-----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, EX/g/aHYfzeEqoRU0N9a508RietUxohjz5ZTg5gL9NwcYPLSauE0ZzNvO/bAJpDu A95+zdo018OKE3hGH34b5w== 0000906318-99-000032.txt : 19990402 0000906318-99-000032.hdr.sgml : 19990402 ACCESSION NUMBER: 0000906318-99-000032 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: SEC FILE NUMBER: 000-16230 FILM NUMBER: 99580406 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________ FORM 10-K __________________ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number 33-16541 December 31, 1998 STRUCTURAL DYNAMICS RESEARCH CORPORATION An Ohio Corporation I.R.S. Employer Identification No. 31-0733928 2000 Eastman Drive, Milford, Ohio 45150 Telephone Number (513) 576-2400 __________________ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of class Common Stock without par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No __________________ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] __________________ As of March 18, 1999, 35,642,423 shares of Common Stock were outstanding. The aggregate market value of Common Stock held by non-affiliates was $424,984,714 at that date. __________________ DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated: Registrant's Annual Report to Shareholders for the year ended December 31, 1998. Part I, Part II and Part IV Registrant's definitive Proxy Statement dated April 1, 1999. Part II, Part III and Part IV PART I Factors That May Affect Future Results Information in this report may contain forward-looking statements which are based on the estimates and assumptions of management at the time such statements are made. Actual results could differ materially from those disclosed in any forward- looking statement as a result of risks and uncertainties, some of which are described in more detail in the "Factors That May Affect Future Results" section of Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" which is incorporated herein by reference to pages 23 through 31 of the Company's 1998 Annual Report to Shareholders. Item 1: Description of Business General Structural Dynamics Research Corporation (the "Company" or "SDRC") is a leading developer and supplier of enterprise-wide, product development software for mechanical design automation ("MDA") and product data management ("PDM"). Customers use the Company's software to develop mechanical products and manage information about their products. The Company's MDA software is an integrated CAD/CAM/CAE (computer-aided design, computer-aided manufacturing and computer-aided engineering) solution which helps manufactures streamline product development processes while reducing time and cost. The Company's PDM software collects comprehensive information across product life stages and readily distributes the information to users, allowing companies to leverage their knowledge to develop products better and faster. Complementing its software tools, the Company supports its customers with training, software implementation and consulting services through its professional services staff. The Company's products and services are most valuable to companies seeking to accelerate their time to market for new products, in response to increased competition, while designing and manufacturing mechanical products in accordance with specific quality and cost criteria. A broad range of customers use the Company's software tools and services with the highest concentration of users in the automotive, electronics, industrial machinery and aerospace industries. The Company was incorporated under the laws of the State of Ohio in 1967. The Company was founded to provide advanced engineering consulting services, and over time, developed some of the CAD/CAM/CAE industry's first mechanical engineering software packages to assist in its consulting efforts. After receiving strong customer interest in these software packages, the Company began marketing its software in the early 1970s. In 1987, the Company made its initial public stock offering. In recent years, the Company has made business acquisitions to expand its ability to develop and market new products to customers. In 1992, the Company and Control Data Systems, Inc. established Metaphase Technology, Inc. ("MTI") as a joint venture company to develop PDM software. In January 1997, the Company acquired the remaining stock of MTI and certain assets of Control Data Systems, Inc.'s global PDM software sales and support business. In June 1996, the Company completed the acquisition of Camax Manufacturing Technologies, Inc. ("Camax") and its wholly owned subsidiaries. Camax provided the Company technology for computer-aided manufacturing software including computerized numerical control machining operations. In 1997, the Company acquired Computer Aided Systems for Engineering, Inc. which had been a third party author of certain software drafting modules. The acquisition provided SDRC with full control of its product development for drafting and the opportunity to facilitate the creation of new products. The Company acquired Imageware Corporation ("Imageware") in November 1998. Imageware is a developer of free form surface-modeling and 3D inspection software tools for the automotive, aerospace and consumer products industries. The Company plans to integrate Imageware's surfacing technologies into SDRC's MDA software, while improving its stand-alone capabilities. In 1998, the Company acquired software from Altris Software, Inc. for the creation of document management functionality within SDRC's PDM software tools. Also in 1998, the Company established a relationship with Engineering Animation, Inc. to create a virtual product development manager ("VPDM") for customer release in 1999. Products & Services I-DEAS Product Suite The Company's MDA software is registered under the trade name I-DEAS Master Series (TM) and is utilized by many high profile, global companies. I-DEAS Master Series is an integrated software solution which allows developers to design, simulate, test and manufacture product concepts faster than the time required using stand-alone or partially integrated software tools. The I-DEAS software is specifically designed to meet the needs of developers who design products by using solid modeling technology. Developers are able to create and view a "master model," a solid representation of a product that precisely defines its geometry and material characteristics. I-DEAS Master Series allows product development team members to work concurrently on the same project sharing this common master model. The master model can be accessed and understood by representatives from a customer's management, marketing and manufacturing functions. Using I-DEAS Master Series, the master model can be analyzed to evaluate the mechanical performance and structural integrity of the design concept, as well as, to provide information that can be used to optimize product performance, study assembly sequences and evaluate manufacturability. The I-DEAS Artisan Series (TM) was specifically created to address the growing mid-price CAD market. It is also based on solid modeling technology of I-DEAS Master Series. Artisan provides high-level design functionality to smaller design groups and companies while ensuring upward data compatibility and user migration to I-DEAS Master Series. Metaphase Enterprise SDRC also develops and markets Metaphase (TM) Enterprise(R) a PDM software, which helps create, manage and control data associated with product information as it evolves through the product life cycle. Metaphase Enterprise software helps customers improve the way they organize, share and access their product data. Product developers can achieve fast, reliable access to the application used to create product designs. Managers can accurately and reliably access information about work-in-process, as well as, documentation of the entire product life cycle. Metaphase Enterprise is a web enabled, modular PDM system designed to provide the depth and breadth of functionality customers require to meet current and future data management needs. Metaphase Enterprise is compatible with client/server environments with distributed design and engineering departments. Imageware Product Suite Through its Imageware division, SDRC develops and markets a suite of surfacing and design inspection software tools. Surfacer (TM) is an advanced, three-dimensional, surface modeling software which assists developers in improving the surface quality of products under design. Surfacer reduces model development time by creating geometric dimensions and performing analysis from physical parts, without computerized descriptions. Services The Company provides customers with process automation and implementation services, as well as, technical software support and training for the software tools it markets. The Company has a worldwide professional services staff with extensive knowledge of MDA technology, engineering applications and development processes. By incorporating industry-specific, best practices utilizing SDRC software tools, the Company's service professionals assist customers in optimizing their product development process and improving their product design. In addition, advanced training and knowledge transfer can be provided to customers to enable them to integrate and leverage their MDA and PDM software investment. Advanced computer simulation methods and in-depth application expertise are available for traditional or highly specialized computer technologies, including design audits, product design, troubleshooting and engineering process design. Technical application engineers provide telephone "hotline" support and on-site customer support to customers under maintenance contracts. Customers under maintenance contract also receive software enhancement versions released during the term of their contract. The Company provides basic training for each major software package. Further training classes are offered for selected applications to support continued growth of customer skills and to increase the productivity of those who utilize SDRC software. Heterogeneous Environment/Platforms The Company's software tools are available on the leading engineering workstations using UNIX and Microsoft NT operating systems. This hardware platform independence allows the Company's customers to operate in a heterogeneous environment, selecting and adding software modules for a broad range of hardware systems based upon their unique requirements. The productivity benefits of leading-edge capabilities, such as unprecedented ease-of-use, team-oriented product development, best-in-class design, performance simulation and integrated applications, have increased the number of potential users who can utilize these tools. Product Development The Company works closely with its customers to identify their needs and define software enhancements to be incorporated into SDRC products. The Company generally develops new functionality internally, through its product development staff. The Company also arranges with third party developers to provide specific functionality through royalty arrangements and software purchase agreements. Development of CAD/CAM/CAE and PDM technology is competitive and advances can occur rapidly. There are no assurances that the Company will be successful in developing new products and that new products will achieve sufficient market acceptance. Research and development expense were approximately $64,182,000, $49,415,000 and $34,018,000 in 1998, 1997, and 1996, respectively. Sales and Marketing The Company markets its products and services through a worldwide direct sales and support force. In addition, the Company utilizes distributors, value-added resellers and other independent representatives for its selling and marketing efforts. Telemarketing is also used to sell maintenance contract renewals. Besides sales account managers, the Company's sales force includes highly skilled engineers and technical support personnel, capable of addressing the sophisticated needs of customers. The Company has a large, diverse base of customers. The Company has an established relationship with a distributor in Japan, Information Services International - Dentsu Ltd., which accounted for approximately 11%, 11% and 12% of the Company's consolidated revenues in 1998, 1997 and 1996, respectively. Revenues from the Ford Motor Company represented 13%, 14% and 11% of consolidated revenue in 1998, 1997 and 1996, respectively. Historically, a significant portion of the Company's revenue is generated from shipments in the last month of a quarter. In addition, higher volumes of orders have been experienced in the fourth quarter. The Company usually ships software licenses within one to two weeks after receipt of a customer order. Typically, orders exist at the end of a quarter, which have not been shipped; however, the value of such orders is not indicative of revenue results for any future period, or material to operating trends. Competition The market for the Company's software products is highly competitive and the Company expects competitive pressure to increase in the future. To remain technologically competitive, the Company must continually enhance its existing software products and pursue the development and introduction of new products. The principal competitive factors for the enterprise product development software and related services market, include product functionality, product integration, hardware platform support, ease of use, price, customer support, technical reputation and size of installed customer base. Additionally, the Company's employees are an important component of the SDRC's approach in providing product development solutions to its customers. The Company's success will depend in part on its ability to attract and retain a work force whose skills are competitively recruited. The Company competes against other MDA products including the CATIA and SolidWorks products marketed by Dassault Systemes, the Unigraphs and SolidEdge products marketed by Unigraphics Solutions, Inc., and the Pro/ENGINEER and CADDS products marketed by Parametric Technology Corporation. The Company also competes against other PDM products such as, Windchill marketed by Parametric Technology Corporation; MatrixOne and Sherpa Works marketed by Inso Corporation; I/MAN, marketed by Unigraphics Solutions, Inc., products marketed by SAP and others. The Company's future success will depend in a large part on its ability to further penetrate its installed customer base, as well as, the installed customer base of its competitors. Employees As of December 31, 1998, the Company had 2,366 full-time employees, of whom 644 were engaged in research and development; 376 in sales and marketing; 440 in technical support; 456 in services; and 450 in general management and administration. Other Information Segment and geographic information is included on pages 48 to 49 of the Company's Annual Report to Shareholders for the year ended December 31, 1998, and is incorporated herein by reference. As is customary throughout the software industry, the Company relies both on copyrights and trade secrecy for proprietary protection of its software products. The duration of such protection is considered to be adequate given the constantly changing nature of the business. The Company also utilizes a number of trademarks, both registered and otherwise, with respect to its software products. The proprietary status of its trademarks lasts indefinitely, as long as the trademarks remain in use. Item 2: Properties The following table sets forth certain information, as of December 31, 1998, with respect to principal properties in which the Company and its subsidiaries conduct their operations.
