<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1996
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-8722
THE MACNEAL-SCHWENDLER CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2239450
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
815 Colorado Boulevard, Los Angeles, California 90041
-----------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (213) 258-9111
--------------------
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
---- ----
The number of shares outstanding of Registrant's Common Stock, par value $.01
per share, was 13,453,806 shares at December 9, 1996.
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets (Unaudited) - October 31, 1996
and January 31, 1996............................................3
Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended October 31, 1996 and 1995...........4
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended October 31, 1996 and 1995.....................5
Notes to Consolidated Financial Statements
(Unaudited).....................................................6
Item 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition.........................................8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.....................................11
2
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JANUARY 31,
1996 1996
---------------- --------------
Assets (UNAUDITED)
- ------
Current assets:
Cash and cash equivalents $ 16,656,000 $ 7,235,000
Short-term investments 1,055,000 3,340,000
Trade accounts receivable, net 33,248,000 36,455,000
Other current assets 9,124,000 9,518,000
--------------- --------------
Total current assets 60,083,000 56,548,000
Property and equipment, net 11,041,000 12,281,000
Capitalized software costs, net 27,922,000 29,069,000
Goodwill and other intangibles, net 16,820,000 19,090,000
Other assets 2,834,000 2,672,000
--------------- --------------
$118,700,000 $119,660,000
--------------- --------------
--------------- --------------
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 1,541,000 $ 2,436,000
Accrued liabilities 21,785,000 20,126,000
Restructuring reserve 47,000 1,389,000
Deferred income 8,224,000 8,663,000
Dividends payable 0 2,151,000
Income taxes payable 254,000 601,000
--------------- --------------
Total current liabilities 31,851,000 35,366,000
Deferred income taxes 9,667,000 10,573,000
Convertible Subordinated Debentures 56,574,000 56,576,000
Commitments
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000
shares authorized; no shares outstanding
at October 31, 1996 or January 31, 1996 ----- -----
Common stock, $0.01 par value,
100,000,000 shares authorized;
13,454,000 and 13,448,000 issued and
outstanding at October 31, 1996 and
January 31, 1996, respectively 30,234,000 30,082,000
Retained deficit (7,843,000) (10,754,000)
Accumulated translation adjustment (1,783,000) (2,183,000)
--------------- --------------
Total shareholders' equity 20,608,000 17,145,000
--------------- --------------
$118,700,000 $119,660,000
--------------- --------------
--------------- --------------
See accompanying notes.
3
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31, NINE MONTHS ENDED OCTOBER 31,
------------------------------ -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Analysis software $ 17,889,000 $ 17,867,000 $ 56,168,000 $ 54,638,000
Modeling software 11,566,000 12,548,000 34,330,000 33,498,000
Other 2,135,000 1,593,000 6,043,000 6,408,000
------------ ------------ ------------ ------------
Total revenues 31,590,000 32,008,000 96,541,000 94,544,000
Operating expenses:
Cost of revenue 4,552,000 5,100,000 14,036,000 14,745,000
Amortization of goodwill and other intangibles 567,000 525,000 1,701,000 1,640,000
Research and development 5,838,000 4,694,000 17,940,000 15,051,000
Selling, general and administrative 15,972,000 15,531,000 50,259,000 45,712,000
------------ ------------ ------------ ------------
Total operating expenses 26,929,000 25,850,000 83,936,000 77,148,000
Operating income 4,661,000 6,158,000 12,605,000 17,396,000
Debenture interest (1,114,000) (1,114,000) (3,342,000) (3,350,000)
Other income (expense), net (74,000) (15,000) (565,000) 792,000
------------ ------------ ------------ ------------
Income before income taxes 3,473,000 5,029,000 8,698,000 14,838,000
Provision for income taxes 1,129,000 1,498,000 2,827,000 4,823,000
------------ ------------ ------------ ------------
Net income $ 2,344,000 $ 3,531,000 $ 5,871,000 $10,015,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Primary earnings per share $ 0.17 $ 0.26 $ 0.43 $ 0.74
