<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 April 30, 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
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(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 June 5, 1996.
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets (Unaudited) - April 30, 1996
and January 31, 1996......................................... 3
Consolidated Statements of Income (Unaudited)
Three Months Ended April 30, 1996 and 1995................... 4
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended April 30, 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
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1996 1996
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,880,000 $ 7,235,000
Short-term investments 1,327,000 3,340,000
Trade accounts receivable, net 33,368,000 36,455,000
Other current assets 10,092,000 9,518,000
------------- --------------
Total current assets 51,667,000 56,548,000
Property and equipment, net 11,814,000 12,281,000
Capitalized software costs, net 29,653,000 29,069,000
Goodwill and other intangibles, net 18,657,000 19,090,000
Other assets 2,816,000 2,672,000
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$ 114,607,000 $ 119,660,000
------------- --------------
------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,054,000 $ 2,436,000
Accrued liabilities 16,847,000 20,126,000
Restructuring reserve 831,000 1,389,000
Deferred income 8,757,000 8,663,000
Dividends payable 2,152,000 2,151,000
Income taxes payable 457,000 601,000
------------- --------------
Total current liabilities 31,098,000 35,366,000
Deferred income taxes 10,573,000 10,573,000
Convertible Subordinated Debentures 56,575,000 56,576,000
Commitments
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000
shares authorized; no shares outstanding
at April 30, 1996 or January 31, 1996 ----- -----
Common stock, $0.01 par value,
100,000,000 shares authorized;
13,452,000 and 13,448,000 issued and
outstanding at April 30, 1996 and
January 31, 1996, respectively 30,211,000 30,082,000
Retained deficit (11,230,000) (10,754,000)
Accumulated translation adjustment (2,620,000) (2,183,000)
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Total shareholders' equity 16,361,000 17,145,000
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$ 114,607,000 $ 119,660,000
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------------- --------------
</TABLE>
See accompanying notes.
3
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THE MACNEAL-SCHWENDLER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
------------------------------
1996 1995
------------- --------------
<S> <C> <C>
Revenues:
Analysis Software $ 19,048,000 $ 18,917,000
Modeling Software 11,386,000 9,536,000
Other 1,758,000 2,182,000
------------- --------------
Total revenues 32,192,000 30,635,000
Operating expenses:
Cost of revenue 4,775,000 4,606,000
Amortization of goodwill and other intangibles 589,000 574,000
Research and development 5,792,000 5,154,000
Selling, general and administrative 17,193,000 14,729,000
------------- --------------
Total operating expenses 28,349,000 25,063,000
Operating income 3,843,000 5,572,000
Debenture interest (1,114,000) (1,119,000)
Other income (expense), net (245,000) 140,000
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Income before income taxes 2,484,000 4,593,000
Provision for income taxes 807,000 1,539,000
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Net income $ 1,677,000 $ 3,054,000
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Primary earnings per share $ 0.12 $ 0.23
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Fully diluted earnings per share $ 0.12 $ 0.22
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Weighted average number of
common shares outstanding 13,615,000 13,394,000
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Cash dividends declared $0.16 $0.16
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</TABLE>
See accompanying notes.
4
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30
------------------------------
1996 1995
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,677,000 $3,054,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment 1,540,000 1,306,000
Amortization of goodwill and other
intangibles 589,000 574,000
Amortization of capitalized software costs 1,861,000 2,058,000
Deferred income taxes - 188,000
(Gain) Loss on disposal of property and
equipment 14,000 (4,000)
Changes in assets and liabilities:
Accounts receivable 3,141,000 74,000
Other current assets (430,000) 796,000
Accounts payable (440,000) (1,096,000)
Accrued liabilities (3,374,000) (5,933,000)
Deferred Income 85,000 113,000
Restructuring costs (558,000) (1,133,000)
Income taxes payable (176,000) 482,000
------------- --------------
Net cash provided by operating activities 3,929,000 479,000
Cash flows from investing activities:
Decrease in short-term investments 2,013,000 15,000
Acquisition of property and equipment (1,062,000) (1,812,000)
Purchase of subsidiary, net of cash acquired (115,000) -
Capitalized software costs (2,445,000) (2,617,000)
Other (215,000) (551,000)
------------- --------------
Net cash used in investing activities (1,824,000) (4,965,000)
Cash flows from financing activities:
Payments of long-term debt (1,000) -
Issuance of common stock 129,000 2,000
Proceeds from short-term borrowing - 2,500,000
Cash dividends paid (2,151,000) (2,141,000)
------------- --------------
Net cash used in financing activities (2,023,000) 361,000
Translation adjustment (437,000) 1,570,000
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Net decrease in cash and cash equivalents (355,000) (2,555,000)
Cash and cash equivalents at beginning of
period 7,235,000 6,944,000
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Cash and cash equivalents at end of period $6,880,000 $4,389,000
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</TABLE>
See accompanying notes.