Space Used In Ownership Operations Location Or Lease (Square Feet) Principal Activities Cincinnati, Lease 221,000 Corporate headquarters, product Ohio (expires development center, and 2011) administration facilities Cincinnati, Lease 93,000 Sales, marketing and services Ohio (expires offices 2007) Dearborn, Lease 39,000 Product development center, Michigan (expires customer support and training 2000) facilities Minneapolis, Lease 37,000 Sales and marketing offices Minnesota (expires and product development center 2000) Minneapolis, Lease 27,000 Sales and marketing offices and Minnesota (expires product development center 1999) Eugene, Lease 22,000 Product development center Oregon (expires 1999) San Diego, Lease 21,000 Sales offices and training California (expires facility 2004) Frankfurt, Lease 19,000 Central Europe sales and Germany (expires customer support office 1999) Paris, Lease 18,000 Southern Europe sales and France (expires customer support office 2002) Tokyo, Lease 16,000 Customer support and services Japan (expires office 2003) Hitchin, Lease 15,000 European headquarters facility England (expires 2017) Seattle, Lease 12,000 Product development center, Washington (expires customer support and training 2002) facilities Ann Arbor, Lease 12,000 Product development center Michigan (expires 1999) Seoul, Lease 12,000 Sales and customer support South Korea (expires office 1999) Troy, Lease 10,000 Sales office Michigan (expires 2000)
Item 3: Legal Proceedings The Company is not a party to any litigation other than ordinary routine litigation incidental to its business. While the outcome of these ordinary, routine legal matters cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company's consolidated results of operations or consolidated financial position. Item 4: Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of 1998. Additional Item: Executive Officers of the Registrant (at March 18, 1999) Name Age Position William J. 54 Chairman of the Board, President and Chief Weyand Executive Officer Robert M. 54 Executive Vice President and Chief Nierman Operating Officer John A. 40 Vice President, Secretary and General Mongelluzzo Counsel Jeffrey J. 46 Vice President, Chief Financial Officer Vorholt and Treasurer Mark C. 42 Vice President, Products Group Goldstein William A. 50 Vice President, Marketing Carrelli William A. 40 Vice President, Human Resources Schwartz Mr. Weyand has served as President and Chief Executive Officer since he joined the Company in June 1997. He has served as Chairman of the Board since March 1998. From April 1995 until June 1997, he was Executive Vice President of Measurex Corporation where he had worldwide responsibility for all sales and customer service operations. While at Measurex Corporation, Mr. Weyand had been Senior Vice President of Worldwide Sales and Service from December 1994 to April 1995; President, North and South America from February to December 1994; Senior Vice President, U.S. and Canada Sales and Service from 1993 to February 1994; Senior Vice President, U.S. Sales and Service from 1991 to 1993. Mr. Nierman has served as Executive Vice President and Chief Operating Officer since January 1998 and served as Vice President, of the Company's Metaphase Technology Group from February 1997 until January 1998. Prior to the acquisition of Metaphase Technology, Inc. in January 1997 by SDRC, Mr. Nierman was President and CEO of Metaphase Technology, Inc. since 1992. Mr. Nierman's previous experience included a variety of senior executive positions in the sales and marketing organizations of Control Data Systems, Inc. Mr. Mongelluzzo has served as Vice President, Secretary and General Counsel since October 1991. He joined the Company in May 1986 as Assistant Counsel and was elected Assistant Secretary in October 1986 and Secretary in December 1986. Mr. Vorholt has served as Vice President, Chief Financial Officer and Treasurer since February 1995. Prior to that time, Mr. Vorholt was the Vice President and Controller since December 1994. Prior to accepting his position with the Company, he was employed by Cincinnati Bell Telephone Company as Senior Vice President - Accounting and Information Systems from 1991 to 1994, and by Cincinnati Bell Information Systems, Inc. as Senior Vice President and Director, 1989 to 1991. Mr. Vorholt is a licensed Certified Public Accountant and Attorney-at-Law. Mr. Goldstein has served as Vice President, Products Group since January 1998. From July 1997 until January 1998, he served as Vice President, I-DEAS, Product Development. From December 1995 to July 1997, he served as Vice President, SDRC Ford Program Office. Prior to assuming that role, Mr. Goldstein was a Vice President in the Company's Product Development group. Mr. Carrelli was named an executive in February 1999. He has served as Vice President, Marketing since April 1997. From 1993 to April 1997, he served as Director of Major Accounts for the Company. Mr. Schwartz joined the Company in March 1999 as Vice President, Human Resources. From 1996 to March 1999, he was Vice President, Human Resources, Americas Group for SAP Americas, Inc. where he was responsible for all human resource activities encompassing the United States, Canada and Latin America. From 1989 to 1996, he was Director of Human Resources for PECO Energy Company. PART II Item 5: Market for Registrant's Common Equity and Related Shareholder Matters The Company's common stock trades on the Nasdaq Stock Market under the symbol SDRC. Additional information, which appears on page 51 of the Company's Annual Report to Shareholders for the year ended December 31, 1998, is incorporated herein by reference. Item 6: Selected Financial Data The selected financial data for the five years ended December 31, 1998, which appears on page 22 of the Company's Annual Report to Shareholders for the year ended December 31, 1998, is incorporated herein by reference. Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations The Management's Discussion and Analysis of Financial Condition and Results of Operations, which appears on pages 23 to 31 of the Company's Annual Report to Shareholders for the year ended December 31, 1998, is incorporated herein by reference. Item 7A: Quantitative and Qualitative Disclosures About Market Risk Information regarding this item, which appears on pages 28 to 29 of the Company's Annual Report to Shareholders for the year ended December 31, 1998, is incorporated herein by reference. Item 8: Financial Statements and Supplementary Data The Consolidated Financial Statements, Supplementary Data and Report of Independent Accountants appearing on pages 32 to 51 of the Company's Annual Report to Shareholders for the year ended December 31, 1998, are incorporated herein by reference and filed as part of Exhibit 13. (The 1998 Annual Report to Shareholders is not to be deemed filed as part of this Form 10-K except for portions thereof which are expressly incorporated by reference.) Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. PART III The information required by Item 10, "Directors and Executive Officers of the Registrant," Item 11, "Executive Compensation," Item 12, "Security Ownership of Certain Beneficial Owners and Management," and Item 13, "Certain Relationships and Related Transactions" is incorporated herein by reference to the Company's definitive Proxy Statement dated April 1, 1999 which relates to its May 6, 1999 Annual Meeting of Shareholders. PART IV Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K a.1. Financial Statements The following Consolidated Financial Statements and related notes of Structural Dynamics Research Corporation and subsidiaries are included in the Annual Report to Shareholders for the year ended December 31, 1998, and incorporated herein by reference: Consolidated Statement of Operations - Years ended December 31, 1998, 1997 and 1996. Consolidated Balance Sheet - December 31, 1998 and 1997. Consolidated Statement of Shareholders' Equity - Years ended December 31, 1998, 1997 and 1996. Consolidated Statement of Cash Flows - Years ended December 31, 1998, 1997 and 1996. Report of Independent Accountants. Notes to Consolidated Financial Statements. The above information is filed with this Form 10-K as part of Exhibit 13. (The 1998 Annual Report to Shareholders is not to be deemed filed as part of this Form 10-K except for portions thereof which are expressly incorporated by reference.) a.2. Financial Statement Schedules The following financial statement schedule of Structural Dynamics Research Corporation and subsidiaries is filed within this Form 10-K: Schedule II Valuation and qualifying accounts The Report of Independent Accountants on the financial statement schedule of Structural Dynamics Research Corporation and subsidiaries appears immediately prior to Schedule II in this Form 10-K. Financial statements of Estech Corporation in which the Company owned an equity interest of 30% as of December 31, 1998, have been omitted because the registrant's proportionate share of the income or losses from continuing operations before income taxes, and total assets of such company is less than 20% of the respective consolidated amounts, and the investment in and advances to such company is less than 20% of consolidated total assets. All other schedules have been omitted because the information either has been shown in the Consolidated Financial Statements or notes thereto, or is not applicable or required under the instructions. a.3. List of Exhibits: 3.01 Amended Articles of Incorporation of Registrant; incorporated by reference to the Company's Registration Statement No. 33-16541, filed August 17, 1987. Amendments incorporated by reference to the Company's Form 10-K for the year ended December 31, 1993 and the Company's definitive Proxy Statement dated March 25, 1997. 3.02 Amended Code of Regulations of Registrant; incorporated by reference to the Company's Registration Statement No. 33-16541, filed August 17, 1987. Amendments incorporated by reference to the Company's definitive Proxy Statement dated March 26, 1996. 4 Rights Agreement; incorporated by reference to the Company's Form 8-K, filed on August 6, 1998. 10.01 Structural Dynamics Research Corporation Tax Deferred Capital Accumulation Plan dated January 1, 1989; incorporated by reference to the Company's Form S-8 registration statement No. 33-22136, filed July 10, 1991. 10.02 Structural Dynamics Research Corporation 1991 Employee Stock Option Plan; incorporated by reference to the Company's Form S-8 registration statement No. 33-41671, filed July 10, 1991. Amendment incorporated by reference to the Company's Form S-8 registration statement No. 33-72328, filed April 27, 1993. 10.03 Structural Dynamics Research Corporation Stock Purchase Plan; incorporated by reference to the Company's Form S-8 registration statement No. 33-40561, filed May 15, 1991. 10.04 Structural Dynamics Research Corporation 1994 Long-Term Stock Incentive Plan; incorporated by reference to the Company's Form S-8 registration statement No. 33-58701, filed April 19, 1995. Amendment to the plan is incorporated by reference to the Company's definitive Proxy Statement dated March 26, 1996. 10.05 Structural Dynamics Research Corporation 1996 Directors' Non-Discretionary Stock Plan; incorporated by reference to the Company's Form S-8 registration statement No. 33-07365, filed July 1, 1996. 10.06 Acquisition Agreement; incorporated by reference to the Company's Form 8-K effective January 22, 1997 pertaining to the acquisition of Metaphase Technology, Inc. 10.07 Agreement of Merger and Plan of Reorganization; incorporated by reference to the Company's Form 8-K, filed January 14, 1998, pertaining to the acquisition of Lookout Drafting, Inc. and Computer Aided Systems for Engineering, Inc. 10.08 Incentive Compensation Plan; incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997. 10.09 Form of Severance Compensation Agreement contracted with each named Executive of the Company; incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997. 10.10 Employment Agreement with William J. Weyand dated June 30, 1997; incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997. 10.11 Non-Qualified Unfunded Deferred Compensation Plan for outside directors of Structural Dynamics Research Corporation; incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997. 10.12 Structural Dynamics Research Corporation Supplemental Retirement Plan, effective January 1, 1998; incorporated by reference to the Company's Form 10-Q for the period ended March 31, 1998. 10.13 Agreement of Merger and Plan of Reorganization pertaining to the acquisition of Imageware Corporation; incorporated by reference to the Company's Form 8-K filed December 4, 1998. 11 Statement regarding computation of per share earnings; information regarding computation of per share earnings is included on page 40 of the Company's Annual Report to Shareholders for the year ended December 31, 1998. 13 Annual Report to Shareholders for the year ended December 31, 1998; portions of which are expressly incorporated by reference in this Form 10-K and filed herewith. 21 Subsidiaries of the Registrant; filed herewith 23 Consent of Independent Accountants; filed herewith 27 Financial Data Schedule; filed electronically b. Reports on Form 8-K The Company filed a Form 8-K on December 4, 1998 to report its acquisition of Imageware Corporation. c. Exhibits as required by Item 601 of Regulation S-K The Company hereby files within this Form 10-K, Exhibits in the List of Exhibits. d. Financial Schedules The Company hereby files with this Form 10-K, the financial statement schedule listed in item 14.a.2. SIGNATURES Pursuant to the requirements of Section 13 or 5(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STRUCTURAL DYNAMICS RESEARCH CORPORATION March 22, 1999 By /s/Jeffrey J. Vorholt (Date) Jeffrey J. Vorholt, Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/William J. Weyand March 25, 1999 /s/John E. McDowell March 26, 1999 William J. Weyand (Date) John E. McDowell (Date) Chairman of the Board, Director President and Chief Executive Officer (Principal Executive Officer) /s/Jeffrey J. Vorholt March 22, 1999 /s/James W. Nethercott March 26, 1999 Jeffrey J. Vorholt (Date) James W. Nethercott (Date) Vice President, Director Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) /s/William P. Conlin March 30, 1999 /s/Arthur B. Sims March 26, 1999 William P. Conlin (Date) Arthur B. Sims (Date) Director Director /s/Gilbert R. Whitaker, Jr. March 26, 1999 /s/Bannus B. Hudson March 25, 1999 Gilbert R. Whitaker, Jr. (Date) Bannus B. Hudson (Date) Director Director EX-13 2 Exhibit 13 SELECTED FINANCIAL DATA Structural Dynamics Research Corporation
