<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, 1997
[ ] 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 13,465,830 shares at June 10, 1997.
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THE MACNEAL-SCHWENDLER CORPORATION
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - April 30, 1997 (Unaudited)
and January 31, 1997...................................... 3
Consolidated Statements of Income (Unaudited)
Three Months Ended April 30, 1997 and 1996............... 4
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended April 30, 1997 and 1996............... 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,
ASSETS 1997 1997
- -------- ----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,539,000 $ 24,016,000
Short-term investments 1,049,000 1,052,000
Trade accounts receivable, net 33,059,000 36,328,000
Other current assets 6,914,000 8,884,000
--------------- ---------------
Total current assets 63,561,000 70,280,000
Property and equipment, net 10,026,000 10,242,000
Capitalized software costs, net 28,173,000 28,173,000
Goodwill and other intangibles, net 15,690,000 16,265,000
Other assets 2,985,000 2,862,000
--------------- ---------------
$ 120,435,000 $ 127,822,000
--------------- ----------------
--------------- ----------------
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 2,182,000 $ 2,248,000
Accrued liabilities 17,060,000 25,968,000
Deferred income 8,955,000 9,035,000
--------------- ----------------
Total current liabilities 28,197,000 37,251,000
Deferred income taxes 10,465,000 10,465,000
Convertible Subordinated Debentures 56,574,000 56,574,000
Commitments
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000
shares authorized; no shares outstanding
at April 30, 1997 or January 31, 1997 ----- -----
Common stock, $0.01 par value,
100,000,000 shares authorized;
13,466,000 and 13,456,000 issued and
outstanding at April 30, 1997 and
January 31, 1997, respectively 30,315,000 30,250,000
Retained deficit (2,167,000) (4,093,000)
Accumulated translation adjustment (2,949,000) (2,625,000)
--------------- --------------
Total shareholders' equity 25,199,000 23,532,000
--------------- --------------
$ 120,435,000 $ 127,822,000
--------------- --------------
--------------- --------------
</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,
------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Revenues:
Software licenses $ 25,424,000 $ 26,784,000
Software maintenance and services 6,512,000 5,237,000
------------ -------------
Total revenues 31,936,000 32,021,000
Operating expenses:
Cost of revenue 5,985,000 4,929,000
Amortization of goodwill and other intangibles 567,000 589,000
Research and development 3,281,000 4,938,000
Selling, general and administrative 17,999,000 17,722,000
------------- -------------
Total operating expenses 27,832,000 28,178,000
Operating income 4,104,000 3,843,000
Debenture interest (1,114,000) (1,114,000)
Other expense, net (72,000) (245,000)
------------- --------------
Income before income taxes 2,918,000 2,484,000
Provision for income taxes 992,000 807,000
-------------- --------------
Net income $ 1,926,000 $ 1,677,000
------------- --------------
------------- --------------
Primary earnings per share $ 0.14 $ 0.12
------------- --------------
------------- --------------
Weighted average number of
common shares outstanding 13,546,000 13,615,000
------------- --------------
------------- --------------
</TABLE>
4
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
APRIL 30
-------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,926,000 $ 1,677,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of property and
equipment 1,376,000 1,540,000
Amortization of goodwill and other intangibles 567,000 589,000
Amortization of capitalized software costs 2,877,000 1,861,000
Loss on disposal of property and equipment 70,000 14,000
Changes in assets and liabilities:
Accounts receivable, net 3,269,000 3,141,000
Other current assets 1,970,000 (430,000)
Accounts payable (66,000) (440,000)
Accrued liabilities (7,940,000) (3,374,000)
Deferred income (80,000) 85,000
Restructuring reserve - (558,000)
Income taxes payable (968,000) (176,000)
--------------- --------------
Net cash provided by operating activities 3,001,000 3,929,000
Cash flows from investing activities:
Decrease in short-term investments 3,000 2,013,000
Acquisition of property and equipment (1,230,000) (1,062,000)
Purchase of subsidiary, net of cash acquired - (115,000)
Capitalized software costs (2,877,000) (2,445,000)
Increase in other assets (115,000) (215,000)
--------------- --------------
Net cash used in investing activities (4,219,000) (1,824,000)
Cash flows from financing activities:
Payments of long-term debt - (1,000)
Issuance of common stock 65,000 129,000
Cash dividends paid - (2,151,000)
--------------- --------------
Net cash provided by (used in) financing activities 65,000 (2,023,000)
Effect of exchange rate changes on cash (324,000) (437,000)
--------------- --------------
Net decrease in cash and cash equivalents (1,477,000) (355,000)
Cash and cash equivalents at beginning of period 24,016,000 7,235,000
--------------- --------------
Cash and cash equivalents at end of period $ 22,539,000 $ 6,880,000
--------------- --------------
--------------- --------------
</TABLE>
See accompanying notes.
