-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Crobvy2Iu9oFGKU0LkC/pKHJwObRSwtVwzmONGEvoZLlFDTZqA7e34cPbHymkEXE TKMt2RyDNEVkaGwNYI2A7Q== 0000906318-97-000017.txt : 19970326 0000906318-97-000017.hdr.sgml : 19970326 ACCESSION NUMBER: 0000906318-97-000017 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STRUCTURAL DYNAMICS RESEARCH CORP /OH/ CENTRAL INDEX KEY: 0000820235 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 310733928 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-16230 FILM NUMBER: 97562267 BUSINESS ADDRESS: STREET 1: 2000 EASTMAN DR CITY: MILFORD STATE: OH ZIP: 45150 BUSINESS PHONE: 5135762400 MAIL ADDRESS: STREET 2: 2000 EASTMAN DRIVE CITY: MILFORD STATE: OH ZIP: 45212 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________ FORM 10-K __________________ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number 33-16541 December 31, 1996 STRUCTURAL DYNAMICS RESEARCH CORPORATION An Ohio Corporation I.R.S. Employer Identification No. 31-0733928 2000 Eastman Drive, Milford, Ohio 45150 Telephone Number (513) 576-2400 __________________ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of class Common Stock without par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __________________ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] __________________ As of March 11, 1997 the latest practicable date, 32,906,924 shares of Common Stock were outstanding. The aggregate market value of Common Stock held by non-affiliates was approximately $721,434,632 at that date. __________________ DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated: Registrant's Annual Report to Shareholders for the year ended December 31, 1996. Part I, Part II and Part IV Registrant's definitive Proxy Statement dated March 25, 1997. Part II, Part III and Part IV PART I. Factors That May Affect Future Results Information provided by the Company or by its spokespersons may contain forward-looking statements. Such statements, made pursuant to the safe harbor established by recent securities legislation, are based on the estimates and assumptions of management at the time such statements are made. Forward-looking statements are subject to risks and uncertainties that may cause the Company's future actual results to differ from those disclosed in any forward-looking statement. Important information about the basis for management's estimates and assumptions is contained in "Factors That May Affect Future Results" included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in the SDRC 1996 Annual Report to Shareholders, which is incorporated by reference. Item 1. Business. General Structural Dynamics Research Corporation (the "Company" or "SDRC") is a leading international supplier of mechanical design automation ("MDA") software, product data management ("PDM") software and related services within the mechanical computer-aided design, manufacturing and engineering ("CAD/CAM/CAE") industry. The Company's mission is to provide software tools and services to significantly enhance SDRC's customers' mechanical product development and engineering processes. The Company's software and services provide customers with a fully integrated solution for a concurrent engineering design to manufacturing life cycle. The Company's principal MDA software product, I-DEAS Master Series(TM), is a world-class, integrated CAD/CAM/CAE solution which allows manufacturers to optimize product performance and reduce cost while streamlining the product development process. The Company has recently released a new product, I-DEAS Artisan Series(TM), that is an MDA product aimed at the mid-level CAD/CAM/CAE market. SDRC's PDM product, Metaphase Series 2 software, provides a comprehensive enterprise approach to the management and control of product information, configuration, release management and work flow. Background The Company was incorporated under the laws of the State of Ohio in 1967. The Company was founded to provide advanced engineering consulting services and over time developed some of the industry's first mechanical engineering software packages to assist in its consulting efforts. After receiving strong customer interest in these software packages, the Company began marketing its software in the early 1970s. Today, SDRC's combination of software technology and related software services provides a comprehensive solution to address customer needs. During the past five years, the Company has restructured certain aspects of its business. In January 1997 the Company acquired the remaining stock of Metaphase Technology, Inc. ("Metaphase") and certain assets of Control Data Systems, Inc.'s global PDM software sales and support business. In 1992 the Company and Control Data Systems, Inc. established Metaphase as a joint venture Company to develop product data management software. In June 1996 the Company completed the acquisition of Camax Manufacturing Technologies, Inc. ("Camax") and its wholly owned subsidiaries. Camax provided computer-aided manufacturing software for computerized numerical control machining operations. In 1995 the Company purchased the remaining interest of SDRC Software and Services GmbH ("SDRC GmbH"). In 1994 the Company and Siemens Nixdorf Informationssysteme AG formed the joint venture, SDRC GmbH, to supply mechanical CAD/CAM/CAE software and services in Central Europe. Also in 1995, the Company merged its software products marketing and engineering services subsidiaries into a single subsidiary which now provides both software products and related services. Strategy The Company's strategy is to provide world-class software and engineering process implementation expertise to help customers improve their mechanical product development and engineering processes. SDRC's customers tend to be product and process innovators who develop an effective long-term relationship with SDRC. In addition to the establishment of these relationships at the high end, SDRC is also broadening its reach into the less service-intensive tiers of the CAD/CAM/CAE market. I-DEAS Product Suite The Company develops, markets and supports a comprehensive MDA software product called I-DEAS ("Integrated Design Engineering Analysis Software") Master Series and a mid priced software product called I-DEAS Artisan Series. I-DEAS(TM) software allows engineers to design, simulate, test and manufacture product concepts in a fraction of the time required using standalone or partially integrated software tools. As a result, the software is a tool to assist customers in developing higher quality products faster, at a lower cost, and delivering to the market in less time. The I-DEAS software is specifically designed and optimized to meet the needs of engineers who design products by using solid modeling technology. With the easy to learn user interface, users are able to create and view a "master model," a solid representation of a product that precisely defines its geometry and material characteristics. I-DEAS Master Series software allows product development team members to work concurrently on the same project sharing this common master model. This master model is easily understood by everyone concerned with the product, including representatives from management, marketing and manufacturing. It can be analyzed to evaluate the mechanical performance and structural integrity of the design concept, as well as to provide information that can be used to optimize product performance, study assembly sequences and assess "manufacturability". Artisan Series was specifically created to address the growing mid price CAD market. Artisan provides high level design functionality to smaller design groups and companies while ensuring upward data compatibility and user migration to I-DEAS Master Series. Metaphase Series 2 SDRC also develops, markets, implements and supports Metaphase Series 2, product data management software, which helps create, manage and control data associated with product information as it evolves through the product life cycle. Metaphase Series 2 is a modular PDM system designed to provide the depth and breadth of functionality customers require to meet current and future data management needs. Metaphase Series 2 software helps customers improve the way they create, share, access, define and support their product data. For product developers, this means fast, reliable access to the latest drawings, specifications and engineering changes they need regardless of location or the application used to create them. And for managers, it means accurate, reliable information about work- in-process as well as documentation of the entire product life cycle. Metaphase Series 2 is compatible with client/server environments with distributed design and engineering departments. Services The Company provides customers with process automation and implementation services as well as technical applications software support, maintenance and training. Building on its extensive knowledge of mechanical design automation technology and engineering applications and processes, the Company offers a "total solution" by providing process automation and software implementation services for I-DEAS and PDM software. Engineering consulting services assist in the optimization of the customers' product design and in the improvement of the customers' development process. In addition, advanced training and knowledge transfer are provided to customers to enable them to integrate and optimize their MDA and PDM investment. Advanced computer simulation methods and in-depth application expertise are utilized for traditional or highly specialized computer technologies including design audits, product design, troubleshooting and engineering process design. Technical applications software support and maintenance service provides telephone "hotline" support and software maintenance corrections for licensed products and features. Software enhancement versions are also released during the term of the contract with documentation updates. In addition, other services are provided that enhance and maintain the customer's software investment. The Company provides basic training for each major software package. Advanced training classes are offered for selected applications to support continued growth of customer skills and to increase the productivity of those who utilize SDRC software. Heterogeneous Environment/Platforms The Company's software is available on the leading engineering workstations. This hardware platform independence allows the Company's customers to operate in a heterogeneous environment, selecting and adding software modules for a broad range of hardware systems based upon their unique requirements. The productivity benefits of leading-edge capabilities, such as unprecedented ease-of-use, team-oriented product development, best- in-class design, performance simulation and integrated applications, have increased the number of potential users who can utilize these tools. The Company believes its products and services are of great value to companies which must accelerate, improve and streamline design processes in response to increased competition while simultaneously designing and manufacturing mechanical products in accordance with specific quality and cost criteria. A broad range of industries are potential users of these tools, with the highest concentration of users in the automotive, consumer and industrial electronics, industrial machinery and aerospace industries. Sales Channels The Company markets its products and services primarily through a worldwide direct sales and support force. The Company employs highly skilled engineers and technically proficient support people capable of serving the sophisticated needs of the customer. The Company also has an established relationship with a distributor in Japan, Information Services International - Dentsu Ltd., which accounted for approximately 12%, 13% and 10% of the Company's consolidated revenues in 1996, 1995 and 1994, respectively. In addition, the Company also utilizes distributors, value-added resellers and other marketing representatives for its marketing efforts. In certain markets where the Company does not maintain a direct sales force, it licenses its products through independent representatives. Telemarketing is also used to complement both the direct and indirect marketing channels. Seasonality Historically, the Company has tended to realize a disproportionate amount of its total revenue in each quarter during the last month of the quarter, and to realize a disproportionate amount of its total annual revenue during the fourth quarter of each year. Future