Year ended December 31 (in thousands, except per share 1998 1997 1996 1995 1994 data) Operating data: Total revenue $403,025 $351,322 $285,256 $224,138 $185,358 Operating income (loss) $ 42,435 $ 37,059 $ 44,900 $ 28,355 $ (1,239) Net income (loss) excluding non-recurring Charges (1) $ 38,902 $ 50,880 $ 38,148 $ 21,491 $(12,191) Net income (loss) before cumulative effect of accounting change $ 35,672 $ 30,030 $ 38,148 $ (2,809) $ (8,295) Net income (loss) $ 35,672 $ 30,030 $ 38,148 $ (2,809) $(12,191) Common Share data: Basic net income (loss) per share $ .99 $ .85 $ 1.11 $ (.09) $ (.39) Diluted net income (loss) per share $ .93 $ .81 $ 1.05 $ (.09) $ (.39) Average common and common equivalent Shares 38,290 36,947 36,290 32,430 31,352 Balance sheet data: Net working capital $108,487 $102,329 $ 68,574 $ 42,412 $ 31,322 Total assets $340,754 $293,196 $239,372 $207,673 $152,192 Long-term liabilities $ 7,872 $ 7,751 $ 9,281 $ 9,730 $ 5,640 Total shareholders' equity $215,774 $177,837 $130,547 $ 85,144 $ 76,414 Pro forma data: (2) Net income (loss) $ 28,096 $ 36,632 $ (4,394) $(13,307) Basic net income (loss) per share $ .80 $ 1.07 $ (.14) $ (.42) Diluted net income (loss) per share $ .76 $ 1.01 $ (.14) $ (.42) (1) Non recurring charges were $24,300 in 1995 for a shareholder, class action lawsuit settlement, (See Note 8 to the consolidated financial statements), $20,850 and $3,230 in 1997 and 1998, respectively, for write-offs of purchased in-process research and development. (See Note 2 to the consolidated financial statements). (2) Pro forma net income and pro forma net income per share reflect the tax expense that would have been reported if Computer Aided Systems for Engineering (an S corporation for income tax reporting purposes prior to a pooling acquisition in December 1997) had been a C corporation. Beginning in 1998, the income on activity associated with Computer Aided Systems for Engineering was taxed at the Company's C corporation rates and included in income tax expense.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Structural Dynamics Research Corporation (in thousands) The following discussion and analysis should be read in conjunction with Selected Financial Data and the Company's Consolidated Financial Statements and accompanying notes. Certain statements in this report are forward-looking statements that involve risks and uncertainties, which could cause the Company's future results to differ from the expectations described herein. Forward-looking statements should be evaluated in the context of risk factors and uncertainties, some of which are described in more detail in "Factors That May Affect Future Results." Overview Structural Dynamics Research Corporation is a leading supplier of enterprise product development solutions through its suite of mechanical design automation ("MDA") software and product data management ("PDM") software. The Company's software tools and related services assist manufacturers worldwide in optimizing their product development cycles by streamlining processes while managing product information and reducing cost. The Company primarily markets its MDA software under the brand name I-DEAS(TM) and its PDM software under the brand name Metaphase(TM). The Company derives its revenue from licensing software, selling maintenance contracts for license upgrade rights and customer support services, and supplying fee based customer services, such as training, consulting and implementation. The Company devotes substantial internal resources to developing new technology and expanding the scope of its software tools. The Company also collaborates with third party developers to integrate specific functionality into its software, providing development solutions needed by the Company's customers. Over the past three years, the Company acquired four other software development companies to complement its ability to develop and market integrated software tools for its customers. Results of Operations For 1998, the Company's consolidated net revenue increased 15% over 1997 to $403,025. Revenue growth was led by strong sales of Metaphase licenses, software maintenance and services in all major geographic regions. During the year, the Company invested substantial resources in key initiatives to brand its trade names, grow its sales force, expand its product development staffs and purchase technology. In 1998 and 1997, the Company recorded non-recurring charges of $3,230 and $20,850 for purchased in-process research and development associated with the acquisition of Imageware Corporation and Metaphase Technologies, Inc., respectively. Net income, excluding non-recurring charges, was $38,902, $50,880 and $38,148 for 1998, 1997 and 1996, respectively. The decline in the Company's profitability margins in 1998 compared to the previous year is a result of its investment initiatives and a larger proportion of revenue from services, which are more cost intensive than sales of software licenses. Revenue The revenue from software licenses grew 3% in 1998 after growing 12% and 17% in 1997 and 1996, respectively. The smaller growth rate is due to lower sales in North America of I-DEAS licenses. The procurement rate of new licenses by a significant U.S. customer leveled in 1998 after major purchases in 1996 and 1997. I-DEAS license growth in Europe and Asia Pacific virtually offset declines in North America. Revenues from the sale of Metaphase licenses were strong, growing 27% in 1998. The Metaphase growth was driven by large orders from automotive and aerospace industry leaders. Software maintenance and services revenue was $227,888, $180,595 and $132,198 in 1998, 1997 and 1996, respectively. Software maintenance and service revenue accounted for 57%, 51% and 46% of consolidated net revenue in 1998, 1997 and 1996, respectively. The growth and larger proportion of total revenue reflect the increased number of software licenses installed worldwide over the last two years. As the installed base expanded, contracts for maintenance support and services increased. Revenue growth was the strongest in Europe due to large implementation projects for I-DEAS and Metaphase license customers. Of consolidated net revenue, North America accounted for 45%, 49% and 48%; Europe, 34%, 30% and 28%; and Asia Pacific, 21%, 21% and 24% in 1998, 1997 and 1996, respectively. The Company expects that the international market will continue to account for a significant portion of total revenue in future periods. Revenue from the sale of Metaphase licenses, maintenance and services accounted for 24% of consolidated net revenue in 1998. In 1999, the Company expects total Metaphase revenue to become a larger percentage of consolidated net revenue. Cost of Revenue Cost of revenue consists principally of the staff and related costs associated with the generation and support of software service revenue, amortization of capitalized software costs, royalty fees paid to third parties under licensing agreements and the cost of distributing software products. The total cost of revenue was $155,936, $120,444 and $80,499 for 1998, 1997 and 1996, respectively. The cost of licenses represented 18% of license revenue for 1998 and 15% for 1997 and 1996. The cost increased as a percent of revenue primarily due to higher fees paid to third party developers. The cost of services and maintenance represented 55%, 53% and 44% of the associated revenue for 1998, 1997 and 1996, respectively. Relative to the associated sales, cost of maintenance and services increased primarily due to the hiring, training and integration cost associated with expanding the workforce to meet the growing demand for software implementation, training and customer support. Europe accounted for the largest increase, growing services and customer support headcount approximately 40% in 1998. Compared to 1996, the Company allocated more fixed facility and common overhead expenses to the cost of services and maintenance in 1998 and 1997 due to the significant growth of the implementation and customer support workforces. Selling and Marketing Expenses Selling and marketing expenses consist of the costs associated with the worldwide sales and marketing staff, advertising and product localization. These expenses were $119,204, $105,756 and $109,700 in 1998, 1997 and 1996, respectively. These amounts represented 30%, 30% and 38% of total revenue for 1998, 1997 and 1996, respectively. The dollar increase in 1998 selling expenses over 1997 was primarily a result of advertising and an expanded sales force. During 1998, the Company initiated an advertising campaign to brand its trade names and slogans. Additionally, the Company increased the number of its sales and sales support personnel by approximately 25% from September 1997. The 1996 selling expense as a percentage of revenue was comparatively higher due to non-recurring bad debts, special commission programs and advertising on a lower base of revenue. While the Company expects selling and marketing expenses to increase in 1999, the expenses may be a slightly lower percentage of total revenue. Research and Development Expenses Research and development expenses consist primarily of salaries, benefits, computer equipment costs and facilities associated with the product development staff. It excludes costs which are capitalized in accordance with Statement of Financial Accounting Standards No. 86. Research and development expense increased to $64,182 in 1998 from $49,415 in 1997 and $34,018 in 1996, representing 16%, 14% and 12% of total revenue for 1998, 1997 and 1996, respectively. The increases were primarily due to sequential increases in product development staff, including the acquisition of Metaphase Technology, Inc. in 1997. The Company was reimbursed $2,775 and $7,153 of product development costs by other companies in 1998 and 1997, respectively. Research and development expenses also excluded capitalized internal software costs of $13,890, $12,957 and $9,679 for 1998, 1997 and 1996, respectively. The increase in capitalized costs reflected the higher level of development staff and timing differences for the release of new products among the three years. Capitalized amounts represented 18%, 21% and 22% of gross research and development cost in 1998, 1997 and 1996, respectively. The relative amounts of capitalized software development cost vary among periods depending on the stage of development being performed on future product releases. The Company expects research and development costs to increase in 1999 but remain stable as a percent of total revenue. General and Administrative Expenses General and administrative expenses consist of costs associated with the executive, finance, legal, human resource and administrative staffs. General and administrative expenses were $18,038, $17,798 and $16,139 in 1998, 1997 and 1996, respectively. The increases were primarily a result of a larger workforce needed to support the Company's growth. General and administrative expenses represent 4%, 5% and 6% of total consolidated revenue for 1998, 1997 and 1996, respectively. The Company expects general and administrative expenses to increase but remain stable as a percent of total revenue in 1999. Acquisitions and purchased in-process research and development In November 1998, the Company acquired all outstanding stock of privately-held Imageware Corporation ("Imageware") for approximately $31,000 in cash, which was paid from the Company's existing cash balances. Imageware is a developer of free form surface-modeling and 3D inspection software tools for the automotive, aerospace and consumer products industries. The Company plans to integrate Imageware's surfacing technologies into I-DEAS software, while improving its stand-alone capabilities and links to other CAD systems. The transaction was accounted for as a purchase and the Company recorded goodwill of approximately $27,600. The Company recorded an in-process research and development charge of $3,230 for incomplete technology obtained in the acquisition. The value of the incomplete technology was based on the income approach using projected net cash inflows beginning in late 1999 and discount rates of 17% to 24%. The incomplete technology includes a surface-modeling project for possible future releases. At the time of acquisition, the technology had not reached technological feasibility within the Company's integrated products and did not have an alternative future use. The surface-modeling project was estimated to be approximately 95% complete. Over the next two years, the Company expects to complete the surface-modeling project and integrate Imageware technology into I-DEAS. Completing the surface-modeling project is estimated to cost $3,000 in 1999. The Company and Control Data Systems, Inc. ("CDSI") formed Metaphase Technology, Inc. ("MTI") as a joint venture in 1992 to develop PDM software solutions for manufacturing companies. In January 1997, the Company acquired the remaining stock of MTI and certain assets of CDSI's global PDM software sales and support business. The purchase price of approximately $33,000 included cash and a stock warrant. The acquisition was accounted for as a purchase. The acquisition included the purchase of incomplete technology that had not reached technological feasibility and did not have an alternative future use. Accordingly, the Company recorded a one-time charge of $20,850 to write off in-process research and development. The value of the incomplete technology was based on the income approach using projected net cash inflows beginning in 1998 and a 19.5% discount rate. The incomplete technology included projects for web access, document management and other functionality primarily related to future releases of Metaphase, after Metaphase Enterprise 2.3. The Company spent approximately $8,000 in 1997 to complete these and other projects for Metaphase 3.0 which was released in January 1998. In December 1997, the Company acquired all of the outstanding stock of two privately held companies doing business together as Computer Aided Systems for Engineering ("CASE") by issuing one million, five hundred thousand shares of common stock having an aggregate market value of approximately $25,000. The acquisition was accounted for as a pooling-of-interests, and accordingly, all prior periods were restated to include the results of CASE. CASE had been a third party developer of drafting software for the Company since 1984. In June 1996, the Company acquired Camax Manufacturing Technologies, Inc. ("Camax") by issuing nine hundred sixty-seven thousand shares of common stock having a market value of $30,000 in exchange for 100 percent ownership of Camax common stock. The acquisition was accounted for as a pooling-of-interests, and accordingly, all prior periods were restated to reflect Camax results. Camax provides computer-aided manufacturing software for computerized-numerical-control machining operations with