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Fully diluted earnings per share $ 0.17 $ 0.24 $ 0.43 $ 0.71
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of
common shares outstanding 13,480,000 13,476,000 13,499,000 13,464,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash dividends declared $ - $ 0.16 $ 0.22 $ 0.48
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
4
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31
--------------------------------
1996 1995
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,871,000 $ 10,015,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of property and equipment 4,780,000 4,222,000
Amortization of goodwill and other intangibles 1,701,000 1,710,000
Amortization of capitalized software costs 5,243,000 6,546,000
Deferred income taxes - 213,000
(Gain) Loss on disposal of property and equipment 23,000 (20,000)
Changes in assets and liabilities:
Accounts receivable, net 3,061,000 6,134,000
Other current assets (379,000) (260,000)
Accounts payable (953,000) (1,098,000)
Accrued liabilities (1,421,000) (5,712,000)
Deferred Income 283,000 (1,113,000)
Restructuring reserve (1,332,000) (3,130,000)
Income taxes payable (379,000) 1,499,000
------------ -------------
Net cash provided by operating activities 16,498,000 19,006,000
Cash flows from investing activities:
Decrease in short-term investments 2,285,000 72,000
Acquisition of property and equipment (3,754,000) (5,586,000)
Proceeds from sale of Electronics Business Unit 5,600,000 -
Purchase of subsidiary, net of cash acquired (115,000) -
Capitalized software costs (6,294,000) (7,839,000)
Decrease (increase) in other assets (238,000) (1,631,000)
------------ -------------
Net cash used in investing activities (2,516,000) (14,984,000)
Cash flows from financing activities:
Payments of long-term debt (2,000) -
Issuance of common stock 152,000 301,000
Proceeds from short-term borrowing - 2,500,000
Cash dividends paid (5,111,000) (6,427,000)
------------ -------------
Net cash used in financing activities (4,961,000) (3,626,000)
Translation adjustment 400,000 (2,096,000)
------------ -------------
Net increase (decrease) in cash and cash equivalents 9,421,000 (1,700,000)
Cash and cash equivalents at beginning of period 7,235,000 6,944,000
------------ -------------
Cash and cash equivalents at end of period $ 16,656,000 $ 5,244,000
------------ -------------
------------ -------------
See accompanying notes.
</TABLE>
5
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: DISPOSITION OF PRODUCT LINE
On July 25, 1996, The MacNeal-Schwendler Corporation ("Company") sold
its Electronics Business Unit ("EBU") to Ansoft Corporation for $5,600,000.
In association with the sale, the Company created reserves to account for
certain direct incremental expenses. These reserves are accounted for as a
component of accrued liabilities. Due to the level of reserves and other
direct expenses associated with the sale, there was no gain recognized on the
sale of the EBU.
NOTE 2: BASIS OF PRESENTATION
The accompanying consolidated financial information is condensed from
that which would appear in the annual financial statements and should be read
in conjunction with the consolidated financial statements included in The
MacNeal-Schwendler Corporation's Annual Report on Form 10-K for the year ended
January 31, 1996.
Supplemental cash flow information for taxes paid during the nine months
ended October 31, 1996 and 1995 were $3,174,000 and $3,324,000, respectively.
Additionally, the Company paid interest of $4,454,000 and $4,737,000 on its
Convertible Subordinated Debentures due 2004 during the nine months ended
October 31, 1996 and October 31, 1995, respectively.
Fully diluted earnings per share calculated under the treasury method
were anti-dilutive for the three and nine months ended October 31, 1996.
Fully diluted earnings per share under the treasury method are calculated by
dividing net income by the weighted average number of shares of common stock
outstanding during the period, adjusted for the pro forma effects of stock
option exercises and debenture conversions.
All interim financial data is unaudited but, in the opinion of
management, reflects all adjustments necessary for a fair presentation
thereof. However, it should be understood that accounting measurements at
interim dates may be less precise than at year end. Operating results for
the nine months ended October 31, 1996 are not necessarily indicative of the
results that may be expected for the year ended January 31, 1997.