quarterly results could be impacted by factors such as order deferrals, a slower growth rate in the market, increased competition or adverse changes in general economic conditions in any of the countries in which the Company does business. Any shortfall in revenue or earnings could have an immediate and significant adverse effect on the trading price of the Company's stock in any given period. The results of operations for the three years ending December 31,1996 are not necessarily indicative of future expectations. Competition The market for the Company's software products is highly competitive and the Company expects competitive pressure to increase in the future. To maintain its position of technological leadership, the Company must continually enhance its existing software products and pursue the development and introduction of new products. The Company competes against products in the CAD/CAM/CAE market including the CATIA products marketed by IBM and Dassault, the UNIGRAPHICS product marketed by EDS, the CADDS product marketed by Computervision Corporation, the I/EMS product marketed by Intergraph Corporation and the Pro/ENGINEER product marketed by Parametric Technology Corporation. In the PDM market, the Company competes against such products as the Optegra product marketed by Computervision Corporation, the Sherpa product marketed by Sherpa Corporation, the IBM Product Manager marketed by IBM and others. The Company's future success will depend in a large part on its ability to further penetrate its installed customer base as well as the installed customer base of its competitors. The principal competitive factors in the CAD/CAM/CAE and PDM market for software and related services are product functionality, product breadth and integration, product performance, product quality, hardware platform support, ease of product use, price, customer support, technical reputation and size of installed customer base. There can be no assurance that the Company will be successful in developing or marketing new products or that any new products will adequately achieve market acceptance. There can be no assurances that competition will not have a material adverse effect on the Company's results of operations. The Company's employees are an important component of the SDRC "total solution" approach in providing MDA and PDM software tools and related engineering consulting services to customers. The Company's success will depend in part on its ability to attract and retain employees who are in great demand. Other Information Segment and geographic information is included on page 53 of the Company's Annual Report to Shareholders for the year ended December 31, 1996, which is incorporated herein by reference. Revenue from one customer represented 11% of consolidated revenue in 1996. The Company owns all the standard software products that it licenses with the exception of I-DEAS Drafting(TM), I-DEAS View Markup(TM), I-DEAS Visualization Laboratory(TM), I-DEAS Assembly Fly Through(TM), I-DEAS Symbols Library(TM), I-DEAS TMG(TM), I-DEAS Electronic Systems Cooling(TM), portions of I-DEAS Sound Quality(TM), the mechanism analysis portion of I-DEAS Assembly Set, and a variety of data translators which it licenses from third parties. Under these license agreements, the Company pays a royalty to the third parties. As is customary throughout the software industry, the Company relies both on copyrights and trade secrecy for proprietary protection of its software products. The duration of such protection is considered to be adequate given the constantly changing nature of the business. The Company also utilizes a number of trademarks, both registered and otherwise, with respect to its software products. The proprietary status of its trademarks lasts indefinitely, as long as the trademarks remain in use. The Company typically ships product within 30 days after acceptance of a customer purchase order and execution of a license agreement. A substantial portion of quarterly shipments tend to be made in the last month of the quarter. The Company does not believe that backlog is indicative of potential revenue for any future period. Research and development expense amounted to approximately $30,719,000, $24,472,000, and $24,917,000 in 1996, 1995, and 1994, respectively. As of December 31, 1996, the Company had 1,604 full-time employees, of whom 371 were engaged in research and development, 1,020 in sales, services support and marketing, and 213 in general management and administration. In addition, the Company employed 33 part-time employees and cooperative students. Item 2. Properties. The following table sets forth certain information, as of December 31, 1996, with respect to principal properties in which the Company and its subsidiaries conduct their operations: Space Used In Ownership Operations Location Or Lease (Square Feet) Principal Activities Cincinnati, Lease 221,000 Corporate Headquarters Office Ohio (expires Facilities, Technical Development 2011) Center, and Administration Cincinnati, Lease 26,000 Sales and Marketing Office Ohio (expires Facilities 2007) Dearborn, Lease 44,000 Technical Development Center Michigan (expires Support and Training Facilities 1998) Minneapolis Lease 28,000 Office Facilities and Technical Minnesota (expires Development Center 2000) San Diego, Lease 25,000 Office Facilities California (expires 1999) Eugene, Lease 22,000 Office Facilities and Technical Oregon (expires Development Center 1999) Madison Lease 16,000 Office Facilities and Test Center Heights, (expires Michigan 1997) Hitchin, Lease 15,000 European Headquarters Office England (expires Facilities 2017) Frankfurt, Lease 19,000 Central Europe Office Facilities Germany (expires 1999) Paris, Lease 18,000 Southern Europe Office Facilities France (expires 2002) Munich, Lease 7,000 Central Europe Development Germany (expires Facilities 2001) Tokyo, Lease 8,000 Asia-Pacific Office Facilities Japan (expires 1997) Management of the Company considers the above properties to be adequate and suitable for present purposes, but will continue to evaluate the need for additional facilities to meet the continued growth of the business. Item 3. Legal Proceedings. Securities Litigation and Related Matters Except for the following matters, SDRC is not a party to any litigation other than ordinary routine litigation incidental to its business. The Company was a defendant in a class action suit alleging violations of certain federal securities laws, captioned In Re: Structural Dynamics Research Corporation Securities Litigation, United States District Court, Southern District of Ohio, Consolidated Master File No. C-1-94-630. In December 1995, the parties to this matter entered into a Memorandum of Understanding for settlement, subject to final Court approval. On March 22, 1996, the Court approved the proposed settlement and a final order was entered. Pursuant to the order, a settlement fund of $37.5 million was established, consisting of $17.6 million cash provided by the Company, $10.0 million in shares of the Company's common stock (to be valued-based on the market price at the time of distribution), and $9.9 million cash provided by the Company's former accountants. The settlement does not constitute an admission of liability on the part of any defendant. The Company's Board of Directors determined that the settlement was in the best interest of the Company and its shareholders in light of the uncertainty of the outcome, the high cost of continued litigation, and the high level of management time and attention continued litigation would have required which could be better spent on the Company's business. The Company was a party to shareholders' derivative litigation captioned In Re: Structural Dynamics Research Corporation Derivative Litigation, United States District Court, Southern District of Ohio, Consolidated Master File No. C-1-94-650. The Company paid the plaintiffs' counsel fees of approximately $900,000 and $50,000 for their out-of-pocket expenses in full settlement of the matter. The parties' agreement was approved by the United States District Court on July 19, 1996. Based on the same facts which gave rise to the Class Action Case and the Derivative Case, the Securities and Exchange Commission commenced a formal, private investigation of SDRC in September 1994 which remains pending. SDRC is fully cooperating with this investigation but cannot predict its outcome. Pursuant to certain contractual obligations, the Company has agreed to indemnify its directors and officers under certain circumstances against claims arising from lawsuits. The Company may be obligated to indemnify certain of its directors and officers for the costs they may incur as a result of the lawsuits. During 1995 and 1996 SDRC carried $5 million of primary directors and officers liability insurance coverage from the Federal Insurance Company plus "excess liability coverage" from Agricultural Excess and Surplus Insurance Company ("AESIC"), which provides $3 million of such coverage, and from Old Republic Insurance Company ("Old Republic"), which provides an additional $2 million of such coverage. The directors and officers liability insurance, both primary and excess, is potentially available with respect to the Class Action Case and the Derivative Case because certain of SDRC's directors and former officers were personal defendants in those matters. Coverage under the excess policies is dependent upon first exhausting the primary coverage. SDRC has come to an understanding with the primary insurer with respect to its coverage, but the excess carriers have to date denied coverage. On October 11, 1995, SDRC and certain officers and directors named in the Class Action Case and/or the Derivative Case filed a declaratory judgment action against the excess carriers in a case entitled Structural Dynamics Research Corporation, et al. v. Agricultural Excess and Surplus Insurance Company, et al., Clermont County Court of Common Pleas, Case No. 95-CV-9697. The action alleges that neither AESIC nor Old Republic is entitled to rescind its policy or exclude any of the named plaintiffs from coverage with respect to claims in the Class Action Case or the Derivative case. AESIC and Old Republic each responded and have taken the position that they are entitled to rescission and that all claims are excluded under the terms of the policy. While SDRC intends to vigorously pursue this case, there can be no assurance as to its ultimate outcome. Additional Executive Officers of the Registrant (at March 11, 1997). Item. Name Age Position Albert F. Peter* 54 Chairman and Chief Executive Officer Phillip R. Bell 41 Vice President, Marketing John A. Mongelluzzo 38 Vice President, Secretary and General Counsel Martin A. Neads 48 Vice President and General Manager, SDRC Operations Robert M. Nierman 52 Vice President, Metaphase Martin D. Schussel 51 Vice President, Product Development Bryan M. Valentine 49 Vice President, Human Resources Jeffrey J. Vorhold 44 Vice President, Chief Financial Officer and Treasurer * Member of Board of Directors Mr. Peter has served as Chief Executive Officer since February, 1995 and Chairman since October, 1996. Prior to that time, Mr. Peter had been serving as SDRC's acting Chief Executive Officer since November, 1994. Mr. Peter was a founder of the Company who served in various capacities until his election to the office of Vice President, a position he held until his retirement in December, 1991. Mr. Peter continues to serve on the Company's Board of Directors, a position he has held since July, 1983. Mr. Bell has served as Vice President, Marketing since May, 1996 and became a board-elected officer of the Company on May 9, 1996. Prior to accepting his position with the Company, he was employed by NCR for 18 years with the last position as Vice President of Global Sales Programs. Mr. Mongelluzzo has served as Vice President, Secretary and General Counsel since October, 1991. From January 1, 1987 he served as Secretary and Counsel for the Company. In May, 1986 he joined the Company as Assistant Counsel, was elected Assistant Secretary in October, 1986 and Secretary in December, 1986. From February, 1985 until May, 1986 Mr. Mongelluzzo was employed as Staff Attorney for the Ohio Department of Commerce. Mr. Neads has served as Senior Vice President - SDRC Operations since November, 1994. Mr. Neads joined the Company in 1976 as a project engineer in our UK Engineering Services Division. In 1981 he transferred to the Software Products Marketing Division as General Manager, UK Operations and two years later was named General Manager, European Operations, SPMD. In 1987 he was promoted to the position of Vice President and General Manager, European Operations, SPMD. Mr. Nierman has served as Vice President, Metaphase since February, 1997. Prior to the acquisition of Metaphase by SDRC, Mr. Nierman was President and CEO of Metaphase Technology, Inc. since 1992. Mr. Nierman's previous experience included a variety of senior executive positions in the sales and marketing organizations of Control Data Corporation. Mr. Schussel has served as Vice President, Product Development since February, 1995 and became a board-elected officer of the Company in April, 1995. Mr. Schussel joined the Company in 1988 and has served in various positions. Mr. Valentine has served as Vice President, Human Resources since October, 1995 and became a board-elected officer of the Company in December, 1995. Prior to accepting his position with the Company, he was employed by AM International, Inc. as Vice President, Human Resources from October, 1986 to June, 1995. Mr. Vorholt has served as Vice President, Chief Financial Officer and Treasurer since February, 1995. Prior to that time, Mr. Vorholt was the Vice President and Controller since December, 1994. Prior to accepting his position with the Company, he was employed by Cincinnati Bell Telephone Company as Senior Vice President - Accounting and Information Systems from 1991 - 1994, and by Cincinnati Bell Information Systems, Inc. as Senior Vice President and Director, 1989 - 1991. Mr. Vorholt is a licensed Certified Public Accountant and Attorney-at-Law. PART II. Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. The Company's common stock is listed and traded on the National Association of Securities Dealers, Inc. Automatic Quotation (NASDAQ) National Market System. Additional information, which appears on page 54 of the Company's Annual Report to Shareholders for the year ended December 31, 1996, is incorporated by reference in this Form 10-K Annual Report. Item 6. Selected Financial Data. The selected financial data for the five years ended December 31, 1996, which appears on page 32 of the Company's Annual Report to Shareholders for the year ended December 31, 1996, is incorporated by reference in this Form 10-K Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Management's Discussion and Analysis of Financial Condition and Results of Operations, which appears on pages 33 to 37 of the Company's Annual Report to Shareholders for the year ended December 31, 1996, is incorporated by reference in this Form 10-K Annual Report. Item 8. Financial Statements and Supplementary Data. The Consolidated Financial Statements and Report of Independent Accountants appearing on pages 38 to 54 of the Company's Annual Report to Shareholders for the year ended December 31, 1996, are incorporated by reference in this Form 10-K Annual Report. With the exception of the aforementioned information and the information incorporated in Items 6 and 7, the 1996 Annual Report to Shareholders is not to be deemed filed as part of this Form 10- K Annual Report. PART III. The information required by Item 10. "Directors and Executive Officers of the Registrant," Item 11. "Executive Compensation," Item 12. "Security Ownership of Certain Beneficial Owners and Management," and Item 13. "Certain Relationships and Related Transactions" is incorporated by reference to the Company's definitive Proxy Statement dated March 25, 1997 which relates to its April 29, 1997 Annual Meeting of Shareholders. PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. a.1. Financial Statements The following Consolidated Financial Statements and related notes of Structural Dynamics Research Corporation and subsidiaries, included in the Annual Report to Shareholders for the year ended December 31, 1996, are incorporated by reference in Item 8. of Part II: Report of Independent Accountants. Consolidated Statement of Operations - Years ended December 31, 1996, 1995 and 1994. Consolidated Balance Sheet - December 31, 1996 and 1995. Consolidated Statement of Shareholders' Equity - Years ended December 31, 1996, 1995 and 1994. Consolidated Statement of Cash Flows - Years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (continued) a.2. Financial Statement Schedules The Report of Independent Accountants on the financial statement schedule of Structural Dynamics Research Corporation and subsidiaries appears immediately prior to the Schedule II in this Form 10-K. The following financial statement schedule of Structural Dynamics Research Corporation and subsidiaries is included in this Item 14: Schedule II Valuation and qualifying accounts All other schedules have been omitted because the information either has been shown in the Consolidated Financial Statements or notes thereto, or is not applicable or required under the instructions. Financial statements of Metaphase Technology, Inc. and Estech Corporation in which the Company owned equity interests of 50% and 30% as of December 31, 1996, respectively, have been omitted because the registrant's proportionate share of the income or losses from continuing operations before income taxes, and total assets of each such company is less than 20% of the respective consolidated amounts, and the investment in and advances to each company is less than 20% of consolidated total assets. a.3. Exhibits: Exhibit Reference 3(a) Amended Articles of Incorporation of Registrant, including subsequent updates Note (f) 3(b) Amended Code of Regulations of Registrant Note (a) 4 Shareholder Rights Plan Note (b) 10(a) Structural Dynamics Research Corporation Tax Deferred Capital Accumulation Plan dated January 1, 1989 Note (e) 10(e) Structural Dynamics Research Corporation 1991 Employee Stock Option Plan Note (d) 10(f) Structural Dynamics Research Corporation 1996 Directors' Non-Discretionary Stock Option Plan Note (i) 10(g) Joint Venture Agreement between Structural Dynamics Research Corporation and Nissan Motor Co., Ltd. Note (c) 10(i) Lease agreement (including amendments #1 and #2) between Park 50 Development Company Limited Partnership and Structural Dynamics Research Corporation Note (e) 10(l) Structural Dynamics Research Corporation 1994 Long-Term Stock Incentive Plan Note (h) 10(m) Agreement of Merger and Plan of Reorganization Note (g) 11 Statement regarding computation of per share earnings 13 Portions of the Annual Report to Shareholders incorporated herein by reference 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants 27 Financial Data Schedule NOTE REFERENCE: (a) Incorporated by reference to the Company's Registration Statement No. 33-16541, which was originally filed on August 17, 1987 and became effective on September 29, 1987. Amendments incorporated by reference to the Company's definitive Proxy Statement dated March 26, 1996. (b) Incorporated by reference to the Company's report on Form 8-K filed on August 3, 1988. (c)Incorporated by reference to the Company's report on Form 10-Q dated May 12, 1989. (d)Incorporated by reference to the Company's definitive Proxy Statement dated March 11, 1991. (e) Incorporated by reference to an exhibit filed in the Company's Annual Report on Form 10-K for the year ended December 31, 1990. (f) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 as originally filed on March 11, 1994. (g) Incorporated by reference to the Company's Registration Statement on Form S-4 effective on May 28, 1996 pertaining to the acquisition of Camax Manufacturing Technologies, Inc. (h) Incorporated by reference to the Company's definitive Proxy Statement dated March 16, 1994. Amendment to the plan is incorporated by reference to the Company's definitive Proxy Statement dated March 26, 1996. (i) Incorporated by reference to the Company's definitive Proxy Statement dated March 26, 1996. b. Reports on Form 8-K None c. Exhibits as required by Item 601 of Regulation S-K None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STRUCTURAL DYNAMICS RESEARCH CORPORATION March 21, 1997 By /s/Jeffrey J. Vorholt (Date) Jeffrey J. Vorholt, Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/Albert F. Peter /s/John E. McDowell Albert F. Peter John E. McDowell Chairman and Chief Executive Director Officer (Principal Executive Officer) March 21, 1997 March 19, 1997 (Date) (Date) /s/Jeffrey J. Vorholt /s/James W. Nethercott Jeffrey J. Vorholt James W. Nethercott Vice President, Director Chief Financial Officer and Treasurer March 21, 1997 (Principal Financial and (Date) Accounting Officer) March 21, 1997 (Date) /s/William P. Conlin /s/ Arthur B. Sims William P. Conlin Arthur B. Sims Director Director March 19, 1997 March 24, 1997 (Date) /s/Bannus B. Hudson /s/Gilbert R. Whitaker, Jr. Bannus B. Hudson Gilbert R. Whitaker, Jr. Director Director March 18, 1997 March 21, 1997 Report of Independent Accountants To the Board of Directors of Structural Dynamics Research Corporation Our audits of the consolidated financial statements referred to in our report dated January 24, 1997 appearing on page 38 of the 1996 Annual Report to Shareholders of Structural Dynamics Research Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14 (a) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ Price Waterhouse LLP Price Waterhouse LLP Cincinnati, Ohio January 24, 1997 SCHEDULE II STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (in thousands)
Balance at Charged Balance Beginning of (Credited) Deductions/ at End Description Period to Income (Recoveries) of Period Accounts Receivable: Year ended December 31, 1994 $2,451 520 (129) $3,100 Year ended December 31, 1995 $3,100 (273) 307 $2,520 Year ended December 31, 1996 $2,520 2,689 1,928 $3,281
EX-11 2 EXHIBIT 11 STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (in thousands, except share data)
1996 1995 1994 PRIMARY Average shares outstanding 32,816 30,930 29,853 Net effect of dilutive stock options -- based on the treasury stock method using average market price 1,974 -- -- Total 34,790 30,930 29,853 Income (loss) before cumulative effect of accounting change $33,689 $(7,471) $(11,577) Cumulative effect of accounting change -- -- (3,896) Net income (loss) $33,689 $(7,471) $(15,473) Primary per share amount: Before cumulative effect of accounting change $ .97 $ (.24) $ (.39) Cumulative effect of accounting change -- -- (.13) Net income (loss) per share $ .97 $ (.24) $ (.52) FULLY DILUTED Average shares outstanding 32,816 30,930 29,853 Net effect of dilutive stock options -- based on the treasury stock method using the year-end market price, if higher than average market price 1,974 -- -- Total 34,790 30,930 29,853 Income (loss) before cumulative effect of accounting change $33,689 $(7,471) $(11,577) Cumulative effect of accounting change -- -- (3,896) Net income (loss) $33,689 $(7,471) $(15,473) Fully diluted per share amount: Before cumulative effect of accounting change $ .97 $ (.24) $ (.39) Cumulative effect of accounting change -- -- (.13) Net income (loss) per share $ .97 $ (.24) $ (.52)
This computation is required by Regulation S-K Item 601 and is filed as an exhibit under Item 14a(3) of Form 10-K. SEC Release No. 33-5133 requires ". . . when per share earnings are disclosed, . . . the information with respect to the computation of per share earnings on both primary and fully diluted bases, presented by exhibit or otherwise, must be furnished even though the amounts of per share earnings on the fully diluted basis are not required to be stated under the provisions of Accounting Principles Board Opinion No. 15." EX-21 3 EXHIBIT 21 STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT State or Other Jurisdiction Name of Incorporation SDRC Operations, Inc. Ohio Metaphase Technology, Inc. Delaware SDRC U.K. Limited United Kingdom SDRC Italia, Srl. Italy SDRC Korea Limited South Korea SDRC Svenska AB Sweden SDRC Singapore Pte. Ltd. Singapore SDRC Nederland B.V. Netherlands SDRC AG Switzerland SDRC Belgium N.V./S.A. Belgium SDRC France S.A. France SDRC Espaua, S.A. Spain SDRC Japan K.K. Japan SDRC Software and Services, GmbH Germany Point Control International Sales Virgin Islands Corporation Note: All of the above corporations are wholly-owned subsidiaries of the Registrant directly or indirectly. EX-23 4 EXHIBIT 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-20774, 33-22136, 33-40561, 33-41671, 33-58701, 33-72328 and 33-07365) of Structural Dynamics Research Corporation of our report dated January 24, 1997 appearing on page 38 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 13 of such Annual Report on Form 10-K. /S/ Price Waterhouse LLP Price Waterhouse LLP Cincinnati, Ohio March 24, 1997 EX-13 5 SUMMARY OF SELECTED FINANCIAL DATA Structural Dynamics Research Corporation