products and services designed to simplify, automate and optimize the machining process to streamline production and accelerate time-to-market. Interest and other income, net Interest income was $7,655, $5,201 and $4,593 for 1998, 1997 and 1996, respectively, and increased sequentially over the past three years due to higher levels of interest bearing cash and securities held by the Company. Additionally, $670 of interest income received on a federal income tax refund was recorded in 1998. In 1998, other income included a net gain of $2,745 from the sale of certain equipment, customer consulting contracts and customer support contracts associated with the Company's test software business, to MTS Systems Corporation ("MTS"). Under the same agreement, the Company also sold a perpetual, exclusive license to MTS for I-DEAS test software for $7,000. MTS assumed responsibility for the continual development of the test software and for servicing the consulting and customer support contracts acquired from the Company. The Company retained the right to sell test software products and enhancements as provided by MTS. Cash inflow to the Company from the agreement was net of payments to MTS for pre-billed, customer support contracts for which MTS assumed responsibility. Also, in 1998, other income included $2,590 received from insurance settlements related to damages incurred by the Company in 1995 from a shareholder, class action lawsuit. Income Taxes The Company recorded income tax expense of $19,551, $11,509 and $8,636 in 1998, 1997 and 1996, respectively. In 1997 and 1996, the Company's provision for income taxes consisted primarily of income taxes currently payable to foreign jurisdictions and foreign withholding taxes incurred on the Company's software licensing revenue. These withholding taxes can be credited against the Company's U.S. income tax liability. The Company has not been in a position to utilize all of these foreign tax credits ("FTCs") on its U.S. return. The FTCs and other tax carryforwards are available to offset future U.S. income tax liabilities, subject to various restrictions. In 1998, the Company's provision for income taxes also included a significant charge for deferred income tax expense. While the Company is still in an alternative minimum tax position, its North American operations are now sufficiently profitable that it began utilizing a portion of its deferred tax assets. In recent years, a substantial portion of deferred tax benefits relating to temporary differences was offset by a valuation allowance because of doubt regarding the ultimate realization of the benefits. This caused the effective tax rate to differ from the statutory rate. The factors, which necessitated the establishment of a complete valuation allowance are not expected to be entirely present in the future. The Company has begun a process to reduce the valuation allowance during future years based on current facts and forecasted circumstances. The Company will continue to monitor this situation and adjust the valuation allowance as appropriate. As of December 31, 1998, $14,687 of the valuation allowance of $27,199 is attributable to the tax benefits of stock option exercises and such benefits will be credited to capital in excess of stated value if realized. Pro forma income tax expense reflects the income tax expense that would have been reported if CASE (an S corporation for income tax reporting purposes prior to the acquisition) had been a C corporation for the years ended December 31, 1997 and 1996. Comprehensive Income Comprehensive income was $37,572, $26,083 and $38,598 in 1998, 1997 and 1996, respectively. The differences between net income and comprehensive income were primarily due to unrealized gains and losses from the translation of foreign subsidiaries' balance sheets into U.S. dollars. Net foreign currency translation losses occurred in 1997 because the U.S. dollar strengthened against the foreign currencies of the subsidiaries. In 1998, these foreign currencies gained relative to the U.S. dollar which resulted in translation gains. Liquidity and Capital Resources As of December 31, 1998, the Company had $122,305 in cash, cash equivalents and liquid investments. The Company's current assets totalled $225,595 and the Company had no material borrowings. The Company also has an unsecured bank line of credit of $15,000. Cash flows generated from operations increased to $80,212 for 1998 compared to $62,981 and $36,593 for 1997 and 1996, respectively. For 1996, net operating cash flow, excluding $17,600 paid for the class action litigation settlement, was $54,193. Operating cash flows have increased due to higher net incomes and in 1998, an improved rate of customer collections relative to the sales level. Operating cash flows also vary among years due to normal variations in the timing of operating disbursements and customer receipts. The Company used $51,831, $55,261 and $34,278 of cash for investing activities in 1998, 1997 and 1996, respectively. Cash was used primarily for business acquisitions, software development and equipment purchases. The Company paid net cash of approximately $30,682 and $29,689 in the acquisitions of Imageware and MTI in 1998 and 1997, respectively. The Company used cash of $17,140, $13,006 and $9,825 to construct and acquire software code in 1998, 1997 and 1996, respectively. Also, the Company added equipment, exclusive of acquisitions, of $12,125, $13,640 and $14,290, respectively in 1998, 1997 and 1996, primarily for furniture and computers to accommodate the increase in employee headcount. Net cash used by financing activities was $10,680 in 1998 and included $15,954 to purchase the Company's own common stock and $1,753 to retire bank debt acquired from purchased companies. Net cash from financing activities was $5,275 and $4,519 during 1997 and 1996, respectively, and reflects proceeds from the Company's stock option programs. Financing activities included cash distributions to CASE shareholders prior to the Company's acquisition of CASE in December 1997. In September 1998, the Company's Board of Directors approved a stock repurchase program authorizing the Company to purchase up to 3,000 shares of its own stock in the open market at management's discretion. Through December 31, 1998, the Company had purchased a total of 925 shares. The repurchase program is being funded from available working capital and is intended to offset the issuance of shares under the existing employee stock plans. The Company's sources of liquidity and funds anticipated to be generated from operations are expected to be adequate for the Company's cash requirements in the foreseeable future. The Company has no current commitments for material capital expenditures. The Company may use portions of its cash and investments to acquire additional companies or technology that is complementary to its product offerings. The Company has never paid a cash dividend and intends to continue its policy of retaining earnings to finance future growth. Recent Accounting Pronouncements Revenue Recognition In August 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition," which was effective for transactions occurring in the Company's fiscal year which began January 1, 1998. In March 1998, the AICPA issued SOP 98-4, "Deferral of the effective date of a provision of SOP 97-2" which allows companies to defer adoption of certain provisions of SOP 97-2 related to vendor-specific objective evidence. In December 1998, the AICPA issued SOP 98-9 "Modification of SOP 97-2" to readdress vendor-specific objective evidence. The Company's adoption of SOP 97-2 in 1998 and the issuance of SOP 98-4 and SOP 98-9 did not have a significant impact on the Company's financial condition or results of operations. Derivatives and Hedging Activities In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including forward foreign exchange contracts, and for hedging activities. The Company enters into forward foreign exchange contracts to hedge certain foreign currency denominated receivables. SFAS No. 133 will be effective for the Company's financial reporting beginning in 2000 and cannot be applied retroactively to financial statements of prior periods. It will require entities to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for gain and losses from changes in the fair value of a particular derivative will depend on the intended use of the derivative. The Company does not expect the eventual adoption of SFAS No. 133 to have a material impact on the results of its operations or financial position. Market Risk The Company faces financial risk to changes in foreign currency exchange rates due to foreign denominated balances related to its Asian and European operations. Historically, using forward foreign exchange contracts, the Company has hedged currency exposures associated with intercompany balances denominated in foreign currencies. The Company's hedging activity is intended to offset the effect of currency fluctuations on these balances. The Company does not engage in trading or speculative currency transactions. The Company's outstanding forward foreign exchange contracts mature within 90 days and did not have a material impact on the Company's operating results or financial position. Movement of exchange rates is not expected to have a material impact on the Company's financial results. Short-term forward contracts to sell foreign currencies at December 31, 1998: Forward Contract U.S. Contract Dollar Rate French franc 3,500 5.60 Korean won 1,800 1,225.04 Japanese yen 1,500 115.00 German mark 1,500 1.67 Swedish krona 1,500 8.10 Italian lira 1,500 1,654.53 Netherland guilder 1,200 1.88 Swiss franc 1,100 1.38 Spanish peseta 600 141.84 British pound 600 .60 The Company also faces exposure to changes in interest rates. The Company has a portfolio of marketable securities consisting of U.S. Treasury and U.S. Government agency obligations. These securities are classified as available for sale, and consequently are recorded at fair market value with unrealized gains or losses reported as a separate component of stockholder's equity. Given the short maturities and investment grade quality of the portfolio, the interest rate exposure is not considered material. As a result, the Company does not hedge interest rate exposures. The following table presents expected cash flows from market risk sensitive financial instruments over the next five years. These financial instruments are denominated in U.S. dollars and are not held for the purpose of trading. Interest rate sensitive marketable securities at December 31, 1998: Fair Contractual Maturity Value 1999 2000 2001 2002 2003 thereafter Fixed rate securities 21,724 11,715 9,000 961 Weighted average interest rate 6.26 5.66 5.58 The carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents and accounts receivable approximate fair market value due to the short maturities of these instruments. The values represent estimates of expected possible value and are subject to potential credit risk. Factors That May Affect Future Results The historical results of operations and financial position of the Company are not necessarily indicative of future financial performance. The Company's results and forward-looking statements are subject to certain risks and uncertainties, including but not limited to those discussed below, that could cause future results to differ materially from those projected. Market Growth The Company derives most of its revenues from selling software products and services to the high-end users of the product design markets. Market growth and the Company's ability to match resource levels with market growth rates will directly impact its future operating results. For 1998, actual market growth rates for high-end, MDA license sales within North America deteriorated relative to beginning of the year forecasts. MDA market growth may have slowed due to preferences among new users for lower priced, mid-range products and strong capacity within the installed base of seats already sold. If MDA market growth rates continue to decline, the Company's license revenue growth, as well as maintenance and services revenue growth, is likely to slow as well. Resource Management The Company invests resources in product development, selling, marketing and customer service opportunities with the expectation of revenue growth and incremental earnings. The Company's operating expense levels are planned, in part, on expected revenue growth, and the expense levels are generally committed in advance. In recent months, the Company has expanded its sales infrastructure and increased the number of software product developers. Additionally, certain technologies obtained in the Imageware acquisition will require substantial investment to meet customer needs. Since expenses are relatively fixed in the near term, future operating results will be impacted by the Company's ability to convert invested outlays into expected revenue growth at profitable margins. Competition The product development software industry is highly competitive. Companies compete based on functionality, integration, scalability, customer support, market timing, price and other factors. Some competitors have focused their efforts to develop software native to the Microsoft Windows platform. While the Company's software products are available for a variety of vendor platforms, including Windows, they currently do not provide user interfaces or linking functionality native to Windows applications. Customer preferences for the Company's products, including platform choices, cannot be assured. The Company's success is dependent on its ability to continue to develop, enhance and market new products to meet its customers' sophisticated needs within competitive pricing structures and in a timely manner. Consequently, the Company relies on highly skilled technical, sales and other key employees who are competitively recruited within the software industry. Additionally, the Company relies, to a lesser degree, on third parties for development. Failure to attract and retain key personnel and maintain important third party relationships, could have an adverse impact on future operating results. Also, the entire industry may experience pricing and margin pressure which could adversely affect the Company's operating results. The Company's success also depends, in part, on its ability to protect the intellectual property rights of its products and brand names. Product Distribution Besides its own sales force, the Company relies on distributors, representatives and value-added resellers to sell a significant portion of its products. The loss of a major customer or a reduction in orders from a major customer, distributor, representative or value- added reseller could have a significant impact