Certain reclassifications have been made to the financial information
for the three months and nine months ended October 31, 1995 in order to
conform to the October 31, 1996 presentation.
NOTE 3: CAPITALIZED SOFTWARE
Software costs capitalized and amortized from operating activities were
as follows:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
----------------------------- -----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Software costs capitalized $ (1,811,000) $ (2,767,000) $(6,294,000) $(7,839,000)
Amortization of capitalized software 1,661,000 2,367,000 5,243,000 6,546,000
------------ ------------ ----------- ----------
Net capitalized software costs $ (150,000) $ (400,000) $(1,051,000) $(1,293,000)
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
Software costs capitalized is included in Research and Development.
Amortization of capitalized software is included in Cost of Revenue.
6
<PAGE>
The Company wrote off $4,898,000 and $2,700,000 of capitalized software costs
and accumulated amortization of capitalized software costs, respectively, as
part of the direct costs associated with the sale of the Electronics Business
Unit.
NOTE 4: ACCRUED LIABILITIES
The components of accrued liabilities are as follows:
October 31, January 31,
1996 1996
---- ----
Compensation and related expenses $ 4,639,000 $ 4,075,000
Commissions payable 3,152,000 3,369,000
Sales taxes payable 3,039,000 1,700,000
Contribution to profit sharing plan 2,544,000 3,155,000
Costs associated with sale of EBU 2,481,000 0
Post retirement benefits 1,557,000 1,060,000
Royalties payable 737,000 791,000
Debenture interest payable 573,000 1,685,000
Incentive compensation 233,000 200,000
Other 2,830,000 4,091,000
------------ ------------
$ 21,785,000 $ 20,126,000
------------ ------------
------------ ------------
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS ENDED OCTOBER 31, 1996
Consolidated third quarter revenues were $31,590,000 compared with revenues
of $32,008,000 in the same quarter of the prior fiscal year, a decrease of one
percent. The decrease was the result of a four percent revenue decline in
Europe and flat revenues in The Americas and Asia-Pacific. On a geographical
basis, the Americas represented 44%, Europe represented 29%, and Asia Pacific
represented 27% of total revenues for the quarter. Current-quarter revenues
were negatively affected by the sale of the MSC/EMAS product line in the second
quarter of the current year. If MSC/EMAS revenues are excluded from prior year
revenues, consolidated third quarter revenues increased by two percent in the
current quarter. Furthermore, excluding prior year MSC/EMAS revenues, Asia-
Pacific and European revenues, measured in local currency, increased by thirteen
percent and three percent, respectively. The Americas revenues also increased
by three percent, excluding prior year MSC/EMAS revenues.
Current quarter revenues, measured in U.S. dollars, were adversely affected
by the continued strength of the U.S. dollar against the Japanese yen and German
mark compared to the same quarter last year. Had the U.S. dollar remained at
the same foreign exchange levels as the prior year, consolidated third-quarter
revenues would have been higher by approximately $1,200,000.
Cost of revenue decreased $548,000, or eleven percent, as a result of a
decrease in the amortization of capitalized software costs compared to the third
quarter of the prior fiscal year. The decrease in the cost of revenue was
mitigated by an increase in third party royalty expenses, which resulted from an
increase in the sale of software products for which the Company pays royalties.
Research and development costs increased $1,144,000, or 24%, due almost entirely
to a significant decrease in the rate at which software costs were capitalized
compared to the prior year. Excluding this fluctuation caused by differing
rates of software capitalization, the increase in "core" research and
development expenses was approximately three percent. Selling, general and
administrative expenses increased three percent as well, due to an increase in
selling expenses in The Americas. The resulting changes as described above
generated an overall increase in operating expenses of four percent, to
$26,929,000, compared to the same quarter last year.
The Company's resulting income from operations for the quarter ended
October 31, 1996 was $4,661,000, a 24% decrease from operating income of
$6,158,000 during the third quarter last year.