Year ended December 31 (in thousands, except per share data) 1996 1995 1994 1993 1992 ------ ------ -------- -------- -------- Statement of operations data: Total revenue $285,256 $224,138 $185,358 $165,893 $167,105 Operating income (loss) 40,525 23,809 (4,462) (6,896) 12,904 Income (loss) before income taxes and cumulative effect of accounting changes 42,325 (292) (7,696) (7,050) 15,022 Income (loss) before cumulative effect of accounting changes 33,689 (7,471) (11,577) (11,365) 9,420 Net income (loss) 33,689 (7,471) (15,473) (11,365) 10,987 Income (loss) per share: Before cumulative effect of accounting changes .97 (.24) (.39) (.37) .30 Net income (loss) .97 (.24) (.52) (.37) .35 Common and common equivalent shares 34,790 30,930 29,853 30,885 31,179 Balance sheet data: Working capital $ 66,519 $ 37,688 $ 29,801 $ 30,623 $ 51,437 Total assets 238,079 204,384 151,937 145,258 146,279 Long-term liabilities 8,394 8,675 11,523 1,029 985 Total shareholders' equity 129,299 81,372 74,879 89,902 97,576
During 1993 and 1994, the Company's level of expenses increased to support technological development and to promote revenue growth. As anticipated revenue growth did not materialize, the Company's expenses exceeded revenue resulting in operating and net losses. In 1995, the anticipated cost of the class action lawsuit settlement, net of estimated insurance proceeds, was included in the results of the operations. Management's Discussion and Analysis of Financial Condition and Results of Operations Structural Dynamics Research Corporation (in thousands) The Company operates in a single industry segment providing mechanical design automation (MDA) software, product data management (PDM) software and related services. I-DEAS Master Series(R) is a world-class, integrated CAD/CAM/CAE product which allows manufacturers to optimize product performance and reduce cost, while streamlining the product development process from concept through manufacturing. This total approach to product and process engineering enables significant improvements in quality, while reducing overall development time and cost. Metaphase Series 2(R) software, SDRC's PDM product, provides a comprehensive approach to the management and control of product information and configuration, release management and work flow. CAMAND(R) and Smart CAM(R) are MDA products used for generating, optimizing, simulating and verifying NC programs and machine tool motion for all types of CNC machining processes. Revenue Consolidated revenue, including licenses and services, for 1996 rose to $285,256 compared with 1995 revenue of $224,138 and 1994 revenue of $185,358. This represents increases of 27% in 1996 and 21% in 1995. The growth is due to an increase in the Company's installed software base and the associated increase in maintenance, software services and training revenue. Software Licenses Revenue. Software licenses revenue for 1996 increased to $153,058 compared to 1995 revenue of $131,211 and 1994 revenue of $115,051. These amounts represent an increase of 17% in 1996 and 14% in 1995 which is attributed to the continued market acceptance of the I-DEAS Master Series product enhancements and significant software license purchases from a large automotive customer. The Company expects continued growth in software licenses revenue. Software Maintenance and Services Revenue. Software maintenance and services revenue is derived from software maintenance contracts, software services and training. Combined software maintenance and services revenue increased to $132,198 in 1996 or 42% over 1995 and to $92,927 in 1995 or 32% over 1994. This revenue represents 46%, 41% and 38% of consolidated total revenue in 1996, 1995 and 1994, respectively. Software maintenance growth is due to increased revenue generated from maintenance contracts for both new and existing customers. Software services growth is primarily attributable to the increased level of I-DEAS and Metaphase Series 2 implementation and integration projects. In addition, the Company's software services revenue was impacted favorably by a significant contract from one of its major automotive customers. The Company expects that the software maintenance and services revenue will continue to increase. Geographic. Total revenue from international operations accounted for 52%, 54% and 55% of consolidated total revenue in 1996, 1995 and 1994, respectively. In 1996, significant increases in domestic revenue from a major automotive customer and slower revenue increases in Asia-Pacific resulted in declining international revenue as a percentage of total revenue. In July 1995, the Company purchased the remaining shares in SDRC GmbH. As of the acquisition date, the revenue generated by SDRC GmbH was included in the consolidated financial statements. The Company expects the international market to continue to account for a significant portion of total revenue. Cost and Expenses Cost of Revenue. Cost of revenue consists principally of the staff and related costs associated with the generation and support of software services revenue, amortization of capitalized software construction costs, royalty fees paid to third parties under licensing agreements and the cost of distributing software products. Cost of licenses revenue represents variable costs associated with the generation of licenses revenue. These costs increased to $27,719 in 1996 from $24,659 and $20,311 in 1995 and 1994, respectively. As a percent of software licenses revenue these represent 18%, 19% and 18% in 1996, 1995 and 1994, respectively. In absolute dollars, the Company expects these costs to increase in direct proportion to licenses revenue growth. Cost of maintenance and services revenue increased to $60,454 in 1996 from $40,342 and $31,347 in 1995 and 1994, respectively. As a percent of software maintenance and services revenue these represent 46%, 43% and 45% in 1996, 1995 and 1994, respectively. The increase in 1996 is primarily the result of hiring and start-up costs for new employees associated with the growth in services revenue. The decline in 1995 was attributable to the sale of our low margin European services business. The Company expects these costs to increase in absolute dollars in proportion to software services and maintenance growth. Selling and Marketing Expenses. Selling and marketing expenses consist of the costs associated with the worldwide sales and marketing staff, advertising and product localization. These expenses amounted to $109,700, $97,272 and $99,744 in 1996, 1995 and 1994, respectively. These amounts represent 38%, 43% and 54% of total revenue for 1996, 1995 and 1994, respectively. 1996 selling costs as a percentage of revenue decreased due to lower selling and marketing costs related to software services and maintenance revenue. The selling and marketing expense decrease in 1995 from 1994 is due to a reduction in staff and related staff costs partially offset by an increase in sales incentives for both the direct and indirect channels. The Company expects to continue to expand its sales organization to meet the growing customer demand for its products and services. Research and Development Expenses. The Company continues to invest significant amounts in the technological advancement of its product line. Research and development expenses amounted to $30,719, $24,472 and $24,917 in 1996, 1995 and 1994, respectively. These amounts represent 11%, 11% and 13% of total revenue for 1996, 1995 and 1994, respectively. In 1995, research and development expenses as a percent of total revenue decreased because of a reduction in staff and related staff costs which occurred in the fourth quarter of 1994 and first quarter of 1995. The Company expects that the research and development costs will increase in absolute dollars due to the acceleration of the development of its I-DEAS Master Series software and other product initiatives. Research and development expenses consist of expenses for development of software products which cannot be capitalized in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Research and development expenses exclude internally developed capitalized software costs of $9,679, $6,928 and $9,312 in 1996, 1995 and 1994, respectively. These capitalized amounts represent 24%, 22% and 27% of research and development expenses in 1996, 1995 and 1994, respectively. The reduction in 1995 software capitalization was the result of a staff reduction in early 1995. The staff levels were increased in 1996 to meet development needs resulting in increased software capitalization. General and Administrative Expenses. General and administrative expenses consist of costs associated with the corporate, finance, human resource and administrative staffs. General and administrative expenses amounted to $16,139, $13,584 and $13,501 in 1996, 1995 and 1994, respectively. These amounts represent 6%, 6% and 7% of total consolidated revenue for 1996, 1995 and 1994, respectively. The Company expects general and administrative costs to remain stable as a percent of revenue. Equity in Losses of Affiliates During 1992, the Company and Control Data Systems, Inc. formed a joint venture known as Metaphase Technology, Inc. (Metaphase). Metaphase is involved in developing and marketing product data management software. The Company pays royalty fees to Metaphase based upon the amount of PDM sales. During 1994, the Company formed a joint venture with Siemens Nixdorf Informationssysteme AG (SNI), SDRC Software and Services, GmbH (SDRC GmbH) to market the Company's software products in Central Europe. The Company's equity in the losses of affiliates represents its share of Metaphase and SDRC GmbH joint venture losses, the majority of which resulted from the SDRC GmbH joint venture. In 1995, the Company purchased the remaining shares in SDRC GmbH at its net book value. As of the acquisition date, 100% of the operating results of SDRC GmbH were included in the consolidated financial statements. In 1996, equity in loss of affiliates primarily represents SDRC's share of the Metaphase joint venture losses. Acquisition of Metaphase Technology, Inc. In January 1997, the Company acquired the remaining stock of Metaphase Technology, Inc. and certain assets from Control Data Systems, Inc. for approximately $31,000. The purchase price includes cash and a stock warrant. The Company expects a significant one-time charge to earnings in 1997 for the write-off of purchased research and development in process. The transaction will be accounted for as a purchase. Acquisition of Camax Manufacturing Technologies, Inc. On January 16, 1996, the Company entered into a definitive agreement to acquire Camax Manufacturing Technologies, Inc. (Camax) and its wholly owned subsidiaries. Camax provides computer-aided manufacturing (CAM) software for computerized-numerical-control machining operations, with products and services designed to simplify, automate and optimize the machining process to streamline production and accelerate time-to-market. During 1996, SDRC issued Common Stock having a market value of $30,000 in exchange for 100 percent ownership of Camax common stock. The acquisition was accounted for under the pooling-of-interests method and all prior periods presented have been restated to reflect Camax results. In 1996, SDRC recorded other expense of $1,102 in costs related to the acquisition. Litigation Settlement In December 1995, the Company and plaintiffs' counsel in a class action lawsuit entered into a Memorandum of Understanding setting forth the terms of a proposed settlement. Pursuant to the proposed settlement, the Company agreed to establish a settlement fund of $27,600 consisting of $17,600 cash and $10,000 in the form of shares of the Company's common stock. The anticipated cost of the settlement net of estimated insurance proceeds was recorded as an expense in 1995. The insurance proceeds of $5,000 were received in 1996. In January 1996, $17,600 was transferred to a settlement fund in accordance with the Memorandum of Understanding. During 1996, a final settlement between the Company and the plaintiffs was accepted by the Court and the Company expects to issue $10,000 in stock to the settlement fund during 1997. Other Income, Net Other income, net, consists principally of interest income and foreign currency losses. For the three-year period ended December 31, 1996, interest income increased due to interest for income tax refunds received in 1995, higher investment balances in 1995 and 1996 and increasing interest rates throughout the period. 