on the results of operations in any particular quarter. Historically, a significant portion of the Company's revenue is generated from shipments in the last month of a quarter. In addition, higher volumes of orders have been experienced in the fourth quarter. The concentration of orders makes projections of quarterly financial results difficult. If customers delay their orders or a disruption in the Company's distribution occurs, quarterly results of operations in any particular quarter may be negatively impacted. The Company usually ships software licenses within one to two weeks after receipt of a customer order. Typically, orders exist at the end of a quarter, which have not been shipped; however, the value of such orders is not indicative of revenue results for any future period, or material to operating trends. International Business A significant portion of the Company's revenues is from international markets. As a result, the Company's financial results could be impacted by weakened general economic conditions, differing technological advances or preferences, volatile foreign exchange rates and government trade restrictions in any country in which the Company does business. The Company has invested sizable resources in the Asia Pacific region, particularly in Japan and South Korea. Economic instability in this region could lead to an adverse impact on the Company's operation results and financial position. Year 2000 The Year 2000 causes uncertainties about whether computer systems and other equipment with date sensitive hardware or software will appropriately recognize and process dates beyond 1999. The failure of software programs, computer hardware and equipment in this regard could result in business interruptions and adversely affect the Company's operating results. The Company has taken measures to address its exposure to these potential date-related failures. The Company's major exposures to date-related failures include product liability for the software tools which it markets. The Company's primary software offerings, (I-DEAS Master Series and Metaphase Enterprise), store dates in a full, four-digit format. The Company has conducted extensive testing of these software offerings, including integrated third party functionality, for Year 2000 compliance ("compliance"). Based on testing to date, I-DEAS Master Series 5, Metaphase Enterprise 2.3 and their respective subsequent releases, properly recognize and process dates beyond 1999 when the underlying operating system of the host machine provides full date information to the software. The Company has tested, and will continue to test, its code for new products and enhancements to ensure compliance in future software releases. Potential causes of failure will continue to be rectified in a timely manner. Compliance of product versions prior to I-DEAS Master Series 5 and Metaphase Enterprise 2.3 is not completely known; however, if there are issues of non-compliance, current customers of such products can upgrade to achieve Year 2000 compliance. While the software products were developed to be compliant, customizations and modifications to the products are the responsibilities of the customer and may not necessarily be compliant. To date, the Company is not aware of any customer customizations or modifications which result in significant date-related failures of otherwise compliant software. The Company relies on third parties for telecommunications, electricity, banking, shipping and other essential business operations. Additionally, its information systems depend on computer hardware, software, and other equipment also supplied by third parties. To reduce the uncertainty caused by third party reliance, and mitigate the consequences of the Year 2000, the Company has adopted a Year 2000 conversion approach with five basic phases: Awareness, Assessment, Renovation, Validation, and Implementation. The approach is being applied throughout the Company and is in differing phases among areas of exposure. The Company is in the process of identifying the critical suppliers of services and systems and assessing which, if any, areas pose significant risks of business interruption. So far, no significant deficiencies have been identified. The Company's enterprise management information system, SAP R/3, is Year 2000 compliant based on representations from its supplier, SAP AG. At this time, the Company expects the conversion to Year 2000 compliance to be completed in 1999. The total cost of any modifications necessary to achieve compliance is not expected to be material to operating results. The Company's policy, in accordance with generally accepted accounting procedures, is to expense as incurred the cost of maintenance and modification to existing systems, and to capitalize the cost of any new software or hardware and amortize that cost over the estimated useful lives of the assets. While the Company has taken measures to reduce the risk of date-related failures, it cannot eliminate the potential for business interruption or product failure due to third party non-compliance. Additionally, Year 2000 interruptions in the Company's customer base could reduce or delay sales. With respect to contingency plans, the Company has not developed contingency plans at this time to handle significant failures. The Company will address contingency planning in 1999 for the most likely worst case scenarios. Euro Conversion On January 1, 1999, eleven of the fifteen member countries of the European Union (the "participating countries") established fixed conversion rates between their existing sovereign currencies (the "legacy currencies") and the euro currency, adopting the euro as their common legal currency on that date. The legacy currencies are scheduled to remain legal tender in the participating countries as denominations of the euro until January 1, 2002. During this transition period, public and private parties may pay for goods and services using either the euro or the participating country's legacy currency on a "no compulsion, no prohibition" basis whereby recipients must accept euro or the legacy currency as offered by the payor. A currency translation process known as triangulation dictates how legacy currencies are converted to the euro and other legacy currencies. Beginning January 1, 2002, the participating countries will issue new euro-denominated bills and coins and replace the legacy currencies as legal tender in cash transactions by July 1, 2002. Because the Company conducts a significant portion of its business in Europe, including subsidiaries in five euro participating countries, its business and operations will be affected by the euro conversion. Management is addressing the euro conversion, but its impact on future operating results is uncertain. Management expects the conversion to increase cross-border competition for its products within Europe, to a minor extent, due to easier price transparency for customers. While management expects the total unit price of product and taxes charged to European customers to converge over time, the impact on the total revenues and the mix of revenues among its European subsidiaries in the near term is uncertain. Additionally, increased cross-border competition could effect the Company's labor cost and eventually its allocation of resources within Europe. The Company has implemented an upgrade to its management information system which includes the ability to simultaneously record transactions in euro, perform the prescribed currency conversion computations and convert legacy currency amounts to euro. The impact of the conversion on the Company's currency risk and taxable income is not expected to be significant. In regard to contracts denominated in legacy currencies, management has not identified any third party or customer contracts whose performance might be considered unenforceable due to a currency substitution. Management will continue to monitor for significant contracts which may be void due to the conversion. Stock Market Volatility The trading price of the Company's stock, like other software and technology stocks, is subject to significant volatility. If revenues or earnings fail to meet securities analysts' expectations, there could be an immediate and significant adverse impact on the trading price of the Company's stock. In addition, the Company's stock price may be affected by broader market factors that may be unrelated to the Company's performance. Report of Management Responsibility for the integrity and objectivity of the financial information presented in this Annual Report rests with Structural Dynamics Research Corporation's management. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, applying certain estimates and judgments as required. Financial information contained elsewhere in this Annual Report is consistent with that in the financial statements. The management of the Company is responsible for establishing and maintaining a system of internal accounting control that is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded. This system is supported by written policies and procedures, organizational structures that provide an appropriate division of responsibility, internal reviews, and the careful selection and training of qualified personnel. Our independent accountants, PricewaterhouseCoopers LLP, audit the financial statements in accordance with generally accepted auditing standards, which includes the consideration of the system of internal control to the extent they deem necessary to express an opinion on the financial statements. The Board of Directors, through its Audit Committee composed of outside directors, meets regularly with the Company's independent accountants and management to review the adequacy of internal accounting controls, financial reporting and the extent and results of the audit effort. /s/William J. Weyand William J. Weyand Chairman of the Board, President and Chief Executive Officer /s/Jeffrey J. Vorholt Jeffrey J. Vorholt Vice President, Chief Financial Officer and Treasurer Report of Independent Accountants To the Board of Directors and Shareholders of Structural Dynamics Research Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of cash flows and of shareholders' equity present fairly, in all material respects, the financial position of Structural Dynamics Research Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Cincinnati, Ohio January 25, 1999 CONSOLIDATED STATEMENT OF OPERATIONS Structural Dynamics Research Corporation
Year ended December 31 (in thousands, except per share 1998 1997 1996 data) Revenue: Software licenses $175,137 $170,727 $153,058 Software maintenance and services 227,888 180,595 132,198 -------- ------- --------- Total revenue 403,025 351,322 285,256 Cost of revenue: Software licenses 30,837 25,518 22,578 Software maintenance and services 125,099 94,926 57,921 --------- -------- ------- Total cost of revenue 155,936 120,444 80,499 --------- -------- ------- Gross profit 247,089 230,878 204,757 Operating expenses: Selling and marketing 119,204 105,756 109,700 Research and development 64,182 49,415 34,018 General and administrative 18,038 17,798 16,139 Purchased in-process research and development 3,230 20,850 ------- ------- -------- Total operating expenses 204,654 193,819 159,857 ------- ------- -------- Operating income 42,435 37,059 44,900 Interest and other income, net 12,788 4,480 1,884 ------- ------- ------- Income before income taxes 55,223 41,539 46,784 Income tax expense 19,551 11,509 8,636 ------- ------- ------ Net income $ 35,672 $ 30,030 $ 38,148 ======== ======= ====== Basic net income per share $ .99 $ .85 $ 1.11 Diluted net income per share $ .93 $ .81 $ 1.05 Pro forma net income and per share data: Income before income taxes as reported 41,539 46,784 Pro forma income tax expense 13,443 10,152 Pro forma net income $ 28,096 $ 36,632 ======= ====== Pro forma basic net income per share $ .80 $ 1.07 Pro forma diluted net income per share $ .76 $ 1.01 Average common and common equivalent shares 38,290 36,947 36,290 See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET Structural Dynamics Research Corporation
December 31 (thousands, except per share data) 1998 1997 Assets Current assets: Cash and cash equivalents $100,581 $ 81,056 Marketable securities 11,787 13,030 Trade accounts receivable, net of allowances of $5,563 and $3,529 92,169 88,954 Other accounts receivable 8,956 17,815 Prepaid expenses and other current assets 12,102 9,082 ------- ------- Total current assets 225,595 209,937 Marketable securities 9,937 14,925 Net property and equipment 25,674 24,627 Marketable software costs, net 36,237 31,610 Goodwill and other intangibles 32,886 4,833 Other assets 10,425 7,264 ------- ------- Total assets $340,754 $293,196 ======= ======= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 14,840 12,230 Accrued expenses 21,598 17,327 Accrued compensation 27,773 22,263 Accrued income taxes 7,242 9,182 Deferred revenue 45,655 46,606 ------- ------- Total current liabilities 117,108 107,608 Other long-term liabilities 7,872 7,751 Shareholders' equity: Common stock, $.0069 per share stated value; 100,000 shares authorized; 35,487 and 35,654 shares outstanding, net of 2,313 and 1,500 shares in treasury 246 248 Capital in excess of stated value 114,499 114,132 Retained earnings 102,807 67,135 Accumulated other comprehensive income: Foreign currency translation adjustment (1,843) (3,667) Unrealized gain (loss) on marketable securities 65 (11) ------- ------- Total accumulated other comprehensive income (1,778) (3,678) Total shareholders' equity 215,774 177,837 ------- -------- Total liabilities and shareholders' equity $340,754 $293,196 ======= =======
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Structural Dynamics Research Corporation Common Stock Comprehensive Income Capital in Stated excess of Retained Accumulated Total (in thousands, except Shares Value Stated value Earnings other Total equity per share data) December 31, 1995 33,084 $ 230 $ 73,522 $ 11,573 $ (181) $85,144 Comprehensive income: Net Income 38,148 $38,148 Other comprehensive income: Foreign currency translation adjustment 298 298 Unrealized gain on marketable securities 152 152 ------- Comprehensive income $38,598 38,598 ======== Transactions involving Employee stock plans 1,176 8 15,016 15,024 Payment of Camax dissenter's rights (1,236) (1,236) Distribution of CASE S corporation (6,983) (6,983) - ------------------------------------------------------------------------------------------------------- December 31, 1996 34,260 $ 238 $ 87,302 $ 42,738 $ 269 $130,547 Comprehensive income: Net Income 30,030 $30,030 Other comprehensive income: Foreign currency translation adjustment (3,965) (3,965) Unrealized gain on marketable securities 18 18 ------- Comprehensive income $26,083 26,083 ======= Transactions involving Employee stock plans 1,025 7 13,333 13,340 Stock Warrant (See Note 2) 3,500 3,500 Distribution for lawsuit settlement 369 3 9,997 10,000 Distribution of CASE S corporation (5,633) (5,633) - ------------------------------------------------------------------------------------------------------ December 31, 1997 35,654 $ 248 $114,132 $ 67,135 $(3,678) $177,837 Comprehensive income: Net Income 35,672 $35,672 Other comprehensive income: Foreign currency translation adjustment 1,824 1,824 Unrealized gain on marketable securities 76 76 -------- Comprehensive income $37,572 37,572 ======== Transactions involving Employee stock plans 758 5 16,314 16,319 Purchase of Treasury Shares (925) (7) (15,947) (15,954) - ------------------------------------------------------------------------------------------------------- December 31, 1998 35,487 $246 $114,499 $102,807 $(1,778) $215,774 =======================================================================================================