5
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited 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, 1997.
Supplemental cash flow information for taxes paid during the three
months ended April 30, 1997 and 1996 were $1,960,000 and $1,198,000,
respectively. Additionally, the Company paid interest of $2,226,000 and
$2,227,000 on its Convertible Subordinated Debentures due 2004 during the
three months ended April 30, 1997 and April 30, 1996, respectively.
Fully-diluted earnings per share calculated under the treasury method
were anti-dilutive for the three months ended April 30, 1997 and 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.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." SFAS No. 128 establishes a different method of computing earnings per
share than is currently required under the provisions of Accounting Principles
Board Opinion No. 15. Under SFAS No. 128, the Company will be required to
present both basic earnings per share and diluted earnings per share. Basic
earnings per share for the three months ended April 30, 1997 and 1996 would
have been $0.14 and $0.12, respectively. Diluted earnings per share for the
three months ended April 30, 1997 and 1996 would have been anti-dilutive. The
Company plans to adopt SFAS No. 128 in its fourth quarter of the current
fiscal year, and at that time all historical earnings per share data
presented will be restated to conform to the provisions of SFAS No. 128.
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, 1997 are not necessarily indicative of the
results that may be expected for the year ended January 31, 1998.
Certain reclassifications have been made to the financial information for
the three months ended April 30, 1996 in order to conform to the April 30, 1997
presentation.
NOTE 2: CAPITALIZED SOFTWARE
The components of net capitalized software costs were as follows:
<TABLE>
Three months Ended April 30,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Software costs capitalized $(2,877,000) $(2,445,000)
Amortization of capitalized software 2,877,000 1,861,000
------------ -------------
Net capitalized software costs $ --- $ (584,000)
------------ -------------
------------ -------------
</TABLE>
Amortization expense associated with capitalized software costs is reported
in cost of revenue, and capitalization of software costs is reported as a
reduction of research and development expense.
6
<PAGE>
NOTE 3: ACCRUED LIABILITIES
The components of accrued liabilities are as follows:
<TABLE>
April 30, January 31,
1997 1997
---- ----
<S> <C> <C>
Compensation and related expenses $ 6,549,000 $ 6,845,000
Commissions payable 2,935,000 3,958,000
Royalties payable 831,000 911,000
Post-retirement benefits 801,000 1,167,000
Contribution to profit sharing plan 772,000 3,107,000
Sales taxes payable 629,000 3,552,000
Debenture interest payable 574,000 1,687,000
Stock purchase plan 396,000 216,000
Incentive compensation 68,000 224,000
Other 3,505,000 4,301,000
------------ -------------
$17,060,000 $ 25,968,000
------------ -------------
------------ -------------
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS ENDED APRIL 30, 1997 VS. THREE MONTHS ENDED APRIL 30, 1996
Consolidated revenues were $31,936,000 in the first quarter, compared to
revenues of $32,021,000 in the first quarter of the prior fiscal year.
Current-quarter revenues were adversely affected by the sale of the MSC/EMAS
product line in the second quarter of the prior fiscal year. If MSC/EMAS
revenues are excluded from prior year revenues, consolidated first quarter
revenues increased by 2% in the current year. In addition, first quarter
revenues, measured in U.S. dollars, were adversely affected by the
strengthening 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 first quarter
revenues would have been higher by approximately $2,200,000, or 7%.
Excluding prior year MSC/EMAS revenues, Asia Pacific and European
revenues, measured in local currency, increased by 16% and 3%, respectively,
and the Americas revenues increased by 12%. On a geographical basis, the
Americas represented 39%, Europe represented 32%, and Asia Pacific
represented 29% of total revenues for the quarter.