1996 other income is offset by a $950 settlement of the shareholders' derivative litigation. In 1995, other income, net, is offset by a net loss of $1,878 resulting from the sale of the United Kingdom test and analysis division. Income Taxes The Company recorded tax expense of $8,636, $7,179 and $3,881 in 1996, 1995 and 1994, respectively. In each of these years (including 1995 and 1994 when the Company incurred losses), the Company's provision for income taxes consisted primarily of income taxes currently payable to foreign jurisdictions and foreign withholding taxes incurred on the Company's software licensing revenue. These withholding taxes can be credited against the Company's U.S. income tax liability. The Company is not currently in a position to utilize all of these foreign tax credits (FTCs) on its U.S. return. The FTCs and other tax carryforwards are available to offset future U.S. income tax liabilities, subject to various restrictions. No benefit was currently recognized for a substantial portion of the Company's U.S. deferred tax assets since it is more likely than not that they will not be realized based upon the Company's current and anticipated mix of domestic and foreign pre-tax accounting income, tax credits and deductions from non-qualified stock option exercises. As of December 31, 1996, $15,353 of the valuation allowance of $34,837 is attributable to the tax benefits of stock option exercises and such benefits will be credited to capital in excess of stated value if realized. In 1994, the Company received a tax refund of $1,754 for research and experimentation credits not previously recorded. Liquidity and Capital Resources As of December 31, 1996, the Company had $100,289 in cash, cash equivalents and liquid investments. The Company's working capital was $66,519 and the Company had no borrowings. The Company also has an unsecured bank line of credit of $15,000. During 1996, 1995 and 1994 the Company generated cash flows from operations of $30,094, $33,793 and $8,181, respectively. The increased income in 1996 was offset by the $17,600 payout for the class action litigation settlement. The increase in net cash provided by operations in 1995 was primarily due to the increase in operating income and the increase in deferred revenue, net of the accounts receivable increase. The Company used $34,238, $8,701 and $21,858 during 1996, 1995 and 1994, respectively, for investing activities. The reduction in investing activities from 1994 to 1995 was primarily due to the conversion of marketable securities into cash. In 1996, the Company added capital equipment of $14,250. This consisted primarily of furniture and workstations to accommodate the increase in employee headcount. Net cash provided by financing activities was $13,276, $12,623 and $747 during 1996, 1995 and 1994, respectively, primarily representing proceeds from the Company's stock option programs. The Company's sources of liquidity and funds anticipated to be generated from operations are expected to be adequate for the Company's cash requirements in the foreseeable future. The acquisition of the remaining 50% share of Metaphase Technology, Inc. will be funded with cash generated from operations. The Company paid no dividends during the period 1994 through 1996 and intends to continue its policy of retaining earnings to finance future growth. The Company has no other current commitments for material capital expenditures. See Note 8 to the consolidated financial statements for additional commitments and contingencies. The Company does not expect inflation to have a material impact on its future operations. Factors That May Affect Future Results Forward looking statements and the Company's results are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ from those disclosed. Any risk and uncertainty posed by competitive, technological or financial factors could have an immediate and significant adverse effect on the trading price of the Company's stock in any given period. Future results could be impacted by factors such as customer order delays, a slower growth rate in the market, increased competition or adverse changes in general economic conditions in any of the countries in which the Company does business. The loss of a major customer or a reduction in orders from a major customer could have a significant impact to the results of operations in any particular quarter. Historically, a significant portion of the Company's revenue is generated from shipments in the last month of a quarter. In addition, higher volumes of orders have been experienced in the second and fourth quarter. The concentration of orders makes projections of quarterly financial results difficult. If customers delay their orders or a disruption in the Company's distribution occurs, quarterly results of operations in any particular quarter may be negatively impacted. A significant portion of the Company's revenue is from the international market. As a result, the Company's financial results could be impacted by weakened general economic conditions, differing technological advances or preferences, volatile foreign exchange rates and government trade restrictions in any country in which the Company does business. The Company relies on distributors, representatives and value added resellers to market its products. The Company's revenue in any particular quarter may be negatively impacted by a lower than anticipated performance of any significant distributor, representative or value added reseller. The Company's success is dependent on its ability to continue to develop, enhance and market new products to meet its customers' sophisticated needs in a timely manner and which are consistent with current technological developments. The Company's success also depends in part on its ability to attract and retain technical and other key employees who are in great demand, to protect the intellectual property rights of its products and to continue key relationships with third party authors. As development cycles become shorter, product quality, performance, reliability, ease of use, functionality, breadth and integration may be impacted. Therefore, customer acceptance of new products cannot be assured. The CAD/CAE/CAM software industry is highly competitive. The entire industry may experience pricing and margin pressure which as a result could adversely affect the Company's operating results and financial position. In addition, the Company's expense levels are based, in part, on its future revenue expectations. The Company continues to increase its operating expense levels to meet the growing customer demand for the Company's products and services. If revenue is below expectations, operating results could be adversely and materially affected. Net income may be disproportionately affected by an unexpected reduction in revenue because the Company's expense levels are generally committed in advance and a relatively small portion of the Company's expenses vary with revenue. The acquisition and integration of the remaining 50% interest in Metaphase Technology, Inc. may impact future results. Future results could also be impacted by the continued integration of the Company and Camax Manufacturing Technologies, Inc. (see Note 2 to the Consolidated Financial Statements). In addition, the Company is in the process of upgrading its world-wide information management system. Such a major undertaking could cause significant disruption as a result of unexpected delays in the implementation of this project. There can be no assurance that the project will be completed within the projected time frame and budget. The trading price of the Company's stock, like other software and technology stocks, is subject to significant volatility due to factors impacting the overall market which are unrelated to the Company's performance. The historical results of operations and financial position of the Company are not necessarily indicative of future financial performance. If revenues or earnings fail to meet securities analysts' expectations, there could be an immediate and significant adverse impact on the trading price of the Company stock. The Company has not experienced a material adverse impact of such risks or uncertainties and does not anticipate such an impact. However, no assurance can be given that such risks and uncertainties will not affect the Company's future results of operations or its financial position. Report of Independent Accountants To the Board of Directors and Shareholders of Structural Dynamics Research Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of cash flows and of shareholders' equity present fairly, in all material respects, the financial position of Structural Dynamics Research Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As described in Note 7 to the consolidated financial statements, in 1994 the Company changed its method of accounting for postemployment benefits. Cincinnati, Ohio January 24, 1997 CONSOLIDATED STATEMENT OF OPERATIONS Structural Dynamics Research Corporation
Year ended December 31 (in thousands, except per share data) 1996 1995 1994 ------- -------- --------- Revenue: Software licenses $153,058 $131,211 $115,051 Software maintenance and services 132,198 92,927 70,307 ------- ------- ------- Total revenue 285,256 224,138 185,358 ------- ------- ------- Cost of revenue: Software licenses 27,719 24,659 20,311 Software maintenance and services 60,454 40,342 31,347 ------- ------- ------- Total cost of revenue 88,173 65,001 51,658 ------- ------- ------- Gross profit 197,083 159,137 133,700 Operating expenses: Selling and marketing 109,700 97,272 99,744 Research and development 30,719 24,472 24,917 General and administrative 16,139 13,584 13,501 ------- ------- ------- Total operating expenses 156,558 135,328 138,162 -------- ------- ------- Operating income (loss) 40,525 23,809 (4,462) Equity in losses of affiliates (230) (951) (5,329) Acquisition costs (1,102) -- -- Litigation settlement -- (24,300) -- Other income, net 3,132 1,150 2,095 -------- ------- ------- Income (loss) before income taxes and cumulative effect of accounting change 42,325 (292) (7,696) Income tax expense 8,636 7,179 3,881 -------- ------- ------- Income (loss) before cumulative effect of accounting change 33,689 (7,471) (11,577) Cumulative effect of accounting change -- -- (3,896) ------- -------- --------- Net income (loss) $ 33,689 $ (7,471) $(15,473) ======= ========= ========= Income (loss) per share: Before cumulative effect of accounting change $ .97 $ (.24) $ (.39) Cumulative effect of accounting change -- -- (.13) ------- --------- --------- Net income (loss) per share $ .97 $ (.24) $ (.52) ======= ========= ========= Weighted average common shares outstanding 34,790 30,930 29,853 ======= ========= ========= See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET Structural Dynamics Research Corporation
December 31 (in thousands, except per share data) 1996 1995 Assets Current assets: Cash and cash equivalents $ 71,278 $ 61,848 Marketable securities 18,502 15,731 Trade accounts receivable, net of allowances of $3,281 and $2,520 61,743 57,927 Other accounts receivable 7,464 10,236 Prepaid expenses and other current assets 7,918 6,283 ------ -------- Total current assets 166,905 152,025 Marketable securities 10,509 4,465 Net property and equipment 20,945 14,521 Computer software construction costs, net 28,614 30,568 Other assets 11,106 2,805 ------- ------- Total assets $238,079 $204,384 ======= ======= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 9,695 $ 10,602 Accrued expenses 14,926 14,728 Accrued compensation 21,119 19,234 Accrued litigation settlement and related costs 10,104 28,600 Accrued income taxes 8,082 6,396 Deferred revenue 36,460 34,777 ------- ------- Total current liabilities 100,386 114,337 ------- ------- Other long-term liabilities 8,394 8,675 Commitments and contingencies (Note 8) Shareholders' equity: Common stock, stated value $.0069 per share Authorized 100,000 shares; outstanding shares - 32,760 and 31,584 net of 1,542 and 1,510 shares in treasury 228 220 Capital in excess of stated value 87,292 73,512 Retained earnings 41,510 7,821 Foreign currency translation adjustment 298 -- Unrealized holding loss on investments (29) (181) ------- ------- Total shareholders' equity 129,299 81,372 ------- ------- Total liabilities and shareholders' equity $238,079 $204,384 ======= =======
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Structural Dynamics Research Corporation