CONSOLIDATED STATEMENT OF CASH FLOWS Structural Dynamics Research Corporation
Year ended December 31 (in thousands) 1998 1997 1996 Cash flows from operating activities: Net income $ 35,672 $ 30,030 $ 38,148 Adjustments to reconcile net income to net cash provided by operating activities: Purchased in-process research and development 3,230 20,850 Amortization of computer software costs 15,973 15,810 11,779 Depreciation and other amortization 12,419 11,032 8,136 Stock contributions to 401(k) plan 3,120 2,249 1,606 Deferred taxes 2,946 (740) (2,125) Gain on sale of test business (2,745) Other (134) 205 213 Changes in assets and liabilities, from operating activities: Decrease (increase) in accounts receivable, net 6,514 (31,439) (1,369) (Increase) in prepaid expenses (2,826) (1,032) (1,635) (Increase) decrease in other assets (1,602) 4,379 (7,261) Increase (decrease) in accounts payable and accrued expenses 10,413 2,049 (16,624) (Decrease) increase in accrued income taxes (1,940) 1,100 1,686 (Decrease) increase in deferred revenue (1,571) 9,835 1,683 Increase (decrease) in other long- term liabilities 743 (1,347) 2,356 ------- -------- -------- Net cash provided by operating activities 80,212 62,981 36,593 Cash flows from investing activities: Purchases of marketable securities (10,802) (20,079) (25,612) Proceeds from sales of marketable securities 17,109 21,153 16,949 Additions to property and equipment, net (12,125) (13,640) (14,290) Additions to marketable software costs (17,140) (13,006) (9,825) Acquisition of Imageware Corporation, net of cash acquired (30,682) Sale of test business, net 1,809 Acquisition of Metaphase Technology, Inc. (29,689) Investment in and advances to joint ventures (1,500) -------- --------- --------- Net cash used in investing activities (51,831) (55,261) (34,278) Cash flows from financing activities: Purchase of common stock (15,954) Issuance of common stock 7,027 11,091 13,418 Repayment of debt (1,753) (183) (680) Distributions of CASE S corporation (5,633) (6,983) Payment of Camax dissenter's rights (1,236) --------- --------- -------- Net cash (used) provided by financing activities (10,680) 5,275 4,519 Effect of exchange rate changes on cash 1,824 (3,965) 298 ------- -------- -------- Increase in cash and cash equivalents $ 19,525 $ 9,030 $ 7,132 Cash and cash equivalents: Beginning of period 81,056 72,026 64,894 --------- ------- ------- End of period $100,581 $ 81,056 $ 72,026 ========= ======= ======= Cash paid during the year for income taxes $ 18,659 $ 11,960 $ 10,462 ========= ======= =======
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") is a leading, worldwide supplier of software development tools to manufacturers for mechanical design automation and product data management. In conjunction with software tools, the Company provides training, consulting and customer support services to its customers. Basis of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company owns a 30% interest in ESTECH, a Japanese joint venture, and accounts for it under the equity method. The impact of its results are not material to the Company's results of operations. Use of Estimates The financial statements, which are prepared in conformity with generally accepted accounting principles, require management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates, based on the facts and circumstances existing at the date of the financial statements, include the estimated useful lives of computer software cost and goodwill and the likelihood of realization of the deferred tax assets. Pro Forma Net Income and Pro Forma Net Income Per Share In 1997, the Company acquired Computer Aided Systems for Engineering ("CASE") which was an S corporation for income tax reporting purposes prior to the acquisition. Pro forma net income and pro forma net income per share reflect the tax expense that would have been reported if CASE had been a C corporation. Comprehensive Income In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards or reporting and display of comprehensive income and its components in the consolidated financial statements. SFAS No. 130 is effective for the Company's reporting periods beginning in 1998 with comparative amounts for prior years. Comprehensive income includes net income as well as other changes in shareholder equity, except shareholders' contributions into the Company and distributions to shareholders. The effect of income taxes on the Company's other comprehensive income is not material. Revenue Recognition The Company's revenue is recognized in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition." The American Institute of Certified Public Accountants ("AICPA") issued SOP 97-2 in 1997, and it became effective for transactions occurring in the Company's fiscal year beginning January 1, 1998. In March 1998, the AICPA issued SOP 98-4 "Deferral of the effective date of a provision of SOP 97-2" which allows companies to defer adoption of certain provisions of SOP 97-2 related to vendor-specific objective evidence. In December 1998, the AICPA issued SOP 98-9 "Modification of SOP 97-2" to readdress vendor-specific objective evidence. The adoption of SOP 97-2 in 1998 and the issuance of SOP 98-4 and SOP 98-9 did not have a significant impact on the Company's financial condition or results of operations. The use of software programs is licensed through the Company's direct sales force and by specific arrangements with certain distributors, value-added resellers and other marketing representatives. Revenue generated by licensing software is recognized when the following criteria have been met: (a) a written order for the unconditional license of software and a software license agreement have been received, (b) the Company has shipped the products to the customer and passwords for customer access are available, (c) the fee is fixed or determinable and (d) collectibility is probable. Revenue from maintenance contracts is recognized ratably over the term of the agreement and the deferred portion represents the substantial component of deferred revenue. Revenue from implementation services, training and other services is recognized as the service is performed. Cost of Revenue The cost of licenses primarily consists of the cost of distributing the software products, an allocation of the amortization of capitalized software costs and an allocation of royalty fees payable to third parties under licensing agreements. Cost of maintenance and services primarily consists of the staff and related costs associated with the generation and support of software service revenue, an allocation of the amortization of capitalized software costs and an allocation of royalty fees payable to third parties under licensing agreements. The allocations between cost of license revenues and maintenance and services revenues are based upon the percentage of the related revenue to total revenue. Management believes that the methodology for allocating the costs is reasonable. Cash Equivalents and Marketable Securities Cash equivalents include highly liquid investments in interest bearing accounts and commercial paper with an original maturity of less than 90 days. Marketable securities consist of U.S. Treasury and U.S. Government agency obligations. Short-term marketable securities have a maturity term in excess of 90 days but less than one year. Long-term marketable securities have a maturity term in excess of one year. The Company also has an unused, unsecured $15,000 bank line of credit. Cash equivalents and marketable securities classified as available-for-sale are recorded at market value, and any related unrealized gains and losses are included in a separate component of shareholders' equity. Marketable securities classified as held-to-maturity are recorded at amortized cost, which approximates market values. Realized and unrealized gains and losses are determined based on the specific identification method. Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and forward foreign exchange contracts approximate fair value due to the short-term nature of these financial instruments. Concentrations of Credit Risk Cash equivalents, marketable securities and accounts receivable represent a potential credit risk to the Company. The Company invests its excess cash with government and major financial institutions having strong credit ratings. Company policy sets credit ratings and maturity terms that limit the risk of credit exposure and maintain necessary liquidity. The Company's revenue is generated from a large customer base in diversified industries across different geographic areas. Revenue from a U.S. based automotive customer represented 13%, 14% and 11% of consolidated net revenue in 1998, 1997 and 1996, respectively and a distributor represented 11%, 11% and 12% of consolidated net revenue in 1998, 1997 and 1996, respectively. The Company performs ongoing credit evaluations of its customers and has not experienced any material losses related to an individual customer or groups of customers in any particular geographic area. Management believes allowances for potential credit losses are adequate. Foreign Currencies In accordance with SFAS 52, financial statements of foreign subsidiaries whose local currency is the functional currency are translated to U.S. dollars at period-end exchange rates for assets and liabilities and at weighted average exchange rates for the results of operations. The resulting translation gains and losses are accumulated in a separate component of shareholders' equity. Gain and losses resulting from transactions denominated in foreign, non-functional currencies are included in other income. Foreign Exchange Contracts The Company enters into forward foreign exchange contracts denominated in foreign currencies to hedge certain foreign currency denominated receivables. Market valuation gains and losses associated with these financial instruments are recorded currently in other income to offset gains and losses arising from foreign currency transactions. The interest element of the foreign currency instruments is recognized over the life of the contract and recorded in other expense. As of December 31, 1998 and 1997, the Company had approximately $14,800 and $12,251, respectively, of forward foreign exchange contracts outstanding. The deferred gains and losses resulting from these contracts were not material. Substantially, all contracts mature within 90 days. Should the counterparty to these contracts fail to meet its obligations, the Company would be exposed to foreign currency fluctuations, along with the cost, if any, to extinguish the contracts. In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including forward foreign exchange contracts, and for hedging activities. SFAS No. 133 will be effective for the Company's financial reporting beginning in 2000 and cannot be applied retroactively to financial statements of prior periods. It will require entities to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for gains and losses from changes in the fair value of a particular derivative will depend on the intended use of the derivative. The Company does not expect the eventual adoption of SFAS No. 133 to have a material impact on the results of its operations or financial position. Property and Equipment Property and equipment are stated at original cost less accumulated depreciation. Depreciation for property and equipment is primarily computed using the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized using the straight-line method over the lesser of the life of the lease or the estimated useful life of the improvement. The general ranges of lives used in calculating depreciation and amortization are computer and other equipment, 2-5 years; office furniture and equipment, 7 years; and leasehold improvements, 1-10 years. Marketable Software Costs The costs related to the internal development or purchase of software to be sold, that are incurred after the technological feasibility of the product has been demonstrated, are capitalized by product. Amortization begins at the time of product release and is calculated on a release-by-release basis. It is the greater of the ratio that the current product revenue bears to the total of current and anticipated future years' revenue or the straight-line method over the remaining estimated economic lives of the software products. Beginning in 1996, the Company began amortizing the software costs related to new releases of the I-DEAS Master Series product over a three year period based upon the estimated future economic life of the product. The costs of marketable software are shown net of accumulated amortization of $63,786 and $47,813 at December 31, 1998 and 1997, respectively. Goodwill and Other Intangibles Goodwill and other intangible assets associated with business acquisitions are recorded based on estimated fair market values and amortized using the straight-line method over their estimated useful lives, which are predominantly seven years from the time of acquisition. The cost of goodwill and other intangibles are shown net of accumulated amortization of $2,110 and $938 at December 31, 1998 and 1997, respectively. Income Taxes In accordance with SFAS No. 109, "Accounting for Income Taxes," deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Earnings Per Share Basic earnings per common share is calculated as net income divided by the weighted average number of common shares outstanding. Diluted earnings per share is computed using the weighted average number of common shares outstanding and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares are calculated using the treasury stock method and consist of dilutive stock option grants. The reconcilations of amounts used for the basic and diluted earnings per share calculations are as follows: Income Shares Per-Share (Numerator) (Denominator) Amount 1998 Basic net income per share $35,672 36,088 $ .99 Effect of stock options 2,202 --------------------- Diluted income per share $35,672 38,290 $ .93 1997 Basic net income per share $30,030 35,265 $ .85 Effect of stock options -- 1,682 ---------------------- Diluted net income per share $30,030 36,947 $ .81 1996 Basic net income per share $38,148 34,315 $1.11 Effect of stock options -- 1,975 Diluted net income per share $38,148 36,290 $1.05
