing, the management of growth, and
the other risks detailed from time to time in the Company's
Securities and Exchange Commission reports. The Company's
results could differ from those results described herein.
Forward looking information should be evaluated in the context of
these and other factors, some of which are described in more
detail in "Factors That May Affect Future Results."
Revenue
The Company's consolidated net revenue increased 7% to $108,907
for the quarter ended September 30, 1999 compared to the
corresponding quarter of 1998. Revenue growth was led by sales
of software maintenance, services and Metaphase licenses.
Metaphase license revenue grew 20% to $13,370 compared to the
same quarter in 1998. Metaphase license growth was led by large
orders to automotive, aerospace and defense industries. I-DEAS
and Metaphase services and maintenance revenue growth was strong
in all major geographic regions, growing 18% during the quarter
ended September 30, 1999 compared to the same period in 1998.
These revenues continued to grow due to an expanded customer base
and overall increases in I-DEAS and Metaphase implementation
projects resulting from license sales. Total revenues from
Metaphase products grew 24% over the prior year quarter and
accounted for 28% of consolidated net revenues for the quarter
ended September 30, 1999 compared to 24% for the corresponding
1998 quarter. I-DEAS license revenue was $29,046 for the quarter
ended September 30, 1999 declining $3,679, or 11% compared to the
previous year's quarter. Increased I-DEAS license sales in North
America and Europe only partially offset declines in Asia-
Pacific. Consolidated net revenue for the quarters ended
September 30, 1999 and 1998 was comprised of 46% and 45% from
North America, 36% and 32% from Europe and 18% and 23% from Asia-
Pacific, respectively.
For the nine months ended September 30, 1999, consolidated net
revenue was $328,089 and grew 14% compared to the same period in
1998. License revenue grew 10% over the corresponding 1998
period. Strong I-DEAS and Metaphase license sales in Europe and
North America offset I-DEAS license sale declines in Asia-
Pacific. I-DEAS license revenues grew 4% to $102,862 while
Metaphase license revenues grew 34% to $32,345 for the nine
months ended September 30, 1999. Total maintenance and service
revenue grew 17% compared to the corresponding 1998 period. For
the nine month periods ended September 30, 1999 and 1998, revenue
in North America accounted for 45% and 45%, Europe 37% and 33%,
and Asia-Pacific 18% and 22%, respectively, of consolidated net
revenues. The Asia-Pacific revenue comparison was impacted by
large I-DEAS license orders in 1998 from a major Japanese
distributor and automotive customers. The Company expects the
international market to continue to account for a significant
portion of total future revenue.
Expenses
Cost of revenue consists principally of the staff and related
costs associated with fee based services and support for software
maintenance contracts; amortization of goodwill, other acquired
intangibles and capitalized software construction costs; royalty
fees paid to third parties under licensing agreements and the
cost of distributing software products. Cost of revenue
increased 27% and 22% for the three and nine month periods ended
September 30, 1999, respectively compared to the corresponding
1998 periods. Cost of revenue represented 47% and 42% of revenue
for the three and nine month periods ended September 30, 1999,
compared to 40% for the corresponding periods in 1998.
The cost of licenses, as a percentage of license revenue
increased to 30% and 22% for the three and nine month periods
ended September 30, 1999, compared to 18% and 19% for the
corresponding periods of 1998. For the quarter ended September
30, 1999, the cost of licenses included a non-recurring royalty
charge of $4,200 paid to a third party supplier in connection
with a major Metaphase sale. Aside from this anomaly, the cost
of license revenue increased faster than license revenue in 1999
due to other increases in royalties paid to third parties for
additional Metaphase functionality and increased amortization for
acquired intangibles. The cost of services and maintenance for
the three and nine month periods ended September 30, 1999 were
58% and 56% of the related revenue, compared to 57% and 55% for
the corresponding 1998 periods. The increases were due to higher
cost of services labor and contractors.
Selling and marketing expenses consist of the costs associated
with the worldwide sales and marketing staff, advertising and
product localization. The expenses increased 5% and 8% for the
three and nine month periods ended September 30, 1999,
respectively, compared to the corresponding 1998 periods. The
increase is primarily due to an increase in related headcount.
Selling and marketing expenses represented 28% of revenue for the
three and nine month periods ended September 30, 1999,
respectively, compared to 29% for the corresponding 1998 periods.
Research and development expenses consist primarily of salaries,
benefits, computer equipment and facilities cost 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 expenses increased 5%
for the quarter ended September 30, 1999, compared to the quarter
ended September 30, 1998. Expenses for the nine months ended
September 30, 1999 did not change compared to the same period of
1998. The 1999 expense levels reflect higher capitalized cost
during 1999 compared to 1998. For the nine months ended
September 30, 1999, the Company capitalized $18,303 of software
development cost, while in the corresponding 1998 period $9,565
of costs were capitalized. Higher capitalization occurred in
1999 due to the timing of coding work related to I-DEAS Master
Series(TM) 7 and Master Series 8. Total software development cost,
including research expenses and capitalized amounts, increased
17% and 15% for the three and nine month periods ended September
30, 1999 compared to the corresponding 1998 periods. The
increase is primarily due to an increase in the number of product
development personnel and more contracted developers. The amount
of capitalized software development cost and accordingly,
research and development expense, may vary among periods
depending on the stage of development being performed on future
product releases.