Foreign Unrealized Total Common stock Capital in currency holding gain share- outstanding excess of Retained translation (loss) on holders' (in thousands) Shares Stated value stated value earnings adjustment investments equity ------- ------------ ------------ -------- ---------- ----------- ------ December 31, 1993 As previously reported 28,709 $199 $45,376 $39,625 $(619) $ -- $ 84,581 Pooling-of- interests (Note 2) 967 7 14,174 (8,860) 5,321 ------ ---- ------ ------ ----- ------- ------- December 31, 1993, as restated 29,676 206 59,550 30,765 (619) -- 89,902 Transactions involving employee stock plans 228 2 1,558 1,560 Purchases of treasury stock (40) (470) (470) Net loss (15,473) (15,473) Foreign currency translation adjustment 29 29 Unrealized holding loss on marketable securities (669) (669) ------ ---- ------ ------- ----- ------ ------- December 31, 1994, as restated 29,864 208 60,638 15,292 (590) (669) 74,879 Transactions involving employee stock plans 1,832 13 14,761 14,774 Purchases of treasury stock (112) (1) (1,887) (1,888) Net loss (7,471) (7,471) Foreign currency translation adjustment 590 590 Unrealized holding gain on marketable securities 488 488 -------- ----- ------- ------- ----- ----- ------ December 31, 1995, as restated 31,584 220 73,512 7,821 -- (181) 81,372 Transactions involving employee stock plans 1,267 9 17,704 17,713 Purchases of treasury stock (91) (1) (2,688) (2,689) Payment for Camax dissenter's rights (1,236) (1,236) Net income 33,689 33,689 Foreign currency translation adjustment 298 298 Unrealized holding gain on marketable securities 152 152 ------ ---- ------- -------- ------ ------ -------- December 31, 1996 32,760 $228 $87,292 $41,510 $ 298 $ (29) $129,299 ====== ===== ======= ======== ====== ====== ========
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF CASH FLOWS Structural Dynamics Research Corporation
Year ended December 31 (in thousands) 1996 1995 1994 ------ ------ ------ Cash flows from operating activities: Net income (loss) $ 33,689 $ (7,471) $(15,473) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 8,073 7,697 8,479 Amortization of computer software construction costs 11,779 8,475 7,137 Deferred taxes (2,125) 563 4 Equity in losses of affiliates 230 951 5,329 Litigation settlement -- 24,300 -- Loss on sale of UK test and analysis division -- 1,878 -- Postemployment benefits accounting change -- -- 3,896 Other (17) (282) 971 Changes in assets and liabilities, net of SDRC GmbH 1995 acquisition: Increase in accounts receivable, net (1,044) (10,699) (14,396) (Increase) decrease in prepaid expenses (1,635) 696 (790) (Increase) decrease in other assets (7,261) 564 (233) Decrease in current long-term debt -- (19) (5) (Decrease) increase in accounts payable and accrued expenses (17,320) (3,793) 5,243 Increase (decrease) in accrued income taxes 1,686 2,134 (1,109) Increase in deferred revenue 1,683 10,623 7,010 Increase (decrease) in other long- term liabilities 2,356 (1,824) 2,118 ------ -------- ------ Net cash provided by operating activities 30,094 33,793 8,181 ------ -------- ------ Cash flows from investing activities: Purchases of marketable securities (25,612) (32,781) (33,835) Proceeds from sales of marketable securities 16,949 38,492 29,112 Additions to property and equipment, net (14,250) (5,706) (5,778) Proceeds from sale of UK test and analysis division -- 524 -- Additions to computer software construction costs (9,825) (8,189) (9,534) Acquisition of remaining shares of SDRC GmbH, net of cash received -- 1,152 -- Investment in and advances to joint ventures (1,500) (2,193) (1,823) ------ ------ ------ Net cash used in investing activities (34,238) (8,701) (21,858) ------ ------ ------ Cash flows from financing activities: Issuance of common stock 17,713 14,774 1,560 Purchases of treasury stock (2,689) (1,888) (470) Payment for Camax dissenter's rights (1,236) -- -- Issuance of long-term debt -- 371 361 Repayment of long-term debt (512) (634) (704) ------- ------- ------- Net cash provided by financing activities 13,276 12,623 747 ------- ------- ------- Effect of exchange rate changes on cash 298 -- 29 ------- ------- ------- Increase (decrease) in cash and cash equivalents 9,430 37,715 (12,901) Cash and cash equivalents: Beginning of period 61,848 24,133 37,034 ------ ------- ------- End of period $ 71,278 $ 61,848 $ 24,133 ====== ======= ======= Cash paid during the year for income taxes $ 10,462 $ 5,941 $ 3,425 ====== ======= =======
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Structural Dynamics Research Corporation (in thousands, except per share data) (1) Summary of Significant Accounting Policies Business Structural Dynamics Research Corporation (the "Company" or "SDRC") is a leading international supplier of mechanical design automation (MDA) software, product data management (PDM) software and related services. Basis of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Investments in which the Company has significant influence, but not control, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated. Use of Estimates The financial statements, which are prepared in conformity with generally accepted accounting principles, require management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates based on the facts and circumstances existing at the date of the financial statements include the estimated useful lives of computer software construction costs and the likelihood of realization of the deferred tax assets. Revenue Recognition The use of software programs is licensed through the Company's direct sales force and by specific arrangements with certain distributors, value-added resellers and other marketing representatives. Revenue generated from licenses is recognized when the following criteria have been met: (a) a written order for the unconditional license of software and a software license agreement have been received, (b) the Company has shipped the products to the customer and performed substantially all services for which it was committed, (c) the customer is obligated to pay and (d) collectibility is probable. Under the terms of a former licensing agreement with an OEM customer, the Company was unable to determine the amount of revenue earned until cash was received from the customer. In 1994, when the Company terminated this licensing agreement, revenue totaling $5,877 was recorded on the cash basis. Revenue from maintenance contracts is recognized ratably over the term of the agreement and the deferred portion represents the substantial component of deferred revenue. Revenue from engineering consulting, customer training and other services is recognized as the service is performed. Cost of Revenue The cost of licenses primarily consists of the cost of distributing the software products and an allocation of the amortization of capitalized software construction costs and royalty fees paid to third parties under licensing agreements. Cost of maintenance and services primarily consists of the staff and related costs associated with the generation and support of software service revenue and an allocation of the amortization of capitalized software construction costs and royalty fees paid to third parties under licensing agreements. The allocation between cost of licenses and maintenance and services is based upon the percentage of the related revenue source to total revenue. Management believes that the methodology for allocating the costs is reasonable. (1) Summary of Significant Accounting Policies - continued Cash Equivalents and Marketable Securities Cash equivalents include highly liquid investments in interest bearing accounts, commercial paper and reverse repurchase agreements with an original maturity of less than 90 days. Marketable securities consist of U.S. treasuries and U.S. government agency obligations. Short-term marketable securities have a maturity term in excess of 90 days but less than one year. Long-term marketable securities have a maturity term in excess of one year. The Company also has an unused unsecured $15,000 bank line of credit. All cash equivalents and marketable securities are classified as available for sale and recorded at market value. Unrealized gains and losses are included in a separate component of shareholders' equity. Realized and unrealized gains and losses are determined based on the specific identification method. Financial Instruments The carrying amounts of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, accrued expenses and forward foreign exchange contracts approximate fair value due to the short-term nature of these financial instruments. Concentrations of Credit Risk Cash equivalents, marketable securities and accounts receivable represent a potential credit risk to the Company. The Company invests its excess cash with government and major financial institutions having strong credit ratings. Company policy sets credit ratings and maturity terms that limit the risk of credit exposure and maintain necessary liquidity. The Company's revenue is generated from a significant customer base in diversified industries across different geographic areas. Revenue from a customer represented 11% of consolidated revenue in 1996 and a distributor represented 12%, 13% and 10% of consolidated revenue in 1996, 1995 and 1994, respectively. The Company performs ongoing credit evaluations of its customers and has not experienced any material losses related to an individual customer or groups of customers in any particular geographic area. Management believes allowances for potential credit losses are adequate in the circumstances. Foreign Currency Translation For 1996 the functional currency of the international operations is the local currency. Foreign currency financial statements are translated at period-end exchange rates for assets and liabilities and at weighted average exchange rates for the results of operations. The translation gains and losses, which were not material, are accumulated in a separate component of shareholders' equity. The functional currency changed to the operations' local currency from the U.S. dollar in 1996 based upon changes in the Company's operating and economic environment. The Company's European operations have become more autonomous due to improved profitability of the subsidiaries and have generated sufficient cash flows from operations to support their operating and capital needs. Utilization of local European resources have been expanded due to the local European customer demand of implementation, support and customization of the Company's software products and the establishment of a European product development staff. Prior to 1996, for operations where the functional currency was the U.S. dollar, the foreign currency gains and losses, which were not material, were included in determining the results of operations. Foreign Exchange Contracts The Company enters into forward foreign exchange contracts denominated in foreign currencies to hedge certain foreign currency denominated receivables. Any market gains and losses associated with these financial instruments are recorded currently in income to offset any gains and losses arising from foreign currency exchange transactions. The resulting gains and losses were not material. The interest element of the foreign currency instruments is recognized over the life of the contract. As of December 31, 1996, the Company did not have any forward foreign exchange contracts outstanding. (1) Summary of Significant Accounting Policies - continued Property and Equipment Depreciation for property and equipment is primarily computed using the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized using the straight-line method over the lesser of the life of the lease or the estimated useful life of the improvement. The general ranges of years used in calculating depreciation and amortization are: computer and other equipment, 2-5 years; office furniture and equipment, 7 years; leasehold improvements, 1-10 years. Computer Software Construction Costs The Company designs, develops and markets computer software products. Costs related to the construction of software that are incurred after the technological feasibility of the product has been demonstrated are capitalized and amortized over the useful lives of such software. Computer software construction costs are shown net of accumulated amortization of $32,022 and $20,243 at December 31, 1996 and 1995, respectively. Beginning in 1996, the Company began amortizing the software construction costs related to new releases of the I-DEAS Master Series product over a three year period based upon the estimated future economic life of the product. Amortization is calculated on a product-by-product basis and is the greater of the ratio that current product