Options to purchase 855 and 1,509 shares of common stock at December 31, 1998 and 1997 respectively, were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of common shares. Reclassifications Certain amounts reported in previous years have been reclassified to conform to the 1998 presentation. (2) Business Acquisitions Imageware Corporation In November 1998, the Company acquired privately-held Imageware Corporation ("Imageware") for approximately $31,000 in cash which was paid from the Company's existing cash balances. Imageware is a developer of free form surface-modeling and 3D inspection software tools for the automotive, aerospace and consumer products industries. The Company plans to integrate Imageware's surfacing technologies into I-DEAS software, while improving its stand-alone capabilities and links to other CAD systems. The transaction was accounted for as a purchase. Goodwill, computer software to be marketed and certain other intangibles were valued at approximately $27,600, $3,460 and $2,025, respectively. All intangibles associated with the acquisition are being amortized by the straight-line method over their useful lives, which do not exceed seven years. In addition, the Company recorded a one-time charge of $3,230 to write off in-process research and development, which had not reached technological feasibility and had no alternative future use. The Company's consolidated statement of operations includes results of Imageware since November 20, 1998. The historic operating results of Imageware are not material to the Company's consolidated operations, therefore pro forma results are not presented. Metaphase Technology, Inc. In 1992, the Company and Control Data Systems, Inc. ("CDSI") established a joint venture company, Metaphase Technology, Inc., ("MTI"), to develop and market PDM software worldwide. The Company initially owned a 35% interest and increased such interest to 50% during 1993. The Company's investment in MTI was accounted for on the equity basis. In January 1997, the Company acquired the remaining stock of MTI and certain assets of CDSI's global PDM software sales and support business. The purchase price of approximately $33,000 included cash and a stock warrant. The warrant was exercisable for 750 shares of the Company's common stock without par value at the exercise price of $28 per share and expired on December 31, 1998. A value of $3,500 was assigned to the warrant and recorded in Shareholders' equity. The acquisition was accounted for using the purchase method. The Company's consolidated statement of operations includes the operating results of MTI and the CDSI assets acquired, beginning January 1, 1997. The excess of purchase price over the fair values of the net assets acquired of approximately $2,816 was recorded as goodwill. Certain other intangibles, including computer software construction costs, totalled approximately $8,555. All intangibles associated with the acquisition are being amortized using the straight-line method over their useful lives, which do not exceed seven years. Also in connection with the acquisition, the Company recorded a one-time charge to operations of $20,850 for the write off of in-process research and development acquired in the transaction that had not reached technological feasibility and did not have an alternative future use. Pro forma results of the purchase are not presented, as the amounts are not material to the consolidated financial statements. Computer Aided Systems for Engineering In December 1997, the Company acquired all the outstanding stock of two privately held companies doing business together as Computer Aided Systems for Engineering, ("CASE"), by issuing 1,500 shares of common stock having an aggregate market value of approximately $25,000. The acquisition was accounted for as a pooling-of-interests, and accordingly, all prior periods were restated to include CASE results. CASE, an S corporation prior to acquisition, had been a third party developer of drafting software for the Company since 1984. Revenue and net income of the separate companies for the years before the acquisition are as follows:
1997 1996 Revenue: SDRC $351,322 $285,256 CASE 8,749 7,674 Less intercompany sales (8,749) (7,674) -------- -------- Total revenue $351,322 $285,256 Net income: SDRC $ 24,342 $ 33,689 CASE 5,688 4,459 --------- ---------- Net income $ 30,030 $ 38,148 ========== ==========
Adjustments recorded to adopt the same accounting practices were not material to the consolidated financial statements. Acquisition costs were not material. Camax Manufacturing Technologies, Inc. In June 1996, the Company completed the acquisition of Camax Manufacturing Technologies, Inc. ("Camax") and its wholly-owned subsidiaries. Camax provides computer-aided manufacturing software for computerized-numerical-control machining operations. The Camax products and services are designed to simplify, automate and optimize the machining process to streamline production and accelerate time-to-market. In exchange for 100 percent ownership of Camax common stock, the Company issued approximately 967 shares of its common stock and paid approximately $1,236 to a Camax shareholder who exercised dissenter's rights. The market value of the shares and cash paid was approximately $30,000. Acquisition charges of $1,102 were recorded in the second quarter of 1996. The acquisition was accounted for as a pooling-of-interests. All historical financial data of the Company was restated to include the results of Camax for all periods presented. Adjustments recorded to adopt the same accounting practices were not material to the consolidated financial statements. (3) Marketable securities Marketable securities consist of the following:
December 31, 1998 Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value Current: Available-for-sale $11,009 $ 55 $11,064 Held to maturity 723 723 -------------------------------------- $11,732 $ 55 $11,787 Non Current: Available-for-sale $ 9,935 $ 48 $(46) $ 9,937 ======================================
December 31, 1997 Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value Current: Available-for-sale $12,916 $ 9 $ (2) $12,923 Held to maturity 107 107 ------- ------- ------ ------- $13,023 $ 9 $ (2) $13,030 Non Current: Available-for-sale $14,943 $ 42 $(60) $14,925
Non current, available-for-sale marketable securities at December 31, 1998, have maturities of $9,000 in 2000 and $961 in 2013. Realized gains and losses on the sale of marketable securities were immaterial. (4) Property and Equipment Property and equipment, recorded at cost, December 31 consists of the following: 1998 1997 Property and equipment, at cost: Computer and other equipment $ 63,943 $ 57,364 Office furniture and equipment 18,929 16,983 Leasehold improvements 7,819 6,685 ------ ------ 90,691 81,032 Less accumulated depreciation and amortization (65,017) (56,405) -------- -------- Net property and equipment $ 25,674 $ 24,627 ======== ======== Future minimum lease payments under noncancelable operating leases for the five years ending December 31, 2003 approximate $20,403, $13,237, $9,697, $7,578 and $5,994, respectively, and $38,021 thereafter. Total rental expenses under operating leases for the years ended December 31, 1998, 1997 and 1996 were $22,681, $19,604 and $16,426, respectively. (5) Income Taxes Pre-tax accounting income consists of the following:
Year ended December 31 1998 1997 1996 Domestic $38,506 $25,741 $32,236 Foreign 16,717 15,798 14,548 ------- ------- ------ $55,223 $41,539 $46,784 ======= ======= ======
The provision for income taxes consists of the following:
Year ended December 31 1998 1997 1996 Federal: Current $ 109 $ 740 $ 1,234 Deferred 2,946 (740) (2,125) ----- ----- -------- 3,055 (891) State: 2,250 1,200 1,418 Foreign: Income taxes 7,449 5,520 3,125 Withholding taxes 6,797 4,789 4,984 ------ ------- ------ Actual income tax expense $19,551 $11,509 $ 8,636 ====== ======= ====== Deferred state and foreign taxes are not material. The provision for income taxes differs from the amounts computed by using the statutory U.S. Federal income tax rate. The reasons for the differences are as follows:
Year ended December 31 1998 1997 1996 Computed expected income tax expense $19,328 $14,539 $16,374 Increase (reduction) resulting from: State taxes, net of federal benefit 1,463 780 922 Foreign income taxed at other than the U.S. statutory rate 878 9 (1,966) Purchased in-process research and development 1,130 7,297 Research and experimentation credit (1,400) IRS audit settlement (1,751) Release of valuation allowance (1,059) Utilization of U.S. tax carryforwards (9,721) (4,806) S corporation benefit (1,934) (1,516) Change in net deferred taxes (828) (2,125) Alternative minimum taxes 740 1,125 Other 962 627 628 --------- --------- -------- Actual Income tax expense $19,551 $11,509 $ 8,636 ========= ========= ========
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows:
December 31 1998 1997 Deferred tax assets: Computer software construction costs and capitalized Research expenses, net of amortization $ 11,656 $ 15,624 Tax credit and net operating loss carryforwards 10,136 9,291 Other liabilities and reserves 5,321 4,526 Revenue recognition and accounts receivable 3,334 2,753 Property and equipment 2,474 1,663 Other 296 608 ------------------ Total deferred tax assets 33,217 34,465 Valuation allowance (27,199) (31,538) ------------------ Net deferred tax assets 6,018 2,927 Deferred tax liabilities: Purchase accounting intangibles (1,890) ------------------- Total net deferred taxes $ 4,128 $ 2,927 ===================
Of the $10,136 in tax carryforwards available at December 31, 1998, none expire before 2003. Alternative minimum tax carryforwards of $3,835 never expire. The net change in the valuation allowance for deferred tax assets was a decrease of $4,339 and $3,294 in 1998 and 1997, respectively. Of the $27,199 in valuation allowance at December 31, 1998, $14,687 is attributable to the tax benefit of stock option exercises. Such benefits will be credited to capital in excess of stated value if realized. The Company does not accrue Federal income taxes on undistributed earnings of its foreign subsidiaries that (1) have been, or are intended to be, permanently reinvested or (2) if remitted, would not have material income tax consequences. Undistributed earnings of foreign subsidiaries amounted to approximately $18,327 and $17,111 at December 31, 1998 and 1997, respectively. (6) Shareholders' Rights Plan In August 1998, the Board of Directors adopted a Shareholders' Rights Plan to protect shareholders' interests in the event of an unsolicited attempt to gain control of the Company. This plan replaced a plan which had been adopted in 1988 and expired in 1998. Under the Shareholders' Rights Plan, shareholders are granted certain rights in the event of a triggering event ("Rights"). The Rights become exercisable if a person acquires 20% or more of the Company's outstanding common stock or announces a tender offer which would result in a person or group acquiring 20% or more of the common stock ("Distribution Date"). If, at any time following the Distribution Date, the Company has not redeemed the Rights, the Company becomes the surviving corporation in a merger or a person becomes the beneficial owner of 20% or more of the Company's common stock ("Triggering Date"), each holder of a Right will have the right to purchase shares of the Company's common stock having a value equal to two times the Right's exercise price of $110. If, at any time following the Triggering Date, the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation, each holder of a Right shall have the right to purchase shares of common stock of the acquiring company having a value equal to two times the exercise price of the Right. The Rights expire on August 10, 2008, and may be redeemed by the Company for $.0025 per Right. (7) Common Stock and Employee Benefit Plans Stock Option Plans Under the 1991 Employee Stock Option Plan, the Company reserved 5,300 shares of previously unissued common stock. There are 8 shares remaining available to grant under this Plan. In 1994, the shareholders adopted the 1994 Long-Term Stock Incentive Plan, allowing stock incentives including stock options, stock appreciation rights, stock awards, and any combination to be granted to employees. The number of shares with respect to which stock incentives may be granted in one calendar year shall not exceed 4% of the Company's issued and outstanding common stock. Only stock options have been granted under the 1994 plan. In 1996, the shareholders approved a Director's Non-Discretionary Stock Option Plan allowing for grants to outside directors at the fair market value at the date of grant. Under this 1996 plan, the Company had reserved 1,000 shares of previously unissued common stock and 880 remain available for grant. Under the plans, employee options expire ten years from the date of grant and are exercisable as follows: 33% on the first anniversary of the grant date; an additional 34% on the second anniversary; and all or any remaining options on the third anniversary until expiration. Director options expire five years from the date of grant and are exercisable 50% upon expiration of six months from the grant date and all or any remaining options on the first anniversary of the grant date until expiration. With the acquisition of Camax on June 30, 1996, the Company assumed approximately 175 outstanding stock options representing all of Camax's obligations under five existing stock option plans and certain out-of-plan options. The assumed stock options and stock appreciation rights were generally granted to employees and directors of Camax at 100% of the market value at the date of grant and expire ten years from date of grant. No additional stock options will be granted under the Camax plans. In September 1998, the Company's Board of Directors approved a stock option exchange program allowing employees to exchange any outstanding options granted after January 1, 1996 for new options at the market price of $11.06. The new options vest over three years and expire in ten years from September 25, 1998. The Company cancelled and reissued 3,658 options under this exchange program. The following table reflects option activity over the last three years.