General and administrative expenses consist of costs associated
with the executive, finance, legal, human resource and corporate
administrative staffs. These expenses decreased 2% for the
quarter ended September 30, 1999, compared to the corresponding
1998 quarter due primarily to lower third party legal fees.
General and administrative expenses represented 4% of revenue for
the three and nine month periods ended September 30, 1999,
compared to 4% and 5% for the three and nine month periods ended
September 30, 1998, respectively.
Other Income
For the three and nine month periods ended September 30, 1999,
other income was $1,464 and $4,899, respectively, and primarily
reflects interest income from cash equivalents and marketable
securities. For the three and nine month periods ended September
30, 1998, other income was $4,144 and $10,829, respectively. In
addition to investment interest income, other income for the
quarter ended September 30, 1998 included a $2,745 gain from the
sale of the Company's test business. For the nine months ended
September 30, 1998, other income also included $2,590 received
from insurance settlements and $670 of interest income received
on a federal income tax refund.
Taxes
In recent years, a substantial portion of the net deferred tax
assets was offset by a valuation allowance because of doubt
regarding the ultimate realization of the assets. This caused
the effective tax rate to differ from the expected statutory
rate. The factors, which necessitated the establishment of a
complete valuation allowance are not expected to be entirely
present in the future. As a result, the Company began a process
in 1998 to reduce the valuation allowance over approximately a
three year time frame based on current facts and forecasted
circumstances.
The effective tax rate for the nine month period ended September
30, 1999 was 38% compared to 32% for the corresponding 1998
period. The increase is primarily due to 1) a non-recurring, one-
time tax benefit relating to a refund received in 1998 from the
Internal Revenue Service in settlement of its audit of years
prior to 1994, and 2) non-deductible charge for purchased in-
process research and development resulting from the acquisition
of TD Technologies, Inc. in 1999.
Comprehensive Income
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.
During the quarter ended September 30, 1999, the U.S. dollar
weakened against the foreign currencies of the subsidiaries,
resulting in translation gains. For the nine months ended
September 30, 1999, net foreign currency translation losses
occurred because the U.S. dollar strengthened against the
European currencies of subsidiaries during the period.
Acquisitions
In September 1999, the Company acquired all the outstanding stock
of privately-held TD Technologies, Inc. ("TD") of Dallas, Texas
for approximately $10,275. The transaction was accounted for as a
purchase. The purchase price included shares of common stock and
stock options issued to assume outstanding TD employee stock
options. TD develops and markets SLATE(TM), System Level Automation
Tool for Engineers. SLATE(TM) helps users define and track evolving
product requirements from inception through the product life
cycle. The Company plans to integrate TD's technologies into
Metaphase software while improving its stand-alone capabilities.
The acquisition included the purchase of incomplete technology
which included projects for web interfaces, CAD interfaces and
tighter integration with office software products. In aggregate,
these projects were 50% complete at the acquisition date. These
projects had not reached technological feasibility and did not
have an alternative future use. Accordingly, the Company
recorded a one-time charge to write off $950 of in-process
research and development. The value of the incomplete technology
was based on the income approach using projected net cash flows
beginning in 2000 and a discount rate of 22.5%. Also, the
Company capitalized approximately $8,800 for goodwill, $4,950 for
software and $1,150 for other intangible assets which will be
amortized over the next five to seven years. The historic
operating results of TD are not material to the Company's
consolidated results of operations.
In August 1999, the Company purchased all the outstanding stock
of privately-held Enterprise Software Products, Inc. ("ESP") of
Philadelphia, Pennsylvania for $15,500 in cash. ESP develops and
markets FEMAP(TM), a simulation and analysis software for desktop
computers. The Company plans to integrate ESP's technologies
into I-DEAS software while improving its stand-alone
capabilities. At the time of the acquisition, ESP had several
research and development projects relating to post-processing
capabilities and a CAD interface which were only 70% to 80%
complete. As a result, the Company recorded a one-time charge of
$1,400 to write off these in-process research and development
projects, which had not reached technological feasibility and did
not have an alternative future use. The value of the incomplete
technology was based on the income approach using projected net
cash flows beginning in 2000 and a discount rate of 22.5%. The
Company recorded goodwill of approximately $665, software of
$9,500 and other intangible assets totalling $3,750 which will be
amortized over the next five to seven years. The historic
operating results of ESP are not material to the Company's
consolidated results of operations.