Net income was $2,344,000 compared to net income of $3,531,000 in the prior
year, a decrease of 34%. Primary earnings per share for the three months ended
October 31, 1996 were $0.17 compared to $0.26 for the three months ended October
31, 1995.
NINE MONTHS ENDED OCTOBER 31, 1996
Consolidated nine-month revenues were $96,541,000 compared to $94,544,000
for the same period in the prior fiscal year, an increase of two percent. The
increase was the result of a ten percent and five percent increase in Asia-
Pacific and European revenues, respectively, partially offset by a four percent
decline in The Americas revenues. Revenues, measured in U.S. dollars, were
adversely affected by the significant strengthening of the dollar against the
Japanese yen and German mark compared to the same period last year. Had the U.S.
dollar remained at the same foreign exchange levels as the prior year, nine-
month revenues would have been higher by approximately $4,300,000. Measured in
local currency, European and Asia-Pacific revenues increased by nine percent and
twenty-two percent, respectively.
8
<PAGE>
Consolidated revenues grew in nearly every line of software except
MSC/NASTRAN and MSC/ARIES. Revenues from MSC/NASTRAN continue to be adversely
affected by pricing pressures from other providers of analysis software, while
revenues from MSC/ARIES continue to be negatively impacted by the loss of a key
license agreement with Ford Motor Company. This decline in revenues was more
than offset by revenue growth from other lines of MSC software, including
MSC/PATRAN and MSC/NASTRAN for Windows. On a geographical basis, the Americas
represented 41%, Europe represented 32%, and Asia-Pacific represented 27% of
total revenues for the nine months ended October 31, 1996.
Cost of revenue decreased $709,000, or five percent, as a result of a
decrease in the amortization of capitalized software costs compared to the first
nine months of the prior fiscal year. The decrease in the cost of revenue was
mitigated by an increase in third party royalty expenses, which resulted from a
significant increase in the sale of software products for which the Company pays
royalties. Research and development costs increased $2,889,000, or 19%,
primarily due to the significant decrease in the rate at which software costs
were capitalized compared to the prior year. Excluding this fluctuation caused
by differing rates of software capitalization, the increase in "core" research
and development expenses was six percent. Selling, general and administrative
expenses increased primarily in the Company's European and Asia-Pacific
operations, due to the expanded infrastructure necessary to support the
increased level of revenues. The resulting changes, as described above,
generated an overall increase in operating expenses of nine percent, to
$83,936,000, compared to the same period last year.
The Company's resulting income from operations for the nine months ended
October 31, 1996 was $12,605,000, a 28% decrease from operating income of
$17,396,000 during the same period last year.
Nonoperating income and expense variances are primarily due to foreign
exchange rate losses caused by the strengthened U.S. dollar.
Net income was $5,871,000 compared to net income of $10,015,000 in the
prior year, a decrease of 41%. Primary earnings per share for the nine months
ended October 31, 1996 were $0.43 compared to $0.74 for the nine months ended
October 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
A dividend of $.06 per share was paid on September 4, 1996 to shareholders
of record on August 16, 1996. However, the Company subsequently reevaluated its
dividend policy and eliminated its quarterly dividend in order to reinvest more
of its earnings into the Company's business. The Company currently anticipates
that it will retain all future earnings for use in its business and does not
anticipate paying any cash dividends on its common stock in the foreseeable
future.
Historically, working capital needed to finance the Company's operations
and growth has been provided by cash flow from operations. Management believes
that cash generated from operations will continue to be sufficient for working
capital needs in the foreseeable future. Net cash from operating activities was
$16,498,000 in the first nine months of fiscal 1997 compared with $19,006,000
during the comparable period of the prior year. The Company's working capital
was $28,232,000 at October 31, 1996, an increase from $21,182,000 at January 31,
1996. Cash and short-term investments were $17,711,000 at October 31, 1996
compared to $10,575,000 at January 31, 1996. The increase in cash and short-
term equivalents was primarily the result of the sale of the Company's
Electronics Business Unit to Ansoft Corporation for $5,600,000. The Company has
an agreement for a $5,000,000 unsecured line of credit with its principal bank
at the prevailing prime rate under which no amounts were outstanding at October
31, 1996.