Cost of revenue increased $1,056,000, or 21%, entirely as a result of an
increase in the amortization of capitalized software costs compared to the
first quarter of the prior fiscal year. Research and development costs, which
are reported net of capitalized software costs, decreased $1,657,000, or 34%,
due to several factors. In the first quarter, the amount of research and
development costs capitalized increased by $432,000 compared to the first
quarter of the prior year, due to the increased level of new product
development in the current quarter. The amount of research and development
costs capitalized fluctuates from quarter to quarter, depending in part on
the number of products and their stage of development. Excluding software
capitalization, the decrease in research and development expenses was 17%,
due mostly to changes in development staffing and exchange rate fluctuations
that reduced overseas development expenses measured in dollars. The resulting
changes as described above generated an overall decrease in operating
expenses of 1%, to $27,832,000, compared to the same quarter last year.
The Company's resulting income from operations for the quarter ended
April 30, 1997 was $4,104,000, a 7% increase from operating income of
$3,843,000 during the first quarter last year. The net effect of the
capitalization of software development costs and the amortization of such
capitalized costs was zero for the three months ended April 30, 1997,
compared to a net benefit of $584,000 for the three months ended April 30,
1996. Excluding net software capitalization, operating income for the three
months ended April 30, 1997 rose 26% compared to the three months ended April
30, 1996.
Net income was $1,926,000 compared to net income of $1,677,000 in the
prior year, an increase of 15%. Primary earnings per share for the three
months ended April 30, 1997 were $0.14 compared to $0.12 for the three months
ended April 30, 1996. The stronger U.S. dollar had an adverse effect on first
quarter earnings. Had exchange rates for the three months ended April 30,
1997 remained the same as for the three months ended April 30, 1996, net
income and primary earnings per share would have been higher by $762,000 and
$0.06, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Historically, working capital needed to finance the Company's operations
and growth has been provided by cash on hand and 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 $3,001,000 in the three months ended April 30, 1997,
compared with $3,929,000 during the comparable period of the prior year. Cash
and short-term investments were $23,588,000 at April 30, 1997 compared to
$25,068,000 at January 31, 1997. The decrease in cash and
8
<PAGE>
short-term equivalents was a composite result of the Company's normal business
cycle. In addition, the Company made its annual profit-sharing contribution
and semi-annual debenture interest payment during the three months ended
April 30, 1997. The Company's working capital was $35,364,000 at April 30,
1997, an increase from $33,029,000 at January 31, 1997. The Company has an
agreement for a $15,000,000 unsecured line of credit with its principal bank
at the prevailing prime rate. No amounts were outstanding under this
agreement at April 30, 1997.
The Company issued convertible subordinated debentures in connection
with the PDA acquisition in the aggregate amount of approximately $56,608,000.
The debentures bear interest at 7-7/8%, with interest payments due
semi-annually in March and September. A debenture interest payment of
$2,226,000 was made in March 1997. The amount of interest will decrease if
the debentures are converted into common stock. The debentures mature in
August 2004.
Management expects to continue to reinvest the Company's revenues in the
research and development of new computer software products and the
enhancement of existing products. Total research and development costs were
$6,158,000 and $7,383,000 for the three months ended April 30, 1997 and April
30, 1996, respectively, of which $2,877,000 and $2,445,000 were capitalized.
Product development costs and the capitalization rate vary depending in part
on the number of products in process and the stage of development of those
products.
During the three months ended April 30, 1997 and April 30, 1996, the
Company acquired $1,230,000 and $1,062,000, respectively, of new property and
equipment. Capital expenditures during the current and prior fiscal years
included upgrades to computer equipment and 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. Management expects overall expenditures for
property and equipment in future years to be consistent with those for the
fiscal year ended January 31, 1997.
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, expected trends in revenue and operating expense, capital
expenditure plans, 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, MSC/FEA,
MSC/SuperModel and MSC/NASTRAN FOR WINDOWS; and such risks and uncertainties
as are
9
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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.
(a) Exhibit 27 -- Financial Data Schedule
(b) The Company did not file any Current Reports on Form 8-K
during the quarter ended April 30, 1997.
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 11, 1997
-------------
/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>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 22,539
<SECURITIES> 1,049
<RECEIVABLES> 34,755
<ALLOWANCES> 1,696
<INVENTORY> 0
<CURRENT-ASSETS> 63,561
<PP&E> 34,266
<DEPRECIATION> 24,240
<TOTAL-ASSETS> 120,435
<CURRENT-LIABILITIES> 28,197
<BONDS> 56,574
0
0
<COMMON> 30,315
<OTHER-SE> (5,116)
<TOTAL-LIABILITY-AND-EQUITY> 120,435
<SALES> 0
<TOTAL-REVENUES> 31,936
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</TABLE>