5
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: 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 three months
ended April 30, 1996 and 1995 were $1,198,000 and $55,000, respectively.
Additionally, the Company paid interest of $2,227,000 and $2,561,000 on its
Convertible Subordinated Debentures due 2004 during the three months ended April
30, 1996 and April 30, 1995, respectively.
Fully diluted earnings per share calculated under the treasury method
were anti-dilutive for the three months ended April 30, 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. Shares outstanding for calculating
fully diluted earnings per share were 17,349,000 and 17,128,000 for the three
months ended April 30, 1996 and April 30, 1995, respectively.
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 three months ended April
30, 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 ended April 30, 1995 in order to conform to the April 30, 1996
presentation.
NOTE 2: CAPITALIZED SOFTWARE
The components of net capitalized software costs include:
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Software costs capitalized $(2,445,000) $(2,617,000)
Amortization of capitalized software 1,861,000 2,058,000
----------- -----------
Net capitalized software costs $(584,000) $(559,000)
----------- -----------
----------- -----------
</TABLE>
6
<PAGE>
Amortization of capitalized software is included in Cost of Revenue.
NOTE 3: ACCRUED LIABILITIES
The components of accrued liabilities are as follows:
<TABLE>
<CAPTION>
April 30, January 31,
1996 1996
---- ----
<S> <C> <C>
Compensation and related expenses $4,209,000 $4,075,000
Contribution to profit sharing plan 837,000 3,155,000
Commissions payable 3,202,000 3,369,000
Consumption taxes payable 2,072,000 1,700,000
Post retirement benefits 1,109,000 1,060,000
Royalties payable 736,000 791,000
Debenture interest payable 572,000 1,685,000
Bonus payable 116,000 200,000
Other 3,994,000 4,091,000
----------- -----------
$16,847,000 $20,126,000
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----------- -----------
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS ENDED APRIL 30, 1996
The Company recorded total revenues of $32,192,000 for the three months
ended April 30, 1996 compared to total revenues of $30,635,000 for the same
period in the prior fiscal year, an increase of five percent. Excluding the
unfavorable effects of exchange rate fluctuations, revenues in Europe and Asia
Pacific increased 19% and 25%, respectively, while revenues in the Americas
decreased by 11%. European and Asia Pacific revenues were positively impacted
by the continued strong growth of MSC/PATRAN and MSC/NASTRAN FOR WINDOWS, while
revenues in the Americas were negatively impacted by the loss of a major
MSC/ARIES contract with Ford Motor Company. Additionally, the Company is
experiencing increasing downward pricing pressures on MSC/NASTRAN revenues due
to increased competition from other providers of analysis software, especially
in North America. Overall revenues from analysis software, including
MSC/NASTRAN, were nearly unchanged from the same period last year. Overall
modeling revenues increased 19%, with increases in MSC/PATRAN and MSC/MVISION
revenues of 31% and 188%, respectively, compared to the same period in the prior
fiscal year. Other revenues declined modestly.
Cost of revenue increased $169,000, or 4%, as a result of increased
royalty expenses associated with higher modeling software revenues, including
revenues from MSC/PATRAN and MSC/MVISION. The increase in the cost of
revenue was mitigated by a decrease in the amortization of capitalized
software costs compared to the prior year. Research and development costs
increased $638,000, or 12%, primarily due to the decrease in the
capitalization of software costs compared to the prior year, and increased
development costs. Selling, general and administrative expenses increased in
the Company's European and Asia Pacific operations, due to the increased
infrastructure necessary to support the increased level of revenues.
