==========================================START OF PAGE 1====== UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 38493 / April 10, 1997 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 903 / April 10, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9291 ------------------------------------ : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS AND OPINION : AND ORDER PURSUANT LYNN K. BLATTMAN, : TO SECTION 21C OF THE : SECURITIES EXCHANGE ACT Respondent. : OF 1934 : ------------------------------------ I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted against Lynn K. Blattman ("Blattman" or "Respondent") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"). II. In anticipation of the institution of these administrative proceedings, Blattman has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the Commission's findings contained herein, except that she admits to the jurisdiction of the Commission over her and over the subject matter of these proceedings, Blattman consents to the entry of this Order Instituting Public Proceedings and Opinion and Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"). III. On the basis of this Order and the Respondent's Offer of Settlement, the Commission finds the following:1 A. FACTS 1. SUMMARY From at least 1992 through 1994, Structural Dynamics Research Corporation ("SDRC") and certain of its officers engaged in conduct that violated the anti-fraud, periodic reporting, books and records, and internal accounting control provisions of the federal securities laws.2 Beginning in at least 1992 and continuing through September 14, 1994, when SDRC initially disclosed accounting irregularities, SDRC inflated revenues and earnings by recognizing both premature and fictitious revenue. SDRC's recognition of premature and fictitious revenue in its Far East Operations was frequently based on purchase orders containing conditional language. SDRC violated, among other things, Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder. Respondent Blattman was a cause of these violations due to her knowledge of the improper revenue recognition practices relating to the Far East Operations and her preparation of the financial statements incorporated in SDRC's filings with the Commission on Forms 10-K and 10-Q despite her knowledge of those improper practices. 2. RESPONDENT Blattman, age 42, has been the assistant controller for SDRC since 1988 where she has been responsible for the preparation of SDRC's Forms 10-K and 10-Q, including the financial statements contained therein. Blattman has also been responsible for overseeing SDRC's accounts receivable and for preparing various accounts receivable reports. Blattman is a certified public accountant licensed in the state of Ohio since 1978. 3. ISSUER SDRC, an Ohio corporation with its principal place of business in Milford, Ohio, is an international supplier of mechanical design automation software and engineering services to 1 The findings herein are made pursuant to the Offer of Settlement submitted by Blattman and are not binding on any other person or entity named as a respondent in this or any other proceeding. 2 See SEC v. Structural Dynamics Research Corporation, et al., Litigation Release No. 15325 (1996). automotive, aerospace and industrial manufacturers. SDRC, which was founded as an engineering consulting firm in 1967, went public in September 1987. At all relevant times, the Company's common stock was registered pursuant to Section 12(g) of the Exchange Act and traded on the NASDAQ National Market System. SDRC's Forms 10-K and 10-Q filed with the Commission from the first quarter of 1992 through the second quarter of 1994 were materially false and misleading.3 SDRC violated, among other things, Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder. 4. SDRC'S IMPROPER REVENUE RECOGNITION PRACTICES SDRC marketed and sold its products in the Far East, in part, through representatives. SDRC's representatives had no authority to sublicense (resell) SDRC's software, but instead acted as SDRC's sales agents. By at least 1992, SDRC began recognizing some premature or fictitious revenue based on orders from Far East representatives. In connection with these orders, SDRC's representatives had not finalized or obtained orders from end-users. These orders were therefore not final, but were instead contingent upon sale of the product to a legitimate end-user. SDRC recorded revenue relating to these orders based solely upon purchase orders from representatives which often contained conditional language, indicating that the sale had not been finalized.4 At a minimum, many of the purchase orders specified 3 In January 1995, SDRC restated its previously issued annual financial statements for 1991 through 1993 and its quarterly financial statements for 1992, 1993 and the first two quarters of 1994. The restated financial statements reflected material decreases to revenue and net income. For the affected period, revenue was restated by between 9% and 22%, and net income (loss) was restated by between 34% and 457%. 