revenue bears to the total of current and anticipated future years' revenue or the straight-line method over the remaining estimated economic lives of the software products. Income Taxes In accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. As of December 31, 1996, no benefit was currently recognized for a substantial portion of the Company's U.S. deferred tax assets since it is more likely than not that they will not be realized based upon the Company's current and anticipated mix over the next four years of domestic and foreign pre-tax accounting income, tax credits, and deductions from non-qualified stock option exercises. The Company does not accrue Federal income taxes on undistributed earnings of its foreign subsidiaries that (1) have been, or are intended to be, permanently reinvested or (2) if remitted, would not have material income tax consequences. Undistributed earnings amounted to approximately $12,396 at December 31, 1996. Per Share Data Income (loss) per common and common equivalent share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Primary and fully diluted income (loss) per share and common and common equivalent shares are the same for all periods presented. Dilutive common equivalent shares are calculated using the treasury method and consist of stock option grants and an estimated number of shares to be issued in settlement of litigation (see Note 8). (2) Business Acquisitions Metaphase Technology, Inc. In 1992 the Company and Control Data Systems, Inc. established a joint venture company, Metaphase Technology, Inc. (Metaphase), to develop and market product data management software worldwide. The Company initially owned a 30% interest and increased such interest to 50% during 1993. The Company's investment in Metaphase has been accounted for on the equity basis. In January 1997 the Company acquired the remaining stock of Metaphase and certain assets of Control Data Systems, Inc.'s global PDM software sales and support business. The purchase price of approximately $31,000 includes cash and a stock warrant. The warrant is exercisable for 750 shares of the Company's common stock without par value at the exercise price of $28 per share and expires on December 31, 1998. The acquisition will be accounted for using the purchase method. Camax Manufacturing Technologies, Inc. In June 1996 the Company completed the acquisition of Camax Manufacturing Technologies, Inc. (Camax) and its wholly owned subsidiaries. Camax provides computer-aided manufacturing (CAM) software for computerized-numerical-control machining operations. The Camax products and services are designed to simplify, automate and optimize the machining process to streamline production and accelerate time-to-market. In exchange for 100 percent ownership of Camax common stock, SDRC issued approximately 967 shares of SDRC common stock and paid approximately $1,236 to a Camax shareholder who exercised dissenter's rights. The market value of the shares and cash paid was approximately $30,000. Acquisition charges of $1,102 were recorded in the second quarter of 1996. The acquisition has been accounted for as a pooling-of-interests. All historical financial data of the Company has been restated to include the results of Camax for all periods presented. Revenue and net income (loss) of the separate companies for the periods before the Three months Year ended Year ended acquisition ended March December December are as follows: 31, 1996 31, 1995 31, 1994 Revenue: SDRC $60,971 $204,084 $167,547 Camax 4,078 20,054 17,811 ------ -------- --------- Total revenue $65,049 $224,138 $185,358 ====== ======== ========= Net income (loss): SDRC $ 6,860 $ (8,467) $(12,897) Camax (504) 996 (2,576) ------ -------- ------- Net income (loss) $ 6,356 $ (7,471) $(15,473) ====== ======== ======= Adjustments recorded to adopt the same accounting practices are not material to the consolidated financial statements. (2) Business Acquisitions - continued SDRC Software and Services, GmbH In 1994 the Company formed a joint venture with Siemens Nixdorf Informationssysteme AG and in 1995 purchased the remaining interest of SDRC GmbH. The acquisition was accounted for using the purchase method. As of the acquisition date, 100% of the operating results of SDRC GmbH are included in the consolidated financial statements. Proforma results of the purchase are not presented as the amounts are not material to the consolidated financial statements. ESTECH Corporation In 1989 the Company and Nissan Motor Co., Ltd. established a Japanese joint venture company, ESTECH Corporation (ESTECH) to provide engineering services in Japan and the Asia-Pacific areas. The Company owns a 30% interest in ESTECH. The impact of its results are not material to the Company's results of operations. Joint Venture Data Financial data for the year ended December 31, 1995 for Metaphase and for the year ended December 31, 1994 for Metaphase and SDRC GmbH is presented below: Year ended and as of December 31 1995 1994 Current assets $ 3,304 $ 5,905 Non-current assets 4,766 4,426 Current liabilities 8,901 8,564 Non-current liabilities 3,470 6,760 Net revenue 11,295 14,379 Loss before income taxes (405) (10,483) Net loss $ (417) $(10,502 The financial impact of Metaphase for 1996 is not considered material. (3) Marketable Securities December 31, December 31, 1996 1995 Fair Amortized Fair Amortized Marketable Value Cost Value Cost securities consist of: Short-term: Available-for-sale $18,502 $18,468 $11,231 $11,240 Held-to-maturity certificates of deposit -- -- 4,500 4,500 -------- ------ ------ ------ Total short-term marketable securities $18,502 $18,468 $15,731 $15,740 ======== ====== ====== ====== Long-term: Available-for-sale $10,509 $10,572 $ 4,465 $ 4,637 ======== ====== ====== ====== Available-for-sale marketable securities have maturities of $18,502 in 1997, $9,620 in 1998 and $889 in 2013. (4) Property and Equipment Property and equipment, December 31 recorded at cost, consist of: 1996 1995 Property and equipment, at cost: Computer and other equipment $ 49,376 $ 40,164 Office furniture and equipment 14,535 11,762 Leasehold improvements 5,695 4,125 ------ ------ 69,606 56,051 Less accumulated depreciation and amortization (48,661) (41,530) ------ ------ Net property and equipment $ 20,945 $ 14,521 ====== ====== Future minimum lease payments under noncancelable operating leases for the five years ending December 31, 2001 approximate $11,785, $10,290, $6,646, $4,292 and $3,928, respectively, and $41,523 thereafter. Total rental expenses under operating leases for the years ended December 31, 1996, 1995 and 1994 were $16,426, $14,576 and $13,811, respectively. (5) Income Taxes Year ended December 31 Pre-tax accounting income (loss) consists of the following: 1996 1995 1994 Domestic $27,777 $(6,164) $(7,443) Foreign 14,548 5,872 (253) ------ ------ ------ $42,325 $ (292) $(7,696) ====== ====== ====== Year ended December 31 The provision for income taxes consists of the following: 1996 1995 1994 Federal: Current $ 1,234 $ 35 $(1,722) Deferred (2,125) 563 4 ------ ----- ------ (891) 598 (1,718) State 1,418 282 418 Foreign: Income taxes 3,125 2,215 1,118 Withholding taxes 4,984 4,084 4,063 ------ ------ ------ Income tax expense $ 8,636 $7,179 $ 3,881 ====== ====== ====== Deferred state and foreign taxes are not material. (5) Income Taxes - continued
The provision for income taxes differs from the amounts computed by using the statutory U.S. Federal income tax rate. The reasons for the differences Year ended December 31 are as follows: 1996 1995 1994 ------ ------ ------ Computed expected income tax expense (benefit) $14,814 $ (102) $(2,694) Increase (reduction) resulting from: Foreign withholding taxes, without current benefit -- 4,084 4,063 Foreign income taxed at other than the U.S.statutory rate (1,966) 160 1,207 U.S. losses without tax benefit -- 2,157 2,605 Utilization of U.S. tax carryforwards (4,806) -- -- Receipt of research and experimentation tax credit refund not previously recorded -- -- (1,754) Change in net deferred taxes (2,125) 563 4 Alternative minimum taxes 1,125 -- -- State taxes, net of federal benefit 922 282 418 Other 672 35 32 ------ ------ ------ Income tax expense $ 8,636 $7,179 $ 3,881 ====== ====== ======
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities December 31, are as follows: 1996 1995 Deferred tax assets: Revenue recognition and accounts receivable $ 2,580 $ 1,997 Property and equipment 1,114 1,297 Computer software construction costs and capitalized research expenses, net of amortization 10,794 229 Accrued lawsuit settlement 3,536 8,260 Other liabilities and reserves 5,006 6,247 Tax credit and net operating loss carryforwards 12,482 17,103 Other 1,450 1,380 ------- ------- Total deferred tax assets 36,962 36,513 Valuation allowance (34,837) (36,513) ------- ------- Net deferred tax assets 2,125 -- ------- ------- Deferred tax liabilities -- -- ------- ------- Total net deferred taxes $ 2,125 $ -- ======= ======= Of the $12,482 in tax carryforwards available at December 31, 1996, $6,908 expire in the years 1997 through 2000 and the remainder expire thereafter through the year 2011. $2,125 of alternative minimum taxes never expire. The net change in the valuation allowance for deferred tax assets was a decrease of $1,676 in 1996 and an increase of $12,679 in 1995. Of the $34,837 in valuation allowance at December 31, 1996, $15,353 is attributable to the tax benefit of stock option exercises. Such benefits will be credited to capital in excess of stated value when realized. (6) Shareholders' Rights Plan In 1988 the Board of Directors adopted a Shareholders' Rights Plan to protect shareholders' interests in the event of an unsolicited attempt to gain control of the Company. Under the Shareholders' Rights Plan, shareholders are granted certain rights in the event of a triggering event ("Rights"). The Rights become exercisable if a person acquires 20% or more of the Company's outstanding common stock or announces a tender offer which would result in a person or group acquiring 20% or more of the common stock (Distribution Date). If, at any time following the Distribution Date, the Company has not redeemed the Rights, the Company becomes the surviving corporation in a merger or a person becomes the beneficial owner of 20% or more of the Company's common stock (Triggering Date), each holder of a Right will have the right to purchase shares of the Company's common stock having a value equal to two times the Right's exercise price of $110. If, at any time following the Triggering Date, the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation, each holder of a Right shall have the right to purchase shares of common stock of the acquiring company having a value equal to two times the exercise price of the Right. The Rights expire on August 10, 1998, and may be redeemed by the Company for $.0025 per Right. (7) Common Stock and Employee Benefit Plans Stock Option Plans Under the 1991 Employee Stock Option Plan, the Company has reserved 5,300 shares of previously unissued common stock. Under the plan, options to purchase shares may be granted to key employees and executive officers at the fair market value at the date of grant. In 1991 the adoption of the Director's Non-Discretionary Stock Option Plan converted the Amended and Restated 1986 Stock Option Plan into a non-discretionary plan allowing future grants to outside directors at the fair market value at the date of grant. Under the original 1986 plan, the Company had reserved 7,000 shares of previously unissued common stock. The status of all outstanding options previously granted to employees remained unchanged. In 1994 the shareholders adopted the 1994 Long-Term Stock Incentive Plan, allowing stock incentives including stock options, stock appreciation rights, stock awards, and any combination to be granted to employees. The number of shares with respect to which stock incentives may be granted in one calendar year shall not exceed 4% of the Company's issued and outstanding common stock. No stock incentives other than non-qualified stock options have been granted under the 1994 plan. Under the plans, employee options expire ten years from the date of grant and are exercisable as follows: 33% on the first anniversary of the grant date; an additional 34% on the second anniversary; and all or any remaining options on the third anniversary until expiration. Director options expire five years from the date of grant and are exercisable 50% upon expiration of six months from the grant date and all or any remaining options on the first anniversary of the grant date until expiration. With the acquisition of Camax on June 30, 1996, the Company assumed approximately 175 outstanding stock options representing all of Camax's obligations under five existing stock option plans and certain out-of-plan options. The assumed stock options and stock appreciation rights were generally granted to employees and directors of Camax at 100% of the market value at the date of grant and expire ten years from date of grant. No additional stock options will be granted under the Camax plans. (7) Common Stock and Employee Benefit Plans - continued Stock Option Plans - continued