Selling, general, and administrative expenses also rose in North America in
anticipation of proportionately higher first quarter revenues which did not
materialize as expected. The resulting increases as described above
generated an overall increase in expenses of 13%, to $28,349,000 compared to
the same period last year.
In order to conform to the current year presentation of expenses, certain
reclassifications were made in the presentation of prior year expenses.
Management implemented these changes in order to increase the usefulness of the
financial information presented. Prior year expenses relating to the Company's
North American Integration Services division have been reclassified from
research and development to cost of revenue. Additionally, prior year
amortization of organization costs has been reclassified from other expense to
amortization of goodwill and other intangibles. The reclassifications of first
quarter Integration Services expenses and amortization of organization costs
amounted to $518,000 and $78,000, respectively.
The Company's resulting income from operations for the quarter ended April
30, 1996 was $3,843,000, a 31% decrease from operating income of $5,572,000
during the first quarter last year.
Nonoperating income and expense decreased primarily due to foreign exchange
rate losses of $166,000, caused by a strengthening U.S. dollar and the
settlement of a lease agreement with HP/Convex for $77,000.
Net income was $1,677,000 compared to net income of $3,054,000 in the prior
year, a decrease of 45%. Primary earnings per share for the three months ended
April 30, 1996 were $0.12 compared to $0.23 for the three months ended April 30,
1995.
LIQUIDITY AND CAPITAL RESOURCES
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 provide sufficient capital
for working capital needs in the foreseeable future. Net cash from operating
activities was $3,929,000 in the first quarter of fiscal 1997 compared with
$479,000 during the comparable quarter of the prior
8
<PAGE>
year. The Company's working capital was $20,569,000 at April 30, 1996, down
from $21,182,000 at January 31, 1996. However, cash and short-term investments
continued to decrease, falling from $10,575,000 at January 31, 1996 to
$8,207,000 at April 30, 1996, primarily as a result of reduced earnings, payment
of the Company's semi-annual interest payment on its Convertible Subordinated
Debentures in March and payment of dividends in excess of earnings. 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
April 30, 1996.
The Company provided reserves for consolidating its operations resulting
from the acquisition of PDA Engineering in the third quarter of fiscal 1995.
Included in this reserve were approximately $10,800,000 of items that relate to
cash expenditures. As of April 30, 1996, approximately $10,000,000 in cash has
been expended in relation to these items. The Company expects to incur
additional cash outflows of approximately $800,000 over the next nine months
related to the restructuring reserve.
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 $8,237,000 and $7,771,000 for the three months ended April 30,
1996 and April 30, 1995, respectively, of which $2,445,000 and $2,617,000 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 three months ended April 30, 1996 and April 30, 1995, the
Company acquired $1,062,000 and $1,812,000, respectively, of new property and
equipment. Capital expenditures during fiscal 1996 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 three months ended April 30, 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 fiscal
1996.
Management believes that unless sales and/or margins on sales in North
America improve significantly, its cash and short-term investments will continue
to decline during the remainder of the fiscal year. The Company is actively
evaluating strategies to increase sales, reduce expenses and conserve cash. The
Company is also evaluating the continued viability of the Company's dividend
payments in light of its capital structure, earnings and cash needs.
A dividend payment of $0.16 per share is payable on June 5, 1996 to
shareholders of record on May 17, 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, reevaluation of the Company's quarterly dividend
payment, 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; the demand
for MSC/ARIES in light of recent substantial declines in revenue from MSC/ARIES;
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
9
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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, MicroWaveLab, 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: June 6, 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> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 6,880
<SECURITIES> 1,327
<RECEIVABLES> 35,383
<ALLOWANCES> 2,015
<INVENTORY> 0
<CURRENT-ASSETS> 51,667
<PP&E> 32,061
<DEPRECIATION> 20,247
<TOTAL-ASSETS> 114,607
<CURRENT-LIABILITIES> 31,098
<BONDS> 56,575
0
0
<COMMON> 30,211
<OTHER-SE> (13,850)
<TOTAL-LIABILITY-AND-EQUITY> 114,607
<SALES> 0
<TOTAL-REVENUES> 32,192
<CGS> 4,775
<TOTAL-COSTS> 28,349
<OTHER-EXPENSES> 245
<LOSS-PROVISION> 47
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<INCOME-PRETAX> 2,484
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<EPS-PRIMARY> 0.12
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</TABLE>