December 31, 1998 December 31, 1997 December 31, 1996 Weighted Weighted Weighted Stock Average Stock Average Stock Average Options Exercise Price Options Exercise Price Options Exercise Price Outstanding at beginning of the year 5,797 19.54 4,945 $17.10 5,008 $12.09 Granted 5,263 14.11 2,190 $22.33 1,337 $30.09 Exercised (567) 11.87 (931) $11.74 (1,169) $11.11 Cancelled (4,044) 23.71 (407) $22.81 (231) $13.93 -------------------------------------------------------------------------- Outstanding at end of the year 6,449 13.18 5,797 $19.54 4,945 $17.10 ========================================================================== Options exercisable at end of the year 2,374 15.05 2,891 $15.89 2,935 $13.71 ===========================================================================
(7) Common Stock and Employee Benefit Plans Information regarding options outstanding as of December 31, 1998 is as follows:
Options Outstanding Options Exercisable Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price $ 4.56 - $10.56 650 3.72 6.94 632 6.88 $10.88 - $11.06 3,662 9.70 11.06 18 10.99 $11.12 - $15.50 762 4.55 13.26 730 13.24 $15.53 - $20.13 807 4.45 18.02 623 18.19 $20.46 - $24 218 3.52 21.85 121 21.60 $24.18 4 8.64 24.19 1 24.19 $25.06 6 7.06 25.06 4 25.06 $26.19 60 4.35 26.19 30 26.19 $28.75 15 3.04 28.75 15 28.75 $31.25 265 1.84 31.25 200 31.25 --------------------------------------------------------------------------------------------------------- $ 4.56 - $31.25 6,449 7.23 13.18 2,374 15.05 ========================================================================================================= /TABLE Stock Purchase Plan Under the Stock Purchase Plan, all U.S. full-time employees are entitled to purchase the Company's common stock at 90% of fair market value. Employees electing to participate must contribute at least 1% with a maximum of 10% of the participant's base salary and commissions each month. All incidental expenses related to the issuance of these shares, including the 10% discount, have been charged to income. The plan has no fixed expiration date, may be terminated by the Company at any time and has no limitation on the number of shares that may be issued. Other Employee Benefit Plans The Company provides retirement benefits to substantially all employees through defined contribution plans. The Company's contributions are primarily based on employee compensation and years of service. Expenses related to the U.S. 401(k) plan and other defined contribution plans were approximately $5,427, $3,967, $3,225 in 1998, 1997 and 1996, respectively. Employees of U.S. divisions of the Company may make contributions to the 401(k) Plan by authorizing a reduction of their compensation of at least 1% up to a maximum of 15%. The Company may provide a matching contribution in the form of Company stock or cash equal to 50% of the employee contribution, up to a maximum of 6% of the employee compensation. Participants are immediately vested in their voluntary contributions and are vested in the Company contributions after three years of continuous service. The Company provides severance benefits for involuntarily terminated employees based on employees' prior years of service. The Company's obligation for these post employment benefits is recorded in other long-term liabilities. Stock-Based Compensation The Company accounts for stock options in accordance with Accounting Principles Board opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized in results of operations for stock option grants. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards since January 1, 1995, and allocated over the options' vesting period consistent with the provisions of SFAS No. 123, the Company's net income and income per share would have been reduced to the pro forma amounts as follows: Year ended December 31 1998 1997 1996 Net income - as reported $35,672 $30,030 $ 38,148 Net income - pro forma 26,268 19,758 32,727 Diluted income per share - as reported $ .93 $ .81 $ 1.05 Diluted income per share - pro forma $ .69 $ .53 $ .90
The pro forma effect on the Company's net income and income per share for 1998, 1997 and 1996 is not representative of the pro forma effect in future years. The pro forma effect does not take into consideration compensation expense related to grants made prior to 1995 or additional grants in future years which are anticipated. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants: dividend yield of 0%; expected terms of 3 years; expected volatility of 60% for 1998, 57% for 1997 and 63% for 1996; and risk-free interest rate of 4.7% for 1998, 5.7% for 1997 and 5.6% for 1996. The weighted average fair value of options granted was $6.26, $10.07 and $13.76, for 1998, 1997 and 1996, respectively. (8) Contingencies and Litigation The Company is currently not a party to any litigation other than ordinary routine litigation incidental to its business. The Company was a defendant in a shareholder, class action lawsuit which originated in 1994 and alleged violations of certain federal securities laws. In December 1995, the parties to this matter entered into a memorandum of understanding for settlement, which was subsequently approved by the Court. Pursuant to the memorandum, a settlement fund of $37,500 was established, consisting of $17,600 of cash provided by the Company, $10,000 in shares of the Company's common stock, and $9,900 of cash provided by the Company's former accountants. The Company's contribution to the settlement fund, and other litigation cost, net of estimated insurance proceeds were recorded as an expense in 1995. The Company contributed $17,600 of cash and $10,000 of common stock to the settlement fund in 1996 and 1997 respectively, to finalize its obligation to the settlement fund. (9) Interest and Other Income, Net Interest and other income, net consists of: Year ended December 31 1998 1997 1996 Interest income $ 7,655 $5,201 $4,593 Gain on sale of test software business 2,745 Insurance and litigation settlements 2,590 (950) Equity in earnings (losses) of affiliates 211 (39) (230) Acquisition expense (1,102) Other (413) (682) (427) ----------------------------- Interest and other income, net $12,788 $4,480 $1,884 ============================= (10) Product and Geographic Information In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which sets standards for disclosing information about the operating results of internal segments. SFAS No. 131 establishes requirements to report selected segment information quarterly, and to report annually, entity-wide disclosures about products and services, major customers and the material countries in which the Company operates. The Company measures operating results as a single reportable segment which provides multiple products and services for customers to manage product development processes. The Company classifies revenue in the geography of the customer at the time of sale. However, the customer has the right to redeploy licenses anywhere in the world. As a result, revenue comparisons by geography and among years, may not necessarily represent where licenses are used.
Revenue by products and services are as follows for each year ended December 31,
1998 1997 1996 Software licenses I-DEAS $135,362 $139,332 $135,822 Metaphase 39,775 31,395 17,236 ------------------------------------ Total software licenses 175,137 170,727 153,058 Software maintenance and services I-DEAS 171,377 138,363 111,170 Metaphase 56,511 42,232 21,028 ------------------------------------ Total software maintenance and services 227,888 180,595 132,198 ------------------------------------ Consolidated net revenue $403,025 $351,322 $285,256 =====================================
Revenues by geographic area are as follows:
Year ended December 31 1998 1997 1996 United States $176,169 $171,003 $136,532 Europe 138,091 107,153 80,275 Asia-Pacific 85,955 73,166 68,449 Other 2,810 ---------------------------------- Consolidated net revenue $403,025 $351,322 $285,256 ===================================
Long lived assets by geographic area are as follows:
December 31 1998 1997 1996 United States $85,758 $55,160 $51,883 Europe 6,244 5,627 4,790 Asia-Pacific 3,595 652 295 Other 1,817 --------------------------------- Consolidated $97,414 $61,439 $56,968 =================================
(11) Quarterly Results of Operations (Unaudited) The following table sets forth selected unaudited quarterly financial information for 1998 and 1997. The Company believes that all necessary adjustments have been included to present fairly the selected quarterly information. Three months ended Year ended March 31, June 30, September 30, December 31, December 31, 1998 1998 1998 1998 1998 1998 Revenue $91,112 $95,142 $101,819 $114,952 $403,025 Gross profit 56,625 56,199 61,206 73,059 247,089 Net income 10,328 5,113 10,338 9,893 35,672 Basic earnings per share .29 .14 .29 .27 .99* Dilutive earnings per share .28 .14 .28 .26 .93* Three months ended Year ended March 31, June 30, September 30, December 31, December 31, 1997 1997 1997 1997 1997 1997 Revenue $80,864 $88,678 $ 86,738 $ 95,042 $351,322 Gross profit 52,904 58,507 55,729 63,738 230,878 Net income (loss) (11,167) 11,633 12,752 16,812 30,030 Basic earnings (loss) per share (.32) .33 .36 .47 .85* Dilutive earnings (loss) per share (.32) .32 .34 .46 .81* * Per share amounts are not additive.
(12) Common Stock Information (Unaudited) The Company paid no dividends in 1998 or 1997 and intends to continue its policy of retaining earnings to finance future growth. There were approximately 1,875 shareholders of record as of December 31, 1998. The Company's common stock is listed and traded on The Nasdaq Stock Market ("Nasdaq"). The high and low trade prices per share for the Company's common stock as reported on the Nasdaq are contained in the table below. Prices reflect inter-dealer prices without retail mark-up, mark-down or commission. Three months ended March 31, June 30, September 30, December 31, 1998 1998 1998 1998 High 28 15/16 29 23 7/8 19 7/8 Low 20 1/2 21 8 3/4 7 1/2 Three months ended March 31, June 30, September 30, December 31, 1997 1997 1997 1997 High 26 27 5/8 30 25 7/8 Low 29 1/8 18 7/16 23 3/4 15 1/4
EX-21 3 Exhibit 21 STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT State or Other Jurisdiction Name of Incorporation SDRC CASE/Inc. Ohio SDRC Brasil Limitada Brazil SDRC U.K. Limited United Kingdom SDRC Italia, Srl. Italy SDRC Korea Limited South Korea SDRC Svenska AB Sweden SDRC Singapore Pte. Ltd. Singapore SDRC Nederland B.V. Netherlands SDRC AG Switzerland SDRC Belgium N.V./S.A. Belgium SDRC France S.A. France SDRC Espana, S.A. Spain SDRC Japan K.K. Japan SDRC Software and Services, GmbH Germany SDRC India Private Limited India Imageware Corporation Michigan Imageware U.K. Limited United Kingdom Imageware GmbH Germany Imageware France S.A. France Note: All of the above corporations are wholly owned subsidiaries of the Registrant either directly or indirectly. 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 25, 1999 appearing on page 32 of the 1998 Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears in this Form 10-K. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Cincinnati, Ohio March 26, 1999 Report of Independent Accountants To the Board of Directors of Structural Dynamics Research Corporation Our audits of the consolidated financial statements referred to in our report dated January 25, 1999 appearing on page 32 of the 1998 Annual Report to Shareholders of Structural Dynamics Research Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14 (a) of this Form 10- K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Cincinnati, Ohio January 25, 1999 Schedule II STRUCTURAL DYNAMICS RESEARCH CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (in thousands)
Balance at Additions Balance Beginning of Charged to Deductions/ at End Description of Period Expense (Recoveries) of Period Accounts Receivable: Year ended December 31, 1996 $2,520 2,689 1,928 $3,281 ====== ====== ====== ======= Year ended December 31, 1997 $3,281 1,005 757 $3,529 ====== ====== ====== ======= Year ended December 31, 1998 $3,529 4,496 2,462 $5,563 ====== ====== ====== =======
EX-27 5
5 1,000 12-MOS DEC-31-1998 DEC-31-1998 100,581 21,724 101,125 (5,563) 0 225,595 90,691 65,017 340,754 117,108 0 0 0 246 215,528 340,754 403,025 403,025 155,936 204,654 (12,788) 0 0 55,223 19,551 35,672 0 0 0 35,672 .99 .93
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