Weighted Weighted Weighted Average Average Average Stock Exercise Stock Exercise Stock Exercise Options Price Options Price Options Price ----------------- ----------------- ----------------- December 31, 1996 December 31, 1995 December 31,1994 Outstanding at beginning of the year 5,008 $12.09 7,289 $12.58 7,446 $13.19 Granted 1,337 $30.09 1,143 $ 7.54 1,365 $10.93 Exercised (1,169) $11.11 (1,510) $ 7.90 (153) $ 4.92 Cancelled (231) $13.93 (1,914) $14.90 (1,369) $14.96 Outstanding at end of the year 4,945 $17.10 5,008 $12.09 7,289 $12.58 Options exercisable at year end 2,935 $13.71 3,227 $13.36 5,310 $12.45
The weighted average fair value of options granted in 1996 was $13.76 and in 1995 was $3.69. Information regarding options outstanding as of December 31, 1996 is as follows:
Weighted Average Weighted Weighted Stock Remaining Average Stock Average Range of Options Contractual Exercise Options Exercise Exercise Prices Outstanding Life Price Exercisable Price - --------------- ----------- ----------- --------- ----------- --------- $ 1.38 - $ 5.50 367 2.54 $ 4.59 351 $ 4.56 $ 5.63 - $ 6.31 630 8.01 $ 6.26 180 $ 6.27 $ 7.13 - $ 9.88 182 3.76 $ 9.63 168 $ 9.71 $10.17 - $11.13 606 6.70 $11.07 411 $11.05 $11.25 - $15.06 203 5.74 $12.94 164 $12.96 $15.50 - $15.50 579 5.92 $15.50 579 $15.50 $15.94 - $16.75 583 4.79 $16.37 578 $16.36 $17.19 - $20.13 518 5.38 $19.94 424 $20.06 $20.19 - $20.44 175 8.03 $26.00 52 $27.22 $29.44 $31.25 1,102 9.08 $31.25 28 $31.25 - --------------- ----- ---- ------ ----- ------ $1.38 - $31.25 4,945 6.53 $17.10 2,935 $13.71 =============== ===== ==== ====== ===== ======
Stock Purchase Plan Under the Stock Purchase Plan, all domestic full-time employees who are non-executive officers are entitled to purchase the Company's common stock at 90% of fair market value. Employees electing to participate must contribute at least 1% with a maximum of 10% of the participant's base salary and commissions each month. All incidental expenses related to the issuance of these shares including the 10% discount have been charged to income. The plan has no fixed expiration date, may be terminated by the Company at any time and has no limitation on the number of shares that may be issued. (7) Common Stock and Employee Benefit Plans - continued Tax Deferred Capital Accumulation Plan The Structural Dynamics Research Corporation Tax Deferred Capital Accumulation Plan (401(k) Plan) is a defined contribution plan covering all salaried employees of the domestic divisions of the Company. Employees may make contributions to the 401(k) Plan by authorizing a reduction of their compensation of at least 1% up to a maximum of 15%. The Company may provide a matching contribution in the form of Company stock or cash equal to 50% of the employee contribution, up to a maximum of 6% of the employee compensation. Participants are immediately vested in their voluntary contributions and are vested in the Company contributions after three years of continuous service. Other Employee Benefit Plans The Company provides retirement benefits to substantially all employees through defined contribution plans. The Company's contributions are primarily based on employee compensation and years of service. Expenses related to the 401(k) Plan and other defined contribution plans were approximately $3,225, $3,044 and $2,122 in 1996, 1995 and 1994, respectively. Postemployment Benefits Plans The Company provides severance benefits for involuntarily terminated employees attributable to employees' prior service. In the first quarter of 1994, the cumulative effect of adopting SFAS No. 112 "Employers' Accounting for Postemployment Benefits" reduced income by $3,896, net of zero tax benefit. Stock-Based Compensation The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized in the results of operations for the stock option grants. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been reduced to the pro forma amounts as follows: 1996 1995 Net income (loss) - as reported $33,689 $(7,471) Net income (loss) - pro forma 28,268 (8,547) Income (loss) per share - as reported .97 (.24) Income (loss) per share - pro forma $ .81 $ (.28) The pro forma effect on the Company's net income (loss) and income (loss) per share for 1996 and 1995 is not representative of the pro forma effect in future years. The pro forma effect does not take into consideration compensation expense related to grants made prior to 1995 or additional grants in future years which are anticipated. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: dividend yield of 0%; expected volatility of 62.8%; risk-free interest rate of 5.6%; and expected terms of 1.86 years, adjusted for vesting requirements. (8) Commitments and Contingencies Except for the following matters, SDRC is not a party to any litigation other than ordinary routine litigation incidental to its business. The Company was a defendant in a class action suit alleging violations of certain federal securities laws, captioned In Re: Structural Dynamics Research Corporation Securities Litigation, United States District Court, Southern District of Ohio, Consolidated Master File No. C-1-94-630. In December 1995, the parties to this matter entered into a Memorandum of Understanding for settlement, subject to final Court approval. On March 22, 1996, the Court approved the proposed settlement and a final order was entered. Pursuant to the order, a settlement fund of $37.5 million was established, consisting of $17.6 million cash provided by the Company, $10.0 million in shares of the Company's common stock (to be valued-based on the market price at the time of distribution), and $9.9 million cash provided by the Company's former accountants. The settlement does not constitute an admission of liability on the part of any defendant. The Company's Board of Directors determined that the settlement was in the best interest of the Company and its shareholders in light of the uncertainty of the outcome, the high cost of continued litigation, and the high level of management time and attention continued litigation would have required which could be better spent on the Company's business. The Company was a party to shareholders' derivative litigation captioned In Re: Structural Dynamics Research Corporation Derivative Litigation, United States District Court, Southern District of Ohio, Consolidated Master File No. C-1-94-650. The Company paid the plaintiffs' counsel fees of approximately $900 and $50 for their out-of-pocket expenses in full settlement of the matter. The parties' agreement was approved by the United States District Court on July 19, 1996. Based on the same facts which gave rise to the Class Action Case and the Derivative Case, the Securities and Exchange Commission commenced a formal, private investigation of SDRC in September 1994 which remains pending. SDRC is fully cooperating with this investigation but cannot predict its outcome. Pursuant to certain contractual obligations, the Company has agreed to indemnify its directors and officers under certain circumstances against claims arising from lawsuits. The Company may be obligated to indemnify certain of its directors and officers for the costs they may incur as a result of the lawsuits. (9) Other Income, Net Year ended December 31 Other income, net consists of: 1996 1995 1994 Interest income $ 4,535 $ 3,651 $ 2,349 Loss on sale of UK test and analysis division -- (1,878) -- Other (1,403) (623) (254) Other income, net $ 3,132 $ 1,150 $ 2,095 In July 1995, SDRC sold its test and analysis division located in the United Kingdom to MascoTech Engineering Europe Limited for net proceeds of $524 and realized a loss on the sale of $1,878. The loss includes foreign currency losses and estimated costs pertaining to a lease commitment. Other consists of net foreign currency exchange gains and losses and, in 1996, the derivative litigation settlement. (10) Segment and Geographic Information The Company operates in a single industry segment providing mechanical design automation software and related services to manufacturers for the design, analysis, testing and manufacturing of mechanical products. SDRC also supplies product data management systems providing a comprehensive approach to the management and control of engineering information.
Financial data by geographic area Operating Identifiable is as follows: Revenue Income(Loss) Assets ------- ------------ ------------ Year ended December 31, 1996 North America $136,532 $ 19,889 $ 81,140 Europe 80,275 16,014 47,470 Asia-Pacific 68,449 16,581 18,737 Corporate -- (11,959) 90,732 ------- ------- ------- Consolidated $285,256 $ 40,525 $238,079 ======= ======= ======= Year ended December 31, 1995 North America $102,271 $ 12,369 $ 67,774 Europe 61,420 7,949 39,024 Asia-Pacific 60,447 14,929 14,637 Corporate -- (11,438) 82,949 ------- ------- ------- Consolidated $224,138 $ 23,809 $204,384 ======= ======= ======= Year ended December 31, 1994 North America $ 83,750 $ 5,777 $ 60,698 Europe 48,960 (248) 26,620 Asia-Pacific 52,648 1,308 6,421 Corporate -- (11,299) 58,198 ------- ------- -------- Consolidated $185,358 $ (4,462) $151,937
Depreciation and Financial data by industry segment Operating Identifiable Amortization Capital for 1994 is as follows: Revenue Income (Loss) Assets Expense Expenditures --------- ------------ ------------ ------------ ------------ Year ended December 31, 1994 Software products and services $166,261 $(4,757) $ 91,674 $6,304 $5,062 Engineering services 19,097 295 9,030 1,061 391 Corporate -- -- 51,233 1,114 325 ------- ------ ------- ------ ----- Consolidated $185,358 $(4,462) $151,937 $8,479 $5,778 ======= ====== ======= ====== =====
Disclosure of industry segment data for 1995 and 1996 is not considered material. (11) Quarterly Results of Operations (Unaudited) The following table sets forth selected unaudited quarterly financial information for 1996 and 1995. The Company believes that all necessary adjustments have been included to present fairly the selected quarterly information.
Three months ended Year ended March 31, June 30, September 30, December 31, December 31, 1996 1996 1996 1996 1996 -------- ------- ------------ ----------- ------------ Revenue $65,049 $66,669 $71,777 $81,761 $285,256 Gross profit $45,912 $45,566 $49,402 $56,203 $197,083 Net income $ 6,356 $ 6,607 $ 8,379 $12,347 $ 33,689 Earnings per share $ .18 $ .19 $ .24 $ .36 $ .97
Three months ended Year ended March 31, June 30, September 30, December 31, December 31, 1995 1995 1995 1995 1995 -------- -------- ------------ ----------- ----------- Revenue $48,430 $51,382 $55,747 $ 68,579 $224,138 Gross profit $34,958 $35,958 $37,929 $ 50,292 $159,137 Net income (loss) $ 480 $ 3,036 $ 5,889 $(16,876) $ (7,471) Earnings (loss) per share $ .02 $ .09 $ .18 $ (.54) (.24)* * Per share amounts are not additive.
(12) Common Stock Information (Unaudited) The Company's common stock is listed and traded on the National Association of Securities Dealers, Inc. Automatic Quotation (NASDAQ) National Market System. The high and low bid prices per share for the Company's common stock as reported on the NASDAQ National Market System are contained in the table below. Such quotations reflect inter-dealer prices without retail mark-up, mark-down or commission. The Company paid no dividends in 1996 or 1995 and intends to continue its policy of retaining earnings to finance future growth. There were approximately 1,300 shareholders of record as of December 31, 1996. Three months ended March 31, June 30, September 30, December 31, 1996 1996 1996 1996 High 35 1/2 37 3/8 27 1/4 24 1/4 Low 22 1/4 19 1/2 15 17 1/8 Three months ended March 31, June 30, September 30, December 31, 1995 1995 1995 1995 High 9 5/8 15 20 1/4 30 1/2 Low 5 1/8 8 3/8 10 3/8 16 EX-27 6
5 1000 12-MOS DEC-31-1996 DEC-31-1996 71,278 18,502 65,024 (3,281) 0 166,905 69,606 (48,661) 238,079 100,386 0 0 0 228 129,071 238,079 285,256 285,256 88,173 156,558 (1,800) 2,689 0 42,325 8,636 33,689 0 0 0 33,689 .97 .97
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