4 Under Generally Accepted Accounting Principles ("GAAP"), revenue should be recognized when it is both realized or realizable and earned. Revenue is realized when a product is "exchanged for cash or claims to cash," and "when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues." Thus, revenue generally is recognized at the time of sale, and that usually means when the product is delivered to the customer. Recognition and Measurement in Financial Statements of Business Enterprises, Statement of Financial Accounting Concepts No. 5,  83 (1984). ==========================================START OF PAGE 3====== that product was not to be shipped until further notice from the customer. Many other purchase orders were actually titled "Conditional Purchase Order."5 Certain employees in SDRC's Far East Operations obtained these purchase orders from the representatives by offering volume discounts to them, as well as by threatening to terminate SDRC's relationship with the representatives and to seek other sales agents in that region. The product "sold" under these orders was often shipped to a freight forwarder and held until further instructions from the Far East Operations.6 Although SDRC, at times, received payment in a piecemeal fashion as orders were finalized with end-users, SDRC recorded all of the revenue at the time it first received these orders from representatives. In many instances, these orders were never paid for, the revenue was reversed and the related receivable was written off. The amount of premature and fictitious revenue recognized gradually grew during 1991 and 1992, and increased dramatically during 1993 and the first three quarters of 1994. 5. BLATTMAN'S KNOWLEDGE OF THE FAR EAST OPERATIONS REVENUE RECOGNITION PRACTICES Blattman had concerns that SDRC was improperly recognizing revenue from Far East representatives. She was aware of certain information that indicated that sales had been recognized prematurely or improperly. She nevertheless prepared the financial statements in SDRC's 1993 Form 10-K and its Forms 10-Q for 1993 and the first two quarters of 1994. Blattman questioned the appropriateness of recognizing revenue based on purchase orders containing conditional language obtained from Far East representatives in November 1990, October 1991 and November 1991 memoranda to SDRC's chief financial officer and controller. Neither the chief financial officer nor the controller responded to the issues raised in Blattman's memos. Blattman was aware that SDRC wrote off material amounts of accounts receivable and reversed the related revenue. In the summer of 1993, in an effort to understand why write-offs of Far 5 For example, some purchase orders obtained from Far East Computers ("FEC"), an SDRC representative in Singapore, contained the following language: "Conditional Purchase Order. Do not ship until notified by customer. No obligation to pay." 6 When the fraud was disclosed in September 1994, at least $30 million of SDRC product was in warehouses rented from Emery at the Cincinnati airport. ==========================================START OF PAGE 4====== East receivables were increasing, Blattman studied and documented the Far East Operation's ("FEO's") sales and revenue recognition practices. In an extensive report based on this study, she documented the recognition of revenue based on purchase orders containing conditional language, the shipment of product to an Emery warehouse rather than to FEO's customers and the rate of payment for FEO's receivables. Based on all of these factors, Blattman recommended in her report that certain Far East orders should not be recorded as revenue and also advocated the need to establish reserves for FEO's receivables. Although she gave the report to SDRC's controller, he took no further action with respect to the information contained in it. B. LEGAL ANALYSIS Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers to file with the Commission annual and quarterly reports on Forms 10-K and 10-Q, respectively. Among other things, these reports must make disclosures regarding an issuer's periodic revenue and income. Pursuant to instructions applicable to Forms 10-K and 10-Q, the financial statements must conform to Regulation S-X, which requires conformity with GAAP. 17 C.F.R. 210.4-01(a)(1). As early as 1991, Blattman became aware that SDRC had recognized revenue on the basis of purchase orders containing conditional language which she knew or should have known were not in accordance with GAAP. By the summer of 1993, she conducted a thorough investigation of FEO's sales and revenue recognition practices and identified practices that suggested SDRC was improperly recognizing revenue. Although Blattman was not involved in deciding which orders would be recognized as revenue by SDRC, she was aware of information indicating that revenue was recognized improperly and alerted management to her concerns. Given management's failure to respond to or resolve her concerns, Blattman should not have prepared the financial statements included in SDRC's 1993 Forms 10-Q and 10-K and the Forms 10-Q for the first two quarters of 1994 filed with the Commission, including the financial statements contained therein. Therefore, Blattman was a cause of SDRC's violations of Section 13(a) and Rules 13a-1, 13a-13 and 12b-20 thereunder due to acts and omissions which she knew or should have known would contribute to them. ==========================================START OF PAGE 5====== IV. FINDINGS Based on the foregoing, the Commission finds that Blattman caused violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder. V. OFFER OF SETTLEMENT Blattman has submitted an Offer of Settlement in which, without admitting or denying any of the findings set forth herein, she consents to the Commission's issuance of this Order, which orders that she cease and desist from causing any violation, and causing any future violation, of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder. VI. Accordingly, IT IS HEREBY ORDERED that, pursuant to Section 21C of the Exchange Act, Blattman cease and desist from causing any violation, and any future violation, of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder. By the Commission. Jonathan G. Katz Secretary ==========================================START OF PAGE 6======