Liquidity and Capital Resources
During the nine months ended September 30, 1999, the Company
generated $72,204 of cash from operating activities. The Company
used approximately $15,548 to purchase the outstanding stock of
ESP and pay acquisition cost related to ESP and TD. The Company
purchased two hundred ninety-five thousand shares of its own
stock for $4,762 under a stock repurchase program. At September
30, 1999, the Company had cash and investments of $150,969 as
compared to $122,305 at December 31, 1998. The Company's net
working capital was $108,865 at September 30, 1999.
The Company does not have any long term debt or current
commitments for material capital expenditures. The Company may
use portions of its cash and investments to purchase additional
shares of its own stock or to acquire technology complementary to
its product offerings. The existing sources of liquidity and
funds anticipated to be generated from operations are expected to
provide adequate cash to fund the Company's projected needs for
the foreseeable future.
Factors That May Affect Future Results
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. 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 forecasted revenue growth, and expense
levels are generally committed in advance. 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.
If market growth rates for MDA or PDM are less than forecasted,
the Company's license revenue growth, as well as maintenance and
services revenue growth, are likely to be less than expected.
High-end market growth could slow due to preferences among new
users for lower priced, mid-range products or a strong capacity
within the installed base of seats already sold. Also, the
entire product development software industry may experience
pricing pressure which could adversely affect the Company's
revenue amounts.
Product Distribution
The Company is in the process of reorganizing much of its
worldwide sales organization by integrating its I-DEAS and
Metaphase sales forces. The reorganization is intended to
increase focus on selling enterprise-wide, product development
solutions, which include software licenses, support and
consulting services, to larger customer accounts. Besides its
own sales force, the Company continues to rely on distributors,
representatives and value-added resellers to sell a significant
portion of its software licenses. Disruptions in the internal
sales organization or with a distributor, representative or value-
added reseller could have a significant impact on operating
results in a quarter. Because a significant portion of quarterly
revenues are usually generated from relatively large customer
license orders, failure to close a few large orders in any
particular quarter may negatively impact operating results.
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. 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.
Product Development
The product development software industry is highly competitive.
Software products compete based on software functionality,
integration, scalability, customer support, delivery 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, most of
them 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. The
Company has committed to providing certain enhancements and
integrations to customers within aggressive time frames. Failure
to meet these time frames could result in delayed or lost revenue
opportunities. The Company relies on highly skilled technical
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.
Technology Acquisitions
In the past twelve months, the Company has purchased software
technology and software licensing rights from third parties.
Additionally, the Company acquired Imageware Corporation, TD
Technologies, Inc. and Enterprise Software Products, Inc. with
the objective of extending its I-DEAS and Metaphase product
offerings. Such investments have resulted in increased royalty
expense and amortization of software, goodwill and other acquired
intangible assets. As a result, these technology acquisitions
have had a dilutive effect on the Company's 1999 earnings. The
effect on future years' earnings will depend, in part, on the
Company's ability to integrate the purchased technology, advance
it for the Company's customers and market the new technologies
profitably.
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(TM) and Metaphase Enterprise(TM)), 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 risk 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. 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. Approximately 100% of the enterprise-wide networks and
critical computer systems have been assessed and have been
validated as compliant or renovated to compliance. All of the
Company's North American facilities have been assessed and are
expected to be compliant as to power, communication and other
necessary utilities. Of the European and Asian facilities that
have been assessed, all have been validated as compliant.
Approximately 10% of the Company's employees are in European and
Asian facilities that have not been assessed as compliant. The
Company continues to assess all sites in Europe and Asia-Pacific
to identify areas that may need renovation.
The total cost of any modifications necessary to achieve
compliance has not been and 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. The Company has taken measures to reduce the risk
of date-related failures; however, it cannot eliminate the
potential for business interruption or product failure due to
third party non-compliance. While the Company does not expect
significant interruptions, the Company is formulating contingency
plans for the potential disruption of critical functions. Year
2000 interruptions in the Company's customer base could reduce or
delay sales.
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.
Item 3. Quantitative and Qualitative Disclosures about Market
Rights.
There have not been any significant changes to the Company's
financial market risk exposure since filing of the Company's 1998
Annual Report on Form 10-K.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
27 Financial data schedule for the period ended September 30,
1999, filed herewith.
b) No report on Form 8-K was filed during the third quarter of
1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
STRUCTURAL DYNAMICS RESEARCH CORPORATION
Date: November 11, 1999 By: /s/ Jeffrey J. Vorholt
Jeffrey J. Vorholt,
Vice President,
Chief Financial Officer and
Treasurer
* Pursuant to the last
sentence of
General Instruction G to Form 10-
Q, Mr. Jeffrey J.
Vorholt has executed
this Quarterly Report on Form
10-Q both on behalf of the
registrant and in his capacity
as its principal
financial and accounting
officer.
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