9
<PAGE>
Management expects to continue to invest a substantial portion of the
Company's revenues in the research and development of new computer software
products and the enhancement of existing products. Research and development
expenses were $24,234,000 and $22,890,000 for the nine months ended October 31,
1996 and October 31, 1995, respectively, of which $6,294,000 and $7,839,000 were
capitalized. Product development costs and the capitalization rate may vary
depending in part on the number of products and the stage of development of the
products in process.
During the nine months ended October 31, 1996 and October 31, 1995, the
Company acquired $3,754,000 and $5,586,000, respectively, of new property and
equipment. Capital expenditures during the prior and current fiscal years
included significant upgrades to computer equipment to keep current with
technological advances and expansion of facilities worldwide. The Company's
capital expenditures vary from year to year as required by business needs. The
Company intends to continue to expand the capabilities of its computer
equipment, which is used in the development and support of its proprietary
software products. Although capital expenditures for the nine months ended
October 31, 1996 were less than the comparable period last year, management
expects overall expenditures for property and equipment in future years to be
consistent with those for the fiscal year ended January 31, 1996.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information in the Management's Discussion and Analysis of Results
of Operations and Financial Condition contained in this Form 10-Q includes
information that is forward-looking. Such forward-looking statements include,
among others, statements concerning the Company's international expansion,
capital expenditure plans, the Company's dividend policy, the Company's
expectations regarding future liquidity, and other statements of expectations,
beliefs, future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical fact.
The forward-looking statements in this report are based on current
expectations and are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by those
statements. The risks and uncertainties include but are not limited to: the
timely development and market acceptance of new versions of the Company's
software products; the impact of competitive products and pricing; effective
development and utilization of the Company's offshore projects (currently in
Taiwan and India); successful involvement of international and domestic business
partners in creating mechanical engineering solutions; the level of economic
activity in the U.S. and abroad; fluctuations of the U.S. dollar versus foreign
currencies; timely development of CAE technologies which, among other things,
must accommodate industry trends such as increasing computing power and
increased usage of workstations; the Company's ability to reduce costs without
adversely impacting revenues; the Company's ability to attract, motivate and
retain salespeople, programmers and other key personnel; continued demand for
the Company's products, including MSC/NASTRAN, MSC/PATRAN, MSC/ARIES,
MSC/MVISION, MSC/DYTRAN and MSC/NASTRAN FOR WINDOWS; and such risks and
uncertainties as are detailed from time to time in the Company's other
Securities and Exchange Commission reports and filings.
Subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are hereby expressly qualified in their
entirety by the cautionary statements in this section of this Form 10-Q.
10
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MACNEAL-SCHWENDLER CORPORATION
----------------------------------
(Registrant)
Date: December 12, 1996
------------------
/s/ LOUIS A. GRECO
----------------------------------------
Louis A. Greco, Chief Financial Officer
(Mr. Greco is the Principal Financial and
Accounting Officer and has been duly
authorized to sign on behalf of the
registrant.)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 16,656
<SECURITIES> 1,055
<RECEIVABLES> 34,716
<ALLOWANCES> 1,468
<INVENTORY> 0
<CURRENT-ASSETS> 60,083
<PP&E> 33,391
<DEPRECIATION> 22,350
<TOTAL-ASSETS> 118,700
<CURRENT-LIABILITIES> 31,851
<BONDS> 56,574
0
0
<COMMON> 30,234
<OTHER-SE> (9,626)
<TOTAL-LIABILITY-AND-EQUITY> 118,700
<SALES> 0
<TOTAL-REVENUES> 96,541
<CGS> 14,036
<TOTAL-COSTS> 83,936
<OTHER-EXPENSES> 565
<LOSS-PROVISION> 155
<INTEREST-EXPENSE> 3,342
<INCOME-PRETAX> 8,698
<INCOME-TAX> 2,827
<INCOME-CONTINUING> 5,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,871
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
